<PAGE>
Filed pursuant to Rule 424(b)(1)
SEC File No. 333-04587
[LOGO OF PATRIOT 5,500,000 SHARES
AMERICAN APPEARS PATRIOT AMERICAN HOSPITALITY, INC.
HERE] COMMON STOCK
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Patriot American Hospitality, Inc. (collectively with its subsidiaries, the
"Company") is a self-administered real estate investment trust ("REIT") which
owns 35 hotels in 13 states, with an aggregate of 8,201 guest rooms (the
"Hotels"). Since its October 1995 initial public offering (the "Initial
Offering"), the Company has acquired 15 hotels (the "Recent Acquisitions")
with an aggregate of 3,995 guest rooms and has entered into contracts to
purchase 6 additional hotels with an aggregate of 1,589 guest rooms (the
"Proposed Acquisitions"). The Hotels are primarily full service properties
serving both business and leisure travelers in major United States markets,
including Atlanta, Boston, Cleveland, Dallas, Denver, Houston, New Orleans,
San Antonio, San Diego and Seattle. Thirty-one of the Hotels are operated
under franchise or brand affiliations with nationally recognized hotel
companies, including Marriott(R), Crowne Plaza(R), Radisson(R), Hilton(R),
Hyatt(R), Four Points by Sheraton(R), Holiday Inn(R), WestCoast(R),
Wyndham(TM), Wyndham Garden(R), Doubletree(R), Embassy Suites(R) and Hampton
Inn(R). See "The Company" and "The Hotels and the Proposed Acquisitions."
Thirty-four of the Hotels are leased to independent lessees (the "Lessees")
under participating leases (the "Participating Leases"), which are designed to
allow the Company to achieve substantial participation in revenue growth at
the Hotels. Neither the Company nor its management owns an interest in, or
participates in the management of, the Lessees. See "The Lessees and the
Operators."
All of the shares of common stock of the Company (the "Common Stock")
offered hereby are being offered by the Company. The Common Stock is listed on
the New York Stock Exchange (the "NYSE") under the symbol "PAH." On July 23,
1996, the last reported sale price of the Common Stock on the NYSE was $28.25
per share. See "Price Range of Common Stock and Distribution History." The
Company's Articles of Incorporation limit the number of shares of Common Stock
that may be owned by any single person or affiliated group. See "Description
of Capital Stock--Articles of Incorporation and Bylaw Provisions."
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
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<S> <C> <C> <C>
Per Share........................ $28.25 $1.55 $26.70
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Total............................ $155,375,000 $8,525,000 $146,850,000
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Total Assuming Full Exercise of
Over-Allotment Option (3)....... $178,681,250 $9,803,750 $168,877,500
</TABLE>
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(1) See "Underwriting."
(2) Before deducting expenses estimated at $2,700,000, which are payable by
the Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to
the Underwriters to purchase up to 825,000 additional shares of Common
Stock, on the same terms, solely to cover over-allotments. See
"Underwriting."
---------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Common Stock will be made in New York City on or about
July 29, 1996.
---------------
PAINEWEBBER INCORPORATED
BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
SMITH BARNEY INC.
---------------
THE DATE OF THIS PROSPECTUS IS JULY 23, 1996.
<PAGE>
[MAP OF UNITED STATES SHOWING LOCATIONS OF
HOTELS OWNED BY THE COMPANY AND PROPOSED
ACQUISITIONS APPEARS HERE]
<PAGE>
[PICTURE OF WYNDHAM GREENSPOINT HOTEL, HOUSTON, TEXAS]
[PICTURE OF HYATT NEWPORTER HOTEL, NEWPORT BEACH, CALIFORNIA]
[PICTURE OF MARRIOTT WINDWATCH HOTEL, HAUPPAUGE, NEW YORK]
<PAGE>
[PICTURE OF CROWNE PLAZA RAVINIA, ATLANTA, GEORGIA]
[PICTURE OF WESTCOAST PLAZA PARK SUITES, SEATTLE, WASHINGTON]
[PICTURE OF DEL MAR HILTON, DEL MAR (SAN DIEGO), CALIFORNIA]
<PAGE>
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW
YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Developments Since the Initial Offering.................................. 3
Risk Factors............................................................. 6
The Hotels and the Proposed Acquisitions................................. 7
The Lessees and the Operators............................................ 10
Formation Transactions and Benefits to Related Parties................... 11
Distribution Policy...................................................... 11
Tax Status............................................................... 12
The Offering............................................................. 12
Summary Financial Information............................................ 13
RISK FACTORS.............................................................. 16
Dependence on Lessees and
Payments under the Participating Leases................................. 16
Lack of Control Over Operations of the Hotels............................ 16
Risks Associated with the Company's Acquisition of a Substantial Number
of Additional Hotels.................................................... 16
Risks of Leverage; No Limits on Indebtedness............................. 16
Possible Adverse Effects of Shares Available for Future Sale Upon Market
Price of Common Stock................................................... 17
Risk of Investment in Subsidiaries....................................... 17
Limited Operating History................................................ 18
Competition for Management Time.......................................... 18
Conflicts of Interest.................................................... 18
Hotel Industry Risks..................................................... 18
Real Estate Investment Risks............................................. 19
Tax Risks................................................................ 21
Risks of Operating Hotels Under Franchise or Brand Affiliations.......... 22
Limitation on Acquisition and Change in Control.......................... 23
Ability of Board to Change Policies...................................... 23
Adverse Effect of Increase in Market Interest Rates on Price of Common
Stock................................................................... 23
THE COMPANY............................................................... 24
General.................................................................. 24
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business Strategy........................................................ 25
The Operating Partnership................................................ 28
DEVELOPMENTS SINCE THE INITIAL OFFERING................................... 29
Recent Acquisitions...................................................... 29
Proposed Acquisitions.................................................... 30
Financing Activities..................................................... 31
New Franchise and Brand Affiliations..................................... 31
USE OF PROCEEDS........................................................... 32
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY...................... 33
CAPITALIZATION............................................................ 34
SELECTED FINANCIAL INFORMATION............................................ 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 41
Background and Recent Developments....................................... 41
Proposed Acquisitions.................................................... 43
Results of Operations of the Company..................................... 43
Results of Operations of the Lessees..................................... 45
Results of Operations of the Initial Hotels.............................. 47
Liquidity and Capital Resources.......................................... 49
Renovations and Capital Improvements..................................... 50
Inflation................................................................ 50
Seasonality.............................................................. 50
THE HOTEL INDUSTRY........................................................ 51
THE HOTELS AND THE PROPOSED ACQUISITIONS.................................. 52
Supplemental Information Regarding Significant Properties................ 54
The Participating Leases................................................. 59
Crowne Plaza Ravinia..................................................... 67
Franchise and Brand Affiliations......................................... 68
Employees................................................................ 70
Environmental Matters.................................................... 70
Competition.............................................................. 71
Insurance................................................................ 71
Legal Proceedings........................................................ 71
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
FORMATION TRANSACTIONS..................................................... 72
Formation Transactions.................................................... 72
Benefits to Officers, Directors and Primary Contributors.................. 73
Valuation of Interests.................................................... 75
Transfer of Initial Hotels................................................ 75
MANAGEMENT................................................................. 77
Directors and Executive Officers.......................................... 77
Committees................................................................ 79
Executive Compensation.................................................... 80
Option Grants in 1995..................................................... 80
Option Exercises in 1995 and Year End Option Values....................... 81
Compensation Developments................................................. 81
Employment Agreements..................................................... 81
Compensation of Directors................................................. 81
Stock Incentive Plans..................................................... 82
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 85
Relationships Among Officers and
Directors ............................................................... 85
Acquisition of Interests in Certain of the Hotels......................... 85
Sublease and Services Agreement........................................... 85
Employment Agreements..................................................... 85
Interest of Director...................................................... 85
THE LESSEES AND THE OPERATORS.............................................. 86
PRINCIPAL SHAREHOLDERS..................................................... 88
DESCRIPTION OF CAPITAL STOCK............................................... 90
Common Stock.............................................................. 90
Preferred Shares.......................................................... 90
Articles of Incorporation and Bylaw Provisions............................ 90
Business Combinations..................................................... 94
Control Share Acquisitions................................................ 95
Other Matters............................................................. 95
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................. 96
Investment Policies....................................................... 96
Financing................................................................. 96
Conflict of Interest Policies............................................. 97
Policies with Respect to Other Activities................................. 98
Working Capital Reserves.................................................. 98
SHARES AVAILABLE FOR FUTURE SALE........................................... 99
PARTNERSHIP AGREEMENT...................................................... 100
Management................................................................ 100
Transferability of Interests.............................................. 100
Capital Contribution...................................................... 100
Redemption Rights......................................................... 101
Registration Rights....................................................... 101
Operations................................................................ 101
Distributions and Allocations............................................. 102
Term...................................................................... 102
Tax Matters............................................................... 102
Preferred OP Units........................................................ 102
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 103
Taxation of the Company................................................... 103
Requirements for Qualification............................................ 104
Failure to Qualify........................................................ 112
Taxation of Taxable U.S. Shareholders..................................... 112
Taxation of Shareholders on the Disposition of the Common Stock........... 113
Information Reporting Requirements and Backup Withholding................. 113
Taxation of Tax-Exempt Shareholders....................................... 113
Taxation of Non-U.S. Shareholders......................................... 114
State and Local Taxes..................................................... 115
Tax Aspects of the Operating Partnership and the Subsidiary Partnerships.. 117
PAH Ravinia............................................................... 119
UNDERWRITING............................................................... 120
EXPERTS.................................................................... 121
LEGAL MATTERS.............................................................. 122
ADDITIONAL INFORMATION..................................................... 122
GLOSSARY................................................................... 123
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES............ F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes the
Underwriters' over-allotment option is not exercised. Unless the context
requires otherwise, the term "Company," as used herein, includes Patriot
American Hospitality, Inc., PAH GP, Inc. ("PAH GP") and PAH LP, Inc. ("PAH
LP"), each of which is a wholly-owned subsidiary of Patriot American
Hospitality, Inc., and Patriot American Hospitality Partnership, L.P., a
Virginia limited partnership (the "Operating Partnership"). The term "Operating
Partnership," unless the context requires otherwise, includes any subsidiaries
of the Operating Partnership. The offering of Common Stock pursuant to this
Prospectus is referred to herein as the "Offering." See "Glossary" for the
definitions of certain terms used in this Prospectus. This Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's
actual results could differ materially from those set forth in the forward-
looking statements. Certain factors that might cause such a difference are
discussed in the section entitled "Risk Factors" starting on page 16 of this
Prospectus.
THE COMPANY
The Company is a self-administered real estate investment trust ("REIT")
which owns 35 hotels in 13 states, with an aggregate of 8,201 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 29 full service hotels, 5 limited service hotels and an
executive conference center. Thirty-one of the Hotels are operated under
franchise or brand affiliations with nationally recognized hotel companies,
including Marriott(R), Crowne Plaza(R), Radisson(R), Hilton(R), Hyatt(R), Four
Points by Sheraton(R), Holiday Inn(R), Wyndham(TM), Wyndham Garden(R),
WestCoast(R), Doubletree(R), Embassy Suites(R) and Hampton Inn(R). For the
twelve months ended March 31, 1996, the Hotels had an average occupancy of
71.3% and an average daily room rate ("ADR") of $81.89.
Since the Company's October 1995 initial public offering (the "Initial
Offering"), the Company has acquired 15 hotels (the "Recent Acquisitions") with
an aggregate of 3,995 guest rooms for approximately $277 million and has
entered into contracts to purchase 6 additional hotels with an aggregate of
1,589 guest rooms (the "Proposed Acquisitions") for an aggregate purchase price
(excluding acquisition-related expenses) of approximately $103 million. The
Company purchased the Recent Acquisitions with proceeds from the exercise of
the underwriter's over-allotment option in the Initial Offering and with funds
from its line of credit (the "Line of Credit"). The Company's purchase of each
of the Proposed Acquisitons is subject to the satisfaction of various closing
conditions and, therefore, no assurances can be given that these acquisitions
will be completed. See "Developments Since the Initial Offering--Proposed
Acquisitions." If all of the Proposed Acquisitions are consummated, the Company
will have invested approximately $380 million in hotel acquisitions and more
than doubled its room portfolio since the Initial Offering.
The Company leases each of the Hotels, except the Crowne Plaza Ravinia which
is owned through a special purpose corporation, to lessees that are independent
from the Company (the "Lessees") pursuant to separate participating leases (the
"Participating Leases"). The Crowne Plaza Ravinia acquisition was structured
without a Lessee for reasons specific to the acquisition. The Company
anticipates that future acquisitions will continue to be structured with
Lessees. The Lessees and the special purpose corporation that owns the Crowne
Plaza Ravinia in turn have entered into separate agreements (the "Management
Agreements") with hotel management entities (the "Operators") to operate the
Hotels. Neither the Company nor its management owns an interest in, or
participates in the management of, the Lessees or the Operators, thus avoiding
certain potential conflicts of
1
<PAGE>
interest generally associated with the structure of hospitality REITs. All
Participating Leases between the Company and the Lessees have been negotiated
on an arms length basis.
In connection with the Initial Offering, the Company closed the Line of
Credit with Paine Webber Real Estate Securities Inc. ("Paine Webber Real
Estate"). See "Developments Since the Initial Offering--Financing Activities."
The Company believes market conditions today remain favorable for the
acquisition of hotel properties at attractive returns and, particularly with
respect to full service hotels, at prices significantly below replacement cost.
Accordingly, the Company intends to continue to acquire additional hotels that
meet one or more of its investment criteria. See "The Company--Business
Strategy--Acquisitions." Because the Company's structure is designed to
accommodate multiple lessees, hotel brand owner/operators, major hotel
management companies and hotel franchisors have presented the Company with
opportunities to acquire attractive hotel properties (including properties not
otherwise marketed for sale) and the Company expects such opportunities will
continue. The Company believes its acquisition capabilities are enhanced by the
fact that its capital structure provides significant financial flexibility. The
Company intends to continue to maintain a conservative capital structure and
currently intends to limit consolidated indebtedness to no more than 40% of its
total market capitalization.
The Company was formed to continue and expand the hotel acquisition,
ownership, redevelopment and repositioning business of the Patriot American
Group ("Patriot American"). Patriot American had historically pursued an
investment strategy that emphasized purchasing hotels at attractive prices and
renovating, repositioning and remarketing them to achieve significant revenue
growth and favorable investment returns. From January 1, 1992 to March 31,
1996, approximately $29.7 million was invested in renovations and other capital
improvements to the 20 Hotels acquired by the Company in connection with the
Initial Offering (the "Initial Hotels"). The Initial Hotels achieved
significant growth in occupancy, ADR and room revenue per available room
("REVPAR") from 1993 through 1995, as summarized in the following chart:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT
------------------------- CHANGE
1993(1) 1994(1) 1995(2) 1993-1995
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Occupancy.................................... 65.8% 71.0% 72.1% 9.6%
ADR.......................................... $69.14 $72.57 $77.92 12.7%
REVPAR....................................... $45.48 $51.49 $56.20 23.6%
</TABLE>
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(1) For comparative purposes, 1994 and 1993 data includes the results of
operations for the Marriott Troy Hotel, which was acquired on December 30,
1994, and 1993 data also includes results for the pre-acquisition period
for three Initial Hotels acquired by the Company's predecessors in 1993.
(2) Excludes the Recent Acquisitions.
For 1993, 1994, and 1995, average occupancy rates for the U.S. lodging
industry were 63.1%, 64.7% and 65.5%, respectively, according to Smith Travel
Research, Inc. ("Smith Travel"). Management believes the growth in occupancy,
ADR and REVPAR at the Initial Hotels primarily reflects the successful
renovation, repositioning and remarketing strategies of Patriot American, the
superior management and marketing capabilities of the Operators, and the
upswing in the hotel industry caused by a slowing of new hotel construction
nationally and improving economic conditions, following an extended period of
unprofitable industry performance in the late 1980s and early 1990s.
The Company's executive office is located at 3030 LBJ Freeway, Suite 1500,
Dallas, Texas 75234, and its telephone number is (214) 888-8000.
2
<PAGE>
DEVELOPMENTS SINCE THE INITIAL OFFERING
Since the Initial Offering, the Company has benefited from the following
developments:
RECENT ACQUISITIONS
Since the Initial Offering, the Company has invested approximately $277
million in the acquisition of Hotels (including purchase prices and
approximately $3.7 million in acquisition-related expenses), increasing its
room portfolio by approximately 95%. Set forth below are summary descriptions
of the Recent Acquisitions.
Embassy Suites, Hunt Valley, Maryland. In November 1995, the Company acquired
the 223-suite Embassy Suites in Hunt Valley, Maryland outside Baltimore for
approximately $16.0 million in cash. The Company has leased the hotel to Metro
Hotels Leasing Corporation ("Metro Lease Partners").
Crowne Plaza Ravinia, Atlanta, Georgia. In December 1995, PAH Ravinia, Inc.
("PAH Ravinia"), a corporation in which the Company owns a 99.04% interest,
acquired the 495-room Crowne Plaza Ravinia, a hotel located adjacent to Holiday
Inn Worldwide headquarters in the Perimeter Center/Ravinia area of Atlanta,
Georgia. The Company paid approximately $4.5 million in cash for its investment
in PAH Ravinia and advanced to PAH Ravinia an aggregate of $40.5 million in
first and second lien mortgage loans. The Company intends to complete
approximately $2.7 million in renovations to the Hotel following completion of
the Olympic Games.
Tremont House Hotel, Boston, Massachusetts. In January 1996, the Company
acquired the 288-room Tremont House Hotel in Boston, Massachusetts for
approximately $16.5 million in cash. The Company has commenced an extensive
$8.5 million renovation of the Hotel. This project includes renovation of
existing guest rooms and common areas, the addition of 31 new guest rooms on a
penthouse level and the reconfiguration of certain existing rooms resulting in
an expected aggregate room count following completion of the renovation of
approximately 321. The Company has leased the Hotel to CHC Lease Partners.
Holiday Inn Lenox, Atlanta, Georgia. In March 1996, the Company acquired the
297-room Holiday Inn Lenox in the Buckhead section of Atlanta for approximately
$7.3 million in cash and 167,012 units of limited partnership interest in the
Operating Partnership ("OP Units"), valued at approximately $4.7 million at the
closing of the acquisition. The Hotel is leased to CHC Lease Partners.
Del Mar Hilton, Del Mar (San Diego), California. In March 1996, the Company
acquired the 245-room Del Mar Hilton for approximately $14.8 million in cash.
This Hotel is located in suburban San Diego, California, adjacent to the Del
Mar Racetrack and Fairgrounds. The Company has leased the Hotel to CHC Lease
Partners.
WestCoast Portfolio. In April 1996, the Company acquired a six hotel
portfolio (the "WestCoast Portfolio") for approximately $75.6 million in cash
and 331,577 OP Units, valued at approximately $8.8 million at the closing of
the acquisition. The portfolio includes the 194-suite WestCoast Plaza Park
Suites, 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 WestCoast Long Beach Hotel and
Marina in Long Beach, California; and the 147-room WestCoast Wenatchee Center
Hotel in Wenatchee, Washington. The Company intends to complete a $1.8 million
renovation of the WestCoast Long Beach Hotel and Marina, and to complete build
out of a restaurant at the WestCoast Plaza Park Suites, converting this Hotel
to a full service property. The Company has leased the hotels in the WestCoast
Portfolio under Participating Leases to NorthCoast Hotels L.L.C.
("NorthCoast"), a recently formed company owned by a consortium of investors
including principals of WestCoast Hotels, Inc. ("WestCoast Hotels"), a major
regional hotel management company based in Seattle, and Sunmakers Travel Group
("Sunmakers"), a major tour and travel company in the Pacific Northwest.
Hyatt Regency, Lexington, Kentucky. In May 1996, the Company acquired the
365-room Hyatt Regency in Lexington, Kentucky for approximately $14.3 million
in cash. The Hotel adjoins Lexington's convention center and the Rupp Arena.
The Company has leased the Hotel to NorthCoast.
3
<PAGE>
Doubletree Denver/Boulder, Westminster (Denver), Colorado. In June 1996, the
Company acquired the 180-room Doubletree Denver/Boulder in suburban Denver,
Colorado for approximately $12.5 million in cash. The Company intends to
complete approximately $950,000 of renovations to the Hotel. The Hotel is the
Company's first Doubletree branded property and first acquisition in the Denver
area. The Company has leased the Hotel to DTR North Canton, Inc. (the
"Doubletree Lessee"), a subsidiary of Doubletree Hotels Corporation
("Doubletree Hotels").
Wyndham Greenspoint Hotel, Houston, Texas; Wyndham Garden-Midtown, Atlanta,
Georgia. In July 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 for approximately $61.0 million in cash and 17,036 OP
Units, valued at approximately $500,000 at the time of the acquisition. The
Company has leased these Hotels to Crow Hotel Lessee, Inc., an entity formed by
members of the Trammell Crow family (the "Wyndham Lessee"). In connection with
this acquisition, the Company agreed to maintain at least $22.0 million of debt
on the Wyndham Greenspoint Hotel until the end of 1999 and Paine Webber Real
Estate has extended a single asset mortgage loan of $22.0 million on this Hotel
(the "Greenspoint Loan").
PROPOSED ACQUISITIONS
The Company has entered into contracts to purchase the Proposed Acquisitions
for an aggregate purchase price (excluding acquisition-related expenses) of
approximately $103 million. The purchase of each of the Proposed Acquisitions
is subject to satisfactory completion of closing conditions, including, with
regard to the acquisition of the three Wyndham Garden Hotels described below,
the waiver or significant reduction of certain prepayment penalties on debt of
the current owners secured by the hotels. No assurances can be given that the
Company will acquire any or all of the Proposed Acquisitions. Assuming
completion of the Proposed Acquisitions, the Company will have invested
approximately $380 million in hotel acquisitions since the Initial Offering,
more than doubling its rooms portfolio to a total of 41 hotels with 9,790
rooms. Set forth below are summary descriptions of the Proposed Acquisitions.
Marriott WindWatch Hotel, Hauppauge (Long Island), New York. In March 1996,
the Company entered into an agreement to acquire the 362-room Marriott
WindWatch Hotel in Hauppauge (Long Island), New York for approximately $30
million in cash. This Proposed Acquisition will represent the Company's first
hotel in the metropolitan New York area.
Bonaventure Resort & Spa, Ft. Lauderdale, Florida. In May 1996, the Company
entered into an agreement to acquire the 492-room Bonaventure Resort & Spa in
Ft. Lauderdale, Florida for approximately $16.2 million in cash and the
assumption of approximately $3.0 million in operating liabilities. The hotel is
situated on 23 acres and is 15 miles west of Ft. Lauderdale International
Airport. Upon completion of the acquisition, the Company intends to complete an
$8.5 million renovation of the hotel and implement a strategic and marketing
plan which will include branding the facility as a Registry Resort and Spa. The
Company currently anticipates that CHC Lease Partners will lease the hotel.
Wyndham Garden Hotels. In July 1996, the Company entered into an agreement to
acquire the 148-room Wyndham Garden located in Novi (Detroit), 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
(collectively, the "Wyndham Garden Hotels") for approximately $35.3 million in
cash. The Company currently anticipates that the Wyndham Lessee will lease each
of the Wyndham Garden Hotels.
Valley River Inn, Eugene, Oregon. In July 1996, the Company entered into an
agreement to acquire the 257-room Valley River Inn in Eugene, Oregon for
approximately $18.8 million in cash. The hotel is situated on the banks of the
Willamette River and is adjacent to the Valley River Center Mall. The Company
currently anticipates that NorthCoast will lease the hotel.
In addition to the Proposed Acquisitions, as part of its ongoing business,
the Company continually engages in discussions with public and private real
estate entities regarding possible portfolio or single asset acquisitions.
4
<PAGE>
The Company currently has over $800 million of hotel acquisition opportunities
under review. No assurances can be given that the Company will acquire any of
the hotel opportunities currently under review.
CAPITAL IMPROVEMENTS AND RENOVATIONS
The Company believes a regular program of capital improvements, including
replacement and refurbishment of furniture, fixtures and equipment ("F, F & E")
at the Hotels, as well as the renovation and redevelopment of selected Hotels,
is essential to maintaining the competitiveness of the Hotels and maximizing
revenue growth. The Company has budgeted approximately $17.5 million to
complete renovations at the Crockett Hotel, the Crowne Plaza Ravinia, the
Tremont House Hotel, the Del Mar Hilton, the WestCoast Long Beach Hotel and
Marina, the Doubletree Denver/Boulder, the Wyndham Greenspoint Hotel and the
Wyndham Garden-Midtown. The Company spent approximately $900,000 of this amount
through March 31, 1996 and expects to spend the remainder in 1996 and early
1997. In addition, as part of its ongoing capital improvement program, the
Company has budgeted approximately $11.3 million in 1996 for capital
improvements and the replacement of F, F & E within the Company's portfolio,
including the Recent Acquisitions. The Company's budget for capital
expenditures, exclusive of renovations, exceeds 4.0% of total revenues at the
Hotels in 1996 due to capital expenditures required by certain franchisors and
the Company's decision to accelerate certain capital improvements originally
intended to be completed over a longer period.
FINANCING ACTIVITIES
Private Placement. In May 1996, the Company sold an aggregate of
approximately $40.0 million 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. The purchaser is subject to certain restrictions
on the resale of the Common 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. Prior to the
third anniversary of issuance, the Preferred OP Units generally will not be
exchangeable for Common Stock, except under certain limited circumstances.
After three years, the holders will have the right to exchange Preferred OP
Units for shares of Common Stock on a one-for-one basis, subject to adjustment
and to an ownership limitation of 4.9% of all outstanding Common Stock. 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, subject to
adjustment. See "Partnership Agreement--Preferred OP Units."
Line of Credit. In May 1996, the maximum amount available under the Line of
Credit was increased from $165 million to $250 million and certain other
modifications were made, thereby increasing the Company's ability to borrow
under the Line of Credit. 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 million. The Line
of Credit and the Greenspoint Loan are cross-defaulted. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Greenspoint Loan. In July 1996, Paine Webber Real Estate extended the $22.0
million Greenspoint Loan. The entire principal amount under the Greenspoint
Loan matures in October 1998 and bears interest at a rate per annum equal to
30-day LIBOR (as defined in the Glossary) plus 1.90%.
NEW FRANCHISE AND BRAND AFFILIATIONS
With the completion of the Recent Acquisitions, the Company expanded the
franchise and brand affiliations in its portfolio to include Crowne Plaza(R),
Doubletree(R), Embassy Suites(R), Hyatt(R), WestCoast(R), Wyndham(TM) and
Wyndham Garden(R).
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES VARIOUS RISKS, AND
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS,"
INCLUDING THE FOLLOWING:
. Dependence upon rental payments from the Lessees for substantially all of
the Company's income, including risks related to the ability of the
Lessees to make rent payments sufficient to permit the Company to make
distributions to its shareholders, the failure or delay in making rent
payments, the failure to effectively manage the Hotels and to meet the
obligations under the franchise agreements, and the limited operating
history of the Lessees.
. Dependence upon the ability of the Lessees and the Operators to manage
substantially all of the Hotels and the fact that, because of REIT
qualification requirements, the Company will have only limited approval
rights with respect to the engagement of future managers of the Hotels.
. Risks associated with the Company's acquisition of a substantial number
of additional hotels since the Initial Offering.
. Risks normally associated with debt financing, including the fact that
there is no limitation on the amount of indebtedness that may be incurred
by the Company, and the risk that the Company will not be able to meet
its debt service obligations, and to the extent that it cannot, the risk
that the Company will lose all or some of its assets.
. Risks associated with the Company's ownership of Hotels through
subsidiaries.
. Potential conflicts of interest between the Company and certain of its
officers and directors related to adverse tax consequences to certain of
the Company's officers and directors upon the sale of certain of the
Hotels, which could lead to decisions with respect to the disposition or
refinancing of such Hotels that do not reflect solely the interests of
the Company's shareholders.
. Risks affecting the hotel industry generally, and the Hotels
specifically, including competition for guests, increases in operating
costs due to inflation and other factors, dependence on business and
commercial travelers and tourism, increases in energy costs and other
expenses of travel, seasonality and the need for future expenditures for
capital improvements and for replacement of F, F & E in excess of
budgeted amounts, all of which could have a material adverse effect on
the Company's Cash Available for Distribution. Cash Available for
Distribution means funds from operations adjusted for certain non-cash
items, less reserves for capital expenditures.
. Risks affecting the real estate market generally, including economic and
other conditions that may adversely affect real estate investments,
including the Hotels, and the Lessees' ability to make rent payments from
the operations of the Hotels, relative illiquidity of real estate,
increases in taxes caused by increased assessed values or property tax
rates, and potential liabilities, including liabilities for unknown or
future environmental problems, all of which could have a material adverse
effect on Cash Available for Distribution.
. Tax risks, including taxation of the Company as a corporation if it fails
to qualify as a REIT, and taxation of the Operating Partnership as a
corporation if it were deemed not to be a partnership and the Company's
liability for federal and state taxes on its income in either such event,
which could have a material adverse effect on Cash Available for
Distribution.
. Potential loss of franchise licenses relating to the franchised Hotels
and varying capital requirements of franchisors that may affect the value
of the Hotels.
. The restriction on ownership of shares of Common Stock intended to insure
compliance with certain requirements related to continued qualification
of the Company as a REIT, and certain other provisions in the Company's
Articles of Incorporation and Bylaws, which may have the effect of
inhibiting a change in control of the Company even where such a change of
control could be beneficial to the Company's shareholders.
6
<PAGE>
THE HOTELS AND THE PROPOSED ACQUISITIONS
The Hotels are diversified by franchise or brand affiliation and product
type, including 29 full service hotels, 5 limited service hotels and an
executive conference center. The Company believes the diversity of its
portfolio moderates the potential effects on the Company of changes in local
market competition or developments affecting specific franchises, hotel markets
or price segments in the hotel industry. The Hotels are located primarily in
major metropolitan areas with convenient access to interstate highways,
commercial airports and other transportation facilities, local business centers
and tourist attractions. The Company's acquisition activities are focused on
full service hotels serving major U.S. business centers and primary tourist
destinations.
Consistent with the Company's acquisition strategy, the Proposed Acquisitions
consist of six full service hotels, all of which are located in major
metropolitan areas, including the Company's first full service hotel
acquisitions in the metropolitan New York and Chicago areas.
The tables on the following pages set forth certain information with respect
to the Hotels and the Proposed Acquisitions.
7
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
GUEST YEAR BUILT/
LOCATION ROOMS RENOVATED(1)
-------- --------- ------------
<S> <C> <C> <C>
OWNED HOTELS
FULL SERVICE HO-
TELS:
Marriott
Hotel(5)....... Troy, MI 350 1990
Holiday Inn
Select North
Dallas(5)...... Farmers Branch (Dallas), TX 374 1979/1994
Hilton Inn
Cleveland
South(5)....... Independence, OH 191 1980/1994
Crockett
Hotel(5)....... San Antonio, TX 206 1909/1983
Four Points by
Sheraton(5).... Saginaw, MI 156 1984
Bourbon Orleans
Hotel(5)....... New Orleans, LA 211 1800s/1995
Radisson New
Orleans
Hotel(5)....... New Orleans, LA 759 1924/1995
Radisson Hotel &
Suites(5)...... Dallas, TX 198 1986/1994
Radisson Suites
Town &
Country(5)..... Houston, TX 173 1986/1992
Holiday Inn
Aristocrat(5).. Dallas, TX 172 1925/1994
Holiday Inn
Northwest(5)... Houston, TX 193 1982/1994
Holiday Inn
Northwest
Plaza(5)....... Austin, TX 193 1984/1994
Holiday Inn(5).. San Angelo, TX 148 1984/1994
Holiday Inn..... Sebring, FL 148 1983/1995
Fairmount Hotel. San Antonio, TX 37 1906/1994
Embassy Suites
Hunt Valley(5). Hunt Valley, MD 223 1985/1995
Crowne Plaza
Ravinia(5)..... Atlanta, GA 495 1986/1993
Tremont House
Hotel(5)(6).... Boston, MA 288 1925/1988
Holiday Inn
Lenox(5)....... Atlanta, GA 297 1987/1995
Del Mar
Hilton(5)...... Del Mar (San Diego), CA 245 1989
WestCoast
Gateway Hotel.. Seattle, WA 145 1990
WestCoast
Roosevelt
Hotel(5)....... Seattle, WA 151 1929/1987
WestCoast
Wenatchee
Center
Hotel(5)....... Wenatchee, WA 147 1986/1994
Hyatt Newporter
Hotel.......... Newport Beach, CA 410 1962
WestCoast Long
Beach Hotel and
Marina......... Long Beach, CA 192 1976/1987
Hyatt
Regency(5)..... Lexington, KY 365 1977/1992
Doubletree
Denver/Boulder(5). Westminster (Denver), CO 180 1985/1992
Wyndham Greenspoint Hotel(7). Houston, TX 472 1985/1995
Wyndham Garden
Hotel-
Midtown(5)..... Atlanta, GA 191 1987/1994
-----
Subtotal/Weighted
Average........ 7,310
LIMITED SERVICE
HOTELS:
Hampton Inn
Jacksonville
Airport........ Jacksonville, FL 113 1985
Hampton Inn..... Rochester, NY 113 1986
Hampton Inn
Cleveland
Airport........ North Olmsted, OH 113 1986
Hampton Inn..... Canton, OH 108 1985
WestCoast Plaza
Park
Suites(5)(8)... Seattle, WA 194 1990
-----
Subtotal/Weighted
Average........ 641
CONFERENCE CEN-
TER:
Peachtree
Executive
Conference
Center(5)...... Peachtree City (Atlanta), GA 250 1984
-----
Total/Weighted
Average--
Owned Hotels.. 8,201
=====
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1996
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
AVERAGE REVENUE PER
TOTAL PRO FORMA AVERAGE DAILY RATE AVAILABLE ROOM
REVENUE LEASE PAYMENTS(2) OCCUPANCY(3) (ADR)(3) (REVPAR)(4)
-------- ----------------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
OWNED HOTELS
FULL SERVICE HO-
TELS:
Marriott
Hotel(5)....... $ 17,980 $ 5,375 76.0% $103.34 $78.51
Holiday Inn
Select North
Dallas(5)...... 10,178 2,837 69.2 72.24 49.95
Hilton Inn
Cleveland
South(5)....... 8,158 2,343 69.9 84.95 59.36
Crockett
Hotel(5)....... 5,174 2,347 67.4 83.16 56.01
Four Points by
Sheraton(5).... 4,170 1,098 75.9 61.10 46.38
Bourbon Orleans
Hotel(5)....... 7,607 3,557 80.1 115.65 92.62
Radisson New
Orleans
Hotel(5)....... 19,411 5,705 65.8 78.51 51.64
Radisson Hotel &
Suites(5)...... 5,151 1,713 78.0 70.51 54.97
Radisson Suites
Town &
Country(5)..... 4,647 1,823 74.2 79.41 58.88
Holiday Inn
Aristocrat(5).. 4,686 1,520 68.7 82.42 56.60
Holiday Inn
Northwest(5)... 2,926 914 64.0 51.45 32.92
Holiday Inn
Northwest
Plaza(5)....... 6,370 2,395 84.7 81.75 69.24
Holiday Inn(5).. 3,078 977 74.3 57.13 42.43
Holiday Inn..... 2,489 680 57.7 55.10 31.80
Fairmount Hotel. 2,793 643 74.0 148.96 110.19
Embassy Suites
Hunt Valley(5). 6,026 1,900 70.7 80.18 56.68
Crowne Plaza
Ravinia(5)..... 22,254 N/A(9) 75.5 102.04 77.06
Tremont House
Hotel(5)(6).... 9,952 3,001 75.4 89.62 67.60
Holiday Inn
Lenox(5)....... 7,233 2,759 72.8 77.27 56.24
Del Mar
Hilton(5)...... 7,644 1,917 68.4 77.08 52.69
WestCoast
Gateway Hotel.. 2,560 1,236 83.3 51.99 43.32
WestCoast
Roosevelt
Hotel(5)....... 4,049 2,050 74.4 89.75 66.75
WestCoast
Wenatchee
Center
Hotel(5)....... 4,236 824 63.4 59.05 37.41
Hyatt Newporter
Hotel.......... 19,361 3,813 72.3 97.56 70.58
WestCoast Long
Beach Hotel and
Marina......... 3,157 428 49.1 57.03 28.02
Hyatt
Regency(5)..... 12,189 2,742 64.6 80.34 51.92
Doubletree
Denver/Boulder(5). 5,461 1,693 78.1 70.65 55.20
Wyndham Greenspoint Hotel(7). 18,272 6,113 72.6 82.44 59.84
Wyndham Garden
Hotel-
Midtown(5)..... 6,422 2,294 73.7 93.74 69.06
-------- ----------------- ------------ ---------- --------------
Subtotal/Weighted
Average........ $233,634 $64,697 71.2% $ 82.05 $58.41
LIMITED SERVICE
HOTELS:
Hampton Inn
Jacksonville
Airport........ $ 2,037 $ 865 88.8% $ 53.62 $47.59
Hampton Inn..... 2,194 1,099 74.1 69.33 51.37
Hampton Inn
Cleveland
Airport........ 1,902 898 75.8 59.33 44.94
Hampton Inn..... 1,450 640 70.6 49.81 35.16
WestCoast Plaza
Park
Suites(5)(8)... 6,107 3,353 75.3 104.85 78.94
-------- ----------------- ------------ ---------- --------------
Subtotal/Weighted
Average........ $ 13,690 $ 6,855 76.8% $ 71.87 $55.16
CONFERENCE CEN-
TER:
Peachtree
Executive
Conference
Center(5)...... $ 14,854 $ 5,181 59.6% $109.46 $65.18
-------- ----------------- ------------ ---------- --------------
Total/Weighted
Average--
Owned Hotels.. $262,178 $76,733 71.3% $ 81.89 $58.36
======== ================= ============ ========== ==============
</TABLE>
(Notes on following page)
8
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
---------------------------------
AVERAGE REVENUE PER
NUMBER DAILY AVAILABLE
OF GUEST YEAR BUILT/ AVERAGE RATE ROOM
LOCATION ROOMS RENOVATED(1) OCCUPANCY(3) (ADR)(3) (REVPAR)(4)
----------------------- -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PROPOSED ACQUISITIONS
Marriott WindWatch Hotel. Hauppauge, NY 362 1989 76.0% $99.83 $75.88
Bonaventure Resort & Spa. Ft. Lauderdale, FL 492 1981 59.0 90.54 53.41
Wyndham Garden Hotel..... Novi (Detroit), MI 148 1988/1994 77.3 68.29 52.78
Wyndham Garden Hotel..... Wood Dale (Chicago), IL 162 1986/1994 70.7 82.10 58.03
Wyndham Garden-Las
Colinas................. Irving (Dallas), TX 168 1986 75.9 96.22 73.04
Valley River Inn......... Eugene, OR 257 1973 69.2 83.96 58.12
</TABLE>
- --------
(1) The Company defines a renovation as a significant upgrade of guest rooms or
common areas with capital expenditures averaging at least $1,000 per guest
room for limited service hotels and at least $1,500 per guest room for full
service hotels and conference centers. In some cases, renovations occurred
over more than one calendar year. Year renovated reflects the calendar year
in which the most recent of such renovations were completed. Information on
renovations for Recent Acquisitions and Proposed Acquisitions was provided
by prior owners.
(2) Under the terms of the Participating Leases, Lessees are obligated to pay
the greater of Base Rent or Participating Rent plus certain additional
amounts ("Additional Charges"), which vary with the Participating Lease.
(3) The Company calculates Average Occupancy based upon total number of paid
rooms (excluding rooms for which no charge has been made) divided by the
total number of available rooms. Average Daily Rate is calculated using
paid occupied rooms.
(4) REVPAR is determined by dividing room revenue by available rooms for the
applicable period.
(5) The Line of Credit is secured by a first mortgage lien on this Hotel.
(6) The Company intends to increase the room count at this Hotel to
approximately 321 rooms in connection with a planned $8.5 million
renovation. At present, only 283 of the 288 rooms are utilized as guest
rooms.
(7) The Greenspoint Loan is secured by a first mortgage lien on this Hotel. The
Line of Credit is secured by a second mortgage lien on this Hotel.
(8) This Hotel currently contains unused restaurant space. The Company intends
to complete the build out of a restaurant in this space, thereby converting
the Hotel from a limited service to a full service property.
(9) The Crowne Plaza Ravinia is not leased. The Company's share of net income
and share of funds from operations (as defined in the Glossary) from PAH
Ravinia were $3,912,000 and $5,822,000, respectively, on a pro forma basis
for the twelve months ended March 31, 1996.
9
<PAGE>
THE LESSEES AND THE OPERATORS
The Company leases each of the Hotels, except the Crowne Plaza Ravinia, to a
Lessee. The current Lessees are CHC Lease Partners, an entity owned by CHC
International, Inc. ("CHC") and a principal of the Gencom Group ("Gencom");
Metro Lease Partners, an affiliate of Metro Joint Venture, d/b/a Metro Hotels,
a Dallas-based hotel Company ("Metro Hotels"); NorthCoast, an entity owned by a
consortium of investors including principals of WestCoast Hotels and Sunmakers;
the Doubletree Lessee, a subsidiary of Doubletree Hotels; and the Wyndham
Lessee, an entity formed by members of the Trammell Crow family. See
"Developments Since the Initial Offering--Proposed Acquisitions."
CHC Lease Partners. CHC Lease Partners leases the Initial Hotels, the Tremont
House Hotel, the Holiday Inn Lenox, and the Del Mar Hilton from the Company
pursuant to separate Participating Leases that require CHC Lease Partners to
maintain a minimum net worth equal to the greater of (i) $10 million or (ii)
17.5% of the initial projected annual lease payments for all hotels leased by
the Company to CHC Lease Partners. CHC Lease Partners is owned by CHC and a
principal of Gencom. CHC was formed in 1994 to succeed to the hotel and land-
based casino businesses of the Continental Companies and Carnival Corporation.
As of March 31, 1996, CHC had under management 36 hotels with approximately
9,400 rooms located primarily in the United States, as well as in South
America, the Caribbean, Mexico and the Bahamas. Gencom's hotel management
affiliate, GAH, has been among the fastest growing hotel management companies
in the United States in recent years, having increased its number of guest
rooms under management from approximately 1,600 at December 31, 1992 to
approximately 8,600 at March 31, 1996. Specializing in full service properties,
GAH manages 35 hotels throughout the United States. Although CHC owns 50% of
GAH, CHC's hotels and rooms under management presented above exclude hotels
managed by GAH.
CHC Lease Partners has contracted with hotel management subsidiaries of CHC
and GAH to manage the Tremont House Hotel, the Holiday Inn Lenox, the Del Mar
Hilton and 19 of the 20 Initial Hotels. In addition, CHC Lease Partners has
contracted with Metro Hotels to manage the Holiday Inn Select North Dallas.
Metro Lease Partners. The Company leases the Embassy Suites, Hunt Valley to
Metro Lease Partners under a Participating Lease which requires Metro Lease
Partners to maintain a minimum net worth of $515,000, which represents
approximately 25% of estimated Participating Rent for this Hotel in 1996. Metro
Lease Partners has contracted with its affiliate Metro Hotels to manage the
Embassy Suites, Hunt Valley. Metro Lease Partners and Metro Hotels are Dallas-
based hotel companies owned by Walker Harman. As of April 30, 1996, Metro
Hotels had 12 hotels under management with approximately 2,400 rooms located
throughout the United States.
NorthCoast. The Company leases each of the six Hotels in the WestCoast
Portfolio and the Hyatt Regency, Lexington to NorthCoast under separate
Participating Leases which require NorthCoast to maintain a minimum net worth
equal to the greater of approximately $2.9 million or 20% of current year's
budgeted lease payments. NorthCoast is a Seattle-based company owned by a
consortium of investors including principals of WestCoast Hotels and Sunmakers.
As of April 30, 1996, WestCoast Hotels had 20 hotels under management with
approximately 4,100 rooms located primarily on the Pacific Coast.
Doubletree Lessee. The Company leases the Doubletree Denver/Boulder to the
Doubletree Lessee under a Participating Lease that requires the Doubletree
Lessee to maintain a minimum net worth equal to the greater of $400,000 or 20%
of the current year's budgeted lease payments. The Doubletree Lessee is a
subsidiary of Doubletree Hotels, a subsidiary of Doubletree Corporation. The
Doubletree Lessee has contracted with DTM Management Inc., also a subsidiary of
Doubletree Hotels, to manage the Doubletree Denver/Boulder. As of December 31,
1995, Doubletree Corporation managed or franchised 116 hotels with an aggregate
of 30,615 rooms in 32 states, the District of Columbia and Mexico.
Wyndham Lessee. The Company leases the Wyndham Greenspoint Hotel and the
Wyndham Garden-Midtown to the Wyndham Lessee, an entity formed by members of
the Trammell Crow family, under
10
<PAGE>
Participating Leases. The obligations of the Wyndham Lessee under the
Participating Leases are guaranteed by a separate entity formed by members of
the Trammell Crow family (the "Wyndham Guarantor"). The Wyndham Guarantor is
required to maintain a minimum net worth equal to 20% of the current year's
budgeted lease payments for such Hotels (such percentage being subject to
adjustment if the parties enter into leases for additional hotels). The Company
currently intends to lease each of the Wyndham Garden Hotels to the Wyndham
Lessee upon acquisition. The Wyndham Lessee has contracted with Wyndham
Management Corporation, a subsidiary of Wyndham Hotel Corporation (collectively
with Wyndham Management Corporation, "Wyndham"), to manage both the Wyndham
Greenspoint Hotel and the Wyndham Garden-Midtown. At June 25, 1996, Wyndham's
portfolio consisted of 65 hotels operated by Wyndham, 3 franchised hotels and 3
hotels under renovation or construction for a total of 18,484 rooms located in
22 states, the District of Columbia, and the Caribbean.
Holiday Inns, Inc. The Crowne Plaza Ravinia is managed for PAH Ravinia by
Holiday Inns, Inc.
While each Lessee's ability to make lease payments under the applicable
Participating Lease is dependent primarily upon its ability to generate
sufficient cash flow from the operation of the Hotels that it leases, the
minimum net worth requirements are designed to provide a source of funds to
make such payments and to fund operational shortfalls if operating cash flow is
inadequate. The Participating Leases have been negotiated on an arms length
basis. The Participating Leases with CHC Lease Partners and (subject to limited
exceptions) with NorthCoast contain cross-default provisions such that a
default under one Participating Lease is also a default under all Participating
Leases with the same Lessee. Additionally, the Wyndham Garden-Midtown
Participating Lease and the Wyndham Greenspoint Hotel Participating Lease
contain cross-default provisions. The Company generally intends to utilize
similar cross-default provisions when leasing multiple properties to a single
Lessee in the future. The Participating Leases have an average term of
approximately eleven years, with expiration dates staggered between the years
2005 and 2008, subject to earlier termination upon the occurrence of certain
events. See "The Hotels--Participating Leases--Lessee Capitalization" and "The
Lessees and the Operators."
FORMATION TRANSACTIONS AND BENEFITS TO RELATED PARTIES
The Company was formed to continue and expand the hotel acquisition,
ownership, redevelopment and repositioning businesses of Patriot American.
Certain investors in the entities that owned the Hotels acquired by the Company
in connection with the Initial Offering, including members of management,
received certain benefits in connection with the Initial Offering and the
transactions described in this Prospectus under "Formation Transactions" (the
"Formation Transactions").
DISTRIBUTION POLICY
The Board of Directors of the Company has declared a quarterly distribution
of $0.48 per share of Common Stock ($1.92 per share on an annualized basis)
payable on July 30, 1996 to shareholders of record on June 27, 1996. Future
distributions by the Company will be at the discretion of the Board of
Directors and there can be no assurance that any such distributions will be
made by the Company. Distributions by the Company to the extent of its current
and accumulated earnings and profits for federal income tax purposes generally
will be taxable to stockholders as ordinary dividend income. Distributions in
excess of current and accumulated earnings and profits will be treated as a
non-taxable reduction of the stockholder's basis in its shares of Common Stock
to the extent thereof, and thereafter as taxable gain. Distributions that are
treated as a reduction of the stockholder's basis in its shares of Common Stock
will have the effect of deferring taxation until the sale of the stockholder's
shares. The Company has determined that, for federal income tax purposes,
approximately 26% of the $0.48 per share distribution paid for 1995 represented
a return of capital to the stockholders. Given the dynamic nature of the
Company's acquisition strategy and the extent to which any future acquisitions
would alter this calculation, no assurances can be given regarding what percent
of future distributions will constitute return of capital for federal income
tax purposes.
11
<PAGE>
TAX STATUS
The Company will elect to be taxed as a REIT under sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ending December 31, 1995. With certain exceptions, as a REIT,
the Company is not subject to federal income tax at the corporate level on its
taxable income that is distributed to its shareholders. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its taxable income. Failure to
qualify as a REIT would render the Company subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates, and distributions to the shareholders in any such year will
not be deductible by the Company. Although the Company does not intend to
request a ruling from the Internal Revenue Service (the "Service") as to its
REIT status, the Company has received the opinion of its legal counsel as to
its REIT status, which opinion is based on certain assumptions and
representations and will not be binding on the Service or any court. Even if
the Company qualifies for taxation as a REIT, however, the Company may be
subject to certain state and local taxes on its income and property. In
connection with the Company's election to be taxed as a REIT, the Company's
Articles of Incorporation impose restrictions on the transfer of shares of
Common Stock. The Company has adopted the calendar year as its taxable year.
See "Risk Factors--Tax Risks," "Risk Factors--Limitation on Acquisition and
Change in Control," "Federal Income Tax Considerations--Taxation of the
Company," "Federal Income Tax Consequences--State and Local Taxes," and
"Description of Capital Stock--Articles of Incorporation and Bylaw Provisions--
Restrictions on Transfer."
THE OFFERING
All of the shares of Common Stock offered hereby are being offered by the
Company.
Common Stock Offered by the Company..... 5,500,000 shares
Common Stock to be Outstanding after 24,480,976 shares(1)
the Offering...........................
Use of Proceeds......................... To reduce amounts outstanding under
the Line of Credit (which amounts
have been borrowed principally to
complete the Recent Acquisitions)
and/or for general corporate and
working capital purposes.
- --------
(1) Includes 3,502,328 shares issuable at the Company's option upon redemption
of OP Units (or exchange of Preferred OP Units at the holders' option) and
62,255 shares of restricted Common Stock owned by certain executive
officers and directors of the Company. Excludes 1,000,000 shares of Common
Stock reserved for issuance pursuant to the Patriot American Hospitality,
Inc. 1995 Incentive Plan.
12
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth historical and pro forma financial information
for the Company and the Lessees, and should be read in conjunction with the
financial statements and notes thereto which are contained elsewhere in this
Prospectus. The pro forma operating information is presented as if the Initial
Offering, Recent Acquisitions, Private Placement and the current Offering had
occurred at January 1, 1995 and is carried forward through each period
presented, and therefore incorporates certain assumptions that are included in
the Notes to the Pro Forma Condensed Consolidated Statements of Operations
included elsewhere in this Prospectus. The pro forma balance sheet data is
presented as if the acquisition of the Recent Acquisitions completed after
March 31, 1996 and the application of the proceeds of the Private Placement and
the current Offering had occurred on March 31, 1996.
PATRIOT AMERICAN HOSPITALITY, INC.
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
-------------------------------- --------------------------------------------
PERIOD
OCTOBER 2, 1995
(INCEPTION OF
OPERATIONS) THREE MONTHS YEAR ENDED TWELVE MONTHS THREE MONTHS
THROUGH ENDED DECEMBER 31, ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Participating lease
revenue(2)............ $ 10,582 $ 12,371 $ 75,921 $ 76,733 $19,983
Income before minority
interest and
extraordinary items... 7,064 8,286 47,702 48,802 13,145
Income before
extraordinary
items(3).............. 6,096 7,128 40,881 41,823 11,265
Net income applicable
to common
shareholders.......... $ 5,359 $ 7,128 $ 40,881 $ 41,823 $11,265
PER SHARE DATA:
Income before
extraordinary items... $ 0.42 $ 0.48 $ 1.95 $ 1.99 $ 0.54
Extraordinary items,
net of minority
interests(3).......... (0.05) -- -- -- --
--------- -------- -------- -------- -------
Net income applicable
to common
shareholders.......... $ 0.37 $ 0.48 $ 1.95 $ 1.99 $ 0.54
========= ======== ======== ======== =======
Dividends per common
share................. $ 0.48 $ 0.48
========= ========
Weighted average common
shares and common
share equivalents
outstanding........... 14,675 14,734 20,979 20,979 20,979
========= ======== ======== ======== =======
CASH FLOW DATA:
Cash provided by
operating
activities(4)......... $ 7,618 $ 9,002 $ 67,204 $ 68,043 $17,571
Cash used in investing
activities(5)......... (306,948) (37,838) (10,508) (10,645) (2,684)
Cash provided by (used
in) financing
activities(6)......... 304,099 32,165 (47,042) (47,042) (11,760)
OTHER DATA:
Funds from
Operations(7)......... $ 9,798 $ 11,634 $ 67,704 $ 68,891 $18,184
Cash Available for
Distribution(8)....... 8,603 10,388 57,963 59,014 15,694
Weighted average common
shares and OP units
outstanding........... 17,024 17,107 24,481 24,481 24,481
<CAPTION>
HISTORICAL
-------------------------------- PRO FORMA
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Investment in hotel
properties, at cost,
net................... $ 265,759 $306,552 $479,151
Total assets........... 324,224 369,578 541,554
Total debt............. 9,500 50,250 26,861
Minority interest in
Operating Partnership. 41,522 45,485 72,737
Shareholders' equity... 261,778 261,727 427,325
</TABLE>
(Notes on page 15)
13
<PAGE>
LESSEES
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
-------------------------------- -----------------------------------------------
PERIOD
OCTOBER 2, 1995
(INCEPTION) THREE MONTHS TWELVE MONTHS THREE MONTHS
THROUGH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- ----------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Room revenue........... $21,508 $25,308 $158,865 $160,909 $40,549
Food and beverage
revenues.............. 8,649 8,240 61,037 61,364 14,913
Conference center
revenue............... 576 645 2,434 2,380 645
Telephone and other
revenue............... 1,732 2,373 14,807 15,271 3,979
------- ------- -------- -------- -------
Total revenue.......... 32,465 36,566 237,143 239,924 60,086
Hotel operating
expenses.............. 20,801 23,050 156,684 158,799 39,631
Participating Lease
payments(2)........... 10,582 12,371 75,921 76,733 19,983
------- ------- -------- -------- -------
Income before Lessee
expenses.............. 1,082 1,145 4,538 4,392 472
Lessee expenses(9)..... 573 599 5,646 5,509 1,170
------- ------- -------- -------- -------
Net income(9).......... $ 509 $ 546 $ (1,108) $ (1,117) $ (698)
======= ======= ======== ======== =======
</TABLE>
(Notes on page 15)
14
<PAGE>
NOTES TO SUMMARY FINANCIAL INFORMATION
(1) The pro forma information does not purport to represent what the Company's
financial position or the Company's or the Lessees' results of operations
actually would have been if the Initial Offering, Recent Acquisitions,
Private Placement and the current Offering in fact occurred on such date or
at the beginning of the periods indicated, or to project the Company's or
Lessees' results of operations for any future periods.
(2) With respect to the pro forma information, represents participating lease
payments from the Lessees to the Operating Partnership calculated on a pro
forma basis by applying the provisions of the Participating Leases to the
historical revenue of the Hotels as if January 1, 1995 were the beginning
of a lease year.
(3) Pro forma operating results do not include the effect of extraordinary
items reported on an historical basis.
(4) Pro forma cash provided by operating activities represents income before
income allocable to minority interest, plus depreciation and amortization
(including amortization of unearned management stock compensation) less the
non-cash portion of the Company's equity in earnings of unconsolidated
subsidiary. The pro forma amounts do not include adjustments from changes
in working capital resulting from changes in current assets and current
liabilities as there is no historical data available as of both the
beginning and end of each period presented.
(5) On a pro forma basis, cash used in investing activities represents the
approximate 4.0% of hotel revenue which is required to be reserved under
the terms of the Participating Leases for capital improvements and the
replacement and refurbishment of F, F & E.
(6) Pro forma cash used in financing activities represents estimated dividends
and distributions to be paid based on the Company's initial annual dividend
rate of $1.92 per share and an aggregate of 23,818,585 shares of Common
Stock and OP Units outstanding and $1.98 per share on the 662,391 Preferred
OP Units outstanding.
(7) In accordance with the resolution adopted by the Board of Governors of the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"),
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 and joint
ventures. 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. Under the Participating Leases, the Company is obligated to
establish a reserve for capital improvements at the Hotels (including the
replacement or refurbishment of F, F & E) and to pay real estate and
personal property taxes and casualty insurance. The Company believes that
funds from operations is helpful to investors as a measure of the
performance of an equity REIT, because, along with cash flows from
operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures.
(8) Cash Available for Distribution represents funds from operations, as
adjusted for certain non-cash items (e.g., non-real estate related
depreciation and amortization), less reserves for capital expenditures.
(9) Historical Lessee expenses represent management fees paid to the Operators
and Lessee overhead expenses, net of dividend and interest income earned by
the Lessees. Management fees paid to the Operators are subordinate to the
Lessees' obligations to the Company under the Participating Lease
agreements. Pro forma Lessee net income excludes pro forma dividends on
approximately 300,000 OP Units, which form a portion of the required
capitalization of certain of the Lessees and pro forma interest income
associated with the Lessees' working capital balances.
15
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Common Stock in the Offering.
DEPENDENCE ON LESSEES AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to shareholders depends almost
exclusively upon the ability of the Lessees to make rent payments under the
Participating Leases (which is dependent primarily on the Lessees' ability to
generate sufficient revenues from the Hotels). Any failure or delay by the
Lessees in making rent payments may adversely affect the Company's ability to
make anticipated distributions to shareholders. Such failure or delay may be
caused by reductions in revenue from the Hotels or in the net operating income
of the Lessees or otherwise. Although failure on the part of the Lessees to
materially comply with the terms of a Participating Lease would give the
Company the right to terminate such lease, repossess the applicable property
and seek enforcement of the payment obligations under the lease, the Company
would then be required to find another lessee to lease such property. There
can be no assurance that the Company would be able to find another lessee or
that, if another lessee were found, the Company would be able to enter into a
new lease on favorable terms.
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
The Company also is dependent on the ability of the Lessees and the
Operators to manage the Hotels. To maintain its status as a REIT, the Company
is not able to operate the Hotels or any subsequently acquired properties. As
a result, the Company will be unable to directly implement strategic business
decisions with respect to the marketing of its properties, such as decisions
with respect to the setting of room rates, repositioning of a franchise,
redevelopment of food and beverage operations and certain similar decisions.
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION OF A SUBSTANTIAL NUMBER OF
ADDITIONAL HOTELS
The Company is currently experiencing a period of rapid growth. Since the
Initial Offering, the Company has invested approximately $277 million in
hotels, increasing its room portfolio by approximately 95%. Additionally, the
Company has entered into contracts to purchase the Proposed Acquisitions for
an aggregate purchase price of approximately $103 million. Assuming completion
of the Proposed Acquisitions, the Company will have increased its rooms
portfolio by approximately 133% since the Initial Offering. The Company's
ability to manage its growth effectively will require it to select Lessees and
Operators to lease and manage newly acquired hotels. There can be no assurance
that the Company, the Lessees, or the Operators will be able to manage these
additional operations effectively.
RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
GENERAL
Neither the Company's Bylaws nor its Articles of Incorporation limit the
amount of indebtedness the Company may incur. Currently, the maximum committed
amount available under the Line of Credit is $228 million. Additionally, the
Company has incurred the $22.0 million Greenspoint Loan. See "Developments
Since the Initial Offering--Financing Activities." The Company has utilized
the Line of Credit to finance certain of the Recent Acquisitions and may use
the Line of Credit to fund the acquisition of additional hotels. The Line of
Credit is currently secured by a first mortgage lien on 25 of the Hotels and a
second mortgage lien on the Wyndham Greenspoint Hotel. The Line of Credit will
be secured by qualifying subsequently acquired hotels that are purchased with
borrowings under the Line of Credit. Other Hotels may be added as security for
the Line of Credit depending upon the outstanding balances thereunder. Subject
to the limitations described above, the Company may borrow additional amounts
from the same or other lenders in the future, or may issue corporate debt
securities in public or private offerings. Certain of such additional
borrowings may be secured by properties owned by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Policies and Objectives with
Respect to Certain Activities--Financing" and "Management."
16
<PAGE>
There can be no assurances that the Company will be able to meet its debt
service obligations and, to the extent that it cannot, the Company risks the
loss of some or all of its assets, including the Hotels, to foreclosure.
Adverse economic conditions could cause the terms on which borrowings become
available to be unfavorable. In such circumstances, if the Company is in need
of capital to repay indebtedness in accordance with its terms or otherwise, it
could be required to liquidate one or more investments in hotel properties at
times which may not permit realization of the maximum return on such
investments.
VARIABLE RATE DEBT
The Line of Credit and the Greenspoint Loan bear interest at a variable
rate. Economic conditions could result in higher interest rates, which could
increase debt service requirements on variable rate debt and could reduce the
amount of Cash Available for Distribution.
POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON MARKET PRICE
OF COMMON STOCK
Sales of substantial amounts of Common Stock or the perception that such
sales could occur, could adversely affect the prevailing market price for the
Common Stock. The Company has issued an aggregate of 62,255 shares of Common
Stock to certain officers and directors of the Company in connection with the
Initial Offering and pursuant to the Non-Employee Directors' Incentive Plan.
In addition to OP Units issued to the Company, the Operating Partnership has
outstanding an aggregate of 3,502,328 OP Units, including an aggregate of
515,625 OP Units issued in connection with the acquisition of the Holiday Inn
Lenox, the WestCoast Portfolio and the Wyndham Greenspoint Hotel, and 662,391
Preferred OP Units issued in the Private Placement. In the future, the Company
may acquire additional hotels through the issuance of OP Units. OP Units
(other than Preferred OP Units) may be redeemed for cash (or, at the Company's
election, the Company may purchase each OP Unit offered for redemption for one
share of Common Stock). Preferred OP Units may be exchanged for shares of
Common Stock under certain circumstances. See "Developments Since the Initial
Offering--Financing Activities." The Patriot American Hospitality Partnership,
L.P. Partnership Agreement (the "Partnership Agreement") prohibits the
redemption of OP Units until October 2, 1996. In addition, the officers and
directors of the Company and certain other persons have agreed (the "Lock-up
Agreements"), subject to certain limited exceptions, not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock (or any
securities convertible into or exercisable for shares of Common Stock)
received in connection with the Initial Offering for periods ranging from one
to two years after the date of the Initial Offering (the "Lock-up Periods"),
without the prior written consent of PaineWebber Incorporated. The Company has
restricted the transfer of OP Units issued in connection with the acquisition
of the Holiday Inn Lenox, the WestCoast Portfolio and the Wyndham Greenspoint
Hotel for one year, one year, and two years from the date of issuance,
respectively, and may similarly restrict the transfer of OP Units issued in
connection with the acquisition of additional hotels. At the conclusion of
these restrictions, all shares of Common Stock issued in connection with the
formation of the Company or acquired upon redemption of OP Units may be sold
in the public market. In addition, 1,000,000 shares of Common Stock are
reserved for issuance pursuant to the Patriot American Hospitality, Inc. 1995
Incentive Plan (the "1995 Plan"). See "Management--Stock Incentive Plans."
RISK OF INVESTMENT IN SUBSIDIARIES
The capital stock of PAH Ravinia is divided into two classes: voting common
stock, 96% of which is owned indirectly by officers and/or directors of the
Company and 4% of which is held indirectly by the Operating Partnership, and
nonvoting common stock, 100% of which is held by the Operating Partnership.
Management's voting common stock represents 0.96% of the economic interest in
PAH Ravinia. However, as the holders of 96% of the voting common stock,
management retains the ability to elect the directors of PAH Ravinia. Although
the Company's stock ownership represents a 99.04% economic interest in PAH
Ravinia, the Company is not able to elect directors and its ability to
influence the day-to-day decisions of PAH Ravinia may therefore be limited. As
a result, the voting stockholders of PAH Ravinia may implement business policy
decisions that would not have been implemented by the Company and that are
adverse to the interests of the Company or that lead to adverse financial
results.
17
<PAGE>
LIMITED OPERATING HISTORY
The Company has been recently organized and has a limited operating history.
There can be no assurance that the Company will be able to generate sufficient
revenue from operations to make distributions to shareholders. The Company
also is subject to the risks generally associated with the formation of any
new business. The Initial Hotels, on a combined basis, experienced net losses
in 1992 and 1994. In addition, certain of the Recent Acquisitions have
experienced historical net losses. There can be no assurance that the Company
will not experience net losses in the future.
COMPETITION FOR MANAGEMENT TIME
Mr. Nussbaum, the Chairman of the Board and Chief Executive Officer of the
Company, will continue to act as chief executive officer of Patriot American,
and, therefore, will be subject to competing demands on his time. Mr. Nussbaum
intends to devote a majority of his time to the business of the Company.
CONFLICTS OF INTEREST
SALE OF HOTELS
Certain officers and directors of the Company or their affiliates may have
had unrealized gain in their interests in certain of the Initial Hotels
transferred to the Company in connection with the Initial Offering. The sale
of such Hotels by the Company may cause adverse tax consequences to such
officers, directors or their affiliates. Therefore, the interests of the
Company, such officers, directors and their affiliates could be different in
connection with the disposition of such Hotels.
CONTINUING ACQUISITIONS AND HOTEL DEVELOPMENT
Affiliates of the Lessees may acquire, develop or manage hotels that compete
with the Company's Hotels. Accordingly, the Lessees' decisions relating to the
operation of the Hotels that are in competition with other hotels owned or
managed by them may not reflect the interests of the Company.
HOTEL INDUSTRY RISKS
OPERATING RISKS
The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things, (i) competition for guests from other
hotels, a number of which may have greater marketing and financial resources
than the Company and the Lessees; (ii) increases in operating costs due to
inflation and other factors, which increases may not have been offset in
recent years, and may not be offset in the future by increased room rates;
(iii) dependence on business and commercial travelers and tourism, which
business may fluctuate and be seasonal; (iv) increases in energy costs and
other expenses of travel, which may deter travelers; and (v) adverse effects
of general and local economic conditions. These factors could adversely affect
the Lessees' ability to generate revenues and to make lease payments and
therefore the Company's ability to make expected distributions to
shareholders.
The Company is also subject to the risk that in connection with the
acquisition of hotels it may not be possible to transfer certain operating
licenses, such as food and beverage licenses, to the Lessees or Operators, or
to obtain new licenses in a timely manner in the event such licenses cannot be
transferred. For example, the Lessees are currently attempting to obtain new
alcoholic beverage licenses for the Tremont House Hotel, the Marriot Troy
Hotel and the Four Points by Sheraton in Saginaw, Michigan. Although these
Hotels are providing alcoholic beverages under interim licenses or licenses
obtained prior to the Company's acquisition of these Hotels, there can be no
assurance that these licenses will remain in effect until the Company obtains
new licenses or that new licenses will be obtained. The failure to have
alcoholic beverages licenses or other operating licenses could adversely
affect the ability of the affected Lessees to generate revenues and make lease
payments to the Company.
OPERATING COSTS AND CAPITAL EXPENDITURES; HOTEL RENOVATION
Hotels in general, including the Hotels, have an ongoing need for
renovations and other capital improvements, particularly in older structures,
including periodic replacement or refurbishment of F, F & E.
18
<PAGE>
Under the terms of the Participating Leases, the Company is obligated to
establish a reserve to pay the cost of certain capital expenditures at the
Hotels and pay for periodic replacement or refurbishment of F, F & E and
expects to be similarly obligated with respect to the Proposed Acquisitions.
However, if capital expenditures exceed the Company's expectations, the
additional cost could have an adverse effect on the Company's Cash Available
for Distribution. In addition, the Company has and may continue to acquire
hotels where significant renovation is either required or desirable.
Renovation of hotels involves certain risks, including the possibility of
environmental problems, construction cost overruns and delays, uncertainties
as to market demand or deterioration in market demand after commencement of
renovation and the emergence of unanticipated competition from other hotels.
COMPETITION FOR INVESTMENT OPPORTUNITIES
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell.
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
of the Hotels in the second and third quarters of a calendar year. Seasonal
variations in revenue at the Hotels may cause quarterly fluctuations in the
Company's lease revenue.
INVESTMENT IN SINGLE INDUSTRY
The Company's current strategy is to acquire interests only in hotels and
related properties. As a result, the Company will be subject to risks inherent
in investments in a single industry. The effects on Cash Available for
Distribution to the Company's shareholders resulting from a downturn in the
hotel industry will be more pronounced than if the Company had diversified its
investments.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS
The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property. The underlying value of the
Company's real estate investments and the Company's income and ability to make
distributions to its shareholders is dependent upon the ability of the Lessees
to operate the Hotels in a manner sufficient to maintain or increase revenues
and to generate sufficient income in excess of operating expenses to make rent
payments under the Participating Leases. Income from the Hotels may be
adversely affected by changes in national economic conditions, changes in
local market conditions due to changes in general or local economic conditions
and neighborhood characteristics, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures,
changes in real estate tax rates and other operating expenses, adverse changes
in governmental rules and fiscal policies, civil unrest, acts of God,
including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors which are beyond the control of the Company.
VALUE AND ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
is limited. If the Company must sell an investment, there can be no assurance
that the Company will be able to dispose of it in the time period it desires
or that the sales price of any investment will recoup or exceed the amount of
the Company's investment.
PROPERTY TAXES
Each Hotel is subject to real property taxes. The real property taxes on
hotel properties in which the Company invests may increase or decrease as
property tax rates change and as the properties are assessed or reassessed by
taxing authorities. If property taxes increase, the Company's ability to make
expected distributions to its shareholders could be adversely affected.
19
<PAGE>
CONSENTS OF GROUND LESSOR REQUIRED FOR SALE OF CERTAIN HOTELS
The Fairmount Hotel, the Holiday Inn Lenox, the Hyatt Newporter Hotel, the
WestCoast Long Beach Hotel and Marina and the Hyatt Regency, Lexington are
subject to ground leases with third party lessors. In addition, the Company
may acquire hotels in the future that are subject to ground leases. Any
proposed sale of a hotel that is subject to a ground lease by the Operating
Partnership or any proposed assignment of the Operating Partnership's
leasehold interest in the ground lease may require the consent of third party
lessors. As a result, the Company and the Operating Partnership may not be
able to sell, assign, transfer or convey the Operating Partnership's interest
in any such hotel in the future absent the consent of such third parties, even
if such transaction may be in the best interests of the shareholders of the
Company.
ENVIRONMENTAL MATTERS
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future legislation. Under
various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the owner's ability to borrow by using such
real property as collateral. Persons who arrange for the transportation,
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for releases of hazardous materials,
including asbestos-containing materials ("ACMs"), into the environment, and
third parties may seek recovery from owners or operators of real properties
for personal injury associated with exposure to released ACMs or other
hazardous materials. Environmental laws may also impose restrictions on the
manner in which a property may be used or transferred or in which businesses
may be operated, and these restrictions may require expenditures. In
connection with the ownership and operation of the Hotels, the Company, the
Operating Partnership or the Lessees may be potentially liable for any such
costs. The cost of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially adversely affect the Company's results of operations and financial
condition. Phase I environmental site assessments ("ESAs") have been conducted
at all of the Hotels by qualified independent environmental engineers. The
purpose of Phase I ESAs is to identify potential sources of contamination for
which the Hotels may be responsible and to assess the status of environmental
regulatory compliance. The ESAs have not revealed any environmental liability
or compliance concerns that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations or liquidity,
nor is the Company aware of any such liability or concerns. Nevertheless, it
is possible that these ESAs did not reveal all environmental liabilities or
compliance concerns or that material environmental liabilities or compliance
concerns exist of which the Company is currently unaware. The Company has not
been notified by any governmental authority, and has no other knowledge of,
any material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental substances in connection with any of its
hotels, except as noted below.
Marriott WindWatch Hotel. The Marriott WindWatch Hotel, a Proposed
Acquisition, is in close proximity to a former municipal landfill, which has
been designated as a National Priorities List ("NPL") site by the United
States Environmental Protection Agency ("EPA"). The Hotel property is
downgradient of the NPL site. An environmental consultant retained by the
Company has informed the Company that the current data relating to the NPL
site do not suggest any groundwater contamination from the former landfill has
migrated onto the Hotel property. The environmental consultant has also
informed the Company that it is unlikely that any groundwater contamination
from the former landfill will in the future migrate onto the hotel property
resulting in contaminant levels above applicable action levels. Remediation
activities by the municipality, under the supervision of the EPA and the New
York State Department of Environmental Conservation ("DEC"), are ongoing but
have not yet been completed. The DEC has indicated that it does not intend to
pursue as potentially responsible parties nearby landowners whose property
becomes contaminated as a result of off-site migration from the former
landfill.
20
<PAGE>
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that the Company is not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants. If the Company were required to make
modifications to comply with the ADA, the Company's ability to make expected
distributions to its shareholders could be adversely affected.
UNINSURED AND UNDERINSURED LOSSES
Each Participating Lease specifies comprehensive insurance to be maintained
on each of the Hotels, including liability, fire and extended coverage.
Management believes such specified coverage is of the type and amount
customarily obtained for or by an owner of hotels. Leases for subsequently
acquired hotels will contain similar provisions. However, there are certain
types of losses, generally of a catastrophic nature, such as earthquakes and
floods, that may be uninsurable or not economically insurable. The Company's
Board of Directors and management will use their discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a
view to maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
infeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore
its economic position with respect to such property.
ACQUISITION AND DEVELOPMENT RISKS
The Company intends to pursue acquisitions of additional hotels and, under
appropriate circumstances, may pursue development opportunities. Acquisitions
entail risks that investments will fail to perform in accordance with
expectations and that estimates of the cost of improvements necessary to
market and acquire properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. New project
development is subject to numerous risks, including risks of construction
delays or cost overruns that may increase project costs, new project
commencement risks such as receipt of zoning, occupancy and other required
governmental approvals and permits and the incurrence of development costs in
connection with projects that are not pursued to completion. The fact that the
Company must distribute 95% of its net taxable income in order to maintain its
qualification as a REIT may limit the Company's ability to rely upon lease
income from the Hotels or subsequently acquired properties to finance
acquisitions or new developments. As a result, if debt or equity financing
were not available on acceptable terms, further acquisitions or development
activities might be curtailed or Cash Available for Distribution might be
adversely affected.
TAX RISKS
FAILURE TO QUALIFY AS A REIT
The Company operates in a manner designed to permit it to qualify as a REIT
for federal income tax purposes. The continued qualification of the Company as
a REIT will depend on the Company's continuing ability to meet various
requirements concerning, among other things, the ownership of its outstanding
stock, the nature of its assets, the sources of its income, and the amount of
its distributions to its shareholders. If the Company were to fail to qualify
as a REIT in any taxable year, the Company would not be allowed a deduction
for distributions to shareholders in computing its taxable income and would be
subject to federal income tax (including any applicable minimum tax) on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Company also would be disqualified from treatment
as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the Company's Cash Available for
Distribution would be reduced for each of the years involved. Although the
Company currently intends to continue to operate in a manner designed to
permit it to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Board of Directors to revoke
the REIT election. See "Federal Income Tax Considerations."
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ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is generally required each year
to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company is subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85%
of its ordinary income for that year, (ii) 95% of its capital gain net income
for that year and (iii) 100% of its undistributed income from prior years.
The Company intends to make distributions to its shareholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income consists primarily of its share of the income of the
Operating Partnership, and the Company's Cash Available for Distribution
consists primarily of its share of cash distributions from the Operating
Partnership. Differences in timing between taxable income and Cash Available
for Distribution and the seasonality of the hotel industry could require the
Company to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. For federal income tax
purposes, distributions paid to shareholders may consist of ordinary income,
capital gains, nontaxable return of capital, or a combination thereof. The
Company provides its shareholders with an annual statement as to its
designation of the taxability of distributions.
Distributions by the Company are determined by the Company's Board of
Directors and depend on a number of factors, including the amount of the
Company's Cash Available for Distribution, the Company's financial condition,
any decision by the Board of Directors to reinvest funds rather than to
distribute such funds, the Company's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations--Requirements for Qualification--Distribution Requirements."
FAILURE OF THE OPERATING PARTNERSHIP TO BE CLASSIFIED AS A PARTNERSHIP FOR
FEDERAL INCOME TAX PURPOSES; IMPACT ON REIT STATUS
The Operating Partnership (and each of its Subsidiary Partnerships, as
defined in "Federal Income Tax Considerations") has been structured to be
classified as a partnership for federal income tax purposes. If the Operating
Partnership (or a Subsidiary Partnership) were to fail to be classified as a
partnership for federal income tax purposes, the Operating Partnership (or the
Subsidiary Partnership) would be taxable as a corporation. In such event, the
Company likely would cease to qualify as a REIT for a variety of reasons.
Furthermore, the imposition of a corporate income tax on the Operating
Partnership would reduce substantially the amount of Cash Available for
Distribution. See "Federal Income Tax Considerations--Tax Aspects of the
Operating Partnership and the Subsidiary Partnerships."
RISKS OF OPERATING HOTELS UNDER FRANCHISE OR BRAND AFFILIATIONS
Thirty-one of the Hotels are operated under franchise or brand affiliations.
In addition, hotels in which the Company invests subsequently may be operated
pursuant to franchise or brand affiliations. The continuation of the franchise
licenses relating to the franchised Hotels (the "Franchise Licenses") is
subject to specified operating standards and other terms and conditions. The
continued use of a brand is generally contingent upon the continuation of the
Management Agreement related to that Hotel with the branded Operator.
Franchisors typically inspect licensed properties periodically to confirm
adherence to operating standards. Action on the part of any of the Company,
the Operating Partnership, the Lessees or the Operators could result in a
breach of such standards or other terms and conditions of the Franchise
Licenses and could result in the loss or cancellation of a franchise license.
It is possible that a franchisor could condition the continuation of a
franchise license on the completion of capital improvements which the Board of
Directors determines are too expensive or otherwise unwarranted in light of
general economic conditions or the operating results or prospects of the
affected hotel. In that event, the Board of Directors may elect to allow the
franchise license to lapse. In any case, if a franchise or brand affiliation
is terminated, the Company and the Lessee may seek to obtain a suitable
replacement franchise or brand affiliation, or to operate the Hotel
independent of a franchise or brand affiliation. The loss of a franchise or
brand affiliation could have a material adverse effect upon the operations or
the underlying value of the hotel
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covered by the franchise or brand affiliation because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor or brand owner.
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). Furthermore, if any shareholder or group of shareholders of
any Lessee owns, actually or constructively, 10% or more in value of the
capital stock of the Company, such Lessee could become a related party tenant
of the Operating Partnership, which would result in loss of REIT status for
the Company. For the purpose of preserving the Company's REIT qualification,
the Company's Articles of Incorporation prohibit direct or indirect ownership
(taking into account applicable ownership provisions of the Code) in excess of
the Ownership Limitation, which prohibits ownership of more than 9.8% of any
class of the Company's outstanding capital stock, subject to the Look-Through
Ownership Limitation, which permits mutual funds and certain other entities to
own as much as 15% of a class of the Company's capital stock in appropriate
circumstances. Generally, the capital stock owned by affiliated owners is
aggregated for purposes of the Ownership Limitation. The Ownership Limitation
could have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of the Common Stock might receive a premium
for their Common Stock over the then prevailing market price or in which such
holders might believe to be otherwise in their best interests. See
"Description of Capital Stock--Articles of Incorporation and Bylaw
Provisions--Restrictions on Transfer" and "Federal Income Tax Considerations--
Requirements for Qualification."
PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to issue up
to 20,000,000 preferred shares and to establish the preferences and rights of
any shares issued. See "Description of Capital Stock--Preferred Shares." The
issuance of preferred shares could have the effect of delaying or preventing a
change in control of the Company even if a change in control were in the
shareholders' interest. No preferred shares are currently issued or
outstanding.
VIRGINIA ANTI-TAKEOVER STATUTES
As a Virginia corporation, the Company is subject to various provisions of
the Virginia Stock Corporation Act ("the VSCA") that impose certain
restrictions and require certain procedures with respect to certain takeover
offers and business combinations, including, but not limited to, combinations
with interested holders and share purchases from certain holders. Such
provisions may deter takeover attempts or tender offers, including offers or
attempts that may result in the payment of a premium over the market price for
the Common Stock or that a shareholder might otherwise consider in its best
interest. See "Description of Capital Stock--Articles of Incorporation and
Bylaw Provisions."
ABILITY OF BOARD TO CHANGE POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, are determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time
without a vote of the shareholders of the Company. See "Policies and
Objectives with Respect to Certain Activities."
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on certain financial
instruments. Thus, an increase in market interest rates will result in higher
yields on certain financial instruments, which could adversely affect the
market price of the Common Stock.
23
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THE COMPANY
GENERAL
The Company is a self-administered REIT, which owns 35 Hotels in 13 states,
with an aggregate of 8,201 guest rooms. 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 29 full service hotels,
5 limited service hotels and an executive conference center. Thirty-one of the
Hotels are operated under franchise or brand affiliations with nationally
recognized hotel companies, including Marriott(R), Crowne Plaza(R),
Radisson(R), Hilton(R), Hyatt(R), Four Points by Sheraton(R), Holiday Inn(R),
Wyndham(TM), Wyndham Garden(R), WestCoast(R), Doubletree(R), Embassy Suites(R)
and Hampton Inn(R). For the twelve months ended March 31, 1996, the Hotels had
an average occupancy of 71.3% and ADR of $81.89.
Since the Initial Offering, the Company has acquired the 15 Recent
Acquisitions with an aggregate of 3,995 guest rooms for approximately $277
million and has entered into contracts to purchase the 6 Proposed Acquisitions
with an aggregate of 1,589 guest rooms for an aggregate purchase price
(excluding acquisition-related expenses) of approximately $103 million. The
Company purchased the Recent Acquisitions with proceeds from the exercise of
the underwriter's over-allotment option in the Initial Offering and with funds
from its Line of Credit. The Company's purchase of each of the Proposed
Acquisitions is subject to the satisfaction of various closing conditions and,
therefore, no assurances can be given that these acquisitions will be
completed. See "Developments Since the Initial Offering--Proposed
Acquisitions." If all of the Proposed Acquisitions are consummated, the
Company will have invested approximately $380 million in hotel acquisitions
and more than doubled its room portfolio since the Initial Offering.
The Company leases each of the Hotels, except the Crowne Plaza Ravinia which
is owned through a special purpose corporation, to independent Lessees
pursuant to separate Participating Leases. The Crowne Plaza Ravinia
acquisition was structured without a Lessee for reasons specific to the
acquisition. The Company anticipates that future acquisitions will continue to
be structured with Lessees. The Lessees and the special purpose corporation
that owns the Crowne Plaza Ravinia in turn have entered into separate
Management Agreements with the Operators to operate the Hotels. Neither the
Company nor its management owns an interest in, or participates in the
management of, the Lessees or the Operators, thus avoiding certain potential
conflicts of interest generally associated with the structure of hospitality
REITs. All Participating Leases between the Company and the Lessees have been
negotiated on an arms length basis.
In connection with the Initial Offering, the Company closed the Line of
Credit with Paine Webber Real Estate. See "Developments Since the Initial
Offering--Financing Activities."
The Company believes market conditions today remain favorable for the
acquisition of hotel properties at attractive returns and, particularly with
respect to full service hotels, at prices significantly below replacement
cost. Accordingly, the Company intends to continue to acquire additional
hotels that meet one or more of its investment criteria. See "--Business
Strategy--Acquisitions." The Company believes its ability to implement its
acquisition strategy is enhanced by the favorable reputation and track record
of the Company as a credible acquiror of hotels and the extensive industry
relationships developed by Patriot American and the Company's management team.
The Company expects that these relationships will provide the Company with
opportunities to purchase selected hotels before active marketing of such
hotels commences. Further, because the Company's structure is designed to
accommodate multiple lessees, hotel brand owner/operators, major hotel
management companies and hotel franchisors have presented the Company with
opportunities to acquire attractive hotel properties (including properties not
otherwise marketed for sale) and the Company expects such opportunities will
continue. The Company believes its acquisition capabilities are enhanced by
the fact that its capital structure
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provides significant financial flexibility. The Company intends to continue to
maintain a conservative capital structure and currently intends to limit
consolidated indebtedness to no more than 40% of its total market
capitalization.
The Company's executive officers have extensive, nationwide experience in
the acquisition, ownership, operation, development and repositioning of each
type of hotel represented in the Company's portfolio. The Company's Chairman
of the Board and Chief Executive Officer, Paul A. Nussbaum, founded Patriot
American in 1991 and has 24 years of real estate industry experience. Thomas
W. Lattin, the Company's President and Chief Operating Officer, has over 25
years of hotel industry experience as an executive and consultant. Rex E.
Stewart, the Company's Executive Vice President and Chief Financial Officer,
has over 20 years of experience in hotel finance and development. Leslie Ng, a
Senior Vice President of Acquisitions, has over eight years of experience in
hotel acquisitions and financing. Michael Murphy, a Senior Vice President of
Acquisitions, has over 15 years of experience in the real estate and hotel
industries. Terry Huntzicker, the Company's Vice President of Construction and
Design has over 30 years of experience in hotel design and construction.
The Company was formed to continue and expand the hotel acquisition,
ownership, redevelopment and repositioning business of Patriot American.
Patriot American had historically pursued an investment strategy that
emphasized purchasing hotels at attractive prices and renovating,
repositioning and remarketing them to achieve significant revenue growth and
favorable investment returns. From January 1, 1992 to March 31, 1996,
approximately $29.7 million was invested in renovations and other capital
improvements to the Initial Hotels. The Initial Hotels achieved significant
growth in occupancy, ADR and REVPAR from 1993 through 1995, as summarized in
the following chart:
<TABLE>
<CAPTION>
PERCENT
YEAR ENDED DECEMBER 31, CHANGE
------------------------- 1993-
1993(1) 1994(1) 1995(2) 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Occupancy...................................... 65.8% 71.0% 72.1% 9.6%
ADR............................................ $69.14 $72.57 $77.92 12.7%
REVPAR......................................... $45.48 $51.49 $56.20 23.6%
</TABLE>
- --------
(1) For comparative purposes, 1994 and 1993 data includes the results of
operations for the Marriott Troy Hotel, which was acquired on December 30,
1994, and 1993 data also includes results for the pre-acquisition period
for three Initial Hotels acquired by the Company's predecessors in 1993.
(2) Excludes the Recent Acquisitions.
For 1993, 1994, and 1995, average occupancy rates for the U.S. lodging
industry were 63.1%, 64.7% and 65.5%, respectively, according to Smith Travel.
Management believes the growth in occupancy, ADR and REVPAR at the Initial
Hotels primarily reflects the successful renovation, repositioning and
remarketing strategies of Patriot American, the superior management and
marketing capabilities of the Operators, and the upswing in the hotel industry
caused by a slowing of new hotel construction nationally and improving
economic conditions, following an extended period of unprofitable industry
performance in the late 1980s and early 1990s.
BUSINESS STRATEGY
The Company's primary business objective is to maximize its Cash Available
for Distribution and enhance shareholder value by acquiring additional hotels
that meet one or more of the Company's investment criteria, by participating
in increased revenue from the Hotels and any subsequently acquired hotels
through participating leases and, under appropriate circumstances, by
developing selected additional hotels.
Acquisitions
The Company seeks to acquire additional hotel properties that meet one or
more of its investment criteria as generally described below. As a result of
Patriot American's successful acquisition activities over the past
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several years, the Company believes it possesses a competitive advantage in
market knowledge, technical expertise and industry relationships, which has
enabled it to successfully implement its acquisition strategy on a national
scale. The Company also benefits from the extensive experience and
relationships developed by the members of its management team over the past 20
years. Further, as one of the nation's largest publicly traded hotel REITs,
the Company has access to a wide variety of public and private financing
sources to fund acquisitions, such as the issuance of debt, equity and hybrid
securities, as well as the use of OP Units as consideration where cash is not
appropriate for tax or other reasons. The Line of Credit also enables the
Company to contract for and complete the acquisition of hotels without
financing contingencies.
Management believes the lodging industry in the United States is in the
midst of a continuing recovery from a period of low profitability, which
resulted from high levels of debt financing, over-supply of hotel rooms caused
by overbuilding and economic recession. As a result, the Company believes
opportunities currently exist to acquire hotels at attractive prices and,
therefore, to capitalize further on improving industry conditions and
performance. Generally, hotel acquisition opportunities vary over time by
geographic area and product type. The Company's management is experienced in
the acquisition of hotels of various product types (luxury, full service,
limited service, all-suite hotels, destination resorts and conference centers)
throughout the U.S. This broad-based experience positions the Company to
capitalize on changing hotel industry conditions and market opportunities. The
Company concentrates its investment activities on hotel properties that meet
one or more of the following criteria:
. full service commercial hotels in major U.S. business markets;
. major tourist hotels, destination resorts or conference centers, which
appeal to specific market niches, are well-established in their markets
and offer a full range of amenities and services;
. undervalued hotels, whose performance the Company believes can be
significantly enhanced through market repositioning, redevelopment and
turnaround strategies;
. hotels with sound operational fundamentals that are underperforming due
to a lack of invested capital because they are owned or controlled by
financially distressed owners or involuntary owners that may have
acquired the hotels through foreclosure or settlement;
. hotels that the Company can convert to recognized, successful franchise
or brand affiliations when such affiliations are underrepresented in the
particular geographic region or market area; and
. portfolios of hotels that exhibit some or all of the other criteria
discussed above, where purchasing several hotels in one transaction
enables the Company to obtain a favorable price or to purchase attractive
assets that otherwise would not be available to the Company.
Because the Company is independent of the Lessees and the Operators, the
Company has flexibility with respect to leasing additional hotels, subject to
a limited right of first offer held by CHC Lease Partners. See "The Lessees
and the Operators--Right of First Offer." As a result, hotel brand
owner/operators, major hotel management companies and hotel franchisors have
presented the Company with attractive opportunities to acquire hotel
properties (including properties not otherwise marketed for sale), which then
may be leased back to such entities. The recent acquisitions of Embassy
Suites, Hunt Valley, the Crowne Plaza Ravinia, the WestCoast Portfolio, the
Doubletree Denver/Boulder, the Wyndham Greenspoint Hotel, the Wyndham Garden-
Midtown, and the proposed acquisition of the Wyndham Garden Hotels represent
examples of hotel acquisition opportunities brought to the attention of the
Company by management and franchise companies. The Company expects that hotel
brand owners/operators, major hotel management companies and hotel
franchisors, as well as the Lessees and the Operators, will continue to be a
valuable source of acquisition opportunities for the Company.
Internal Growth
The Company believes the Hotels offer opportunities for revenue and cash
flow growth through effective sales and marketing and efficient operations.
The Lessees and the Operators have demonstrated expertise in hotel operations
and management and possess the human and systems resources necessary to
maximize revenue and
26
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income growth. The business relationships among the Company, the Lessees and
the Operators have been structured to provide the Lessees and the Operators
with incentives to operate and maintain the Hotels leased and operated by them
in a manner designed to maximize revenue growth and increase the Company's
Cash Available for Distribution.
Participating Rent. The Participating Leases are structured to enable the
Company to participate significantly in the growth of room, food and beverage,
telephone and other revenue from the Hotels. The Participating Leases provide
for the Company to receive monthly the greater of Base Rent or Participating
Rent at each Hotel, plus certain Additional Charges as applicable.
"Participating Rent" is determined according to a formula based on varying
percentages of room revenue, food and beverage revenue, telephone revenue and
other revenue at each of the Hotels. These percentages have been negotiated by
the Company and the Lessee on an arms length basis based on historical and
projected operating performance at each of the Hotels. While the terms of the
Participating Leases are revenue-based, such terms have been developed with
consideration to the fixed and variable nature of hotel operating expenses and
changes in operating margins typically associated with increases in revenue.
See "The Hotels--The Participating Leases."
Hotel Operations. Under the Participating Leases, the Lessees and the
Operators are obligated to prepare annual operating budgets, capital budgets
and marketing plans for each Hotel leased and operated by them, which are
subject to the approval of the Company. The Operators regularly measure actual
results from operations against prior years' results and planned budgets to
create an aggressive, goal-oriented approach to the operation of each Hotel
operated by them. The Operators also provide incentive compensation programs
for key members of the sales and operations management staff of the Hotels,
consistent with the Company's goal of increasing Cash Available for
Distribution.
The Operators utilize sophisticated management systems to maximize revenues,
achieve favorable profit margins and ensure consistency and quality of
service. The Company believes the Operators historically have been successful
hotel managers because they apply professional approaches to the fundamental
processes that produce revenue and income, including:
. Detailed operating budgets
. Targeted sales and marketing plans
. Computerized yield management systems
. Sophisticated scheduling and labor management systems
. Automated food and beverage cost control systems
. Networked management information systems
. Employee training and incentive programs
. Guest feedback and quality control systems
Capital Improvements, Renovation and Refurbishment. The Company believes a
regular program of capital improvements, including replacement and
refurbishment of F, F & E at the Hotels, as well as the renovation and
redevelopment of selected Hotels, is essential to maintaining the
competitiveness of the Hotels and maximizing revenue growth. From January 1,
1992 through March 31, 1996, approximately $29.7 million (or an average of
$7,060 per guest room) was spent on renovations and capital improvements at
the Initial Hotels to position them for future growth. Twelve of the Initial
Hotels were renovated during this period. See "The Hotels." The Company has
budgeted approximately $17.5 million to complete renovations at the Crockett
Hotel, the Crowne Plaza Ravinia, the Tremont House Hotel, the Del Mar Hilton,
the WestCoast Long Beach Hotel and Marina, the Doubletree Denver/Boulder, the
Wyndham Greenspoint Hotel and the Wyndham Garden-Midtown. The Company spent
approximately $900,000 of this amount through March 31, 1996 and expects to
spend the remainder in 1996 and early 1997. In addition, as part of its
ongoing capital improvement program, the Company has budgeted approximately
$11.3 million in 1996 for capital improvements and the replacement of F, F & E
within the Company's portfolio, including the Recent Acquisitions.
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<PAGE>
The Participating Leases require the Company to establish aggregate minimum
reserves averaging 4.0% of total revenue for the Hotels (which on a pro forma
basis for the Initial Hotels, for the twelve months ended March 31, 1996,
represented approximately 5.8% of room revenue and an average of $1,200 per
guest room) which are provided by the Company to the Lessees for capital
improvements and the replacement and refurbishment of F, F & E necessary to
maintain the competitive position of the Hotels. Generally, the Company and
the Lessees must agree on the use of funds in these reserves, and the Company
has the right to approve the Lessees' annual and long-term capital expenditure
budgets. While the Company expects its reserves to be adequate to fund
recurring capital needs, the Company may use Cash Available for Distribution
in excess of distributions paid (subject to federal income tax restrictions on
the Company's ability to retain earnings) or funds drawn under the Line of
Credit to fund additional capital improvements, as necessary, including
significant renovations at the Company's hotels. The Company's budget for
capital expenditures, exclusive of renovations, exceeds 4.0% of total revenues
at the Hotels in 1996 due to capital expenditures required by certain
franchisors and to the Company's decision to accelerate certain capital
improvements originally intended to be completed over a longer period.
Development
Due to the current favorable acquisition environment for hotels, the Company
intends to emphasize acquisitions over development in pursuing the Company's
growth objectives. The Company believes in most markets it is possible to
acquire full service hotel properties at values below replacement cost, with
existing or achievable cash flows commensurate with the Company's investment
criteria. However, the Company will evaluate from time to time, and may
undertake, attractive opportunities to develop new hotels or expand existing
hotels. The Company is currently evaluating a potential expansion of the
Doubletree Denver/Boulder by approximately 80 rooms on contiguous land owned
by the Company, however, the Company has made no commitments with respect to
such expansion.
The Company's executive officers have participated in the development of
over 20 hotels and have significant experience in all phases of the
development process, including site selection, franchise selection, hotel
programming and design, zoning and construction management. The Company
believes this management expertise will enhance its hotel development efforts
and its capability to evaluate hotels for acquisition, expansion and
turnaround situations. See "Policies and Objectives with Respect to Certain
Activities--Investment Policies--Development of Hotel Properties." See "Risk
Factors--Changes in Policies."
THE OPERATING PARTNERSHIP
The Company owns an approximately 81.5% interest in the Operating
Partnership, a Virginia limited partnership. The Operating Partnership owns,
directly or through subsidiary partnerships, all of the Hotels (except the
Crowne Plaza Ravinia, which is owned by PAH Ravinia, Inc.) and leases such
hotels to the Lessees. Because of certain state tax considerations, the
Company holds its interest in the Operating Partnership through two wholly-
owned subsidiaries, PAH GP and PAH LP. PAH GP is the sole general partner of
the Operating Partnership and owns a 1.0% general partnership interest in the
Operating Partnership. Through PAH GP, the Company controls the Operating
Partnership and its assets. PAH LP is one of the Operating Partnership's
limited partners (the "Limited Partners") and owns an approximately 80.5%
limited partnership interest in the Operating Partnership. In their capacity
as such, the Limited Partners have no authority to transact business for, or
participate in the management, activities or decisions of, the Operating
Partnership. Upon completion of the Offering, the Company will own indirectly
through PAH GP and PAH LP an approximately 85.7% interest in the Operating
Partnership, consisting of a 1.0% general partner interest and an 84.7%
limited partner interest.
28
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DEVELOPMENTS SINCE THE INITIAL OFFERING
Since the Initial Offering, the Company has benefitted from the following
developments:
RECENT ACQUISITIONS
Since the Initial Offering, the Company has invested approximately $277
million in the acquisition of Hotels (including purchase prices and
approximately $3.7 million in acquisition-related expenses), increasing its
room portfolio by approximately 95%. Set forth below are summary descriptions
of the Recent Acquisitions.
Embassy Suites, Hunt Valley, Maryland. In November 1995, the Company
acquired the 223-suite Embassy Suites in Hunt Valley, Maryland outside
Baltimore for approximately $16.0 million in cash. The Company has leased the
hotel to Metro Lease Partners. Metro Hotels, a Dallas-based hotel company that
managed the hotel prior to the acquisition and an affiliate of Metro Lease
Partners, manages the Hotel.
Crowne Plaza Ravinia, Atlanta, Georgia. In December 1995, PAH Ravinia, a
corporation in which the Company owns a 99.04% interest, acquired the 495-room
Crowne Plaza Ravinia, a hotel located adjacent to Holiday Inn Worldwide
headquarters in the Perimeter Center/Ravinia area of Atlanta, Georgia. The
Hotel is managed by Holiday Inns, Inc., which managed the Hotel prior to the
acquisition. The Company paid approximately $4.5 million in cash for its
investment in PAH Ravinia and advanced to PAH Ravinia an aggregate of $40.5
million in first and second lien mortgage loans. The Company intends to
complete approximately $2.7 million in renovations to the Hotel following
completion of the Olympic Games.
Tremont House Hotel, Boston, Massachusetts. In January 1996, the Company
acquired the 288-room Tremont House Hotel in Boston, Massachusetts for
approximately $16.5 million in cash. The Company has commenced an extensive
$8.5 million renovation of the Hotel. The project includes renovation of
existing guest rooms and common areas, the addition of 31 guest rooms on a
penthouse level and the reconfiguration of certain existing rooms resulting in
an expected aggregate room count following completion of the renovation of
approximately 321. The Company has leased the Hotel to CHC Lease Partners. The
Hotel is managed by a subsidiary of GAH.
Holiday Inn Lenox, Atlanta, Georgia. In March 1996, the Company acquired the
297-room Holiday Inn Lenox in the Buckhead section of Atlanta for
approximately $7.3 million in cash and 167,012 OP Units, valued at
approximately $4.7 million at the closing of the acquisition. The Hotel is
leased to CHC Lease Partners and is managed by GAH.
Del Mar Hilton, Del Mar (San Diego), California. In March 1996, the Company
acquired the 245-room Del Mar Hilton for approximately $14.8 million in cash.
This Hotel is located in suburban San Diego, California, adjacent to the Del
Mar Racetrack and Fairgrounds. The Company has leased the Hotel to CHC Lease
Partners and GAH manages the Hotel.
WestCoast Portfolio. In April 1996, the Company acquired the six hotel
WestCoast Portfolio for approximately $75.6 million in cash and 331,577 OP
Units, valued at approximately $8.8 million at the closing of the acquisition.
The portfolio includes the 194-suite WestCoast Plaza Park Suites, 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 WestCoast Long Beach Hotel and Marina in Long Beach,
California; and the 147-room WestCoast Wenatchee Center Hotel in Wenatchee,
Washington. The Company intends to complete a $1.8 million renovation of the
WestCoast Long Beach Hotel and Marina, and to complete build out of a
restaurant at the WestCoast Plaza Park Suites, converting this Hotel to a full
service property. The Company has leased the hotels in the WestCoast Portfolio
under Participating Leases to NorthCoast, a recently formed company owned by a
consortium of investors including principals of WestCoast Hotels, a major
regional hotel management company based in Seattle, and Sunmakers, a major
tour and travel company in the Pacific Northwest. WestCoast Hotels manages
each of the hotels in the WestCoast Portfolio except for the Hyatt Newporter
Hotel, which is managed by Hyatt Corporation ("Hyatt").
29
<PAGE>
Hyatt Regency, Lexington, Kentucky. In May 1996, the Company acquired the
365-room Hyatt Regency in Lexington, Kentucky for approximately $14.3 million
in cash. The Hotel, which is subject to a long-term ground lease, adjoins
Lexington's convention center and the Rupp Arena. The Company has leased the
Hotel to NorthCoast and Hyatt manages the Hotel.
Doubletree Denver/Boulder, Westminster (Denver), Colorado. In June 1996, the
Company acquired the 180-room Doubletree Denver/Boulder in suburban Denver,
Colorado for approximately $12.5 million in cash. The Company intends to
complete approximately $950,000 of renovations to the Hotel. The Hotel is the
Company's first Doubletree branded property and first acquisition in the
Denver area. The Company has leased the Hotel to the Doubletree Lessee and DTM
Management Inc., a subsidiary of Doubletree Hotels, manages the Hotel.
Wyndham Greenspoint Hotel, Houston, Texas; Wyndham Garden-Midtown, Atlanta,
Georgia. In July 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 for approximately $61.0 million in cash and 17,036
OP Units, valued at approximately $500,000 at the time of the acquisition. The
Company has leased these Hotels to the Wyndham Lessee and Wyndham manages the
Hotels. In connection with this acquisition, the Company agreed to maintain at
least $22.0 million of debt on the Wyndham Greenspoint Hotel until the end of
1999 and Paine Webber Real Estate has extended the $22.0 million Greenspoint
Loan. See "--Financing Activities--Greenspoint Loan."
PROPOSED ACQUISITIONS
The Company has entered into contracts to purchase the Proposed Acquisitions
for an aggregate purchase price (excluding acquisition-related expenses) of
approximately $103 million. The purchase of each of the Proposed Acquisitions
is subject to satisfactory completion of closing conditions, including, with
regard to the acquisition of the three Wyndham Garden Hotels described below,
the waiver or significant reduction of certain prepayment penalties on debt of
the current owners secured by the hotels. No assurances can be given that the
Company will acquire any or all of the Proposed Acquisitions. Assuming
completion of the Proposed Acquisitions, the Company will have invested
approximately $380 million in hotel acquisitions since the Initial Offering,
more than doubling its rooms portfolio to a total of 41 hotels with 9,790
rooms. Set forth below are summary descriptions of the Proposed Acquisitions.
Marriott WindWatch Hotel, Hauppauge (Long Island), New York. In March 1996,
the Company entered into an agreement to acquire the 362-room Marriott
WindWatch Hotel in Hauppauge (Long Island), New York for approximately $30
million in cash. This Proposed Acquisition will represent the Company's first
hotel in the metropolitan New York area.
Bonaventure Resort & Spa, Ft. Lauderdale, Florida. In May 1996, the Company
entered into an agreement to acquire the 492-room Bonaventure Resort & Spa in
Ft. Lauderdale, Florida for approximately $16.2 million in cash and the
assumption of approximately $3.0 million in operating liabilities. The hotel
is situated on 23 acres and is 15 miles west of Ft. Lauderdale International
Airport. Upon completion of the acquisition, the Company intends to complete
an $8.5 million renovation of the hotel and implement a strategic and
marketing plan which will include branding the facility as a Registry Resort
and Spa. The Company currently anticipates that CHC Lease Partners will lease
and a hotel management subsidiary of CHC will manage the hotel.
Wyndham Garden Hotels. In July 1996, the Company entered into an agreement
to acquire the 148-room Wyndham Garden located in Novi (Detroit), 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
approximately $35.3 million in cash. The Company currently anticipates that
the Wyndham Lessee will lease and Wyndham will manage each of the Wyndham
Garden Hotels.
30
<PAGE>
Valley River Inn, Eugene, Oregon. In July 1996, the Company entered into an
agreement to acquire the 257-room Valley River Inn in Eugene, Oregon for
approximately $18.8 million in cash. The hotel is situated on the banks of the
Willamette River and is adjacent to the Valley River Center Mall. The Company
currently anticipates that NorthCoast will lease and WestCoast Hotels will
manage the hotel.
In addition to the Proposed Acquisitions, as part of its ongoing business,
the Company continually engages in discussions with public and private real
estate entities regarding possible portfolio or single asset acquisitions. The
Company currently has over $800 million of hotel acquisition opportunities
under review. No assurances can be given that the Company will acquire any of
the hotel opportunities currently under review.
FINANCING ACTIVITIES
Private Placement. In May 1996, the Company sold an aggregate of
approximately $40.0 million of equity securities to an institutional investor
that purchased the securities on behalf of two owners. The securities
consisted of 811,393 shares of Common Stock sold at $26.95 per share and
662,391 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. The purchaser
is subject to certain restrictions on the resale of the Common 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. Prior to the third anniversary of issuance, the
Preferred OP Units generally will not be exchangeable for Common Stock, except
under certain limited circumstances. After three years, the holders will have
the right to exchange Preferred OP Units for shares of Common Stock on a one-
for-one basis, subject to adjustment and to an ownership limitation of 4.9% of
all outstanding Common Stock. In the event that the Operating Partnership
generates unrelated business taxable income, as defined in section 512 of the
Code ("UBTI") in excess of a threshold amount, the quarterly distributions on
the Preferred OP Units will be increased to account for the tax payable on
such excess UBTI. 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, subject to adjustment.
Line of Credit. In May 1996, the maximum amount available under the Line of
Credit was increased from $165 million to $250 million and certain other
modifications were made, thereby increasing the Company's ability to borrow
under the Line of Credit. 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
million. The Line of Credit and the Greenspoint Loan are cross-defaulted. The
Line of Credit matures in October 1998 and bears interest at a rate per annum
equal to 30-day LIBOR plus 1.90%. No prepayment penalties are required under
the Line of Credit. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Greenspoint Loan. In July 1996, Paine Webber Real Estate extended the $22.0
million Greenspoint Loan. The entire principal amount under the Greenspoint
Loan matures in October 1998 and bears interest at a rate per annum equal to
30-day LIBOR plus 1.90%. No prepayment penalties are required in connection
with the prepayment of amounts outstanding under the Greenspoint Loan.
NEW FRANCHISE AND BRAND AFFILIATIONS
With the completion of the Recent Acquisitions, the Company expanded the
franchise and brand affiliations in its portfolio to include Crowne Plaza(R),
Doubletree(R), Embassy Suites(R), Hyatt(R), Wyndham(TM), Wyndham Garden(R) and
WestCoast(R).
31
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after payment of expenses
incurred in connection with the Offering, are estimated to be approximately
$144.2 million (approximately $166.2 million if the Underwriters' over-
allotment is exercised in full). The Company intends to apply the net proceeds
of the Offering to reduce amounts outstanding under the Line of Credit (which
amounts have been borrowed principally to complete the Recent Acquisitions)
and/or for general corporate and working capital purposes. All outstanding
borrowings under the Line of Credit mature in October 1998 and bear interest
at a rate per annum equal to 30-day LIBOR plus 1.90%. No prepayment penalties
are required under the Line of Credit.
Pending the uses described above, the net proceeds will be invested in
interest-bearing accounts and short-term, interest-bearing securities, which
are consistent with the Company's intention to qualify for taxation as a REIT.
Such investments may include, for example, government and government agency
securities, certificates of deposit, interest-bearing bank deposits and
mortgage loan participations.
32
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Company's Common Stock began trading on the NYSE on September 27, 1995,
under the symbol "PAH." On July 23, 1996, the last reported sale price per
share of Common Stock on the NYSE was $28.25 and there were approximately 77
holders of record of the Company's Common Stock. The following table sets
forth the quarterly high and low closing sale prices per share of Common Stock
reported on the NYSE and the distributions paid by the Company with respect to
each such period.
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
DECLARED
QUARTER ENDED HIGH LOW PER SHARE
------------- ------- -------- -------------
<S> <C> <C> <C>
September 30, 1995 (from September
27, 1995).......................... $25.625 $ 24.75 N/A
December 31, 1995................... $25.75 $ 23.50 $0.48
March 31, 1996 ..................... $28.75 $ 25.75 $0.48
June 30, 1996....................... $29.625 $ 26.75 $0.48
September 30, 1996 (through July 23,
1996).............................. $30.25 $ 28.25 N/A
</TABLE>
The Company's Board of Directors has declared a quarterly distribution of
$0.48 per share to be paid on July 30, 1996 to shareholders of record on June
27, 1996. Purchasers of Common Stock in the Offering will not receive the
second quarter 1996 dividend in respect of the shares of Common Stock offered
hereby. Future distributions by the Company will be at the discretion of the
Board of Directors and will depend on the Company's financial condition, its
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant. There can be no assurance that any such distributions will be made
by the Company.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income. Distributions in excess of
current and accumulated earnings and profit will be treated as a non-taxable
reduction of the stockholder's basis in its shares of Common Stock to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as a reduction of the stockholder's basis in its shares of Common Stock will
have the effect of deferring taxation until the sale of the stockholder's
shares. The Company has determined that, for federal income tax purposes,
approximately 26% of the $0.48 per share distribution paid for 1995
represented a return of capital to the stockholders. Given the dynamic nature
of the Company's acquisition strategy and the extent to which any future
acquisitions would alter this calculation, no assurances can be given
regarding what percent of future distributions will constitute return of
capital for federal income tax purposes.
In the future the Company may implement a dividend reinvestment program
under which holders of Common Stock may elect automatically to reinvest
dividends and make additional investments in shares of Common Stock. If a
dividend reinvestment and stock purchase program is implemented, the Company
may, from time to time, repurchase Common Stock in the open market for
purposes of fulfilling its obligations under the program, or may elect to
issue additional shares of Common Stock.
33
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 on an historical basis and on a pro forma basis, assuming completion
of the Offering and the use of the proceeds from the Offering as described in
"Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
($ IN THOUSANDS)
<S> <C> <C>
Line of credit and mortgage debt.......................... $ 50,250 $ 26,861
Minority interest......................................... 45,485 72,737
Shareholders' equity:
Preferred Shares, no par value, 20,000,000 shares
authorized,
no shares issued and outstanding........................ -- --
Common Stock, no par value, 200,000,000 shares
authorized,
14,665,935 shares issued and outstanding, and 20,978,648
shares issued and outstanding, as adjusted(1)........... -- --
Paid-in capital.......................................... 264,503 430,101
Unearned executive compensation net of accumulated amor-
tization................................................ (1,185) (1,185)
Distributions in excess of earnings...................... (1,591) (1,591)
-------- --------
Total shareholders' equity............................... 261,727 427,325
-------- --------
Total capitalization.................................... $357,462 $526,923
======== ========
</TABLE>
- --------
(1) Excludes 3,502,328 shares issuable upon redemption of OP Units or exchange
of Preferred OP Units outstanding prior to the Offering.
34
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical financial information
and/or selected unaudited pro forma financial information for the Company, the
Lessees and the Initial Hotels.
With respect to the Company, the following tables set forth (i) selected
consolidated historical financial information for the period October 2, 1995
(inception of operations) through December 31, 1995 and the three months ended
March 31, 1996 (unaudited), (ii) selected consolidated historical balance
sheet data as of December 31, 1995, and March 31, 1996 (unaudited),
(iii) selected consolidated unaudited pro forma financial information for the
year ended December 31, 1995, the twelve months ended March 31, 1996 and the
three months ended March 31, 1996, and (iv) selected pro forma balance sheet
data as of March 31, 1996. The selected consolidated historical financial
information for the Company as of December 31, 1995, and for the period
October 2, 1995 (inception of operations) through December 31, 1995, has been
derived from historical financial statements of the Company audited by Ernst &
Young LLP, independent auditors, whose report with respect thereto is included
elsewhere herein.
With respect to the Lessees, the following tables set forth (i) selected
historical operating information for CHC Lease Partners for the period October
2, 1995 (inception) through December 31, 1995 and for the three months ended
March 31, 1996 (unaudited), (ii) selected unaudited historical operating
information for Metro Lease Partners for the period November 15, 1995
(inception) through December 31, 1995 and for the three months ended March 31,
1996, and (iii) selected combined unaudited pro forma operating information
for the Lessees for the year ended December 31, 1995, the twelve months ended
March 31, 1996 and the three months ended March 31, 1996. The selected
historical operating information for CHC Lease Partners for the period October
2, 1995 (inception) through December 31, 1995, has been derived from the
historical financial statements of CHC Lease Partners audited by Price
Waterhouse LLP, independent certified public accountants, whose report with
respect thereto is included elsewhere herein. The selected historical
operating information for Metro Lease Partners has been derived from the
unaudited financial statements of Metro Lease Partners for the periods
indicated.
With respect to the Initial Hotels, the following tables set forth (i)
selected combined historical financial information for the Initial Hotels as
of and for each of the years in the four-year period ended December 31, 1994
and for the period January 1, 1995 through October 1, 1995 and the three
months ended March 31, 1995 (unaudited), and (ii) selected historical
financial information for Troy Park Associates as of and for each of the years
in the four-year period ended December 29, 1994. The selected combined
historical financial information for the Initial Hotels as of December 31,
1994, and for each of the years in the two-year period ended December 31,
1994, and the period January 1, 1995 through October 1, 1995, have been
derived from the historical Combined Financial Statements of the Initial
Hotels audited by Ernst & Young LLP, independent auditors, whose report is
based in part on the reports of Coopers & Lybrand L.L.P., independent
accountants, as set forth in their respective reports thereon for Certain of
the Initial Hotels and Troy Hotel Investors. The financial information for
Troy Park Associates as of December 29, 1994 and for the period January 1,
1994 through December 29, 1994, and the year ended December 31, 1993 has been
derived from the historical financial statements of Troy Park Associates
audited by Coopers and Lybrand L.L.P., independent accountants, as set forth
in their report thereon. Such reports are located elsewhere herein.
The unaudited pro forma operating information is presented as if the Initial
Offering, Formation Transactions, the Recent Acquisitions, Private Placement
and the current Offering had occurred as of the beginning of the period
presented. The unaudited pro forma information does not purport to represent
what the Company's or the Lessees' results of operations would actually have
been if such events and transactions had, in fact, occurred on such date or to
project the Company's or the Lessees' results of operations for any future
period.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and notes thereto located
elsewhere herein.
35
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
-------------------------------- -----------------------------------------------
PERIOD
OCTOBER 2, 1995
(INCEPTION OF
OPERATIONS) THREE MONTHS TWELVE MONTHS THREE MONTHS
THROUGH ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996 DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- ----------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Participating lease
revenue(3)............ $ 10,582 $ 12,371 $ 75,921 $ 76,733 $19,983
Interest and other
income................ 513 92 53 132 92
--------- -------- -------- -------- -------
Total revenue......... 11,095 12,463 75,974 76,865 20,075
--------- -------- -------- -------- -------
Expenses:
Real estate and
personal property
taxes and casualty
insurance............. 901 1,082 6,928 6,995 1,841
Ground lease expense... -- 77 1,351 1,362 332
General and
administrative(4)..... 607 941 3,150 3,150 1,010
Interest expense(5).... 89 601 2,377 2,351 580
Depreciation and
amortization.......... 2,590 2,838 18,040 18,117 4,529
--------- -------- -------- -------- -------
Total expenses........ 4,187 5,539 31,846 31,975 8,292
--------- -------- -------- -------- -------
Income before equity in
earnings of
unconsolidated
subsidiary, minority
interest and
extraordinary items... 6,908 6,924 44,128 44,890 11,783
Equity in earnings of
unconsolidated
subsidiary............ 156 1,362 3,574 3,912 1,362
--------- -------- -------- -------- -------
Income before minority
interest and
extraordinary items... 7,064 8,286 47,702 48,802 13,145
Minority interest in
Operating
Partnership(6)........ (968) (1,158) (6,821) (6,979) (1,880)
--------- -------- -------- -------- -------
Income before
extraordinary items... 6,096 7,128 40,881 41,823 11,265
Extraordinary items,
net of minority
interest(7)........... (737) -- -- -- --
--------- -------- -------- -------- -------
Net income applicable
to common
shareholders.......... $ 5,359 $ 7,128 $ 40,881 $ 41,823 $11,265
========= ======== ======== ======== =======
PER SHARE DATA:
Income before
extraordinary items... $ 0.42 $ 0.48 $ 1.95 $ 1.99 $ 0.54
Extraordinary items,
net of minority
interest.............. (0.05) -- -- -- --
--------- -------- -------- -------- -------
Net income applicable
to common
shareholders.......... $ 0.37 $ 0.48 $ 1.95 $ 1.99 $ 0.54
========= ======== ======== ======== =======
Dividends per common
share................. $ 0.48 $ 0.48
========= ========
Weighted average common
shares and common
share equivalents
outstanding........... 14,675 14,734 20,979 20,979 20,979
========= ======== ======== ======== =======
CASH FLOW DATA:
Cash provided by
operating
activities(8)......... $ 7,618 $ 9,002 $ 67,204 $ 68,043 $17,571
Cash used in investing
activities(9)......... (306,948) (37,838) (10,508) (10,645) (2,684)
Cash provided by (used
in) financing
activities(10)........ 304,099 32,165 (47,042) (47,042) (11,760)
OTHER DATA:
Funds from
Operations(11)........ $ 9,798 $ 11,634 $ 67,704 $ 68,891 $18,184
Cash Available for
Distribution(12)...... 8,603 10,388 57,963 59,014 15,694
Weighted average common
shares and OP Units
outstanding........... 17,024 17,107 24,481 24,481 24,481
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------- PRO FORMA
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1996
----------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Investment in hotel
properties, at cost, net..... $265,759 $306,552 $479,151
Total assets.................. 324,224 369,578 541,554
Total debt.................... 9,500 50,250 26,861
Minority interest in Operating
Partnership.................. 41,522 45,485 72,737
Shareholders' equity.......... 261,778 261,727 427,325
</TABLE>
(Notes on page 40)
36
<PAGE>
LESSEES
SELECTED HISTORICAL AND COMBINED PRO FORMA FINANCIAL DATA(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL(2)
--------------------------------------------------------------
CHC LEASE PARTNERS METRO LEASE PARTNERS
------------------------------ -------------------------------
PERIOD PERIOD
OCTOBER 2, 1995 NOVEMBER 15, COMBINED PRO FORMA
(INCEPTION) 1995 (INCEPTION) ------------------------------------------
THROUGH THREE MONTHS THROUGH THREE MONTHS YEAR ENDED TWELVE MONTHS THREE MONTHS
DECEMBER 31, ENDED DECEMBER 31, ENDED DECEMBER 31, ENDED ENDED
1995 MARCH 31, 1996 1995 MARCH 31, 1996 1995 MARCH 31, 1996 MARCH 31, 1996
--------------- -------------- ---------------- -------------- ------------ -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Room revenue.... $21,092 $24,260 $ 416 $1,048 $158,865 $160,909 $40,549
Food and
beverage
revenues....... 8,524 7,998 125 242 61,037 61,364 14,913
Conference
center revenue. 576 645 -- -- 2,434 2,380 645
Telephone and
other revenue.. 1,703 2,295 29 78 14,807 15,271 3,979
------- ------- ----- ------ -------- -------- -------
Total revenue... 31,895 35,198 570 1,368 237,143 239,924 60,086
Hotel operating
expenses....... 20,386 22,082 415 968 156,684 158,799 39,631
Participating
Lease
payments(3).... 10,432 11,918 150 453 75,921 76,733 19,983
------- ------- ----- ------ -------- -------- -------
Income before
Lessee
expenses....... 1,077 1,198 5 (53) 4,538 4,392 472
Lessee
expenses(13)... 568 565 5 34 5,646 5,509 1,170
------- ------- ----- ------ -------- -------- -------
Net income
(loss)(13)..... $ 509 $ 633 $ -- $ (87) $ (1,108) $ (1,117) $ (698)
======= ======= ===== ====== ======== ======== =======
</TABLE>
(Notes on page 40)
37
<PAGE>
INITIAL HOTELS(14)
SELECTED COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD THREE
JANUARY 1, 1995 MONTHS
YEAR ENDED DECEMBER 31, THROUGH ENDED
---------------------------------------- OCTOBER 1, MARCH 31,
1991 1992 1993 1994 1995 1995
----------- -------- -------- -------- --------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Room revenue........... $23,654 $ 35,844 $ 57,504 $ 69,969 $65,192 $22,242
Food and beverage
revenue............... 10,354 13,533 20,168 23,770 21,872 7,613
Conference center
revenue............... 1,538 1,794 1,970 2,149 1,858 699
Telephone and other
revenue............... 1,788 2,842 4,660 5,593 5,860 1,857
------- -------- -------- -------- ------- -------
Total revenue........ 37,334 54,013 84,302 101,481 94,782 32,411
Departmental and other
expenses(15).......... 29,287 40,795 61,555 70,888 66,071 21,527
Real estate and
personal property
taxes and casualty
insurance............. 1,519 2,299 3,539 3,786 3,413 1,128
Depreciation and
amortization.......... 3,847 4,243 6,649 8,832 7,694 2,649
Interest expense....... 4,487 5,290 9,609 11,197 11,674 4,904
------- -------- -------- -------- ------- -------
Income (loss) before
sale of assets and
extraordinary item.... (1,806) 1,386 2,950 6,778 5,930 2,203
Gain (loss) on sale of
assets................ -- (12) (41) 170 -- --
Extraordinary item..... -- -- -- -- (1,803) (1,803)
------- -------- -------- -------- ------- -------
Net income (loss)...... $(1,806) $ 1,374 $ 2,909 $ 6,948 $ 4,127 $ 400
======= ======== ======== ======== ======= =======
BALANCE SHEET DATA:
Investment in hotel
properties, net....... $56,327 $103,422 $128,555 $149,034 -- --
Total assets........... 64,103 115,284 144,982 171,119 -- --
Mortgages and other
notes payable......... 47,774 85,624 114,619 131,095 -- --
Capital lease
obligations........... 318 538 803 2,284 -- --
Total partners' and
owners' equity........ 11,895 24,739 14,142 19,262 -- --
OTHER DATA:
Number of hotels (at end
of period)............. 11 16 19 20 20 20
Number of rooms (at end
of period)............. 1,814 3,186 3,857 4,207 4,206 4,207
</TABLE>
(Notes on page 40)
38
<PAGE>
TROY PARK ASSOCIATES
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- DECEMBER 29,
1991 1992 1993 1994
----------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
FINANCIAL DATA:
Room revenue....................... $ 7,102 $ 7,453 $ 7,966 $ 9,085
Food and beverage revenue.......... 5,612 5,580 6,123 6,387
Conference center revenue.......... -- -- -- --
Telephone and other revenue........ 856 950 1,014 1,076
------- ------- ------- --------
Total revenue.................... 13,570 13,983 15,103 16,548
Departmental and other ex-
penses(15)........................ 10,513 10,840 11,533 12,402
Real estate and personal property
taxes and casualty insurance...... 651 859 818 800
Depreciation and amortization...... 2,231 2,115 2,043 2,207
Interest expense................... 3,245 3,420 3,304 2,368
------- ------- ------- --------
(3,070) (3,251) (2,595) (1,229)
Provision for impairment of as-
sets(16).......................... -- -- -- 11,504
------- ------- ------- --------
Loss before sale of assets and ex-
traordinary item.................. (3,070) (3,251) (2,595) (12,733)
Extraordinary item(17 )............ -- -- 16,655 --
------- ------- ------- --------
Net income (loss).................. $(3,070) $(3,251) $14,060 $(12,733)
======= ======= ======= ========
BALANCE SHEET DATA:
Investment in hotel properties,
net............................... $35,132 $33,447 $31,889 $ 19,497
Total assets....................... 38,126 36,124 35,302 22,384
Mortgages and other notes payable.. 33,867 34,011 20,250 20,048
Capital lease obligations.......... 161 116 65 10
Total partners' and owners' equity
(deficit)......................... 1,967 (1,284) 12,776 43
</TABLE>
(Notes on following page)
39
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(1) Pro forma amounts as if the Operating Partnership recorded depreciation
and amortization and paid real estate and personal property taxes and
casualty insurance as contemplated by the Participating Leases.
(2) Includes actual results for the Initial Hotels throughout the period and
for the Recent Acquisitions since their respective dates of acquisition by
the Operating Partnership or its subsidiaries.
(3) Represents lease payments from the Lessees to the Operating Partnership in
accordance with the terms of the Participating Leases. Pro forma amounts
are calculated by applying the provisions of the Participating Leases to
the historical revenues of the Hotels as if January 1, 1995 were the
beginning of a lease year.
(4) Pro forma amounts include estimates for legal, accounting, travel and
other expenses associated with operating as a public company.
(5) Pro forma interest expense reflects amortization of deferred financing
costs and interest expense associated with the Line of Credit.
(6) Calculated as approximately 14.3% of the Operating Partnership's income
before extraordinary items on a pro forma basis.
(7) Pro forma operating results do not include the effect of extraordinary
items reported on an historical basis.
(8) Pro forma cash flows provided by operating activities represent income
before income allocable to minority interest, plus depreciation and
amortization (including amortization of unearned management stock
compensation), less the non-cash portion of the Company's equity in
earnings of unconsolidated subsidiary. The pro forma amounts do not
include adjustments from changes in working capital resulting from changes
in current assets and current liabilities as there is no historical data
available as of both the beginning and end of each period.
(9) Pro forma cash used in investing activities represent the approximate 4.0%
of hotel revenue which is required to be reserved under the terms of the
Participating Leases for capital improvements and the replacement and
refurbishment of F, F & E.
(10) Pro forma cash used in financing activities represents estimated
dividends and distributions to be paid based upon the Company's initial
annual dividend rate of $1.92 per share and an aggregate of 23,818,585
shares of Common Stock and OP Units outstanding and $1.98 per share on
the 662,391 Preferred OP Units outstanding.
(11) In accordance with the resolution adopted by the Board of Governors of
NAREIT, 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 and joint ventures. 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. Under the
Participating Leases, the Company is obligated to establish a reserve for
capital improvements at the Hotels (including the replacement or
refurbishment of F, F & E) and to pay real estate and personal property
taxes and casualty insurance. The Company believes that funds from
operations is helpful to investors as a measure of the performance of an
equity REIT, because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with
an understanding of the ability of the Company to incur and service debt
and make capital expenditures.
(12) Cash Available for Distribution represents funds from operations, as
adjusted for certain non-cash items (e.g. non-real estate related
depreciation and amortization), less reserves for capital expenditures.
(13) Historical Lessee expenses represent management fees paid to the
Operators and Lessee overhead expenses, net of dividend and interest
income earned by the Lessees. Management fees paid to the Operators are
subordinate to the Lessees' obligations to the Company under the
Participating Lease agreements. Pro forma Lessee net income excludes pro
forma dividends on approximately 300,000 OP Units, which form a portion
of the required capitalization of certain of the Lessees and pro forma
interest income associated with the Lessees' working capital balances.
(14) The combined historical financial data are derived from the combined
financial statements of the Initial Hotels, which include the financial
position and results of operations of the Marriott Troy Hotel from the
date of acquisition (December 30, 1994) only.
(15) Represents departmental costs and expenses, general and administrative,
repairs and maintenance, utilities, marketing and management fees.
(16) Represents a provision for impairment of long-lived assets with respect
to the Marriott Troy Hotel prior to its acquisition in December 1994.
(17) Represents gain resulting from extinguishment of indebtedness related to
the Marriott Troy Hotel in 1993.
40
<PAGE>
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, and the combined
historical financial statements of the Initial Hotels and the historical
financial statements of Troy Park Associates, which are included elsewhere in
this Prospectus. The following discussion and analysis should be read in
conjunction with the accompanying financial statements and related notes
thereto.
BACKGROUND AND RECENT DEVELOPMENTS
The Company was formed April 17, 1995 as a self-administered REIT for the
purpose of acquiring equity interests in hotel properties. On October 2, 1995,
the Company completed the Initial Offering of 14,605,000 shares of its Common
Stock and commenced operations. The Company, through its wholly-owned
subsidiary, PAH LP, contributed substantially all of the net proceeds of the
Initial Offering to 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, 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 the 20 Initial Hotels with a total of
4,206 guest rooms from various entities and to repay existing mortgages and
other indebtedness of the Initial Hotels. In addition, in connection with the
Initial Offering, the Company closed on the Line of Credit with 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 acquired the 495-room Crowne Plaza Ravinia
in Atlanta, Georgia. The Company paid approximately $4,456,000 for its
investment in PAH Ravinia and loaned to PAH Ravinia an aggregate of
$40,500,000 represented by first and second lien mortgage notes (the "Mortgage
Notes") for the purchase of this Hotel. The investment in PAH Ravinia and
funding of the Mortgage Notes were 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 on
January 16, 1996, for approximately $16,482,000 in cash. The purchase was
financed primarily with funds drawn on the Line of Credit. On March 4, 1996,
the Company acquired the 297-room Holiday Inn Lenox Hotel in Atlanta, Georgia
and on March 27, 1996, the Company acquired the 245-room Del Mar Hilton in Del
Mar (San Diego), California. The Holiday Inn Lenox Hotel 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 was acquired for approximately
$14,765,000 in cash. The purchase was also financed primarily with funds drawn
on the Line of Credit.
41
<PAGE>
On April 2, 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 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.
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.
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) in cash and 17,036 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 has 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. See
"Developments Since the Initial Offering--Financing Activities--Greenspoint
Loan."
The Company, through the Operating Partnership and PAH Ravinia, currently
owns 35 hotel properties in 13 states with an aggregate of 8,201 guest rooms.
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 29 full service hotels, 5 limited service hotels and an executive
conference center. Thirty-one 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, to a Lessee
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, the Wyndham Greenspoint Hotel and the Wyndham
Garden-Midtown are leased to the Wyndham Lessee, and Metro Lease Partners and
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 lease 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
hotel management subsidiaries of CHC and GAH (all of which are affiliates of
CHC Lease Partners) and one Hotel is managed by Metro Hotels. NorthCoast has
entered into Management Agreements
42
<PAGE>
whereby WestCoast, 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 pursuant to separate Management Agreements between
NorthCoast and Hyatt. The Wyndham Greenspoint Hotel and the Wyndham Garden-
Midtown are managed by Wyndham pursuant to separate Management Agreements
between the Wyndham Lessee and Wyndham. Metro Lease Partners has entered into
a Management Agreement with Metro Hotels to manage the Embassy Suites, Hunt
Valley. The Doubletree Lessee has entered into a Management Agreement with
Doubletree Hotels to manage the Doubletree Denver/Boulder. The Crowne Plaza
Ravinia Hotel is being managed by Holiday Inns, Inc. pursuant to a Management
Agreement between PAH Ravinia and Holiday Inns, Inc.
PROPOSED ACQUISITIONS
The Company has entered into contracts to purchase the 492-room Bonaventure
Hotel & Spa in Fort Lauderdale, Florida for a purchase price of approximately
$16,200,000 in cash and the assumption of approximately $3,000,000 in
operating liabilities; the 362-room Marriott WindWatch Hotel in Hauppauge, New
York for a purchase price of approximately $30,000,000 in cash; 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 in cash, and the 257-room Valley River Inn in
Eugene, Oregon for a purchase price of approximately $18,750,000 in cash.
The Company's purchase of each of the Proposed Acquisitions is subject to
the satisfaction of various closing conditions and, therefore, no assurance
can be given that these acquisitions will be completed.
RESULTS OF OPERATIONS OF THE COMPANY
Actual
Three Months Ended March 31, 1996. For the three months ended March 31,
1996, the Company earned $12,371,000 in Participating Lease revenue from the
Lessees, which is net of leasing cost amortization of $23,000. Interest and
other income, which was $92,000 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
$2,838,000. Real estate and personal property taxes and insurance for the
period were $1,082,000 and rent payments on a ground lease were $77,000.
General and administrative expenses were $941,000 (including amortization of
unearned executive compensation of $166,000). The Company reported $601,000 of
interest expense for the period which consisted of $558,000 of interest
incurred on the Line of Credit balance outstanding and $43,000 of amortization
of deferred financing costs. The Company's share of income from an
unconsolidated subsidiary was $1,362,000. The minority interest's share of
income of the Company was $1,158,000 (representing the minority partners'
interest in the Operating Partnership). The resulting net income applicable to
common shareholders was $7,128,000.
For the period October 2, 1995 through December 31, 1995. For the period
October 2, 1995 (inception of operations) through December 31, 1995, the
Company earned $10,582,000 in Participating Lease revenue from the Lessees,
which is net of leasing cost amortization of $23,000. Interest and other
income, which was $513,000 for the period, consisted primarily of interest
income earned on invested cash balances resulting from exercise of the
underwriters' over-allotment option in connection with the Initial Offering.
Depreciation and amortization for the period was $2,590,000. Real estate and
personal property taxes and insurance for the period were $901,000 and general
and administrative expenses were $607,000 (including amortization of unearned
executive compensation of $71,000). The Company reported $89,000 of interest
expense for the period which consists of $62,000 of interest incurred on the
Line of Credit balance outstanding and $27,000 of amortization of deferred
financing costs. The Company's share of income from an unconsolidated
subsidiary was $156,000 and the minority interests' share of income of the
Company was $968,000. The Company reported extraordinary losses
43
<PAGE>
totaling $737,000 (net of the minority interests' share of losses) related to
the pay-off of assumed mortgage debt on hotel properties acquired. The
resulting net income applicable to common shareholders was $5,359,000.
Pro Forma (including Recent Acquisitions)
Three Months Ended March 31, 1996. Pro forma Participating Lease revenue was
$19,983,000 for the three months ended March 31, 1996, which is net of leasing
cost amortization of $23,000. Pro forma real estate and personal property
taxes and ground lease expense were $1,841,000 and $332,000, respectively, for
the quarter. General and administrative expense on a pro forma basis for the
first quarter of 1996 was $1,010,000. Pro forma interest expense was $580,000
including amortization of deferred financing costs associated with the Line of
Credit of $65,000 for the quarter. Pro forma depreciation and amortization
expense was $4,529,000. Pro forma income from an unconsolidated subsidiary was
$1,362,000. The minority interest's share of pro forma income of the Company
was $1,880,000. The resulting pro forma net income applicable to common
shareholders was $11,265,000.
Twelve months ended March 31, 1996. Pro forma Participating Lease revenue
was $76,733,000 for the twelve months ended March 31, 1996, which is net of
leasing cost amortization of $92,000. Of this amount $42,612,000 is
attributable to Participating Lease revenue from the Initial Hotels and
$34,121,000 is attributable to Participating Lease revenue from the Recent
Acquisitions. Pro forma real estate and personal property taxes and casualty
insurance expense was $6,995,000 for the period. Pro forma ground lease
expense was $1,362,000 and pro forma general and administrative expense was
$3,150,000 for the twelve months ended March 31, 1996. Pro forma interest
expense was $2,351,000, including amortization of deferred financing costs
associated with the Line of Credit of $260,000, and pro forma depreciation and
amortization was $18,117,000 for the twelve month period. Pro forma income
from an unconsolidated subsidiary was $3,912,000, an increase of $338,000 or
9.5% over the twelve months ended December 31, 1995, substantially as a result
of an increase in room revenues for the Crowne Plaza Ravinia of $349,000 in
the first quarter of 1996 compared to the first quarter of 1995, a 10.1%
increase. This also reflects an increase in revenue per available room of
13.9% for the first quarter of 1996 compared to the first quarter of 1995 for
this hotel. Real estate and personal property taxes and casualty insurance
expense and ground lease expense all increased only nominally in comparison to
pro forma expense reported for the year ended December 31, 1995. Depreciation
and amortization increased as a result of new capital additions in the fourth
quarter of 1995 and first quarter of 1996. The minority interest's share of
pro forma income of the Company was $6,979,000. The resulting pro forma net
income applicable to common shareholders was $41,823,000.
Year Ended December 31, 1995. Pro forma Participating Lease revenue was
$75,921,000 for the year ended December 31, 1995, which is net of leasing cost
amortization of $92,000. Of this amount $42,402,000 is attributable to
Participating Lease revenue from the Initial Hotels and $33,519,000 is
attributable to Participating Lease revenue from the Recent Acquisitions. Pro
forma real estate and personal property taxes and casualty insurance expense
was $6,928,000 for the year. Pro forma ground lease expense was $1,351,000 and
pro forma general and administrative expense was $3,150,000 for the year ended
December 31, 1995. Pro forma interest expense was $2,377,000, including
amortization of deferred financing costs associated with the Line of Credit of
$260,000, and pro forma depreciation and amortization was $18,040,000 for the
year. Pro forma income from an unconsolidated subsidiary was $3,574,000. The
minority interest's share of pro forma income of the Company was $6,821,000.
The resulting pro forma net income applicable to common shareholders was
$40,881,000.
Funds from Operations
Funds from operations (as defined and computed below) was $9,798,000 for the
period October 2, 1995 (inception of operations) through December 31, 1995 and
$11,634,000 for the three months ended March 31, 1996. On a pro forma basis,
funds from operations was $67,704,000 for the year ended December 31, 1995 and
$68,891,000 for the twelve months ended March 31, 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),
44
<PAGE>
excluding gains (or losses) from debt restructuring or sales of property, plus
depreciation of real property, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for the Company's unconsolidated
subsidiary are calculated to reflect funds from operations on the same basis.
The Company has also made certain adjustments to funds from operations for
real estate related amortization and extraordinary losses. 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
illustrates the difference between the two measures of operating performance:
<TABLE>
<CAPTION>
PERIOD
OCTOBER 2, 1995 FOR THE THREE
THROUGH MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Net income................................ $ 5,359 $ 7,128
Add:
Minority interest in Operating Partner-
ship.................................... 968 1,158
Extraordinary items, net of minority in-
terest.................................. 737 --
Depreciation of buildings and improve-
ments and furniture, fixtures and equip-
ment.................................... 2,529 2,808
Amortization of franchise fees........... 27 22
Amortization of capitalized lease costs.. 23 23
Adjustment for funds from operations of
unconsolidated subsidiary:
Equity in earnings of unconsolidated sub-
sidiary................................. (156) (1,362)
Funds from operations of unconsolidated
subsidiary.............................. 311 1,857
------- -------
Funds from operations..................... $ 9,798 $11,634
======= =======
The Company's share of funds from opera-
tions.................................... $ 8,456 $10,009
======= =======
Fully diluted weighted average shares and
OP Units outstanding..................... 17,024 17,107
======= =======
Weighted average number of common shares
and common share equivalents outstanding. 14,675 14,734
======= =======
</TABLE>
RESULTS OF OPERATIONS OF THE LESSEES
Actual (for the Three Months Ended March 31, 1996)
CHC Lease Partners. For the three months ended March 31, 1996, CHC Lease
Partners had room revenues of $24,260,000 from the 23 hotels it leases. The
room revenue increase of $2,018,000, or 9.0%, over the quarter ended March 31,
1995, included $1,590,000 from the Recent Acquisitions with the remainder
resulting from a 7.1% increase in average daily room rates offsetting a
decline in occupancy from 74.3% to 70.0% at the Initial Hotels. Food and
beverage, conference center and other revenues were $10,938,000 for the
quarter, including $10,319,000 from the Initial Hotels and $619,000 from the
Recent Acquisitions. Food and beverage revenue declined slightly from the
previous year, from $7,613,000 to $7,579,000 for the Initial Hotels.
Conference center, telephone and other revenue increased by $184,000, or 7.2%
over 1995. Hotel operating expenses were $22,082,000, including $20,514,000
related to the Initial Hotels (compared to $20,039,000 in 1995) and $1,568,000
related to the Recent Acquisitions. Participating Lease payments were
$11,918,000 and net income was $633,000.
Combined Lessees. For the three months ended March 31, 1996, CHC Lease
Partners and Metro Lease Partners had combined room revenues of $25,308,000.
Combined food and beverage, conference center and other revenues were
$11,258,000 for the quarter. Participating Lease payments and hotel operating
expenses were $12,371,000 and $23,050,000, respectively, and net income was
$546,000. Metro Lease Partners reported a net loss after all costs and lease
expenses of $87,000 for the period.
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Actual (for the Period October 2, 1995 through December 31, 1995)
CHC Lease Partners. For the period October 2, 1995 (inception) through
December 31, 1995, CHC Lease Partners had room revenues of $21,092,000 from
the Initial Hotels. Food and beverage, conference center and other revenues
were $10,803,000 for the period. Participating Lease payments and hotel
operating expenses were $10,432,000 and $20,386,000, respectively, and net
income was $509,000.
Combined Lessees. For the period October 2, 1995 (inception of CHC Lease
Partners) through December 31, 1995, CHC Lease Partners and Metro Lease
Partners had combined room revenues of $21,508,000. Combined food and
beverage, conference center and other revenues were $10,957,000 for the
period. Participating Lease payments and hotel operating expenses were
$10,582,000 and $20,801,000, respectively, and net income was $509,000.
Combined Pro Forma (including the Recent Acquisitions)
Three Months Ended March 31, 1996. Pro forma room revenue was $40,549,000
for the three months ended March 31, 1996, including $22,670,000 for the
Initial Hotels and $17,879,000 for the Recent Acquisitions. For the Initial
Hotels, this was an increase of $428,000, or 1.9%, over the like period in
1995. Average occupancy for the Initial Hotels was 70.0%, the average daily
rate was $84.61 and revenue per available room was $59.23 for the three month
period. Average occupancy for all of the hotels (excluding the Crowne Plaza
Ravinia, which is not leased) was 68.8% for the first quarter of 1996. Average
daily rates were $84.25 and revenue per available room was $57.96 for the
period.
Pro forma food and beverage revenue was $14,913,000 for the first quarter of
1996, including $7,579,000 for the Initial Hotels and $7,334,000 for the
Recent Acquisitions. For the Initial Hotels, this represented a decrease of
$34,000 from the like period in 1995. Conference center, telephone and other
revenue was $4,624,000 for the period, including $2,740,000 for the Initial
Hotels and $1,884,000 for the Recent Acquisitions. For the Initial Hotels this
represented an increase of $184,000, or 7.2%, over 1995.
Pro forma hotel operating expenses were $39,631,000 for the three months
ended March 31, 1996, including $20,515,000 for the Initial Hotels and
$19,116,000 for the Recent Acquisitions. For the Initial Hotels this was an
increase of $771,000 from 1995. Pro forma hotel operating expenses for all of
the hotels as a percentage of total revenue was 66%. Pro forma Participating
Lease payments were $19,983,000 for the three months ended March 31, 1996.
Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, net of actual dividend and interest income earned, were
$1,170,000, resulting in a pro forma net loss for the three months ended March
31, 1996 of $698,000.
Twelve Months Ended March 31, 1996. Pro forma room revenue was $160,909,000
for the twelve months ended March 31, 1996 including $86,713,000 for the
Initial Hotels and $74,196,000 for the Recent Acquisitions. Average occupancy
for all of the hotels (excluding the Crowne Plaza Ravinia, which is not
leased) was 71% for the twelve month period. Average daily rates were $80.53
and revenue per available room was $57.17 for the period. Average occupancy
for the Initial Hotels was 71.1%, the average daily rate was $79.29 and
revenue per available room was $56.34 for the twelve month period. Average
occupancy for the Recent Acquisitions (excluding the Crowne Plaza Ravinia,
which is not leased) was 70.9%, the average daily rate was $82.02 and revenue
per available room was $58.17 for the twelve month period.
Pro forma food and beverage revenue was $61,364,000 for the twelve months
ended March 31, 1996. Conference center revenue was $2,380,000 and telephone
and other revenue was $15,271,000 for the period. The Initial Hotels had pro
forma food and beverage revenue of $30,362,000, conference center revenue of
$2,380,000 and telephone and other revenue of $7,801,000 for the period. The
Recent Acquisitions had pro forma food and beverage revenue of $31,002,000 and
telephone and other revenue of $7,470,000 for the twelve months ended March
31, 1996.
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<PAGE>
Pro forma hotel operating expenses were $158,799,000 for the twelve months
ended March 31, 1996. Pro forma hotel operating expenses as a percentage of
total revenue were 66.2%. Pro forma Participating Lease payments were
$76,733,000 for the twelve months ended March 31, 1996. The Initial Hotels had
pro forma hotel operating expenses of $82,474,000, which was 64.8% of total
revenue, and pro forma Participating Lease payments of $42,612,000 for the
twelve month period. The Recent Acquisitions had pro forma hotel operating
expenses of $76,325,000, which was 67.7% of total revenue. The operating
expenses for the Recent Acquisitions included $1,273,000 of ground lease
expense, or 1.1% of total revenue. Pro forma Participating Lease payments for
the Recent Acquisitions were $34,121,000 for the twelve months ended March 31,
1996.
Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, net of dividend and interest income earned, were
$5,509,000, resulting in a pro forma net loss for the twelve months ended
March 31, 1996 of $1,117,000.
Year Ended December 31, 1995. Pro forma room revenue was $158,865,000 for
the year ended December 31, 1995, including $86,285,000 for the Initial Hotels
and $72,580,000 for the Recent Acquisitions. Average occupancy for all of the
hotels (excluding the Crowne Plaza Ravinia, which is not leased) was 71.5% for
the year. Average daily rates were $79.09 and revenue per available room was
$56.56 for 1995. On a same property basis (including all the Initial Hotels
except the Marriott Troy Hotel which was acquired in December 1994), each of
the Initial Hotels achieved increased room revenue in 1995 compared to 1994
except for the Holiday Inn Northwest Houston. Average occupancy for the
Initial Hotels was 72.1%, the average daily rate was $77.92 and revenue per
available room was $56.20 for 1995. Average occupancy for the Recent
Acquisitions (excluding the Crowne Plaza Ravinia, which is not leased) was
70.8%, the average daily rate was $80.53 and revenue per available room was
$57.00 in 1995.
Pro forma food and beverage revenue was $61,037,000 for 1995. Conference
center revenue was $2,434,000 and telephone and other revenue was $14,807,000
for the year. The Initial Hotels had pro forma food and beverage revenue of
$30,395,000, conference center revenue of $2,434,000 and telephone and other
revenue of $7,563,000 for the year ended December 31, 1995. The Recent
Acquisitions had pro forma food and beverage revenue of $30,642,000 and pro
forma telephone and other revenue of $7,244,000 for the year ended
December 31, 1995.
Pro forma hotel operating expenses were $156,684,000 for the year ended
December 31, 1995. Pro forma hotel operating expenses as a percentage of total
revenue were 66.1%. Pro forma Participating Lease payments were $75,921,000
for the year. The Initial Hotels had pro forma hotel operating expenses of
$81,704,000, which was 64.5% of total revenue, and pro forma Participating
Lease payments of $42,402,000. The Recent Acquisitions had pro forma hotel
operating expenses of $74,980,000, which was 67.9% of total revenue. The
operating expenses of the Recent Acquisitions included $1,259,000 of ground
lease expense, or 1.1% of total revenue. Pro forma Participating Lease
payments for the Recent Acquisitions was $33,519,000.
Lessee expenses, which on a pro forma basis consist of management fees and
overhead expenses, net of dividend and interest income earned, were
$5,646,000, resulting in pro forma net loss for the year ended December 31,
1996 of $1,108,000.
RESULTS OF OPERATIONS OF THE INITIAL HOTELS
For the Period January 1, 1995 through October 1, 1995. The Initial Hotels
had room revenues of $65,192,000 for the period January 1, 1995 through
October 1, 1995. On a same property basis (including all the Initial Hotels
except the Marriott Troy Hotel which was acquired in December 1994), each of
the Initial Hotels achieved increased room revenue in 1995 compared to 1994
except for the Holiday Inn Northwest Houston. Average occupancy was 73.3%, the
average daily rate was $77.15 and revenue per available room was $56.56 for
the period. Food and beverage, conference center and other revenue for the
period was $29,590,000. Departmental and other expenses (departmental costs
and expenses, general and administrative, repairs and
47
<PAGE>
maintenance, utilities, marketing and management fees) for the period were
$66,071,000, which represents 69.7% of total revenue. Income before fixed
expenses (composed of interest expense, real estate and personal property
taxes, insurance, and depreciation and amortization), gain on sale of assets
and extraordinary items was 30.3% of total revenue for the period, comparable
to the 1994 average of 30.1%. Fixed expenses totaled $22,781,000 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 $4,127,000 and reflects an
extraordinary loss from debt extinguishment on the Bourbon Orleans Hotel of
$1,803,000.
Comparison of the Years Ended December 31, 1994 and 1993. Room revenue
increased from $57,504,000 to $69,969,000, an increase of $12,465,000 or
21.7%. Of the total increase in room revenue, $5,183,000, or 41.6%, was
attributable to the acquisition of three hotels during 1993. Increases in
average occupancy, from 65.4% to 70.7%, and average room rates, from $68.36 to
$70.24, an increase of 2.7%, also contributed to the increase in room revenue.
On a same property basis, (for the 16 hotels owned or managed during all of
1993 and 1994) room revenues increased $7,282,000 or 13.7%, of which
approximately $2,300,000 was attributable to increases in average daily rates
and approximately $4,982,000 was attributable to increases in occupancy. The
increases in both average daily rates and average occupancy were primarily due
to improving conditions in the U.S. lodging industry, completion of
renovations at certain of the Initial Hotels and increased sales and marketing
efforts. This improvement in room revenues occurred despite the fact that
seven of the Initial Hotels were undergoing renovations during 1993 (none of
which were completed during 1993) and renovations at four of the Initial
Hotels commenced during 1994.
Food and beverage revenue increased from $20,168,000 to $23,770,000, a total
of $3,602,000 or 17.9%. Of the total increase in food and beverage revenue,
$2,019,000, or 56.1%, was attributable to the inclusion of the food and
beverage operations of the three hotels acquired in 1993 for a full year in
1994. On a same property basis, food and beverage revenue increased $1,583,000
or 8.9%, due primarily to increased occupancy. This increase was partially
offset by converting the restaurant operations of the Bourbon Orleans Hotel
from owner operated to a third-party net lease in the fourth quarter of 1994.
Conference center revenue increased from approximately $1,970,000 to
$2,149,000, an increase of $179,000 or 9.0%, due primarily to increased
conference revenue resulting from improvement in the overall business climate.
Telephone and other revenue increased from approximately $4,660,000 to
$5,593,000, an increase of $933,000 or 20.0%. Of the total increase in
telephone and other revenue, $378,000 or 40.5% was attributable to inclusion
of a full year of activity for the hotels acquired in 1993. On a same property
basis, telephone and other revenue increased $555,000 or 12.9%, due primarily
to increased occupancy during the period.
Departmental and other expenses increased from $61,555,000 to $70,888,000,
an increase of $9,333,000 or 15.2%, which represented a decrease as a
percentage of total revenue from 73.0% to 69.9%. As a result, income before
fixed expenses, gain on sale of assets and extraordinary item increased from
27.0% to 30.1% of total revenue. Of the total increase in departmental and
other expenses, $5,737,000 or 61.5% related to the inclusion of a full year of
operations in 1994 for the hotels acquired in 1993. On a same property basis,
departmental and other expenses increased $3,596,000 or 6.4% as a result of
increased operating costs at certain of the hotels. General and administrative
expenses increased $594,000 or 7.7%, while repairs and maintenance and
utilities remained relatively stable. Marketing expenses increased $482,000 or
7.2% as a result of increased marketing efforts at newly renovated hotels.
Management fees increased $362,000 or 12.6% as a result of increased hotel
revenues during the period.
Fixed expenses increased from $19,797,000 to $23,815,000, representing an
increase of $4,018,000 or 20.3%, although fixed expenses as a percent of total
revenue remained constant at 23.5%. Of the total increase in fixed expenses,
$1,645,000 or 40.0% resulted from the inclusion of a full year of activity in
1994 for the three hotels acquired in 1993. On a same property basis,
depreciation and amortization increased $1,446,000 or 23.5% as a result of
improvements made to the hotels during 1993 and 1994. Real estate, personal
property taxes and insurance, remained relatively stable during the period,
while interest expense increased $993,000 or 11.0% as a result of new
indebtedness incurred by certain of the Initial Hotels.
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<PAGE>
Net income increased from $2,909,000 in 1993 to $6,948,000 in 1994 as the
result of overall improvement in the operations of the Initial Hotels
described above.
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. The Company currently has approximately $149,000,000 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 1.90%. 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 1.90%. 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. See "Developments Since the Initial Offering--Financing
Activities--Greenspoint Loan."
In May 1996, the Company sold an aggregate of approximately $40,000,000 of
securities to an institutional investor in 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 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 holders
may exchange the Preferred OP Units for shares of Common Stock on a one-for-
one basis, subject to certain adjustments and 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, subject to adjustment.
In addition, the Company is evaluating 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 has entered into contracts to acquire the six Proposed
Acquisitions in the states of New York, Michigan, Texas, Illinois, Oregon and
Florida. These acquisitions are subject to various closing conditions and
there can be no assurance that any or all of the 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 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 lease 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 March 31, 1996 were $8,098,000, including
capital improvement reserves of $1,806,000. Cash flows from operating
activities of the Company was $9,002,000 for the three months ended March 31,
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 $37,838,000 resulted from the
acquisition of hotel properties. Cash flows from financing activities of
$32,165,000 was primarily related to $40,750,000 in borrowings on the Line of
Credit, net of dividends and distributions paid during the quarter.
49
<PAGE>
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 F, F & E. The aggregate amount of such
reserves averages 4.0% of total revenue, with the amount of such reserve with
respect to each Hotel based upon projected capital requirements of such Hotel.
Management believes such reserves will generally be sufficient to fund
recurring capital expenditures for the Hotels. Capital expenditures, exclusive
of renovations, will exceed 4.0% 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 capital expenditures, excluding renovations in 1996 for the Recent
Acquisitions. 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, 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 $900,000 of this amount through
March 31, 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 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.
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 a calendar year. Seasonal
variations in revenue at the Hotels may cause quarterly fluctuations in the
Company's lease revenue.
50
<PAGE>
THE HOTEL INDUSTRY
The United States lodging industry is in the midst of a continuing recovery
from an extended period of unprofitable performance in the late 1980s and early
1990s. The Company expects that this broad industry recovery will contribute to
growth in revenues at the Hotels (and hotels subsequently acquired by the
Company) and thus to increases in the Company's Cash Available for
Distribution.
The hotel industry experienced an extended period of unprofitable performance
from 1986 to 1991. The industry downturn resulted from a dramatic increase in
the supply of hotel rooms that significantly outpaced growth in demand. The
growth in supply, which resulted from the development of new hotels, was
supported by the availability of financing from banks, savings and loans,
insurance companies, high yield bonds and various tax incentives. According to
Smith Travel, and as demonstrated in the chart below, total room supply in the
United States increased by 32%, or approximately 750,000 rooms, from 1980 to
1991. Of this increase, approximately 567,000 rooms were added between 1985 and
1991. In all but two of these years (1988 and 1989), increases in supply
substantially exceeded growth in demand. In some years, demand remained flat or
even declined. As a result of this extended supply/demand imbalance, overall
hotel occupancy rates dropped steadily from 70.6% in 1980 to a 20-year low of
60.9% in 1991. The graph set forth below illustrates the relationship between
supply, demand and occupancy. Increases in demand in excess of increases in
supply necessarily result in higher occupancy.
[BAR GRAPH DEPICTING PERCENTAGE CHANGE IN UNITED
STATES HOTEL ROOM SUPPLY VS. DEMAND (1980-1995) APPEARS HERE]
51
<PAGE>
The hotel industry began its recovery in 1992. New hotel construction
declined considerably as lenders who previously supported development focused
on restructurings and foreclosures of existing hotel loans. With minimal new
capital available for hotel construction, the growth in room supply declined
from a high of 4.2% in 1988 to 1.0% in 1993, and averaged approximately 1.3%
from 1993 through 1995. By contrast, room demand has increased with the
improving economy, and average occupancy and room rates have moved steadily
upward. According to Smith Travel, overall hotel occupancy increased from
60.9% in 1991 to 65.5% in 1995. Average room rate growth increased from 1.4%
in 1992 to 4.8% in 1995. Analysts generally expect overall occupancy growth to
be limited in future years, with continuing growth in average room rates.
While the hotel industry's recovery has been broad-based, the Company
expects the greatest continuing growth to occur in the full service segment of
the industry. Accordingly, the Company intends to continue to focus its
acquisition activities primarily on full service hotels. The Company also
believes the hotel industry's difficulties in the 1980's have produced a more
responsible relationship between hotel developers and financing sources. As a
result, the Company expects future additions to hotel supply, particularly in
the full service sector, will be more demand-driven, minimizing the
overbuilding in key markets that characterized supply growth in the late
1980's, and increasing the prospect for profitable hotel industry growth for
the foreseeable future.
THE HOTELS AND THE PROPOSED ACQUISITIONS
The Hotels are diversified by franchise or brand affiliation and product
type, including 29 full service hotels, 5 limited service hotels and an
executive conference center. The Company believes the diversity of its
portfolio moderates the potential effects on the Company of changes in local
market competition or developments affecting specific franchises, hotel
markets or price segments in the hotel industry. The Hotels are located
primarily in major metropolitan areas with convenient access to interstate
highways, commercial airports and other transportation facilities, local
business centers and tourist attractions. The Company's acquisition activities
are focused on full service hotels serving major U.S. business centers and
primary tourist destinations.
Consistent with the Company's acquisition strategy, the Proposed
Acquisitions consist of six full service hotels, all of which are located in
major metropolitan areas, including the Company's first full service hotel
acquisitions in the metropolitan New York and Chicago areas.
The tables on the following pages set forth certain information with respect
to the Hotels and the Proposed Acquisitions.
52
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
NUMBER AVERAGE REVENUE PER
OF PRO FORMA DAILY AVAILABLE
GUEST YEAR BUILT/ TOTAL LEASE AVERAGE RATE ROOM
LOCATION ROOMS RENOVATED(1) REVENUE PAYMENTS(2) OCCUPANCY(3) (ADR)(3) (REVPAR)(4)
-------- ------ ------------ -------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED HOTELS
FULL SERVICE
HOTELS:
Marriott
Hotel(5)........ Troy, MI 350 1990 $ 17,980 $ 5,375 76.0% $103.34 $ 78.51
Holiday Inn
Select North
Dallas(5)....... Farmers Branch (Dallas), TX 374 1979/1994 10,178 2,837 69.2 72.24 49.95
Hilton Inn
Cleveland
South(5)........ Independence, OH 191 1980/1994 8,158 2,343 69.9 84.95 59.36
Crockett
Hotel(5)........ San Antonio, TX 206 1909/1983 5,174 2,347 67.4 83.16 56.01
Four Points by
Sheraton(5)..... Saginaw, MI 156 1984 4,170 1,098 75.9 61.10 46.38
Bourbon Orleans
Hotel(5)........ New Orleans, LA 211 1800s/1995 7,607 3,557 80.1 115.65 92.62
Radisson New
Orleans
Hotel(5)........ New Orleans, LA 759 1924/1995 19,411 5,705 65.8 78.51 51.64
Radisson Hotel &
Suites(5)....... Dallas, TX 198 1986/1994 5,151 1,713 78.0 70.51 54.97
Radisson Suites
Town &
Country(5)...... Houston, TX 173 1986/1992 4,647 1,823 74.2 79.41 58.88
Holiday Inn
Aristocrat(5)... Dallas, TX 172 1925/1994 4,686 1,520 68.7 82.42 56.60
Holiday Inn
Northwest(5).... Houston, TX 193 1982/1994 2,926 914 64.0 51.45 32.92
Holiday Inn
Northwest
Plaza(5)........ Austin, TX 193 1984/1994 6,370 2,395 84.7 81.75 69.24
Holiday Inn(5).. San Angelo, TX 148 1984/1994 3,078 977 74.3 57.13 42.43
Holiday Inn..... Sebring, FL 148 1983/1995 2,489 680 57.7 55.10 31.80
Fairmount Hotel. San Antonio, TX 37 1906/1994 2,793 643 74.0 148.96 110.19
Embassy Suites
Hunt Valley(5).. Hunt Valley, MD 223 1985/1995 6,026 1,900 70.7 80.18 56.68
Crowne Plaza
Ravinia(5)...... Atlanta, GA 495 1986/1993 22,254 N/A(9) 75.5 102.04 77.06
Tremont House
Hotel(5)(6)..... Boston, MA 288 1925/1988 9,952 3,001 75.4 89.62 67.60
Holiday Inn
Lenox(5)........ Atlanta, GA 297 1987/1995 7,233 2,759 72.8 77.27 56.24
Del Mar
Hilton(5)....... Del Mar (San Diego), CA 245 1989 7,644 1,917 68.4 77.08 52.69
WestCoast
Gateway Hotel... Seattle, WA 145 1990 2,560 1,236 83.3 51.99 43.32
WestCoast
Roosevelt
Hotel(5)........ Seattle, WA 151 1929/1987 4,049 2,050 74.4 89.75 66.75
WestCoast
Wenatchee Center
Hotel(5)........ Wenatchee, WA 147 1986/1994 4,236 824 63.4 59.05 37.41
Hyatt Newporter
Hotel........... Newport Beach, CA 410 1962 19,361 3,813 72.3 97.56 70.58
WestCoast Long
Beach Hotel and
Marina.......... Long Beach, CA 192 1976/1987 3,157 428 49.1 57.03 28.02
Hyatt
Regency(5)...... Lexington, KY 365 1977/1992 12,189 2,742 64.6 80.34 51.92
Doubletree
Denver/Boulder(5). Westminister (Denver), CO 180 1985/1992 5,461 1,693 78.1 70.65 55.20
Wyndham
Greenspoint Hotel(7). Houston, TX 472 1985/1995 18,272 6,113 72.6 82.44 59.84
Wyndham Garden
Hotel-Mid-
town(5)......... Atlanta, GA 191 1987/1994 6,422 2,294 73.7 93.74 69.06
----- -------- ------- ---- ------- -------
Subtotal/Weighted
Average......... 7,310 $233,634 $64,697 71.2% $ 82.05 $ 58.41
LIMITED SERVICE
HOTELS:
Hampton Inn
Jacksonville
Airport......... Jacksonville, FL 113 1985 $ 2,037 $ 865 88.8% $ 53.62 $ 47.59
Hampton Inn..... Rochester, NY 113 1986 2,194 1,099 74.1 69.33 51.37
Hampton Inn
Cleveland
Airport......... North Olmsted, OH 113 1986 1,902 898 75.8 59.33 44.94
Hampton Inn..... Canton, OH 108 1985 1,450 640 70.6 49.81 35.16
WestCoast Plaza
Park
Suites(5)(8).... Seattle, WA 194 1990 6,107 3,353 75.3 104.85 78.94
----- -------- ------- ---- ------- -------
Subtotal/Weighted
Average......... 641 $ 13,690 $ 6,855 76.8% $ 71.87 $ 55.16
CONFERENCE
CENTER:
Peachtree
Executive
Conference
Center(5)....... Peachtree City (Atlanta), GA 250 1984 $ 14,854 $ 5,181 59.6% $109.46 $ 65.18
----- -------- ------- ---- ------- -------
Total/Weighted
Average--Owned
Hotels.......... 8,201 $262,178 $76,733 71.3% $ 81.89 $ 58.36
===== ======== ======= ==== ======= =======
</TABLE>
(Notes on following page)
53
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1996
---------------------------------
AVERAGE REVENUE PER
DAILY AVAILABLE
NUMBER OF YEAR BUILT/ AVERAGE RATE ROOM
LOCATION GUEST ROOMS RENOVATED(1) OCCUPANCY(3) (ADR)(3) (REVPAR)(4)
-------- ----------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PROPOSED ACQUISITIONS
Marriott WindWatch Ho-
tel................... Hauppauge, NY 362 1989 76.0% $99.83 $75.88
Bonaventure Resort &
Spa................... Ft. Lauderdale, FL 492 1981 59.0 90.54 53.41
Wyndham Garden Hotel... Novi (Detroit), MI 148 1988/1994 77.3 68.29 52.78
Wyndham Garden Hotel... Wood Dale (Chicago), IL 162 1986/1994 70.7 82.10 58.03
Wyndham Garden-Las
Colinas............... Irving (Dallas), TX 168 1986 75.9 96.22 73.04
Valley River Inn....... Eugene, OR 257 1973 69.2 83.96 58.12
</TABLE>
- --------
(1) The Company defines a renovation as a significant upgrade of guest rooms
or common areas with capital expenditures averaging at least $1,000 per
guest room for limited service hotels and at least $1,500 per guest room
for full service hotels and conference centers. In some cases, renovations
occurred over more than one calendar year. Year renovated reflects the
calendar year in which the most recent of such renovations were completed.
Information on renovations for Recent Acquisitions and Proposed
Acquisitions was provided by prior owners.
(2) Under the terms of the Participating Leases, Lessees are obligated to pay
the greater of Base Rent or Participating Rent plus Additional Charges,
which vary with the Participating Lease.
(3) The Company calculates Average Occupancy based upon total number of paid
rooms (excluding rooms for which no charge has been made) divided by the
total number of available rooms. Average Daily Rate is calculated using
paid occupied rooms.
(4) REVPAR is determined by dividing room revenue by available rooms for the
applicable period.
(5) The Line of Credit is secured by a first mortgage lien on this Hotel.
(6) The Company intends to increase the room count at this Hotel to
approximately 321 rooms in connection with a planned $8.5 million
renovation. At present only 283 of the 288 rooms are utilized as guest
rooms.
(7) The Greenspoint Loan is secured by a first mortgage lien on this Hotel.
The Line of Credit is secured by a second mortgage lien on this Hotel.
(8) This Hotel currently contains unused restaurant space. The Company intends
to complete the build out of a restaurant in this space, thereby
converting the Hotel from a limited service to a full service property.
(9) The Crowne Plaza Ravinia is not leased. The Company's share of net income
and share of funds from operations from PAH Ravinia were $3,912,000 and
$5,822,000, respectively, on a pro forma basis for the twelve months ended
March 31, 1996.
SUPPLEMENTAL INFORMATION REGARDING SIGNIFICANT PROPERTIES
Crowne Plaza Ravinia--Atlanta, Georgia. The Crowne Plaza Ravinia is located
on a 10-acre wooded site just off Atlanta's perimeter freeway. The Hotel is
located adjacent to Holiday Inn Worldwide headquarters and directly across the
street from Perimeter Center Mall, one of the Southeast's largest upscale
shopping malls. The 15-story Hotel contains 495 guest rooms, including 29
suites, and three restaurants. The Hotel features a three-story greenhouse
lobby, 20 meeting rooms, a grand ballroom, an amphitheatre, an atrium-style
boardroom, and a Crowne Plaza Club floor. The Company believes that the Crowne
Plaza Ravinia competes effectively in its market because of its desirable
location and superior facilities compared to other hotels which cater
primarily to business travelers. The Hotel has excellent highway access
allowing for easy travel within the Atlanta area.
The Crowne Plaza Ravinia constitutes more than 10% of the aggregate
historical cost basis of the Hotels. The aggregate tax basis of depreciable
real and personal property at the Crowne Plaza Ravinia for federal income tax
purposes was approximately $34.8 million and $5.5 million, respectively, as of
December 31, 1995. Depreciation is computed for federal income tax purposes
using the straight-line method over a 40 year life for the real property and
declining balances methods over lives which range from 5 years to 7 years for
the personal property.
The 1995 realty tax base for the Crowne Plaza Ravinia was $41.51 per $1,000
of assessed value. The total annual tax at this rate for 1995 was
approximately $393,600.
The Company owns a 99% non-voting ownership interest in PAH Ravinia, Inc.,
the entity that owns the Crowne Plaza Ravinia. See "Risk Factors--Risk of
Investment in Subsidiaries."
Wyndham Greenspoint Hotel--Houston, Texas. The Wyndham Greenspoint Hotel is
located at the intersection of Interstate 45 and Sam Houston Parkway, 20 miles
north of downtown Houston and 10 minutes from Houston Intercontinental
Airport. The Hotel is located directly across the street from the Greenspoint
Mall. The 15-story hotel contains 472 guest rooms, including 50 suites, and
features modern gothic architecture and a 45-foot high atrium lobby. The
Company believes that the Hotel competes effectively in its market because of
its desirable location and superior accommodations as compared to competing
business hotels.
The Wyndham Greenspoint Hotel constitutes more than 10% of the aggregate
historical cost basis of the Hotels. The aggregate tax basis of depreciable
real and personal property at the Wyndham Greenspoint Hotel for
54
<PAGE>
federal income tax purposes was approximately $55.3 million and $14 million,
respectively, as of December 31, 1995. Depreciation is computed for federal
income tax purposes using the straight-line method over a 40 year life for the
real property and declining balance methods over nine year lives for personal
property.
The Greenspoint Loan is secured by a first mortgage lien on the Wyndham
Greenspoint Hotel. See "Developments Since the Initial Offering--Financing
Activities--Greenspoint Loan".
The 1995 realty tax rate for the Wyndham Greenspoint Hotel was $29.76 per
$1,000 of assessed value. The total annual tax at this rate was approximately
$785,500.
The following tables sets forth the average occupancy, ADR and REVPAR with
respect to the Recent Acquisitions, the Initial Hotels and the Proposed
Acquisitions. The charts summarize the historical operating performance of the
Initial Hotels for those periods the hotels were owned or managed by the
predecessor entities or their affiliates. In addition, information with
respect to the Marriott Troy Hotel is included for all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------- ------------------------------------
Owned Hotels 1994 1995 % CHANGE 1995 1996 % CHANGE
------------ ------ ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
RECENT ACQUISITIONS:
Crowne Plaza Ravinia--
Atlanta, Georgia
Average occupancy..... 74.8% 75.0% 0.3% 74.9% 77.1% 2.9%
ADR................... $88.72 $ 99.34 12.0% $ 101.90 $ 112.78 10.7%
REVPAR................ $66.40 $ 74.50 12.2% $ 76.36 $ 86.98 13.9%
Embassy Suites Hunt
Valley--Hunt Valley,
Maryland
Average occupancy..... 66.1% 69.8% 5.6% 61.4% 65.0% 5.9%
ADR................... $74.83 $ 79.44 6.2% $ 76.42 $ 79.83 4.5%
REVPAR................ $49.49 $ 55.48 12.1% $ 46.95 $ 51.86 10.5%
Tremont House Hotel--
Boston, Massachusetts
Average occupancy..... 75.6% 75.2% (0.5)% 54.8% 55.9% 2.0%
ADR................... $82.89 $ 88.47 6.7% $ 68.37 $ 75.26 10.1%
REVPAR................ $62.63 $ 66.54 6.2% $ 37.43 $ 42.09 12.4%
Holiday Inn Lenox--At-
lanta, Georgia
Average occupancy..... 63.2% 71.3% 12.8% 69.3% 75.2% 8.5%
ADR................... $63.63 $ 74.31 16.8% $ 75.46 $ 86.90 15.2%
REVPAR................ $40.23 $ 53.01 31.8% $ 52.32 $ 65.34 24.9%
Del Mar Hilton--Del
Mar, California
Average occupancy..... 64.8% 67.1% 3.5% 62.9% 68.1% 8.3%
ADR................... $72.83 $ 75.72 4.0% $ 71.59 $ 77.45 8.2%
REVPAR................ $47.17 $ 50.80 7.7% $ 45.06 $ 52.73 17.0%
Plaza Park Suites
Hotel--Seattle,
Washington
Average occupancy..... 71.6% 78.1% 9.1% 71.7% 60.5% (15.6)%
ADR................... $97.54 $100.92 3.5% $ 87.34 $ 104.68 19.9%
REVPAR................ $69.83 $ 78.81 12.9% $ 62.64 $ 63.36 1.1%
WestCoast Roosevelt
Hotel--Seattle,
Washington
Average occupancy..... 73.1% 73.3% 0.3% 57.0% 61.3% 7.5%
ADR................... $80.90 $ 89.17 10.2% $ 83.00 $ 86.36 4.0%
REVPAR................ $59.11 $ 65.39 10.6% $ 47.27 $ 52.91 11.9%
Hyatt Newporter Hotel--
Newport Beach,
California
Average occupancy..... 65.5% 71.9% 9.8% 74.9% 76.5% 2.1%
ADR................... $93.21 $96.15 3.2% $ 95.19 $ 100.57 5.7%
REVPAR................ $61.06 $69.17 13.3% $ 71.25 $ 76.91 7.9%
WestCoast Gateway
Hotel--Seattle,
Washington
Average occupancy..... 77.5% 82.8% 6.8% 74.7% 76.9% 2.9%
ADR................... $48.95 $ 51.42 5.0% $ 46.84 $ 49.49 5.7%
REVPAR................ $37.94 $ 42.57 12.2% $ 34.97 $ 38.07 8.9%
WestCoast Wenatchee
Center Hotel--
Wenatchee, Washington
Average occupancy..... 62.8% 64.0% 1.9% 55.2% 52.8% (4.3)%
ADR................... $54.06 $ 58.92 9.0% $ 54.85 $ 55.33 0.9%
REVPAR................ $33.95 $ 37.70 11.0% $ 30.26 $ 29.19 (3.5)%
WestCoast Long Beach
Hotel and Marina--Long
Beach, California
Average occupancy..... 50.3% 49.9% (.8)% 48.9% 45.6% (6.7)%
ADR................... $55.72 $ 57.47 3.1% $ 56.15 $ 54.01 (3.8)%
REVPAR................ $28.05 $ 28.70 2.3% $ 27.46 $ 24.61 (10.4)%
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------- ------------------------------------
Owned Hotels 1994 1995 % CHANGE 1995 1996 % CHANGE
------------ ------- ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Hyatt Regency--
Lexington, Kentucky
Average occupancy..... 61.7% 63.9% 3.6% 55.2% 58.4% 5.8%
ADR................... $77.41 $ 79.38 2.5% $ 77.62 $ 82.00 5.6%
REVPAR................ $47.75 $ 50.69 6.2% $ 42.87 $ 47.89 11.7%
Doubletree
Denver/Boulder--
Denver, Colorado
Average occupancy..... 82.5% 81.4% (1.3)% 84.0% 70.6% (16.0)%
ADR................... $62.28 $68.93 10.7% $64.13 $70.97 10.7%
REVPAR................ $51.37 $56.13 9.3% $53.84 $50.13 (6.9)%
Wyndham Greenspoint
Hotel--Houston, Texas
Average Occupancy..... 73.3% 72.9% (0.5)% 78.5% 77.1% (1.8)%
ADR................... $ 76.68 $ 81.09 5.8 % $ 83.92 $ 89.05 6.1 %
REVPAR................ $ 56.17 $ 59.13 5.3 % $ 65.88 $ 68.66 4.2 %
Wyndham Garden-
Midtown--Atlanta,
Georgia
Average Occupancy..... 73.5% 72.2% (1.8)% 74.4% 80.5% 8.2 %
ADR................... $ 83.23 $ 90.87 9.2 % $ 92.39 $ 102.82 11.3 %
REVPAR................ $ 61.14 $ 65.57 7.2 % $ 68.74 $ 82.75 20.4 %
TOTAL RECENT
ACQUISITIONS:
Weighted average
occupancy............ 69.1% 71.3% 3.2 % 67.8% 68.5% 1.0 %
ADR................... $ 77.40 $ 82.99 7.2 % $ 80.79 $ 87.74 8.6 %
Weighted REVPAR....... $ 53.48 $ 59.17 10.6 % $ 54.75 $ 60.13 9.8 %
INITIAL HOTELS:
Bourbon Orleans Hotel--New
Orleans, Louisiana
Average occupancy..... 74.3% 81.3% 9.4 % 83.0% 78.3% (5.7)%
ADR................... $107.15 $116.73 8.9 % $ 129.47 $ 125.66 (2.9)%
REVPAR................ $ 79.59 $ 94.84 19.2 % $ 107.44 $ 98.40 (8.4)%
Holiday Inn Select
North Dallas--Farmers
Branch, Texas
Average occupancy..... 72.1% 72.3% 0.3 % 82.2% 69.5% (15.5)%
ADR................... $ 62.10 $ 68.20 9.8 % $ 64.05 $ 79.51 24.1 %
REVPAR................ $ 44.80 $ 49.29 10.0 % $ 52.63 $ 55.27 5.0 %
Hilton Inn Cleveland
South--Independence,
Ohio
Average occupancy..... 70.9% 71.3% 0.6 % 66.5% 61.0% (8.3)%
ADR................... $ 76.45 $ 83.11 8.7 % $ 79.88 $ 88.11 10.3 %
REVPAR................ $ 54.16 $ 59.22 9.3 % $ 53.14 $ 53.77 1.2 %
Crockett Hotel--San
Antonio, Texas
Average occupancy..... 69.3% 67.0% (3.3)% 70.0% 71.4% 2.0 %
ADR................... $ 80.43 $ 83.29 3.6 % $ 83.63 $ 83.14 (0.6)%
REVPAR................ $ 55.73 $ 55.80 0.1 % $ 58.54 $ 59.33 1.3 %
Marriott Hotel--Troy,
Michigan
Average occupancy..... 73.4% 74.4% 1.4 % 70.1% 76.4% 9.0 %
ADR................... $ 97.35 $102.43 5.2 % $ 104.88 $ 108.27 3.2 %
REVPAR................ $ 71.46 $ 76.22 6.7 % $ 73.48 $ 82.71 12.6 %
Four Points by Sheraton--
Saginaw, Michigan
Average occupancy..... 73.5% 75.0% 2.0 % 70.3% 73.8% 5.0 %
ADR................... $ 59.31 $ 61.24 3.3 % $ 60.88 $ 60.29 (1.0)%
REVPAR................ $ 43.60 $ 45.96 5.4 % $ 42.78 $ 44.51 4.0 %
Radisson New Orleans
Hotel--New Orleans,
Louisiana
Average occupancy..... 70.0% 68.7% (1.9)% 73.8% 62.1% (15.9)%
ADR................... $ 69.74 $ 78.69 12.8 % $ 85.20 $ 85.56 0.4 %
REVPAR................ $ 48.82 $ 54.03 10.7 % $ 62.84 $ 53.10 (15.5)%
Radisson Hotel &
Suites--Dallas, Texas
Average occupancy..... 82.2% 80.4% (2.2)% 85.1% 75.2% (11.6)%
ADR................... $ 61.90 $ 66.97 8.2 % $ 64.63 $ 79.12 22.4 %
REVPAR................ $ 50.88 $ 53.83 5.8 % $ 54.98 $ 59.53 8.3 %
Radisson Suites Town &
Country--Houston,
Texas
Average occupancy..... 69.9% 73.1% 4.6% 69.4% 73.5% 5.9%
ADR................... $ 78.95 $ 77.60 (1.7)% $ 77.22 $ 84.52 9.5%
REVPAR................ $ 55.17 $ 56.72 2.8% $ 53.55 $ 62.15 16.1%
Holiday Inn
Aristocrat--
Dallas, Texas
Average occupancy..... 64.0% 69.0% 7.8% 73.2% 71.7% (2.0)%
ADR................... $ 74.43 $ 79.07 6.2% $ 78.15 $ 91.03 16.5%
REVPAR................ $ 47.63 $ 54.57 14.6% $ 57.17 $ 65.28 14.2%
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------- ------------------------------------
Owned Hotels 1994 1995 % CHANGE 1995 1996 % CHANGE
------------ ------- ------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Holiday Inn Northwest--
Houston, Texas
Average occupancy..... 65.0% 65.5% 0.8% 70.8% 64.8% (8.5)%
ADR................... $ 51.80 $ 51.00 (1.5)% $ 52.72 $ 54.65 3.7%
REVPAR................ $ 33.69 $ 33.39 (0.9)% $ 37.31 $ 35.40 (5.1)%
Holiday Inn Northwest
Plaza--Austin, Texas
Average occupancy..... 77.9% 84.9% 9.0% 86.6% 86.0% (0.7)%
ADR................... $ 72.41 $ 80.03 10.5% $ 78.22 $ 85.04 8.7%
REVPAR................ $ 56.39 $ 67.91 20.4% $ 67.75 $ 73.11 7.9%
Holiday Inn--San Ange-
lo, Texas
Average occupancy..... 70.5% 74.2% 5.2% 71.0% 71.1% 0.1%
ADR................... $ 54.77 $ 56.29 2.8% $ 55.44 $ 59.00 6.4%
REVPAR................ $ 38.62 $ 41.79 8.2% $ 39.33 $ 41.93 6.6%
Holiday Inn--Sebring,
Florida
Average occupancy..... 52.8% 58.0% 9.8% 80.5% 79.0% (1.9)%
ADR................... $ 51.70 $ 52.80 2.1% $ 57.50 $ 64.30 11.8%
REVPAR................ $ 27.32 $ 30.64 12.2% $ 46.28 $ 50.77 9.7%
Fairmount Hotel--San
Antonio, Texas
Average occupancy..... 74.3% 74.9% 0.8% 81.2% 77.6% (4.4)%
ADR................... $135.28 $141.72 4.8% $135.29 $162.85 20.4%
REVPAR................ $100.50 $106.08 5.6% $ 109.90 $ 126.38 15.0%
Hampton Inn Jackson-
ville Airport--
Jacksonville, Florida
Average occupancy..... 91.4% 88.8% (2.8)% 93.4% 93.1% (0.3)%
ADR................... $ 43.83 $ 52.29 19.3% $ 51.47 $ 56.58 9.9%
REVPAR................ $ 40.06 $ 46.45 16.0% $ 48.07 $ 52.64 9.5%
Hampton Inn--Rochester,
New York
Average occupancy..... 76.7% 75.3% (1.8)% 70.8% 66.1% (6.6)%
ADR................... $ 64.22 $ 68.44 6.6% $ 62.96 $ 66.62 5.8%
REVPAR................ $ 49.24 $ 51.52 4.6% $ 44.59 $ 44.06 (1.2)%
Hampton Inn Cleveland
Airport--North
Olmsted, Ohio
Average occupancy..... 73.9% 75.2% 1.8% 63.7% 65.9% 3.5%
ADR................... $ 56.01 $ 58.37 4.2% $ 57.40 $ 61.84 7.7%
REVPAR................ $ 41.38 $ 43.92 6.1% $ 36.58 $ 40.77 11.5%
Hampton Inn--Canton,
Ohio
Average occupancy..... 69.9% 73.8% 5.6% 62.7% 50.0% (20.3)%
ADR................... $ 47.33 $ 48.81 3.1% $ 46.39 $ 51.50 11.0%
REVPAR................ $ 33.09 $ 36.02 8.9% $ 29.07 $ 25.77 (11.4%)
Peachtree Conference
Center--Peachtree
City, Georgia
Average occupancy..... 59.5% 60.4% 1.5% 64.3% 61.0% (5.1)%
ADR................... $103.04 $107.84 4.7% $ 108.91 $ 115.31 5.9%
REVPAR................ $ 61.29 $ 65.11 6.2% $ 70.07 $ 70.29 0.3%
TOTAL INITIAL HOTELS:
Weighted average
occupancy............ 71.0% 72.1% 1.5% 74.3% 70.0% (5.8)%
ADR................... $ 72.57 $ 77.92 7.4% $ 78.97 $ 84.61 7.1%
Weighted REVPAR....... $ 51.49 $ 56.20 9.1% $ 58.70 $ 59.23 0.9%
TOTAL OWNED HOTELS:
Weighted average
occupancy............ 70.1% 71.7% 2.3% 71.1% 69.3% (2.5)%
ADR................... $ 74.89 $ 80.37 7.3% $ 79.82 $ 86.11 7.9%
Weighted REVPAR....... $ 52.46 $ 57.65 9.9% $ 56.78 $ 59.66 5.1%
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------ ------------------------------------
Proposed Acquisitions 1994 1995 % CHANGE 1995 1996 % CHANGE
--------------------- -------- -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
PROPOSED ACQUISITIONS:
WindWatch Hotel--
Hauppauge (Long
Island), New York
Average Occupancy..... 73.5% 76.8% 4.5 % 68.9% 65.4% (5.1)%
ADR................... $ 93.45 $ 99.15 6.1 % $ 90.68 $ 93.65 3.3 %
REVPAR................ $ 68.68 $ 76.17 10.9 % $ 62.46 $ 61.20 (2.0)%
Bonaventure Resort &
Spa--Ft. Lauderdale,
Florida
Average Occupancy..... 60.7% 57.7% (4.9)% 71.2% 76.2% 7.0 %
ADR................... $ 89.57 $ 92.66 3.4 % $ 132.33 $ 122.74 (7.2)%
REVPAR................ $ 54.35 $ 53.47 (1.6)% $ 94.27 $ 93.56 (0.8)%
Wyndham Garden--Novi
(Detroit), Michigan
Average Occupancy..... 70.0% 77.5% 10.7 % 74.1% 73.4% (0.9)%
ADR................... $ 60.27 $ 66.37 10.1 % $ 64.50 $ 72.63 12.6 %
REVPAR................ $ 42.17 $ 51.44 22.0 % $ 47.83 $ 53.28 11.4 %
Wyndham Garden--Wood
Dale (Chicago),
Illinois
Average Occupancy..... 72.6% 72.7% 0.1 % 67.5% 59.5% (11.9)%
ADR................... $ 74.83 $ 80.70 7.8 % $ 79.97 $ 86.56 8.2 %
REVPAR................ $ 54.33 $ 58.65 8.0 % $ 53.99 $ 51.54 (4.5)%
Wyndham Garden-Las
Colinas--Irving
(Dallas), Texas
Average Occupancy..... 78.1% 76.3% (2.3)% 79.2% 77.6% (2.0)%
ADR................... $ 83.25 $ 93.67 12.5 % $ 91.82 $ 101.87 10.9 %
REVPAR................ $ 65.02 $ 71.48 9.9 % $ 72.75 $ 79.02 8.6 %
Valley River Inn--
Eugene, Oregon
Average Occupancy..... 69.4% 70.6% 1.7 % 68.0% 62.4% (8.2)%
ADR................... $ 80.92 $ 82.16 1.5 % $ 75.11 $ 82.62 10.0 %
REVPAR................ $ 56.12 $ 58.02 3.4 % $ 51.09 $ 51.55 0.9 %
TOTAL PROPOSED
ACQUISITIONS:
Weighted average
occupancy............ 68.9% 69.5% 0.9 % 71.0% 69.8% (1.7)%
ADR................... $ 83.98 $ 88.66 5.6 % $ 97.88 $ 100.31 2.5 %
Weighted REVPAR....... $ 57.87 $ 61.59 6.4 % $ 69.45 $ 69.98 0.8 %
</TABLE>
58
<PAGE>
THE PARTICIPATING LEASES
The Company leases each of the Hotels, except the Crowne Plaza Ravinia Hotel
which is owned through a special purpose corporation, to a Lessee pursuant to
a separate Participating Lease. The terms of the Participating Leases with
each of CHC Lease Partners, NorthCoast, the Wyndham Lessee, Metro Lease
Partners and the Doubletree Lessee are discussed below. Capitalized terms used
in this section not otherwise defined have the meaning as defined in the
respective Participating Leases or the Lease Master Agreement.
CHC LEASE PARTNERS
The Operating Partnership leases the Initial Hotels, the Tremont House
Hotel, the Holiday Inn Lenox and the Del Mar Hilton to CHC Lease Partners for
staggered terms of between ten and twelve years pursuant to separate
Participating Leases that provide for lease payments equal to the greater of
Base Rent or Participating Rent, plus certain Additional Charges as
applicable. In addition, the Company and CHC Lease Partners have entered into
a Lease Master Agreement (the "Lease Master Agreement"), which sets forth CHC
Lease Partners required capitalization and certain other matters. Each
Participating Lease with CHC Lease Partners' contains the provisions described
below. The following summary is qualified in its entirety by the Participating
Leases and the Lease Master Agreement, filed as exhibits to the Registration
Statement of which this Prospectus is a part.
Participating Lease Terms. The Participating Leases have an average term of
approximately eleven years, with expiration dates staggered between the years
2005 and 2008, subject to earlier termination upon the occurrence of certain
contingencies described in the Participating Leases (including, particularly,
the provisions described herein under "Damage to Hotels," "Condemnation of
Hotels," "Termination of Participating Leases for Failure to Meet Performance
Goals" and "Termination of Participating Leases upon Disposition of Hotels").
Base Rent; Participating Rent; Additional Charges. Each Participating Lease
requires CHC Lease Partners to pay (i) the greater of Base Rent in a fixed
amount or Participating Rent based on certain percentages of room revenue,
food and beverage revenue and telephone and other revenue at each Hotel leased
by it and (ii) certain Additional Charges, including interest accrued on any
late payments. Base Rent and Participating Rent departmental thresholds
increase annually by a percentage equal to the percentage increase in CPI (as
defined in the Glossary) (generally CPI percentage increase plus 0.75% in the
case of the Participating Rent departmental thresholds) compared to the prior
year. With respect to the recently acquired Hotels leased by CHC Lease
Partners, initial Base Rents have been set at higher levels and the CPI
adjustment is limited to cover only certain costs (real estate taxes, etc.)
incurred by the Company. Base Rent is required to be paid monthly in arrears
by the first day of each calendar month, and Participating Rent is payable
monthly in arrears by the tenth day of each calendar month and is calculated
based on the year-to-date departmental receipts as of the end of the preceding
month, and a prorated amount of each of the applicable departmental thresholds
determined based on the month, or portion thereof, of the fiscal year for
which the calculation is being made, and crediting against such amount the
total Participating Rent previously paid for such fiscal year and the
cumulative Base Rent paid for such fiscal year as of the end of the preceding
month. A final adjustment of the Participating Rent for each fiscal year is
made, based on audited statements of revenue for each Hotel.
Other than real estate and personal property taxes, casualty insurance
including loss of income insurance, capital impositions and capital
replacements and refurbishments (determined in accordance with generally
accepted accounting principles) and ground rent (with respect to the Holiday
Inn Lenox), which are obligations of the Company, the Participating Leases
require CHC Lease Partners to make lease payments and pay insurance, all costs
and expenses and all utility and other charges incurred in the operation of
the Hotels leased by it. The Participating Leases also provide for rent
reductions and abatements in the event of damage or destruction or a partial
taking of any Hotel as described under "Damage to Hotels" and "Condemnation of
Hotels. "
59
<PAGE>
CHC Lease Partners Capitalization. CHC Lease Partners is required to
maintain the Minimum Net Worth, as defined, which must be equal to the greater
of (i) $10 million or (ii) 17.5% of the initial projected annual lease
payments for all hotels leased by the Company to CHC Lease Partners. As part
of the Minimum Net Worth, CHC Lease Partners is required to maintain adequate
working capital for the term of the Participating Leases. The balance of the
Minimum Net Worth may consist of OP Units, cash, marketable securities or
shares of Common Stock. Inventory with a value of $1.0 million ($1.4 million
for the first two years of the term of the Participating Leases), which CHC
Lease Partners is not required to return to the Company upon the termination
of the Participating Leases, is included in the calculation of CHC Lease
Partners' Minimum Net Worth. The Minimum Net Worth is available to make
payments under the Participating Leases and to fund operational shortfalls if
operating cash flow is inadequate. In addition to maintaining the Minimum Net
Worth, CHC Lease Partners is not permitted to make payments or distributions
of any kind (other than Base Rent, Participating Rent and Additional Charges
payable to the Company, hotel operating expenses, management fees and other
payments equal to no more than 3.0% of the gross revenue of the hotels leased
by CHC Lease Partners, CHC Lease Partners overhead expenses not to exceed in
any calendar year the interest, dividend and OP Unit distribution income and
capital gains ("Investment Income") of CHC Lease Partners plus $200,000, and
distributions to the owners of CHC Lease Partners of the portion of Investment
Income not used to pay CHC Lease Partners overhead expenses) unless its
Minimum Net Worth exceeds the greater of (i) $11 million or (ii) 17.5% of the
trailing twelve months' actual lease payments for hotels leased to CHC Lease
Partners during all of such period plus the current projected annual lease
payments of the hotels leased to CHC Lease Partners during such period.
Failure by CHC Lease Partners to maintain capitalization in an amount equal to
or greater than the Minimum Net Worth will result in a cross-default of all
leases to which CHC Lease Partners is a party. In the event that the lease for
one or more of the Hotels is terminated (other than as a result of a default
by CHC Lease Partners), the $10 million portion of the Minimum Net Worth
requirement will be reduced on a pro rata basis, provided that if CHC Lease
Partners has leased additional hotels, such pro rata reduction shall be
decreased by the pro rata amount of CHC Lease Partners' Minimum Net Worth
requirement attributable to such additional hotels. The portion of CHC Lease
Partners' capital relied upon to satisfy its Minimum Net Worth requirement may
be invested only in the following: (i) hotel working capital; (ii) investment
grade marketable securities; (iii) shares of Common Stock or OP Units; and
(iv) coinvestments with the Company in specific hotels, if any.
Management Fees. CHC Lease Partners has entered into Management Agreements
with certain subsidiaries of CHC and GAH to manage 19 of the Initial Hotels,
the Tremont House Hotel, the Holiday Inn Lenox and the Del Mar Hilton. These
agreements provide for management fees based upon a percentage of total
revenues at each of the Hotels managed by them. The Management Agreements for
these hotels provide for management fees of 2.50% of total revenues in 1996,
2.75% in 1997, and 3.0% each year thereafter for the remainder of the term of
the Participating Lease. All management fees paid by CHC Lease Partners are
subject to certain limitations related to results of operations of the Hotels
leased by it. The Participating Leases provide that all payments to the
Operators from CHC Lease Partners are subordinate to CHC Lease Partners'
obligations to the Company. CHC Lease Partners has entered into a management
agreement with Metro Hotels for the management of the Holiday Inn Select North
Dallas on substantially the same terms and conditions as the Management
Agreements; however, the management fee payable to Metro Hotels equals 3.0% of
the total revenue at such hotel. Except as described below, in the event of
the termination of any of the Participating Leases with CHC Lease Partners,
the related Management Agreement will also terminate.
Maintenance and Improvements. The Participating Leases obligate the Company
to establish annually a reserve for capital improvements at the Hotels leased
to CHC Lease Partners. The Company and CHC Lease Partners agree on the use of
funds in these reserves, and the Company has the right to approve CHC Lease
Partners' annual and long-term capital expenditure budgets. The aggregate
minimum amount of such reserves averages 4.0% of total revenue for these
Hotels, with the amount of such reserve with respect to each such Hotel based
upon projected capital requirements of such Hotel. The Company, at its
election, may choose to expend more than 4.0% on any Hotel. Any unexpended
amounts remain the property of the Company upon termination of the applicable
Participating Lease. Otherwise, CHC Lease Partners is required, at its
expense, to maintain the
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Hotels leased by it in good order and repair, except for ordinary wear and
tear, and to make repairs (other than capital repairs) which may be necessary
and appropriate to keep such Hotels in good order and repair.
CHC Lease Partners is not obligated to bear the cost of any capital
improvements or capital repairs to the Hotels leased by it. With the consent
of the Company however, CHC Lease Partners, at its expense, may make non-
capital and capital additions, modifications or improvements to the Hotels,
provided that such action does not significantly alter their character or
purposes and maintains or enhances the value of the Hotels. All such
alterations, replacements and improvements are subject to all the terms and
provisions of the Participating Leases and will become the property of the
Company upon termination of the Participating Leases. The Company owns
substantially all personal property (other than inventory, linens and other
nondepreciable personal property) not affixed to, or deemed a part of, the
real estate or improvements on the Hotels, except to the extent that ownership
of such personal property would cause any portion of the rents under the
Participating Leases not to qualify as "rents from real property" for REIT
income test purposes. See "Federal Income Tax Considerations--Requirements for
Qualification--Income Tests."
Insurance and Property Taxes. The Company is responsible for paying for (i)
real estate and personal property taxes (except to the extent that personal
property associated with the Hotels is owned by CHC Lease Partners), (ii)
casualty insurance and (iii) business interruption insurance on the Hotels
leased to CHC Lease Partners. CHC Lease Partners is required to pay or
reimburse the Company for all liability insurance on the Hotels leased by it,
with extended coverage, including comprehensive general public liability,
workers' compensation and other insurance appropriate and customary for
properties similar to the Hotels and with the Company as an additional named
insured.
Events of Default. Events of Default under the Participating Leases and the
Lease Master Agreement include, among others, the following:
(i) the failure by CHC Lease Partners to pay Base or Participating Rent
when due;
(ii) the failure of CHC Lease Partners to pay for required insurance;
(iii) the failure of CHC Lease Partners to maintain the Minimum Net
Worth;
(iv) if CHC Lease Partners shall generally not be paying its debts as
they become due or file a petition for relief or reorganization or
arrangement or any other petition in bankruptcy, for liquidation or to take
advantage of any bankruptcy or insolvency law of any jurisdiction, make an
assignment for the benefit of its creditors, consent to the appointment of
a custodian, receiver, trustee or other similar officer with respect to it
or any substantial part of its assets, be adjudicated insolvent or take
corporate action for the purpose of any of the foregoing; or if a court or
governmental authority of competent jurisdiction shall enter an order
appointing, without consent by CHC Lease Partners, a custodian, receiver,
trustee or other similar officer with respect to CHC Lease Partners or any
substantial part of its assets, or if an order for relief shall be entered
in any case or proceeding for liquidation or reorganization or otherwise to
take advantage of any bankruptcy or insolvency law of any jurisdiction, or
ordering the dissolution, winding-up or liquidation of CHC Lease Partners,
or if any petition for any such relief shall be filed against CHC Lease
Partners and such petition shall not be dismissed within 120 days;
(v) if CHC Lease Partners is liquidated or dissolved or commences
proceedings to effect the same, or ceases to do business or sells all or
substantially all of its assets;
(vi) the failure by CHC Lease Partners to observe or perform any other
term of a Participating Lease and the continuation of such failure for a
period of 30 days after receipt by CHC Lease Partners of notice from the
Company thereof, unless CHC Lease Partners is diligently proceeding to
cure, in which case the cure period will be extended to 180 days; if such
failure cannot be cured within the 180 day period and CHC Lease Partners
continues to act, with diligence, to correct such failure within said 180
days, CHC Lease Partners will be afforded up to an additional 90 days to
cure such failure;
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(vii) if CHC Lease Partners voluntarily discontinues operations of a
Hotel for more than 30 days, except as a result of damage, destruction,
condemnation or force majeure; or
(viii) if an event of default beyond applicable cure periods occurs under
the Franchise License with respect to any Hotel as a result of any action
or failure to act by CHC Lease Partners or its agents (including the
Operators).
In addition, a default of the type described in paragraphs (i) through (v)
above will result in a cross-default of all other Participating Leases to
which CHC Lease Partners is a party.
Indemnification. Under each of the Participating Leases, CHC Lease Partners
indemnifies, and holds harmless, the Company from and against all liabilities,
costs and expenses (including reasonable attorneys' fees and expenses)
incurred by, imposed upon or asserted against the Company on account of, among
other things, (i) any accident or injury to persons or property on or about
the Hotels leased by it, (ii) any misuse by CHC Lease Partners or any of its
agents of the leased property, (iii) any environmental liability caused or
resulting from any action or negligence of CHC Lease Partners (see "The
Hotels--Environmental Matters"); (iv) taxes and assessments in respect of the
Hotels leased by CHC Lease Partners (other than real estate and personal
property taxes and income taxes of the Company on income attributable to such
Hotels and capital impositions); (v) the sale or consumption of alcoholic
beverages on or in the real property or improvements thereon; or (vi) any
breach of the Participating Leases by CHC Lease Partners; provided, however,
that such indemnification will not be construed to require CHC Lease Partners
to indemnify the Company against the Company's own grossly negligent acts or
omissions or willful misconduct.
Assignment and Subleasing. CHC Lease Partners is not permitted to sublet all
or any part of the Hotels leased by it or assign its interest under any of the
Participating Leases, other than to an affiliate, without the prior written
consent of the Company. The Company has generally agreed to consent to any
sublease of a retail portion of the Hotels leased by CHC Lease Partners
(provided such sublease will not cause any Rents to fail to qualify as "rents
from real property" for REIT purposes). No assignment or subletting will
release CHC Lease Partners from any of its obligations under the Participating
Leases.
Participating Lease Modifications. In the event that (i) a Franchise License
is terminated under circumstances that do not constitute an Event of Default
(as described above) or (ii) the Company approves the conversion of a
sublessee of a Hotel into an operating department thereof or vice versa, the
applicable Participating Lease provisions will be modified accordingly.
Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance which then renders the leased property unsuitable for its
intended use and occupancy as a hotel, the Participating Lease shall
terminate, and the Company shall generally be entitled to retain the proceeds
of insurance. In the event that damage to or destruction of a Hotel which is
covered by insurance does not render the leased property unsuitable for its
intended use and occupancy as a hotel, the Company or, at the Company's
option, CHC Lease Partners generally will be obligated to repair or restore
the hotel to substantially the same condition as existed immediately prior to
such damage. In the event of damage to or destruction of any Hotel that is not
covered by insurance, the Company may either repair, rebuild or restore the
hotel (at the Company's expense) to substantially the same condition as
existed immediately prior to such damage or terminate the Participating Lease
on the terms and conditions set forth in such Participating Lease.
Condemnation of Hotels. In the event of a total condemnation of a Hotel, the
relevant Participating Lease will terminate with respect to such hotel as of
the date of taking, and the Company and CHC Lease Partners will be entitled to
their shares of any condemnation award in accordance with the provisions of
the Participating Lease. In the event of a partial taking which does not
render the property unsuitable for its intended use as a hotel, then the
Company or, at the Company's election, CHC Lease Partners shall restore the
untaken portion of the property, and the Company shall contribute to the cost
of such restoration that part of the condemnation award specified for
restoration.
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Termination of Participating Leases for Failure to Meet Performance
Goals. The Company will have the right to terminate the Participating Lease
for a Hotel if the Hotel fails to generate 90% of its annual budgeted room
revenue for any two lease years during the term of the applicable
Participating Lease, unless such failure is caused by an act of God or other
force majeure events, including material, extraordinary economic events not
reasonably foreseeable at the time the annual budget was prepared. In the
event that a Hotel fails to meet this performance goal in any given year, CHC
Lease Partners may cure such failure by paying to the Company the
Participating Rent payment that would have been payable had the hotel
generated 90% of its budgeted room revenue for the applicable period. This
cure payment will not affect CHC Lease Partners' obligations with respect to
Participating Rent for revenue categories other than rooms.
In the event that annual Participating Rent (as calculated using the
applicable Participating Rent formulas) at the Initial Hotels initially is
less than $33.8 million (the "Minimum Participating Rent Standard"), the
Company shall have the option to terminate all of the Participating Leases.
The Minimum Participating Rent Standard will increase by approximately 123% of
the initial Base Rent for subsequently acquired hotels that are leased to CHC
Lease Partners, plus an amount equal to 0.75% annually. The Minimum
Participating Rent Standard will be reduced on a pro rata basis in the event
that any Participating Leases are terminated. The Minimum Participating Rent
Standard is intended to ensure that the Company can retake possession of the
Initial Hotels (and any subsequently acquired hotels leased to CHC Lease
Partners) in the event that Participating Rent payments substantially decline.
Collateralized Capitalization. Until October 1998, $4 million of CHC Lease
Partners' capitalization is pledged to the Company and shall be forfeited by
CHC Lease Partners in the event that during this period, the Participating
Leases are terminated following an event of default or termination for failure
to maintain the Minimum Net Worth or to meet performance goals under one or
more of CHC Lease Partners' leases. A termination of or default under fewer
than all of the Participating Leases will result in a forfeiture of a pro rata
portion of such amount. Such forfeiture will not alter CHC Lease Partners'
obligations in the event of a default, and CHC Lease Partners' total remaining
capitalization will remain available to satisfy such obligations.
Termination of Participating Leases upon Disposition of Hotels. In the event
the Company enters into an agreement to sell or otherwise transfer a Hotel
leased to CHC Lease Partners, the Company, at its option, must either (i) pay
CHC Lease Partners the fair market value of CHC Lease Partners' leasehold
interest in the remaining term of the relevant Participating Lease or (ii)
offer to lease to CHC Lease Partners a substitute hotel or hotels on terms
that would create a leasehold interest in such hotel with a fair market value
equal to or exceeding the fair market value of CHC Lease Partners' remaining
leasehold interest under the relevant Participating Lease.
Termination of Participating Leases upon Change in Tax Laws. In the event
that changes in federal income tax laws allow the Company or a subsidiary or
affiliate to operate hotels directly, the Company has the right to terminate
all, but not less than all, Participating Leases with CHC Lease Partners, in
which event the Company will enter into management contracts with affiliates
of CHC Lease Partners for the terminated hotels at a rate equal to 3% of gross
revenue and upon market terms and conditions to be mutually agreed upon. In
addition, the Company will pay CHC Lease Partners the fair market value of the
remaining term of the Participating Leases, less the fair market value of the
new management agreements to be entered into (assuming terms for such
management agreements equal to the remaining terms of the applicable
Participating Leases).
Franchise Licenses. CHC Lease Partners is the licensee under each of the
Franchise Licenses on the Hotels leased to it. The franchisors have agreed
that upon the occurrence of certain events of default by CHC Lease Partners
under a Franchise License, the franchisors will transfer the Franchise License
for the Hotel to the Company (or its designee) or make other arrangements to
continue the Hotel as part of the franchisor's system. See "Franchise
Agreements."
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Other Lease Covenants. CHC Lease Partners has agreed that during the term of
the Participating Leases it will not engage in any unrelated business
activities. The owners of CHC Lease Partners and their parent entities have
agreed that, for the term of the Participating Leases, any sale of their
interests in CHC Lease Partners or of their hotel management businesses in
general will subject their interest in CHC Lease Partners to a limited fair
market value acquisition right (as defined in the applicable agreement) in
favor of a designee of the Company. In the event that the Company exercises
this right, the non-selling partner of CHC Lease Partners will have the right
to put its interest in CHC Lease Partners to the Company's designee at a price
equal to the fair market value of such interest (as defined in the applicable
agreement). The Participating Leases require CHC Lease Partners to make
available to the Company unaudited quarterly and audited annual operating
information for each hotel leased by CHC Lease Partners.
Inventory. All inventory required in the operation of the Hotels was
transferred to CHC Lease Partners upon acquisition of the Hotel. Upon
termination of a related Participating Lease, CHC Lease Partners shall
surrender the related Hotel together with all such inventory to the Company,
excluding an inventory use allowance averaging approximately $50,000 ($70,000
if the Participating Lease is terminated during the first two years of its
term) at each of the Initial Hotels.
Right of First Offer. CHC Lease Partners has a right of first offer to lease
additional hotels acquired by the Company until October 1997. The right of
first offer does not apply in the event that in the reasonable business
judgment of the Company's Board (a) a different lessee is necessary for the
Company to have the opportunity to acquire the hotel, or (b) CHC Lease
Partners is unqualified or inappropriate to be the lessee of the hotel. Under
the right of first offer, the Company gives CHC Lease Partners written notice
of the economic terms on which it is willing to lease the hotel. CHC Lease
Partners has 30 days following such notice to agree to lease the hotel on such
terms, and, if it fails to do so, the Company may lease the hotel to another
lessee on terms and conditions that are not economically less favorable to the
Company than those offered to CHC Lease Partners. CHC Lease Partners also
shall have the right to lease acquired hotels (on mutually satisfactory terms)
where CHC Lease Partners brings the acquisition opportunity to the Company.
NORTHCOAST
The Operating Partnership leases each of the six Hotels in the WestCoast
Portfolio and the Hyatt Regency, Lexington to NorthCoast for staggered terms
of between ten and twelve years pursuant to separate participating leases (the
"NorthCoast Participating Leases"). The Operating Partnership and NorthCoast
have also entered into a separate master agreement for the lease of the Hotels
other than the Hyatt Regency, Lexington (the "NorthCoast Master Agreement").
The principal provisions of each NorthCoast Participating Lease are
substantially the same as those of the Participating Leases with CHC Lease
Partners summarized above, with specific differences, some of which are
described below.
Base Rent, Participating Rent. In each NorthCoast Participating Lease, the
Base Rent is a fixed amount each year with no formula for adjustments. For the
lease years 1997 and 1998, the prorated monthly installment of Base Rent
payable each month is adjusted up or down by an agreed amount to reflect
seasonal changes. NorthCoast has the option of deferring payment of the first
month of Base Rent, and to pay instead in equal installments through the end
of 1996. NorthCoast is required to pay interest at a rate of 9.75% on any such
deferred Base Rent. Participating Rent is calculated and payable based on
formulas similar in construction to those described in the Participating
Leases with CHC Lease Partners, with annual adjustments of departmental
thresholds determined by a formula based on CPI and an additional percentage
increase agreed to for each lease year. In the NorthCoast Participating
Leases, NorthCoast is also required to pay certain Additional Charges.
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NorthCoast Capitalization. NorthCoast is required to maintain a minimum net
worth which must be equal to the greater of (i) $2,929,000 or (ii) 20% of the
projected annual lease payments for the hotels in the WestCoast Portfolio. 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 the LeParc Interest which
is defined to be a contribution to NorthCoast by Thomas H. Childers of either
a promissory note secured by an interest in LeParc Investment Group, LLC (the
"LeParc Entity") or a direct interest in the LeParc Entity. NorthCoast is
required to maintain ownership of shares of Common Stock or OP Units with a
value of $825,000. North Coast's holdings of shares of Common Stock or OP
Units must be increased upon acquisition of the hotel owned by the LeParc
Entity by the Operating Partnership or if NorthCoast otherwise liquidates its
interest in the Leparc Entity, by the amount of the proceeds of such sale or
liquidation, but not more than an additional $825,000.
Management Fees and Marketing Agreements. NorthCoast has entered into a
Management Agreement for each of the hotels in the WestCoast Portfolio, except
the Hyatt Newporter Hotel, with WestCoast Hotels. The Hyatt Newporter Hotel
and the Hyatt Regency, Lexington are managed by Hyatt under separate
Management Agreements. All management fees payable to WestCoast Hotels from
NorthCoast greater than 1% of hotel revenues are subordinate on a month-to-
month basis to NorthCoast's obligations to the Company. Management fees to
Hyatt are not expressly subordinate to NorthCoast's obligations to the
Company. However, any failure by NorthCoast to make lease payments remains an
event of default under the applicable Participating Lease. The management fees
for the WestCoast Long Beach Hotel and Marina are based on the following
formula: for 1996, the monthly fee is 1% of the prior month's gross room
revenue as defined; for 1997 and thereafter, the monthly fee is 2% of the
prior month's gross room revenue. For each of the other hotels in the
WestCoast Portfolio managed by WestCoast Hotels the annualized management fees
are: for 1996, $26,520; for 1997, $57,600; and for 1998 and thereafter,
$57,600, all increased by a CPI factor. Additionally, NorthCoast has entered
into a joint marketing agreement for each of the WestCoast branded Hotels with
WestCoast Hotel Marketing, Inc., which will receive 2.5% of gross room revenue
as well as certain reservation fees in connection with the use of the
WestCoast brand. For the Hyatt Newporter Hotel, Hyatt receives a management
fee equal to: (a) 3.5% of annual gross revenue (as defined); plus (b) an
additional 0.5% of gross revenue payable only if there is available cash flow
(as defined) greater than the basic 3.5% fee; plus (c) an incentive fee of 10%
of profits (as defined) over $2 million. For the Hyatt Regency Lexington,
Hyatt receives a management fee equal to the greater of (a) 5% of annual gross
revenue (as defined) (not including revenues from meeting rooms and banquets)
plus 3.5% of gross revenue related to meeting rooms and banquets or (b) 20% of
profits (as defined).
Each of the Management Agreements with WestCoast Hotels can be terminated
upon the occurrence of several contingencies, including sale of the Hotel. The
Management Agreements with Hyatt for the Hyatt Newporter Hotel and the Hyatt
Regency, Lexington both predate the Company's purchase of the Hotel and give
Hyatt the right to consent to the sale of the Hotel, which sale would be
subject to the existing Management Agreement.
NorthCoast does not have a right of first offer to lease additional hotels
from the Company.
WYNDHAM LESSEE
The Operating Partnership leases the Wyndham Greenspoint Hotel and the
Wyndham Garden-Midtown to the Wyndham Lessee for an initial term of 10 years
with two five-year renewal options, pursuant to separate Participating Leases
(the "Wyndham Participating Leases"), and has entered into a separate master
lease agreement with the Wyndham Lessee which governs all of the Wyndham
Participating Leases (the "Wyndham Master Agreement"). The principal
provisions of each Wyndham Participating Lease are substantially similar to
those of the Participating Leases with CHC Lease Partners summarized above,
with specific differences, some of which are described below.
Base Rent, Participating Rent. In each Wyndham Participating Lease, the Base
Rent for each Hotel is an amount principally determined based on a percentage
of acquisition and renovation costs incurred by the Operating Partnership for
the Hotel, subject to annual CPI adjustments. Participating Rent is calculated
and
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payable based on formulas similar in construction to those described in the
Participating Leases for CHC Lease Partners, with annual adjustments of
departmental thresholds by a formula based on CPI and an additional percentage
increase. In the Wyndham Participating Leases, the Wyndham Lessee is also
required to pay certain Additional Charges.
Wyndham Lessee Capitalization. The obligations of the Wyndham Lessee under
the Participating Leases are guaranteed by the Wyndham Guarantor, a separate
entity formed by members of the Trammell Crow family. The Wyndham Guarantor is
required to maintain a minimum net worth equal to 20% of the current year's
budgeted lease payments for the Hotels leased by the Wyndham Lessee (unless
the total number of rooms in all hotels leased by the parties increases to
above 1,585, in which case the required percentage will decrease to 17.5%).
The minimum net worth is composed of certain components in specified amounts
which generally exclude intangible assets as defined by generally accepted
accounting principles.
Hotel Management. The Wyndham Participating Leases give the Operating
Partnership the right to approve the terms of any Management Agreement entered
into by the Wyndham Lessee and provide that if one of the Wyndham
Participating Leases is terminated, the Operating Partnership will also have
the right to terminate the Management Agreement for that Hotel. The Wyndham
Participating Leases require that management fees under any Management
Agreement be subordinated only to payments of Base Rent to the Operating
Partnership. However, any failure by the Wyndham Lessee to make any lease
payments (Base Rent, Participating Rent or Additional Charges, as applicable)
is an event of default under the applicable Participating Lease.
Additional Covenants. The Wyndham Lessee has covenanted that if any interest
in the Wyndham Lessee is transferred outside the Trammell Crow family, the
Operating Partnership may terminate the Wyndham Participating Leases if, in
the reasonable judgment of the Operating Partnership, the party newly in
control of the Wyndham Lessee is not competent in that capacity or is a
competitor of the Operating Partnership.
The Wyndham Lessee does not have a right of first offer to lease additional
hotels acquired by the Company. The Wyndham Lessee has the right to terminate
the Participating Lease on the Wyndham Greenspoint Hotel or the Wyndham
Garden-Midtown or to purchase the Hotel in question pursuant to a right of
first refusal, in the event that the Operating Partnership elects to sell such
Hotel and the sale is to be made without terminating the applicable
Participating Lease.
OTHER LESSEES
Metro Lease Partners. The Company leases the Embassy Suites, Hunt Valley to
Metro Lease Partners for a term of 12 years pursuant to a Participating Lease
with terms and conditions substantially similar to the Participating Leases
with CHC Lease Partners. Metro Lease Partners is required to maintain a
minimum net worth of $515,000, which represents approximately 25% of estimated
Participating Rent for this Hotel in 1996. Metro Lease Partners does not have
a right of first offer to lease additional hotels acquired by the Company.
Base Rent in the Participating Lease with Metro Lease Partners is a fixed
amount subject to annual adjustments by a formula based on CPI plus 0.75%.
Participating Rent is calculated and payable based on a formula similar in
construction to those described in the Participating Leases for CHC Lease
Partners, with annual adjustments of departmental thresholds by a formula
based on CPI plus 0.75%. Metro Lease Partners is also required to pay certain
Additional Charges.
Metro Lease Partners has covenanted that Metro Lease Partners will remain
wholly owned by Walker G. Harman and that no interest in Metro Lease Partners
or in the Participating Lease will be transferred without the consent of the
Operating Partnership.
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Metro Lease Partners has entered into a Management Agreement with Metro
Hotels for the management of the Embassy Suites, Hunt Valley which provides
for a base management fee equal to 2% of gross revenues. The Management
Agreement also provides for payment of an incentive management fee to Metro
Hotels based upon Net Cash Flow of the hotel, as defined. In the event of a
termination of a Participating Lease for the Embassy Suites, Hunt Valley, the
Management Agreement also will terminate. Under the Management Agreement, all
payments to Metro Hotels by Metro Lease Partners are subordinated on a month
to month basis to all lease payments owed to the Operating Partnership.
Doubletree Lessee. The Operating Partnership leases the Doubletree
Denver/Boulder to the Doubletree Lessee for a term of 10 years pursuant to a
Participating Lease with terms and conditions substantially similar to the
Participating Leases with CHC Lease Partners. The Doubletree Lessee is
required to maintain a minimum net worth equal to the greater of $400,000 or
20% of current year's budgeted lease payments. The Doubletree Lessee does not
have a right of first offer to lease additional hotels acquired by the
Company.
Base Rent in the Participating Lease with the Doubletree Lessee is an amount
principally determined based on a percentage of the acquisition and renovation
costs incurred by the Operating Partnership for the Hotel, with certain
components of Base Rent subject to annual CPI adjustments. Participating Rent
is calculated and payable based on formulas similar in construction to those
described in the Participating Leases for CHC Lease Partners, with annual
adjustments of departmental thresholds by a formula based on the CPI. The
Doubletree Lessee is also required to pay certain Additional Charges.
The Doubletree Lessee has covenanted that no interest in the Doubletree
Lessee will be transferred outside the control of Doubletree Corporation,
provided that, if through merger or sale of assets the Doubletree Lessee
ceases to be controlled by the Doubletree Corporation, the Operating
Partnership may terminate the Participating Lease for the Hotel only if, in
the reasonable judgment of the Operating Partnership, the party newly in
control of the Doubletree Lessee is not competent in that capacity or is a
competitor of the Operating Partnership.
The Participating Lease for this Hotel requires that the Doubletree Lessee
enter into a Management Agreement and allows for a maximum management fee of
3% of gross revenues as defined and requires the Management Agreement may be
terminated if the Participating Lease for this Hotel terminates. The
Participating Lease requires that all payments by the Doubletree Lessee to the
manager of the Hotel above 2% of gross revenues be subordinated to all lease
payments owed to the Operating Partnership for the first two years of the term
until the total lease payments made achieve a defined minimum return. However,
any failure of the Doubletree Lessee to make lease payments remains an event
of default under the Participating Lease.
CROWNE PLAZA RAVINIA
The Crowne Plaza Ravinia, which is owned by an unconsolidated subsidiary of
the Company, is not operated by a lessee. The hotel is being managed by
Holiday Inns, Inc. for a period of 10 years (with two renewal terms of five
years each) pursuant to a management agreement between PAH Ravinia and Holiday
Inns, Inc. Under the terms of the management agreement, Holiday Inns, Inc.
receives base management fees equal to 4% of gross room revenue. A portion of
this fee is subordinated to the payment of a return on PAH Ravinia's invested
capital of 10.5% per annum. The management agreement also provides for payment
of an incentive fee to Holiday Inns, Inc., subject to PAH Ravinia's receipt of
an aggregate 12.5% per annum return on invested capital.
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FRANCHISE AND BRAND AFFILIATIONS
Thirty-one of the Hotels are operated under franchise or brand affiliations
with nationally recognized hotel companies. The Company anticipates that most
of the additional hotel properties in which it invests will be operated under
franchise or brand affiliations. The Company believes the public's perception
of quality associated with a franchisor or brand operator is an important
feature in the operation of a hotel. Franchisors and brand operators provide a
variety of benefits for hotels which include national advertising, publicity
and other marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards and centralized reservation
systems.
The Franchise Licenses generally specify certain management, operational,
recordkeeping, accounting, reporting and marketing standards and procedures
with which the Lessees must comply. The Franchise Licenses obligate the
Lessees to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided by the Lessees, display of signage, and the type, quality
and age of F, F & E included in guest rooms, lobbies and other common areas.
The Franchise Licenses provide for termination at the franchisor's option
upon the occurrence of certain events, including the Lessees' failure to pay
franchise royalties and fees or perform other covenants under the license
agreement, bankruptcy, abandonment of the franchise, commission of a felony,
assignment of the license without the consent of the franchisor, or failure to
comply with applicable law in the operation of the relevant Hotel. Lessees are
not entitled to terminate the Franchise License without receiving the prior
written consent of the Company. The license agreements will not renew
automatically upon expiration. The Lessees are responsible for making all
payments under the franchise agreements to the franchisors. Under the
franchise agreements, the Lessees pay franchise royalties and fees ranging
from 3.5% to 8% of room revenue, except in the case of the Marriott Troy Hotel
where the franchise royalties and fees equals 6% of room revenue and 3% of
food and beverage revenue.
The Lessees' rights relating to branded Hotels are generally contained in
the Management Agreements related to those Hotels. The Lessees do not pay
additional franchise royalties or fees other than those specified in the
Management Agreements for use of the brands. Generally, the Lessees' rights to
use the brands terminate upon any termination of the applicable Management
Agreements.
DOUBLETREE(R) IS A TRADEMARK AND SERVICE MARK OF DOUBLETREE CORPORATION
("DOUBLETREE"). NEITHER DOUBLETREE NOR ANY OF ITS AFFILIATES OR SUBSIDIARIES
HAS ENDORSED OR APPROVED THE OFFERING. A GRANT OF A DOUBLETREE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY DOUBLETREE (OR ANY OF ITS
AFFILIATES OR SUBSIDIARIES) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE
LESSEES OR THE COMMON STOCK OFFERED HEREBY.
FOUR POINTS(R) IS A TRADEMARK OWNED BY ITT SHERATON CORPORATION TO COVER
RESTAURANT, COCKTAIL LOUNGE, BAR, HOTEL, MOTEL, RESORT AND MOTOR INN SERVICES
IN INTERNATIONAL CLASS 42. ITT SHERATON CORPORATION HAS NOT ENDORSED OR
APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH
IN THIS PROSPECTUS. A GRANT OF A FOUR POINTS HOTEL FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ITT SHERATON CORPORATION (OR ANY
OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEES OR THE COMMON STOCK OFFERED HEREBY.
HAMPTON INN(R) IS A REGISTERED TRADEMARK OF HAMPTON INNS, INC. NEITHER
PROMUS COMPANIES, INC. ("PROMUS"), NOR THE HAMPTON INN HOTEL DIVISION OF
EMBASSY SUITES, INC. HAS ENDORSED OR APPROVED THE OFFERING OR ANY OF THE
FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
HAMPTON INN FRANCHISE LICENSE FOR ANY HOTEL IS NOT INTENDED AS, AND SHOULD NOT
BE INTERPRETED AS, AN
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EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEES OR APPROVAL OF THE COMMON STOCK OFFERED HEREBY.
HILTON(R), HILTON INN(R) AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF
HILTON HOTELS CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. NOR
HILTON HOTELS NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES (COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN
ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS ANY
OF THE HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES
HAVE NOT ASSUMED AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY
PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER
HEREOF. A GRANT OF A HILTON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL
OR ENDORSEMENT BY ANY OF THE HILTON ENTITIES (OR ANY OF THEIR AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE
LESSEES OR THE COMMON STOCK OFFERED HEREBY.
HOLIDAY INN(R), HOLIDAY INN SELECT(R) AND CROWNE PLAZA(R) ARE REGISTERED
TRADEMARKS OF HOLIDAY INNS FRANCHISING, INC. ("HOLIDAY INNS"). HOLIDAY INNS
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE HOTELS SET FORTH IN THIS PROSPECTUS NOR DOES HOLIDAY INNS HAVE ANY
INTEREST IN THE COMPANY, THE LESSEES OR THE COMMON STOCK OFFERED HEREBY,
EXCEPT AS A FRANCHISOR. A GRANT OF A HOLIDAY INN, HOLIDAY INN SELECT OR CROWNE
PLAZA FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
HOLIDAY INNS (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE
COMPANY, THE OPERATING PARTNERSHIP, THE LESSEES OR THE COMMON STOCK OFFERED
HEREBY.
HYATT(R) IS A REGISTERED SERVICE MARK OF HYATT CORPORATION ("HYATT").
NEITHER HYATT NOR ANY OF ITS OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES SHALL IN
ANY WAY BE DEEMED TO BE AN ISSUER OR UNDERWRITER OF THE OFFERING DESCRIBED IN
THIS PROSPECTUS. HYATT AND ITS OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES HAS
NOT ASSUMED AND SHALL NOT HAVE ANY LIABILITY ARISING OUT OF OR RELATED TO THE
SALE OR OFFER OF SAID SECURITIES, INCLUDING, WITHOUT LIMITATION, ANY LIABILITY
OR RESPONSIBILITY FOR ANY FINANCIAL STATEMENTS, PROJECTIONS OR OTHER FINANCIAL
INFORMATION CONTAINED IN THIS PROSPECTUS.
MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC., WHICH
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A MARRIOTT FRANCHISE
LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT
INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF
THE COMPANY, THE OPERATING PARTNERSHIP, THE LESSEES OR THE COMMON STOCK
OFFERED HEREBY.
RADISSON(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL,
INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL
RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A RADISSON
FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT
BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RADISSON
HOTELS INTERNATIONAL, INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE LESSEES OR THE
COMMON STOCK OFFERED HEREBY.
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RADISSON SUITES(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS
INTERNATIONAL, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
RADISSON SUITES FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL
OR ENDORSEMENT BY RADISSON HOTELS INTERNATIONAL, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE OPERATING
PARTNERSHIP, THE LESSEES OR THE COMMON STOCK OFFERED HEREBY.
WESTCOAST(R) IS A TRADEMARK AND SERVICE MARK OF WESTCOAST HOTELS, INC.
("WESTCOAST"). NEITHER WESTCOAST NOR ANY OF ITS AFFILIATES OR SUBSIDIARIES HAS
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A WESTCOAST LICENSE FOR CERTAIN
OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS
OR IMPLIED APPROVAL OR ENDORSEMENT BY WESTCOAST (OR ANY OF ITS AFFILIATES OR
SUBSIDIARIES) OF THE COMPANY, THE OPERATING PARTNERSHIP, THE LESSEES OR THE
COMMON STOCK OFFERED HEREBY.
WYNDHAM(TM), WYNDHAM GARDEN(R) AND THE WYNDHAM W(TM) LOGO ARE TRADEMARKS OF
WYNDHAM. NEITHER WYNDHAM NOR ANY OF ITS OFFICERS, DIRECTORS, AGENTS AND
EMPLOYEES SHALL IN ANY WAY BE DEEMED AN ISSUER OR UNDERWRITER OF THE SHARES OF
COMMON STOCK OFFERED HEREBY. WYNDHAM AND ITS OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES HAVE NOT ENDORSED OR APPROVED OF THE OFFERING AND HAVE NOT ASSUMED
AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY ARISING OUT OF OR RELATED
TO THE OFFER OR SALE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING, WITHOUT
LIMITATION, ANY LIABILITY OR RESPONSIBILITY FOR ANY FINANCIAL STATEMENTS,
PROJECTIONS OR OTHER FINANCIAL INFORMATION CONTAINED IN THIS PROSPECTUS OR ANY
WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER HEREOF.
EMPLOYEES
The Company is self-administered and employs fourteen persons, including
Messrs. Nussbaum, Lattin, Stewart, Ng, Huntzicker and Murphy, and retains
appropriate support personnel to manage its operations in lieu of retaining an
advisor. All persons employed in the operation of the Hotels are employees of
the Operators or their affiliates.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the transportation, disposal or treatment of a
hazardous or toxic substance at a property owned by another may be liable for
the costs of removal or remediation of such substance released into the
environment at that property. The costs of remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to promptly remediate such substances, may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate
as collateral. In connection with the ownership and operation of the Hotels,
the Company, the Operating Partnership or the Lessees, as the case may be, may
be potentially liable for such costs.
Phase I ESAs have been performed on all of the Hotels by a qualified
independent environmental engineer. The purpose of the Phase I ESAs is to
identify potential sources of contamination for which the Hotels may be
responsible and to assess the status of environmental regulatory compliance.
The Phase I ESAs include historical reviews of the Hotels, reviews of certain
public records, preliminary investigations of the sites and surrounding
properties, screening for the presence of ACMs, polychlorinated biphenyls
("PCBs") and underground storage tanks, and the preparation and issuance of a
written report. The Phase I ESAs do not include invasive procedures, such as
soil sampling or ground water analysis.
The ESAs have not revealed any environmental liability or compliance concern
that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability or concern. Nevertheless, it is possible
that the Phase I ESAs did not
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reveal all environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which the Company is
currently unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Hotels will not be affected
by the condition of the properties in the vicinity of the Hotels (such as the
presence of leaking underground storage tanks) or by third parties unrelated
to the Operating Partnership or the Company.
In reliance upon the Phase I ESAs, the Company believes the Hotels are in
compliance in all material respects with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters. The Company has not been notified by any governmental
authority, and has no other knowledge of, any material noncompliance,
liability or claim relating to hazardous or toxic substances or other
environmental substances in connection with any of its Hotels, except as noted
below.
Marriott WindWatch Hotel. The Marriott WindWatch Hotel, a Proposed
Acquisition, is in close proximity to a former municipal landfill, which has
been designated as an NPL site by the EPA. The Hotel property is downgradient
of the NPL site. An environmental consultant retained by the Company has
informed the Company that the current data relating to the NPL site does not
suggest any groundwater contamination from the former landfill has migrated
onto the Hotel property. The environmental consultant has also informed the
Company that it is unlikely that any groundwater contamination from the former
landfill will in the future migrate onto the hotel property resulting in
contaminant levels above applicable action levels. Remediation activities by
the municipality, under the supervision of the EPA and the New York State DEC
are ongoing but have not yet been completed. The DEC has indicated that it
does not intend to pursue as potentially responsible parties nearby landowners
whose property becomes contaminated as a result of off-site migration from the
former landfill.
COMPETITION
The hotel industry is highly competitive. Each of the Hotels is located in a
developed area that includes other hotel properties. The number of competitive
hotel properties in a particular area could have a material adverse effect on
occupancy and ADR of the Hotels or at hotel properties acquired in the future.
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell. Further, the Company believes competition from entities organized for
purposes substantially similar to the Company's objectives could increase
significantly if the Company is successful. Affiliates of the Lessees may
acquire, manage or develop hotels that compete with the Company's Hotels.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
business interruption insurance with respect to the Hotels, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. The Company will carry similar insurance with respect to any other
properties developed or acquired in the future. There are, however, certain
types of losses (such as losses arising from wars, certain losses arising from
hurricanes and losses arising from other acts of nature) that are not
generally insured because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose its capital invested in the affected property,
as well as the anticipated future revenues from such property and would
continue to be obligated on any mortgage indebtedness or other obligations
related to the property. Any such loss could adversely affect the business of
the Company. Management of the Company believes the Hotels are adequately
insured in accordance with industry standards.
LEGAL PROCEEDINGS
Neither the Company nor the Operating Partnership is currently involved in
any material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company or the Operating
Partnership. The Lessees and the Operators have advised the Company that they
currently are not involved in any material litigation, other than routine
litigation arising in the ordinary course of business, substantially all of
which is expected to be covered by liability insurance.
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FORMATION TRANSACTIONS
FORMATION TRANSACTIONS
Simultaneously with the closing of the Initial Offering, the Company
consummated the Formation Transactions, which included the following:
. Mr. Nussbaum and certain of his affiliates, together with John H.
Daniels, William L. Mack and Saundra Mann, each of whom are principals of
Patriot American, and Karim Alibhai, a principal of Gencom, established
the Company and the Operating Partnership and were issued an aggregate of
340,836 OP Units in connection with the capitalization thereof.
. The Company sold 14,605,000 shares of Common Stock in the Initial
Offering and contributed substantially all of the net proceeds thereof to
the Operating Partnership. Upon completion of the Initial Offering and
the Formation Transactions, the Company owned an approximately 86.3%
controlling ownership interest in the Operating Partnership.
. The Operating Partnership acquired a 100% interest in each of the Initial
Hotels for an aggregate of approximately 2.0 million OP Units,
approximately $101.2 million in cash and the repayment of approximately
$162.5 million of existing mortgage and other indebtedness on the Initial
Hotels, as follows:
. The Operating Partnership acquired interests in five of the Initial
Hotels from affiliates of Mr. Nussbaum, Chairman and Chief Executive
Officer of the Company, and certain related trusts in exchange for
95,027 OP Units, valued at approximately $2.3 million.
. The Operating Partnership acquired interests in three of the Initial
Hotels from affiliates of Mr. Daniels, a director of the Company, in
exchange for 73,373 OP Units, valued at approximately $1.8 million,
and approximately $156,000 in cash (to pay tax obligations incurred
in connection with the Formation Transactions).
. The Operating Partnership acquired an interest in one of the Initial
Hotels from an affiliate of Mr. Stewart, an officer of the Company,
in exchange for 1,437 OP Units, valued at approximately $35,000.
. The Operating Partnership acquired interests in four of the Initial
Hotels from affiliates of Mr. Mack, a principal of Patriot American
who is not an officer or director of the Company, in exchange for
740,293 OP Units (including 395,747 OP Units issuable to a creditor
of such affiliates pursuant to the terms of a loan related to such
affiliates' interests in the Initial Hotels), valued at approximately
$17.8 million, and approximately $5.6 million in cash (including
approximately $2.9 million attributable to certain business partners
of Mr. Mack who are not affiliated with Patriot American).
. The Operating Partnership acquired interests in three of the Initial
Hotels from affiliates of Ms. Mann, a principal of Patriot American
who is not an officer or director of the Company, in exchange for
73,373 OP Units, valued at approximately $1.8 million, and
approximately $156,000 in cash (to pay tax obligations incurred in
connection with the Formation Transactions).
. The Operating Partnership acquired an interest in one of the Initial
Hotels from a partnership comprised of current and former executives
of Patriot American who are not affiliated with the Company in
exchange for 4,953 OP Units, valued at approximately $119,000.
. The Operating Partnership acquired interests in six of the Initial
Hotels from Mr. Alibhai in exchange for 428,891 OP Units, valued at
approximately $10.3 million, and approximately $525,000 in cash.
. The Operating Partnership acquired interests in ten of the Initial
Hotels from family members of Mr. Alibhai and from Gencom Interests,
Inc., a corporation owned by Mr. Alibhai and members of his family
("Gencom Interests") in exchange for an aggregate of 210,577 OP
Units, valued at
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approximately $5.1 million, and approximately $17.6 million in cash
(approximately $13.8 million of which was used to repay indebtedness
related to such interests, to pay tax obligations and other expenses
incurred in connection with the Formation Transactions and to
capitalize CHC Lease Partners). Gencom Interests also received
approximately $3.9 million in cash as repayment of indebtedness related
to one of the Initial Hotels.
. The Operating Partnership acquired interests in four of the Initial
Hotels from CHC or its affiliates in exchange for 210,693 OP Units,
valued at approximately $5.1 million, and approximately $3.4 million
in cash (to pay tax obligations and other expenses incurred in
connection with the Formation Transactions and to capitalize CHC Lease
Partners).
. The Operating Partnership acquired interests in two of the Initial
Hotels from Apollo Real Estate Investment Fund, L.P. in exchange for
approximately $22.5 million in cash.
. The Operating Partnership acquired interests in 16 of the Initial
Hotels from parties that are unaffiliated with Patriot American, CHC,
Gencom and certain of their affiliates (collectively, the "Primary
Contributors") in exchange for an aggregate of 148,272 OP Units,
valued at approximately $3.6 million, and approximately $47.7 million
in cash.
. CHC and an affiliate of Mr. Alibhai formed CHC Lease Partners, and each
own 50% of the partnership interests in CHC Lease Partners.
. CHC acquired a 50% interest in GAH, one of the Operators, from certain
affiliates of Patriot American for a promissory note in the amount of
$3.75 million.
. The Operating Partnership leased the Initial Hotels to CHC Lease Partners
for staggered terms of ten to twelve years pursuant to separate
Participating Leases, which provide for rent equal to the greater of Base
Rent or Participating Rent, plus certain Additional Charges as
applicable. CHC Lease Partners holds the Franchise License for each
franchised Initial Hotel. CHC Lease Partners contracted with the
Operators to operate 19 of the Initial Hotels under separate Management
Agreements providing for the subordination of the payment of all
management fees to CHC Lease Partners' obligations to the Operating
Partnership.
. The Operating Partnership entered into the Line of Credit.
BENEFITS TO OFFICERS, DIRECTORS AND PRIMARY CONTRIBUTORS
OFFICERS AND DIRECTORS OF THE COMPANY
As a result of the Formation Transactions, officers and directors of the
Company and certain of their respective affiliates received the following
benefits:
. Mr. Nussbaum and certain related trusts received 260,948 OP Units and
affiliates of Mr. Daniels received 83,042 OP Units and approximately
$156,000 in cash (to pay tax obligations incurred in connection with the
Formation Transactions) as consideration for their interests in the
Initial Hotels and in connection with the initial capitalization of the
Operating Partnership. Mr. Stewart received 1,437 OP Units as
consideration for his interest in one of the Initial Hotels. The OP Units
received by Mr. Nussbaum and related trusts, affiliates of Mr. Daniels
and Mr. Stewart (which are redeemable for cash, or at the Company's
option are exchangeable for Common Stock, at any time after October 2,
1997) were valued at approximately $6.3 million, $2.0 million and
$35,000, respectively, and are more liquid than their interests in the
Initial Hotels.
. The 31,250, 18,750 and 9,375 shares of Common Stock owned by Messrs.
Lattin, Stewart and Ng prior to the Offering, for which they paid nominal
consideration, were valued at approximately $750,000, $450,000 and
$225,000, respectively at the time of the Initial Offering. These shares
of Common Stock vest ratably over a three-year period.
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. Messrs. Nussbaum, Lattin, Stewart and Ng were granted options to acquire
250,000, 100,000, 85,000 and 65,000 shares of Common Stock, respectively.
. Each non-employee director received 260 shares of Common Stock and
options to acquire 7,500 shares of Common Stock.
. The Operating Partnership repaid approximately $373,000 of indebtedness
of affiliates of Mr. Daniels related to their interests in the Initial
Hotels.
. The Operating Partnership repaid approximately $900,000 of indebtedness
guaranteed by Mr. Nussbaum.
. In connection with the issuance of title insurance policies on certain of
the Initial Hotels, a title insurance agency owned by Mr. Nussbaum,
certain members of his family and certain related trusts received
approximately $245,000 in fees.
. Certain tax consequences to officers and directors of the Company and
their affiliates and related trusts and other entities from the
conveyance of their interests in the Initial Hotels to the Operating
Partnership were deferred.
PRIMARY CONTRIBUTORS (EXCLUDING OFFICERS AND DIRECTORS OF THE COMPANY)
The Primary Contributors include Messrs. Nussbaum, Mack and Daniels and Ms.
Mann (who are the principals of Patriot American), Mr. Alibhai (who is a
principal of Gencom), CHC and certain of their respective affiliates. Benefits
of the Formation Transactions to Messrs. Nussbaum and Daniels are described
above. As a result of the Formation Transactions, the remaining Primary
Contributors received the following benefits:
. Affiliates of Mr. Mack received 835,245 OP Units (including 395,747 OP
Units issuable to a creditor of such affiliates pursuant to the terms of
a loan related to such affiliates' interests in the Initial Hotels) and
approximately $5.6 million in cash (including approximately $2.9 million
attributable to certain business partners of Mr. Mack who are not
affiliated with Patriot American); and affiliates of Ms. Mann received
83,042 OP Units and approximately $156,000 in cash (to pay tax
obligations incurred in connection with the Formation Transactions) as
consideration for their interests in the Initial Hotels and in connection
with the capitalization of the Operating Partnership. The OP Units
received by such affiliates of Mr. Mack and Ms. Mann were valued at
approximately $20.0 million and $2.0 million, respectively, at the time
of the Initial Offering and are more liquid than their interests in the
Initial Hotels.
. In satisfaction of approximately $8.6 million of indebtedness of
affiliates of Mr. Mack related to a loan entered into in connection with
their interests in the Initial Hotels, the Operating Partnership paid to
a third party lender approximately $6.3 million in cash and 395,747 OP
Units.
. The Operating Partnership repaid approximately $373,000 of indebtedness
of affiliates of Ms. Mann related to their interests in the Initial
Hotels.
. The Operating Partnership repaid an aggregate of approximately $12.5
million of indebtedness guaranteed by affiliates of Mr. Mack.
. Mr. Alibhai received 489,516 OP Units and approximately $525,000 in cash
as consideration for his interests in the Initial Hotels and in
connection with the capitalization of the Operating Partnership. The OP
Units received by Mr. Alibhai were valued at approximately $11.7 million
at the time of the Initial Offering and are more liquid than his
interests in the Initial Hotels. In addition, Gencom Interests, in which
Mr. Alibhai owns a 30% interest, received 210,577 OP Units and
approximately $8.2 million in cash as consideration for its interests in
the Initial Hotels. The OP Units received by Gencom Interests were valued
at approximately $5.1 million at the time of the Initial Offering and are
more liquid than its interests in the Initial Hotels. Gencom Interests
also received approximately $3.9 million in cash as repayment of
indebtedness related to one of the Initial Hotels.
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. The Operating Partnership repaid an aggregate of approximately $10.1
million of indebtedness guaranteed by Mr. Alibhai.
. CHC and its affiliates received approximately 210,693 OP Units and
approximately $3.4 million in cash as consideration for their interests
in the Initial Hotels. The OP Units received by CHC and its affiliates
were valued at approximately $5.0 million at the time of the Initial
Offering and are more liquid than their interests in the Initial Hotels.
. An affiliate of Patriot American in which Messrs. Nussbaum, Mack and
Daniels and Ms. Mann owned equity interests received a promissory note
from CHC in the principal amount of $3.75 million for its interest in
GAH.
. Approximately $1.2 million of indebtedness incurred by affiliates of CHC
in connection with the acquisition of the Peachtree Executive Conference
Center was repaid from the proceeds of the Initial Offering.
. Through its operation of the Initial Hotels pursuant to the Participating
Leases, CHC Lease Partners, which is owned by Mr. Alibhai and CHC, holds
the Franchise Licenses for the Initial Hotels and is entitled to all cash
flow from the Initial Hotels after payment of lease payments under the
Participating Leases and other operating expenses. Pursuant to the
Management Agreements, the Operators, which are affiliates of Gencom or
CHC, are entitled to receive management fees, payable from the cash flow
to CHC Lease Partners, in an amount initially equal to 2.25% of the
revenues at the Initial Hotels operated by them and escalating to 3.0%
over three years.
. Certain tax consequences to the Primary Contributors and their affiliates
from the conveyance of their interests in the Initial Hotels to the
Operating Partnership were deferred.
VALUATION OF INTERESTS
The initial valuation of the Company was determined primarily based upon a
capitalization of the Company's estimated Cash Available for Distribution and
other factors, rather than on the basis of each property's cost or appraised
value.
The purchase prices for the interests acquired by the Company from parties
unaffiliated with the Primary Contributors and from certain affiliates of the
Primary Contributors were determined pursuant to arms length negotiations. The
allocation of consideration among the Primary Contributors was determined
through negotiation and through the Company's determination of the percentage
of estimated adjusted cash flow that was required to pay the Company's
shareholders a specified initial annual distribution rate, which rate was
based upon prevailing market conditions. The allocation of consideration among
the Primary Contributors, in certain instances, also was affected by
performance-oriented structures contained in the applicable contributing
partnership agreements and reallocations of benefits to be derived among
certain of the contributing partners unrelated to capitalization rates or
market values of the Initial Hotels.
TRANSFER OF INITIAL HOTELS
The Company's interest in the Initial Hotels was acquired pursuant to
various agreements. These acquisitions were subject to all of the terms and
conditions of such agreements. The Company assumed all obligations relating to
the Initial Hotels that may arise after the transfer.
The agreements effecting the transfer of the assets or direct or indirect
interests of the partners and other holders of equity in the entities selling
the Initial Hotels contained representations and warranties from each such
person concerning title to the interests being transferred and the absence of
liens or other encumbrances thereon.
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Mr. Nussbaum, Mr. Alibhai, certain executives of CHC (including Messrs.
Sherwood Weiser and Donald Lefton) and CHC (collectively, the "Indemnitors")
made additional representations with respect to the Company, CHC Lease
Partners and the Initial Hotels in which such Indemnitors hold ownership
interests concerning the operation of such Initial Hotels, environmental
matters and other representations and warranties customarily found in similar
documents and also agreed to indemnify the Company against breaches of such
representations and warranties. These representations and warranties survive
until October 2, 1996. These indemnification obligations are set forth in an
agreement between the Company and the Indemnitors. The Indemnitors (together
with certain principals of Patriot American) pledged (on a sole recourse
basis) approximately 600,000 OP Units (the "Collateral") to secure their
respective indemnification obligations. So long as the indemnified parties
have a valid security interest in the Collateral, their recourse is limited
solely to such Collateral. This agreement also provides that no claims will be
made against any Indemnitor for a breach of the agreement or for certain
litigation claims unless and until the aggregate value of all such claims
exceeds $1.0 million or $150,000, respectively.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of seven members, five of whom are
Independent Directors (as hereafter defined). Each director is elected for a
one year term. The Company currently has six executive officers. Certain
information regarding the directors and executive officers of the Company is
set forth below.
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Paul A. Nussbaum............... Chairman of the Board and Chief Executive 49
Officer
Thomas W. Lattin............... President and Chief Operating Officer 52
Rex E. Stewart................. Executive Vice President; Chief Financial 48
Officer
Michael Murphy................. Senior Vice President--Acquisitions 39
Leslie Ng...................... Senior Vice President--Acquisitions 37
G. Terry Huntzicker............ Vice President--Design and Construction 52
John H. Daniels................ Director 69
Leonard Boxer.................. Independent Director 57
John C. Deterding.............. Independent Director 64
Gregory R. Dillon.............. Independent Director 73
Thomas S. Foley................ Independent Director 67
Arch K. Jacobson............... Independent Director 68
</TABLE>
Paul A. Nussbaum became Chairman and Chief Executive Officer of the Company
in April 1995. Mr. Nussbaum founded Patriot American in 1991 and has been its
Chief Executive Officer since its inception. Prior to his association with
Patriot American, Mr. Nussbaum practiced real estate and corporate law in New
York for 20 years, the last 12 years of which as chairman of the real estate
department of Schulte Roth & Zabel. He currently serves as a member of the
Board of Directors of the Dallas Community Development Assistance Corporation
and as a member of the Mayor's Task Force on Dallas Corporate Facilities. Mr.
Nussbaum is a member of the Urban Land Institute, the American College of Real
Estate Lawyers and the Advisory Board of the Real Estate Center of the Wharton
School of Business, University of Pennsylvania. Mr. Nussbaum is an overseer of
Colby College, Waterville, Maine and holds a B.A. from the State University of
New York at Buffalo and a J.D. from the Georgetown University Law Center.
Thomas W. Lattin was named President and Chief Operating Officer of the
Company in April 1995. He has over 25 years of experience in the hotel
industry as an executive and consultant. From 1976 through 1983, Mr. Lattin
served as President of the Mariner Corporation, a hotel development and
management company based in Houston, Texas. During his tenure, Mariner's hotel
portfolio of owned and managed properties grew from two hotels to 25 hotels
throughout the Sunbelt states. In 1984, he founded Great West Hotels, a hotel
management and consulting company, and served as President and Chief Executive
Officer through 1987. From 1987 through 1994, he served as the National
Partner of the hospitality industry consulting practice of Laventhol & Horwath
and subsequently as a partner in the national hospitality consulting group of
Coopers & Lybrand L.L.P. In 1994, he joined the Hospitality Group of Kidder,
Peabody & Co. Incorporated as a Senior Vice President and later served as a
Senior Vice President with PaineWebber, following PaineWebber's acquisition of
certain assets of Kidder, Peabody & Co. Mr. Lattin is a contributing author of
an introductory textbook on hotel management, which is used by colleges and
universities worldwide. Mr. Lattin holds a B.S. and M.S. in Hotel Management
from the Cornell School of Hotel Administration. He is a certified public
accountant.
Rex E. Stewart became Executive Vice President and Chief Financial Officer
of the Company in April 1995. From 1993 until joining the Company, he served
as Chief Financial Officer and Treasurer of Metro Joint Venture, an
independent hotel management company based in Dallas, Texas, which currently
manages the Holiday Inn Select North Dallas and the Embassy Suites, Hunt
Valley. He served in the same capacities for Metro Hotels, Inc. from 1986
until 1993. Previously, Mr. Stewart was the Chief Financial Officer of Lincoln
Hotel Corporation, which owned and operated a chain of upscale and luxury
hotels across the United States. Prior to his employment
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with Lincoln Hotel Corporation, Mr. Stewart was an audit manager with Arthur
Andersen & Co. in Dallas. He holds a B.B.A. from Texas A&M University and an
M.B.A. from the University of Southern California. He is a certified public
accountant.
Michael Murphy became Senior Vice President--Acquisitions of the Company in
April 1996. From 1986 through 1996, Mr. Murphy was Chief Executive Officer and
Founder of The Stonebridge Group, Inc. ("Stonebridge"), a company specializing
in structuring and negotiating capital market financing transactions. Mr.
Murphy graduated from Williams College, Williamstown, Massachusetts and has a
J.D. from Fordham University of Law, New York.
Leslie Ng became Senior Vice President--Acquisitions of the Company in June
1995. From 1992 to June 1995, he served as Senior Vice President, Development
of CHC. From 1987 until 1992, Mr. Ng was Vice President, Real Estate of
Tobishima Associates, Ltd., a multinational real estate investment and
development company. Prior to his association with Tobishima, Mr. Ng was a
management consultant at Deloitte & Touche from 1985 to 1987 and a structural
engineer at Burns and Roe, Inc., an engineering and construction management
company, from 1980 to 1983. Mr. Ng has a B.E. in civil engineering from The
Cooper Union and an M.B.A. from the Wharton School, University of
Pennsylvania.
G. Terry Huntzicker became Vice President--Design and Construction of the
Company in April 1996. Prior to joining the Company, Mr. Huntzicker was a
partner of G&H Interests, Inc., which developed more than $200 million of new
hotels for its own account. Prior to his association with G&H Interests, Inc.,
Mr. Huntzicker held construction management positions with Mariner Interests,
Inc., a Houston-based hotel company, and Holiday Inns, Inc. Mr. Huntzicker has
a B.S. in engineering from Christian Brothers University, Memphis, Tennessee.
John H. Daniels became a director of the Company in October 1995. He has
served as President of The Daniels Group Inc., a real estate development and
management company, since 1984. Mr. Daniels has also served as Vice Chairman
of Patriot American since its inception in 1991. Prior to forming The Daniels
Group Inc., Mr. Daniels served as Chairman and Chief Executive Officer of
Cadillac Fairview Corporation, a publicly held real estate development and
management company. Mr. Daniels has over 40 years of real estate development
and management experience. Mr. Daniels is also a director of Cineplex-Odeon
Corporation, Consolidated H.C.I. Corporation, Samoth Capital Corporation and
Anitech Enterprises Inc. He holds a B.S. in Architecture from the University
of Toronto.
Leonard Boxer became a director of the Company in October 1995. He has been
a partner and chairman of the real estate department of the law firm of
Stroock & Stroock & Lavan in New York, New York since 1987. Previously, he was
a founder and managing partner and head of the real estate department of
Olnick Boxer Blumberg Lane & Troy, a real estate law firm in New York. Mr.
Boxer is a member of the Board of Trustees of New York University Law School.
He is a member of the New York Regional Cabinet of the United States Holocaust
Memorial Museum. He received his B.A. and L.L.B. from New York University.
John C. Deterding became a director of the Company in October 1995. He has
been the owner of Deterding Associates, a real estate consulting company,
since June 1993. From 1975 until June 1993, he served as Senior Vice President
and General Manager of the Commercial Real Estate division of General Electric
Capital Corporation ("GECC"). In directing the real estate activities at GECC,
he was responsible for both domestic and international lending activities,
portfolio purchases, joint ventures, asset management and real estate
securitization. From November 1989 to June 1993, Mr. Deterding served as
Chairman of the General Electric Real Estate Investment Company, a privately
held REIT. He served as Director of GECC Financial Corporation from 1986 to
1993. Mr. Deterding is also a former member and trustee of the Urban Land
Institute. He holds a B.S. from the University of Illinois.
Gregory R. Dillon became a director of the Company in October 1995. He has
been Vice Chairman Emeritus of Hilton Hotels Corporation ("Hilton") since
1993. He has been a director of Hilton since 1977 and was elected Vice
Chairman in 1990. Mr. Dillon served as an Executive Vice President of Hilton
from 1980 until
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1993. Mr. Dillon was also Executive Vice President of Hilton's franchise
company, Hilton Inns, Inc., from 1971 to 1986. He is a director of the Conrad
N. Hilton Foundation and is a founding member of the American Hotel
Association's Industry Real Estate Financing Advisory Council and the National
Association of Corporate Real Estate Executives (NACORE). In addition to his
undergraduate degree, Mr. Dillon has an L.L.B. from DePaul University.
Thomas S. Foley became a director of the Company in October 1995. He has
been a partner in the Washington, D.C. office of Akin, Gump, Strauss, Hauer &
Feld, L.L.P. since January 1995. From 1965 through 1994, Mr. Foley served 15
terms in the U.S. House of Representatives. Mr. Foley was Speaker of the U.S.
House of Representatives from June 1989 through December 1994. Mr. Foley
currently is a director of the H.J. Heinz Company, and he serves on the Global
Advisory Board of Coopers & Lybrand L.L.P., the Board of Advisors for the
Center for Strategic and International Studies and the Board of Directors for
the Center for National Policy. Mr. Foley received his B.A. and L.L.B. from
the University of Washington.
Arch K. Jacobson became a director of the Company in October 1995. He has
served as President of Jacobson-Berger Capital Group, Inc., a commercial
mortgage banking firm, since 1993. From 1986 to 1993, Mr. Jacobson was
Chairman of Union Pacific Realty Co., a real estate management and development
company. He served in various capacities with the Real Estate Department of
The Prudential Insurance Company from 1955 to 1980 and was President and Chief
Executive Officer of the Prudential Development Company (a subsidiary of the
Prudential Insurance Company) from 1982 to 1986. Mr. Jacobson currently serves
as a director of Walden Residential Properties, Inc., a publicly traded
multifamily apartment REIT. He was formerly a director of La Quinta Limited
Partners, and chaired the committee of independent directors that negotiated
the tender offer for and purchase of that company in 1994. Mr. Jacobson has a
B.S. from Texas A&M University.
COMMITTEES
Audit Committee. The Audit Committee consists of three Independent
Directors: Messrs. Boxer, Dillon and Foley. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls.
Compensation Committee The Compensation Committee consists of three
Independent Directors: Messrs. Dillon, Deterding and Jacobson. The
Compensation Committee determines compensation of the Company's executive
officers and administers the Company's 1995 Plan.
Investment Committee The Investment Committee members are Messrs. Deterding
and Jacobson who are Independent Directors and Mr. Daniels who is a non-
employee Director. Mr. Nussbaum, as Chairman of the Board, serves as an ex-
officio member of the committee. The Investment Committee makes
recommendations concerning the acquisition of hotel investments.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated
by the Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
The Company was organized as a Virginia corporation in April 1995.
Accordingly, the Company did not pay any cash compensation to its executive
officers for the year ended December 31, 1994. The following table sets forth
the base compensation paid to the Chief Executive Officer and to the four most
highly compensated executive officers of the Company other than the Chief
Executive Officer whose base salary, on an annualized basis, and bonus
exceeded $100,000 during the year ended December 31, 1995. Messrs. Huntzicker
and Murphy joined the Company in April 1996 and, consequently, received no
compensation in 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
LONG-TERM
COMPENSATION
NUMBER OF SHARES
NAME POSITION WITH COMPANY BASE SALARY BONUS UNDERLYING OPTION(F)
- ---- -------------------------------------- ----------- ------- --------------------
<S> <C> <C> <C> <C>
Paul A. Nussbaum........ Chairman & Chief Executive Officer $ 45,000(a) (e) 250,000
Thomas W. Lattin........ President & Chief Operating Officer $126,000(b) $33,750 100,000
Rex E. Stewart.......... Executive VP & Chief Financial Officer $ 88,000(c) (e) 85,000
Leslie Ng............... Senior VP--Acquisitions $ 81,000(d) $21,000 65,000
</TABLE>
- --------
(a) Represents amount paid since October 1995 based on an annual salary of
$180,000. Salary prior to October 1995 was paid by Patriot American.
(b) Represents amount paid since April 1995 based on an annual salary of
$175,000.
(c) Represents amount paid since July 1995 based on an annual salary, since
October 1, 1995, of $170,000. Salary prior to July 1995 was paid by Metro
Hotels.
(d) Represents amount paid since June 1995 based on an annual salary, since
October 1, 1995, of $140,000.
(e) Bonus compensation in an amount equal to 25% of Mr. Nussbaum's and 15% of
Mr. Stewart's annual base salary was approved for 1995, but payment of the
bonus was deferred at the election of the executive officer until 1996.
(f) In connection with the Initial Offering, the Company granted incentive
stock options ("ISOs") and nonqualified options to Messrs. Nussbaum,
Lattin, Stewart and Ng to purchase shares of Common Stock. Of the 250,000
options granted to Mr. Nussbaum, 208,340 are nonqualified stock options,
17,361 of which vested on the date of grant and the remainder become
exercisable in eleven quarterly installments, and 41,660 are ISOs which
become exercisable in ten equal annual installments beginning January 1,
1996. Of the 100,000 options granted to Mr. Lattin, 58,340 are
nonqualified stock options, 4,862 of which vested on the date of grant and
the remainder become exercisable in eleven equal quarterly installments,
and 41,660 are ISOs which vest in ten equal annual installments beginning
January 1, 1996. Of the 85,000 options granted to Mr. Stewart, 43,340 are
nonqualified stock options, 3,611 of which vested on the date of grant and
the remainder become exercisable in eleven quarterly installments, and
41,660 are ISOs which vest in ten equal annual installments beginning
January 1, 1996. Of the 65,000 options granted to Mr. Ng, 23,340 are
nonqualified stock options, 1,945 of which vested on the date of grant and
the remainder become exercisable in eleven quarterly installments and
41,660 are ISOs which vest in ten equal annual installments beginning
January 1, 1996.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF SHARE
INDIVIDUAL GRANTS PRICE FOR OPTION TERM
------------------------------------------------- ---------------------
% OF TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE EXPIRATION
NAME GRANTED(#) EMPLOYEES IN 1995 PRICE DATE 5% 10%
- ---- ---------- ------------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul A. Nussbaum........ 250,000 50% $24.00 9/27/2005 $3,773,000 $9,562,000
Thomas W. Lattin........ 100,000 20% $24.00 10/25/2005 1,509,000 3,825,000
Rex E. Stewart.......... 85,000 17% $24.00 10/25/2005 1,283,000 3,251,000
Leslie Ng............... 65,000 13% $24.00 10/25/2005 981,000 2,486,000
</TABLE>
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<PAGE>
OPTION EXERCISES IN 1995 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1995 DECEMBER 31, 1995(2)
NAME EXERCISE REALIZED(1) # EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ----------- --------------------------- -------------------------
<S> <C> <C> <C> <C>
Paul A. Nussbaum.......... -- -- 17,361/232,639 $30,382/$407,118
Thomas W. Lattin.......... -- -- 4,862/95,138 $8,509/$166,491
Rex E. Stewart............ -- -- 3,611/81,389 $6,319/$142,431
Leslie Ng................. -- -- 1,945/63,055 $3,404/$110,346
</TABLE>
- --------
(1) No options were exercised in 1995.
(2) Represents the number of shares of Common Stock underlying the options
(excluding options the exercise price of which was more than the market
value of the underlying securities) times the market price at December 31,
1995 of $25.75, minus the exercise price.
COMPENSATION DEVELOPMENTS
In April 1996, the Board of Directors granted stock options to purchase
approximately 180,000 shares of Common Stock to the executive officers, other
employees and key persons of the Company pursuant to the Company's 1995 Plan.
The options generally have an exercise price of $26.875 (the market price of
the Company's Common Stock on the date of grant) and become exercisable in
seven equal installments beginning in April 1997. The Compensation Committee
has retained Deloitte & Touche LLP as a compensation consultant and is
reviewing the compensation structure of the Company. Following consultation
with its consultant, the Compensation Committee is considering grants of
restricted stock pursuant to the Company's 1995 Plan to the Directors,
executive officers, other employees and key persons of the Company. Under the
Company's 1995 Plan, the Compensation Committee has the authority to grant up
to approximately 307,000 stock options and shares of restricted stock. Any
decisions to grant additional stock options or shares of restricted stock will
be made by the independent members of the Company's Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Nussbaum,
pursuant to which Mr. Nussbaum serves as Chairman and Chief Executive Officer
of the Company for a term of three years at an initial annual base
compensation of $180,000, subject to any increases in base compensation
approved by the Compensation Committee. The Compensation Committee has
increased Mr. Nussbaum's salary to $315,000 effective July 1, 1996. Upon
termination of Mr. Nussbaum's employment other than for cause, Mr. Nussbaum
will be entitled to receive severance benefits in an amount to be determined
by the Compensation Committee. In addition, the Company has entered into
employment agreements with Messrs. Lattin, Stewart, and Ng, pursuant to which
Mr. Lattin serves as President and Chief Operating Officer, Mr. Stewart serves
as Executive Vice President and Chief Financial Officer, and Mr. Ng serves as
Senior Vice President--Acquisitions, each for a term of three years, at an
annual base compensation of $175,000, $170,000, and $140,000 respectively,
subject to any increases in base compensation approved by the Compensation
Committee. The Compensation Committee has increased Mr. Lattin's salary to
$236,000 effective July 1, 1996. Upon termination other than for cause, each
of such officers will be entitled to receive severance benefits in an amount
to be determined by the Compensation Committee. Neither Mr. Murphy nor Mr.
Huntzicker has entered into an employment agreement with the Company.
COMPENSATION OF DIRECTORS
Any director who is not an employee of the Company is paid an annual
retainer fee of $12,500. In addition, each such director is paid $1,250 for
attendance at each meeting of the Company's Board of Directors and $750 for
attendance at each meeting of a committee of the Company's Board of which such
director is a member. The annual retainer fee is paid to such directors one-
half in cash and one-half in shares of Common Stock. Meeting fees are paid in
cash. Directors who are employees of the Company do not receive any fees for
their service on the Board of Directors or a committee thereof. In addition,
the Company reimburses directors for their out-of-pocket expenses incurred in
connection with their service on the Board of Directors.
On October 2, 1995, each non-employee director was granted 260 shares of
Common Stock and non-qualified options to purchase 7,500 shares of Common
Stock at an exercise price of $24.00 per share (the Initial
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<PAGE>
Offering price). On May 23, 1996, each non-employee director was granted 220
shares of Common Stock and non-qualified options to purchase 2,500 shares of
Common Stock at an exercise price of $28.38 per share. In addition, on the
date of the annual meeting of the Company's shareholders, beginning with the
annual meeting to be held in 1996, each such non-employee director then in
office will receive a grant of nonqualified options to purchase an additional
2,500 shares of Common Stock at the then current market price, up to an
aggregate number of shares subject to such options of 17,500 per non-employee
director. All options granted to non-employee directors will vest immediately
upon the date of grant. Any non-employee director who ceases to be a director
will forfeit the right to receive any options not previously granted. See "--
Stock Incentive Plans--The Directors' Plan."
STOCK INCENTIVE PLANS
The Board of Directors has adopted, and the Company's shareholders have
approved, the 1995 Plan and the Patriot American Hospitality, Inc. Non-
Employee Directors' Incentive Plan (the "Directors' Plan") for the purposes of
(i) attracting and retaining employees, directors and other service providers
with ability and initiative, (ii) providing incentives to those deemed
important to the success of the Company, and (iii) associating the interests
of these individuals with the interests of the Company and its shareholders
through opportunities for increased stock ownership.
The 1995 Plan
Administration. The 1995 Plan is administered by the Compensation Committee.
The Compensation Committee may delegate its authority to administer the 1995
Plan. The Compensation Committee may not, however, delegate its authority with
respect to grants and awards to individuals subject to Section 16 of the
Exchange Act. As used in this summary, the term "Administrator" means the
Compensation Committee or its delegate, as appropriate.
Eligibility. Each employee of the Company, or an affiliate, or any other
person whose efforts contribute to the Company's performance, including an
employee who is a member of the Board, is eligible to participate in the 1995
Plan. The Administrator selects the individuals who will participate in the
1995 Plan ("Participants") but no person may participate in the 1995 Plan
while he is a member of the Compensation Committee. The Administrator may,
from time to time, grant stock options, stock awards, incentive awards or
performance shares to Participants.
Options. Options granted under the 1995 Plan may be ISOs or nonqualified
stock options. An option entitles a Participant to purchase shares of Common
Stock from the Company at the option price. The option price may be paid in
cash, with shares of Common Stock, or with a combination of cash and Common
Stock. The option price is fixed by the Administrator at the time the option
is granted, but the price cannot be less than 100% for existing employees (85%
in connection with the hiring of new employees) of the shares' fair market
value on the date of grant. The exercise price of an ISO granted to any
Participant who is a Ten Percent Shareholder (as defined below) may not be
less than 110% of the fair market value of the Common Shares on the date of
grant. A Participant is a Ten Percent Shareholder if he owns, or is deemed to
own, more than ten percent of the total combined voting power of all classes
of stock of the Company or a related entity. A Participant is deemed to own
any voting stock owned (directly or indirectly) by the Participant's spouse,
brothers, sisters, ancestors and lineal descendants. A Participant and such
persons are also considered to own proportionately any voting stock owned
(directly or indirectly) by or for a corporation, partnership, estate or trust
of which the Participant or any such person is a shareholder, partner or
beneficiary. Options may be exercised at such times and subject to such
conditions as may be prescribed by the Administrator but the maximum term of
an option is ten years in the case of an ISO or five years in the case of an
ISO granted to a Ten Percent Shareholder.
No employee may be granted ISOs (under the 1995 Plan or any other plan of
the Company) that are first exercisable in a calendar year for Common Stock
having an aggregate fair market value (determined as of the date the option is
granted) exceeding $100,000. In addition, no Participant may be granted
options in any calendar year for more than 250,000 shares of Common Stock.
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<PAGE>
Stock Awards. Participants also may be awarded shares of Common Stock
pursuant to a stock award. A Participant's rights in a stock award shall be
nontransferable or forfeitable or both unless certain conditions prescribed by
the Administrator are satisfied. These conditions may include, for example, a
requirement that the Participant continue employment with the Company for a
specified period or that the Company or the Participant achieve stated,
performance-related objectives. The objectives may be stated with reference to
the fair market value of the Common Stock or the Company's, a subsidiary's or
an operating unit's return on equity, earnings per share, total earnings,
earnings growth, return on capital or return on assets. A stock award that is
not immediately vested and nonforfeitable will be restricted for a period of
at least three years; provided however, that the period shall be at least one
year in the case of a stock award that is subject to objectives based on one
or more of the foregoing performance criteria. No Participant may be granted
stock awards in any calendar year for more than 50,000 shares of Common Stock.
Incentive Awards. Incentive awards also may be granted under the 1995 Plan.
An incentive award is an opportunity to earn a bonus, payable in cash, upon
attainment of stated performance objectives. The objectives may be stated with
reference to the fair market value of the Common Stock or on the Company's, a
subsidiary's or an operating unit's return on equity, earnings per share,
total earnings, earnings growth, return on capital or return on assets. The
period in which performance will be measured will be at least one year. No
Participant may receive an incentive award payment in any calendar year that
exceeds the lesser of (i) 100% percent of the Participant's base salary (prior
to any salary reduction or deferral election) as of the date of grant of the
incentive award or (ii) $250,000.
Performance Share Awards. The 1995 Plan also provides for the award of
performance shares. A performance share award entitles the Participant to
receive a payment equal to the fair market value of a specified number of
shares of Common Stock if certain standards are met. The Administrator will
prescribe the requirements that must be satisfied before a performance share
award is earned. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or on the Company's, a subsidiary's or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital or return on assets. To the extent that performance shares
are earned, the obligation may be settled in cash, in Common Stock, or by a
combination of the two. No Participant may be granted performance shares for
more than 50,000 shares of Common Stock in any calendar year.
Share Authorization. All awards made under the 1995 Plan are evidenced by
written agreements between the Company and the Participant. A maximum of
1,000,000 shares of Common Stock may be issued under the 1995 Plan. The share
limitation and the terms of outstanding awards shall be adjusted, as the
Compensation Committee deems appropriate, in the event of a stock dividend,
stock split, combination, reclassification, recapitalization or other similar
event.
Termination and Amendment. No option or stock award may be granted and no
performance shares may be awarded under the 1995 Plan after October 25, 2005.
The Board may amend or terminate the 1995 Plan at any time, but, except as set
forth in the immediately preceding paragraph, an amendment will not become
effective without shareholder approval if the amendment increases the number
of shares of Common Stock that may be issued under the 1995 Plan (other than
an adjustment as described above), changes the eligibility requirements or
increases the benefits that may be provided under the 1995 Plan.
Federal Income Taxes. No income is recognized by a Participant at the time
an option is granted. If the option is an ISO, no income will be recognized
upon the Participant's exercise of the option. Income is recognized by a
Participant when he disposes of shares acquired under an ISO. The exercise of
a nonqualified share option generally is a taxable event that requires the
Participant to recognize, as ordinary income, the difference between the
shares' fair market value and the option price.
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<PAGE>
A Participant will recognize income on account of a stock award on the first
day that the shares are either transferable or not subject to a substantial
risk of forfeiture. The amount of income recognized by the Participant is
equal to the fair market value of the Common Stock received on that date.
No income is recognized upon the grant of an incentive award. Income equal
to the amount of the bonus payment will be recognized on the date that payment
is made under the incentive award.
A Participant will recognize income on account of the settlement of a
performance share award. A Participant will recognize income equal to any cash
that is paid and the fair market value of Common Stock (on the date that the
shares are first transferable or not subject to a substantial risk of
forfeiture) that is received in settlement of the award.
The employer (either the Company or its affiliate) will be entitled to claim
a federal income tax deduction on account of the exercise of a nonqualified
option, the vesting of a restricted share award, payment under an incentive
award and the settlement of a performance share award. The amount of the
deduction is equal to the ordinary income recognized by the Participant. The
employer will not be entitled to a federal income tax deduction on account of
the grant or the exercise of an ISO. The employer may claim a federal income
tax deduction on account of certain dispositions of Common Stock acquired upon
the exercise of an ISO.
The Directors' Plan
Eligibility. The Directors' Plan provides for the grant of options to
purchase Common Stock and the award of shares of Common Stock to each eligible
director of the Company. No director who is an employee of the Company is
eligible to participate in the Directors' Plan.
Options. Pursuant to the Directors' Plan, in October 1995 each eligible
director who was a member of the Board of Directors as of September 27, 1995,
was awarded nonqualified options to purchase 7,500 shares of Common Stock
(each such director, a "Founding Director"). The options granted to Founding
Directors related to the Initial Offering have an exercise price equal to the
initial public offering price of $24.00 and vested immediately. Each eligible
director who was not a Founding Director (a "Non-Founding Director") will
receive nonqualified options to purchase 7,500 shares of Common Stock upon
election to the Board of Directors. On the date of each annual meeting of the
Company's shareholders, beginning with the shareholders' meeting in 1996, each
non-employee director then in office will receive an additional grant of
nonqualified options to purchase 2,500 shares of Common Stock, with the
maximum aggregate number of shares subject to options to be granted to each
non-employee director being 17,500. The exercise price of options under future
grants will be 100% of the fair market value of the Common Stock on the date
of grant. The exercise price may be paid in cash, cash equivalents acceptable
to the Compensation Committee, Common Stock or a combination thereof. Options
granted under the Directors' Plan are exercisable for ten years from the date
of grant.
Share Awards. The Directors' Plan also provides for the annual award of
shares of Common Stock to each eligible director. The number of shares so
awarded will have a fair market value equal to $6,250 (i.e., one-half of the
initial annual retainer fee otherwise payable to the director). Pursuant to
the Directors' Plan, in October 1995 and May 1996, each Founding Director was
awarded 260 and 220 shares of Common Stock, respectively. See "Compensation of
Directors." Such shares vest immediately upon grant and are nonforfeitable.
Amendment and Termination. The Directors' Plan provides that the Board may
amend or terminate the Directors' Plan, but the Plan may not be amended more
than once every six months other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, or the rules thereunder. An
amendment will not become effective without shareholder approval if the
amendment changes the eligibility requirements or increases the benefits that
may be provided under the Directors' Plan. No options may be granted under the
Directors' Plan after December 31, 2005.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS
Mr. Nussbaum is Chairman of the Board and Chief Executive Officer of the
Company and a director and Chief Executive Officer of Patriot American. Mr.
Daniels is a director of the Company and is a Vice Chairman of Patriot
American.
ACQUISITION OF INTERESTS IN CERTAIN OF THE HOTELS
One or more of Mr. Nussbaum and certain related trusts, affiliates of Mr.
Daniels and Mr. Stewart owned equity interests in certain of the Initial
Hotels. Such persons, trusts and affiliates received an aggregate of 169,836
OP Units and approximately $156,000 in cash (to pay tax obligations incurred
in connection with the Formation Transactions) in exchange for their interests
in certain of the Initial Hotels. Upon exercise of their rights to redeem such
OP Units (which rights are not exercisable until October 2, 1997), such
persons and entities may receive an aggregate of 169,836 shares of Common
Stock or, at the Company's option, cash in the amount of approximately $4.8
million based on the closing price of the Common Stock on July 23, 1996. See
"Partnership Agreement--Redemption Rights." In addition, the Operating
Partnership repaid approximately $373,000 of indebtedness of affiliates of Mr.
Daniels related to such ownership interests and approximately $900,000 of
indebtedness guaranteed by an affiliate of Mr. Nussbaum. For a discussion of
the consideration received by Messrs. Nussbaum, Stewart and Daniels, their
affiliates and related trusts and other entities in connection with the
Operating Partnership's acquisition of the Initial Hotels and the formation of
the Company, see "Formation Transactions." In connection with the issuance of
title insurance policies on certain of the Hotels, a title insurance agency
owned by Mr. Nussbaum, certain members of his family and certain related
trusts has received approximately $315,000 in fees.
SUBLEASE AND SERVICES AGREEMENT
The Company has entered into a sublease and services agreement with an
affiliate of Patriot American, pursuant to which such affiliate provides the
Company with office space and limited support personnel for the Company's
headquarters at 3030 LBJ Freeway, Suite 1500, Dallas, Texas, for an annual fee
of approximately $100,000.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Nussbaum,
pursuant to which Mr. Nussbaum will serve as Chairman and Chief Executive
Officer of the Company for a term of three years at an initial annual base
compensation of $180,000, subject to any increases in base compensation
approved by the Compensation Committee. The Compensation Committee has
increased Mr. Nussbaum's salary to $315,000 effective July 1, 1996. Upon
termination of Mr. Nussbaum's employment other than for cause, Mr. Nussbaum is
entitled to receive severance benefits in an amount to be determined by the
Compensation Committee. In addition, the Company has entered into employment
agreements with Messrs. Lattin, Stewart and Ng, pursuant to which Mr. Lattin
serves as President and Chief Operating Officer, Mr. Stewart serves as
Executive Vice President and Chief Financial Officer and Mr. Ng serves as
Senior Vice President--Acquisitions, each for a term of three years at an
annual base compensation of $175,000, $170,000 and $140,000, respectively,
subject to any increases in base compensation approved by the Compensation
Committee. The Compensation Committee has increased Mr. Lattin's salary to
$236,000 effective July 1, 1996. Upon termination other than for cause each of
such officers are entitled to receive severance benefits in an amount to be
determined by the Compensation Committee.
INTEREST OF DIRECTOR
Thomas S. Foley, a director of the Company, is a partner in Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a law firm that has advised the Company on
certain matters, including Hotel acquisitions.
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THE LESSEES AND THE OPERATORS
The Company leases each of the Hotels, except the Crowne Plaza Ravinia, to
the Lessees. The current Lessees are CHC Lease Partners, an entity owned by
CHC and a principal of Gencom; Metro Lease Partners, an affiliate of Metro
Hotels; NorthCoast, an entity owned by a consortium of investors including
principals of WestCoast Hotels and Sunmakers; the Doubletree Lessee, a
subsidiary of Doubletree Hotels; and the Wyndham Lessee, an entity formed by
members of the Trammell Crow family.
CHC Lease Partners. CHC Lease Partners leases the Initial Hotels, the
Tremont House Hotel, the Holiday Inn Lenox and the Del Mar Hilton from the
Company pursuant to separate Participating Leases that require CHC Lease
Partners to maintain a Minimum Net Worth, as defined, equal to the greater of
(i) $10 million or (ii) 17.5% of the initial projected annual lease payments
for all hotels leased by the Company to CHC Lease Partners. CHC Lease Partners
is owned by CHC and a principal of Gencom. CHC was formed in 1994 to succeed
to the hotel and land-based casino businesses of the Continental Companies and
Carnival Corporation. As of March 31, 1996, CHC had under management 36 hotels
with approximately 9,400 rooms located primarily in the United States, as well
as in South America, the Caribbean, Mexico and the Bahamas. Gencom's hotel
management affiliate, GAH, has been among the fastest growing hotel management
companies in the United States in recent years, having increased its number of
guest rooms under management from approximately 1,600 at December 31, 1992 to
approximately 8,600 at March 31, 1996. Specializing in full service
properties, GAH manages 35 hotels throughout the United States. Although CHC
owns 50% of GAH, CHC's hotels and rooms under management presented above
exclude hotels managed by GAH.
CHC Lease Partners has contracted with hotel management subsidiaries of CHC
and GAH to manage the Tremont House Hotel, the Holiday Inn Lenox, the Del Mar
Hilton and 19 of the 20 Initial Hotels. In addition, CHC Lease Partners has
contracted with Metro Hotels to manage the Holiday Inn Select North Dallas.
Metro Lease Partners. The Company leases the Embassy Suites, Hunt Valley to
Metro Lease Partners under a Participating Lease which requires Metro Lease
Partners to maintain a minimum net worth of $515,000, which represents
approximately 25% of estimated Participating Rent for this Hotel in 1996.
Metro Lease Partners has contracted with its affiliate Metro Hotels to manage
the Embassy Suites, Hunt Valley. Metro Lease Partners and Metro Hotels are
Dallas-based hotel companies owned by Walker Harman. As of April 30, 1996,
Metro Hotels had 12 hotels under management with approximately 2,400 rooms
located throughout the United States.
NorthCoast. The Company leases each of the six Hotels in the WestCoast
Portfolio and the Hyatt Regency, Lexington to NorthCoast under Participating
Leases which require NorthCoast to maintain a minimum net worth equal to the
greater of approximately $2.9 million or 20% of the current year's budgeted
lease payments. NorthCoast is a Seattle-based company owned by a consortium of
investors including principals of WestCoast Hotels and Sunmakers. As of April
30, 1996, WestCoast Hotels had 20 hotels under management with approximately
4,100 rooms located primarily on the Pacific Coast.
Doubletree Lessee. The Company leases the Doubletree Denver/Boulder to the
Doubletree Lessee under a Participating Lease that requires the Doubletree
Lessee to maintain a minimum net worth equal to the greater of $400,000 or 20%
of the current year's budgeted lease payments. The Doubletree Lessee is a
subsidiary of Doubletree Hotels, a subsidiary of Doubletree Corporation. The
Doubletree Lessee has contracted with DTM Management, Inc., a subsidiary of
Doubletree Hotels, to manage the Doubletree Denver/Boulder. As of December 31,
1995, Doubletree Corporation managed or franchised 116 hotels with an
aggregate of 30,615 rooms in 32 states, the District of Columbia and Mexico.
Wyndham Lessee. The Company leases the Wyndham Greenspoint Hotel and the
Wyndham Garden-Midtown to the Wyndham Lessee, an entity formed by members of
the Trammell Crow family, under Participating Leases. The obligations of the
Wyndham Lessee under the Participating Leases are guaranteed by the Wyndham
Guarantor, a separate entity formed by members of the Trammell Crow family.
The Wyndham Guarantor is required to maintain a minimum net worth equal to 20%
of the current year's budgeted lease
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payments for the Hotels leased by the Wyndham Lessee (such percentage being
subject to adjustment if the parties enter into leases for additional hotels).
The Company currently intends to lease each of the Wyndham Garden Hotels to
the Wyndham Lessee upon acquisition. The Wyndham Lessee has contracted with
Wyndham to manage both the Wyndham Greenspoint Hotel and the Wyndham Garden-
Midtown. At June 25, 1996, Wyndham's portfolio consisted of 65 hotels operated
by Wyndham, 3 franchised hotels and 3 hotels under renovation or construction
for a total of 18,484 rooms located in 22 states, the District of Columbia,
and the Caribbean.
Holiday Inns, Inc. The Crowne Plaza Ravinia is managed for PAH Ravinia by
Holiday Inns, Inc.
While each Lessee's ability to make lease payments under the applicable
Participating Lease is dependent primarily upon its ability to generate
sufficient cash flow from the operation of the Hotels that it leases the
minimum net worth requirements are designed to provide a source of funds to
make such payments and to fund operational shortfalls if operating cash flow
is inadequate. The Participating Leases have been negotiated on an arms length
basis. The Participating Leases with CHC Lease Partners and (subject to
limited exceptions) with NorthCoast contain cross-default provisions such that
a default under one Participating Lease is also a default under all
Participating Leases with the same Lessee. Additionally, the Wyndham Garden-
Midtown Participating Lease and the Wyndham Greenspoint Hotel Participating
Lease contain cross-default provisions. Accordingly, either Lessee's failure
to make required lease payments under any of the Participating Leases which
are cross-defaulted will allow the Company to terminate any or all of the
Participating Leases to which such Lessee is a party. The Company intends to
utilize similar cross default provisions when leasing multiple properties to a
single Lessee in the future. The Participating Leases have an average term of
approximately eleven years, with expiration dates staggered between the years
2005 and 2008, subject to earlier termination upon the occurrence of certain
events.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of July 23, 1996, by (i) each director
of the Company, (ii) each executive officer of the Company, (iii) all
directors and executive officers of the Company as a group and (iv) persons
who own more than 5% of the shares of Common Stock. Except as otherwise
described below, all shares are owned directly and the indicated person has
sole voting and investment power. The number of shares represents the number
of shares of Common Stock that the person holds plus the number of shares of
Common Stock that such person could receive if he redeemed his OP Units under
certain circumstances.
As of July 23, 1996, there were 15,478,648 shares of Common Stock, options
to purchase 737,800 shares of Common Stock, and 3,502,328 OP Units (excluding
OP Units held by subsidiaries of the Company) outstanding.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1)
- ------------------------ --------------------- ----------
<S> <C> <C>
Paul A. Nussbaum............................. 593,001(2) 3.7%
John H. Daniels.............................. 93,522(3) *
Thomas W. Lattin............................. 158,250(4) 1.0
Rex E. Stewart............................... 125,187(5) *
Leslie Ng.................................... 86,875(6) *
G. Terry Huntzicker.......................... 8,000(7) *
Michael Murphy............................... 12,500(8) *
Leonard Boxer................................ 10,480(3) *
John C. Deterding............................ 10,480(3) *
Gregory R. Dillon............................ 10,480(3) *
Thomas S. Foley.............................. 10,480(3) *
Arch K. Jacobson............................. 11,480(3) *
Executive officers and directors as a group
(12 persons)................................ 1,130,735 6.8%
Karim Alibhai................................ 725,145(9) 4.5%
One Westchase Center
10777 Westheimer, Suite 1000
Houston, Texas 77042
Cohen & Steers Capital Management, Inc. ..... 1,111,600(10) 7.2%
757 Third Avenue
New York, New York 10017
</TABLE>
- --------
* Less than 1%.
(1) Assumes that all OP Units held by each person are redeemed for shares of
Common Stock. The total number of shares outstanding used in calculating
the percentage assumes that none of the OP Units held by other persons are
redeemed for shares of Common Stock. Also assumes that all vested and
unvested options to purchase shares of Common Stock are exercised. The
total number of shares outstanding used in calculating the percentage
assumes that no other vested or unvested options held by other persons are
exercised.
(2) Includes options to purchase 325,000 shares of Common Stock issued to Mr.
Nussbaum of which 73,614 are currently exercisable. The number of shares
beneficially owned by Mr. Nussbaum also includes 12,286 OP Units owned by
trusts for the benefit of Mr. Nussbaum's sons. Mr. Nussbaum disclaims
beneficial ownership as to all such OP Units. The number of shares also
includes 15,370 OP Units owned by current and former executives of Patriot
American through a limited partnership of which an affiliate of Mr.
Nussbaum serves as the general partner. Mr. Nussbaum also disclaims
beneficial ownership of these OP Units.
(3) Includes 480 shares of Common Stock and options to purchase 10,000 shares
of Common Stock issued to each non-employee director which are currently
exercisable.
(4) Includes options to purchase 127,000 shares of Common Stock issued to Mr.
Lattin, of which 23,614 are currently exercisable.
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(5) Includes options to purchase 105,000 shares of Common Stock issued to Mr.
Stewart, of which 18,610 are currently exercisable.
(6) Includes options to purchase 77,500 shares of Common Stock issued to Mr.
Ng, of which 11,946 are currently exercisable.
(7) Consists of options to purchase 8,000 shares of Common Stock issued to Mr.
Huntzicker, none of which are currently exercisable.
(8) Consists of options to purchase 12,500 shares of Common Stock issued to
Mr. Murphy, none of which are currently exercisable.
(9) The number of shares beneficially owned by Mr. Alibhai includes an
aggregate of 210,577 OP Units beneficially owned by Gencom Interests, a
family corporation for which he serves as Vice President and of which he
owns 30% of the outstanding capital stock. Mr. Alibhai disclaims beneficial
ownership of these OP Units, except to the extent of his 30% ownership
interest in such corporation. The number of shares also includes 19,375 OP
Units owned by employees of Gencom through a limited partnership of which
Mr. Alibhai serves as the general partner. Mr. Alibhai also disclaims
beneficial ownership of these OP Units.
(10) Beneficial ownership information is based on the Schedule 13G filed by
Cohen & Steers Capital Management, Inc. on February 5, 1996.
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DESCRIPTION OF CAPITAL STOCK
Under its Articles of Incorporation, the Company has the authority to issue
200,000,000 shares of Common Stock and 20,000,000 shares of preferred stock,
no par value (the "Preferred Shares"). No Preferred Shares are outstanding or
will be outstanding immediately after consummation of the Offering.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share on
all matters voted on by shareholders, including elections of directors. Except
as otherwise required by law or provided in any resolution adopted by the
Board of Directors with respect to any series of Preferred Shares, the holders
of such shares exclusively possess all voting power. The Articles of
Incorporation do not provide for cumulative voting in the election of
directors. Subject to any preferential rights of any outstanding series of
Preferred Shares, the holders of shares of Common Stock are entitled to such
dividends as may be declared from time to time by the Board of Directors from
funds available therefor, and upon liquidation will be entitled to receive pro
rata all assets of the Company available for distribution to such holders. All
shares of Common Stock issued in the Offering will be fully paid and
nonassessable, and the holders thereof will not have preemptive rights.
PREFERRED SHARES
The Board of Directors is authorized to provide for the issuance of shares
of Preferred Shares in one or more series, to establish the number of shares
in each series and to fix the designation, powers, preferences and rights of
each such series and the qualifications, limitations or restrictions thereof.
Because the Board of Directors has the power to establish the preferences and
rights of each class or series of Preferred Shares, the Board of Directors may
afford the holders of any series or class of Preferred Shares preferences,
powers and rights, voting or otherwise, senior to the rights of holders of
shares of Common Stock. The issuance of Preferred Shares could have the effect
of delaying or preventing a change in control of the Company.
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of the Company's outstanding
shares of capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the
last half of a taxable year, and the Company must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of twelve months or
during a proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations--Requirements for Qualification." In addition, the Company must
meet certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75% of the Company's
gross income for each year must consist of rents from real property and income
from certain other real property investments. The rents received by the
Operating Partnership and the Subsidiary Partnerships from the Lessees will
not qualify as rents from real property, which could result in loss of REIT
status for the Company, if the Company owns, actually or constructively, 10%
or more of the ownership interests in any Lessee, within the meaning of
section 856(d)(2)(B) of the Code. See "Federal Income Tax Considerations--
Requirements for Qualification--Income Tests."
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Articles of Incorporation, subject to
certain exceptions described below, provides pursuant to the Ownership
Limitation that no person may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.8% of either (i) the
outstanding shares of any class of Common Stock or (ii) the outstanding
Preferred Shares of any class or series of Preferred Shares (subject to the
Look-Through Ownership Limitation applicable to certain shareholders, as
described below). Any transfer of Common Stock or Preferred Shares that
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would (i) result in any person owning, directly or indirectly, Common Stock or
Preferred Shares in excess of the Ownership Limitation, (ii) result in Common
Stock and Preferred Shares being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (iii) result in the Company
being "closely held" within the meaning of section 856(h) of the Code, or (iv)
cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's, the Operating Partnership's
or a Subsidiary Partnership's real property, within the meaning of section
856(d)(2)(B) of the Code, will be null and void, and the intended transferee
will acquire no rights in such shares of Common Stock or Preferred Shares.
Certain types of entities, such as pension trusts qualifying under section
401(a) of the Code, mutual funds qualifying as regulated investment companies
under section 851 of the Code, and corporations, will be looked through for
purposes of the "closely held" test in section 856(h) of the Code. The
Articles of Incorporation allow such an entity under the Look-Through
Ownership Limitation to own up to 15% of the shares of any class or series of
the Company's capital stock, provided that such ownership does not cause any
beneficial owner of such entity to exceed the Ownership Limitation or
otherwise result in a violation of the tests described in clauses (ii), (iii)
and (iv) of the preceding paragraph.
Subject to certain exceptions described below, any purported transfer of
Common Stock or Preferred Shares that would (i) result in any person owning,
directly or indirectly, shares of Common Stock or Preferred Shares in excess
of the Ownership Limitation (or the Look-Through Ownership Limitation, if
applicable), (ii) result in the shares of Common Stock and Preferred Shares
being owned by fewer than 100 persons (determined without reference to any
rules of attribution), (iii) result in the Company being "closely held" within
the meaning of section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a tenant
of the Company's, the Operating Partnership's or a Subsidiary Partnership's
real property, within the meaning of section 856(d)(2)(B) of the Code, will be
designated as "Shares-in-Trust" and will be transferred automatically to a
trust (a "Trust"), effective on the day before the purported transfer of such
shares of Common Stock or Preferred Shares. The record holder of the Common
Stock or Preferred Shares that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of shares of Common
Stock or Preferred Shares to the Company for registration in the name of the
trustee of the Trust (the "Trustee"). The Trustee will be designated by the
Company, but will not be affiliated with the Company. The beneficiary of the
Trust (the "Beneficiary") will be one or more charitable organizations named
by the Company.
Shares-in-Trust will remain issued and outstanding shares of Common Stock or
Preferred Shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires
such Shares-in-Trust without such acquisition resulting in another transfer to
another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. Any vote taken by a Prohibited Owner prior to the Company's
discovery that the Shares-in-Trust were held in trust will be rescinded as
void ab initio. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the
shares of Common Stock or Preferred Shares that were designated as Shares-in-
Trust (or, in the case of a gift or devise, the Market Price (as defined
below) per share on the date of such transfer) or (ii) the price per share
received by the Trustee from the sale of such Shares-in-Trust. Any amounts
received by the Trustee in excess of the amounts to be paid to the Prohibited
Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in
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the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust or (ii) the date the
Company determines in good faith that a transfer resulting in such Shares-in-
Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NYSE or, if the shares of Common Stock or Preferred Shares are
not listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the shares of Common Stock
or Preferred Shares are listed or admitted to trading or, if the shares of
Common Stock or Preferred Shares are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if the shares of
Common Stock or Preferred Shares are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the shares of Common Stock or Preferred Shares
selected by the Board of Directors. "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
or Preferred Shares are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock or Preferred Shares
are not listed or admitted to trading on any national securities exchange,
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
Any person who acquires or attempts to acquire Common Stock or Preferred
Shares in violation of the foregoing restrictions, or any person who owned
shares of Common Stock or Preferred Shares that were transferred to a Trust,
will be required (i) to give immediately written notice to the Company of such
event and (ii) to provide to the Company such other information as the Company
may request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock and Preferred Shares must, within 30 days
after January 1 of each year, provide to the Company a written statement or
affidavit stating (i) the name and address of such direct or indirect owner,
(ii) the number of shares of Common Stock and Preferred Shares owned directly
or indirectly, and (iii) a description of how such shares are held. In
addition, each direct or indirect shareholder shall provide to the Company
such additional information as the Company may request in order to determine
the effect, if any, of such ownership on the Company's status as a REIT and to
ensure compliance with the Ownership Limitation.
The Ownership Limitation generally does not apply to the acquisition of
shares of Common Stock or Preferred Shares by an underwriter that participates
in a public offering of such shares. In addition, the Board of Directors, upon
such conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The foregoing
restrictions will continue to apply until the Board of Directors determines
that it is no longer in the best interests of the Company to attempt to
qualify, or to continue to qualify, as a REIT.
All certificates representing shares of Common Stock bear a legend referring
to the restrictions described above. All additional certificates representing
shares of Common Stock or Preferred Shares will bear substantially the same
legend.
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The ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might receive a premium from their shares of Common Stock over
the then prevailing market price or which such holders might believe to be
otherwise in their best interest.
Number of Directors; Removal; Filling Vacancies
The Articles of Incorporation and Bylaws provide that the number of
directors will consist of not less than three nor more than 15 persons, as
determined by the affirmative vote of a majority of the members of the entire
Board of Directors. At all times a majority of the directors shall be
Independent Directors, except that upon the death, removal or resignation of
an Independent Director, such requirement shall not be applicable for 60 days.
Presently there are seven directors, five of whom are Independent Directors.
The shareholders are entitled to vote on the election or removal of directors,
with each share entitled to one vote. The Bylaws provide that, unless the
Board of Directors otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum. The Articles of Incorporation provide that directors may be removed
only by the affirmative vote of the holders of at least 75% of the outstanding
stock of the Company then entitled to vote on the election of the directors at
a special meeting of the shareholders called for such purpose. This provision,
when coupled with the provision of the Bylaws authorizing the Board of
Directors to fill vacant directorships, could temporarily prevent any
shareholder from enlarging the Board of Directors and filling the new
directorships with such shareholder's own nominees. Any directors so elected
shall hold office until the next annual meeting of shareholders.
Special Meetings
Although the VSCA does not give shareholders the right to call a special
meeting of shareholders, the Articles of Incorporation provide that such a
meeting may be called by the written request of shareholders holding 25% of
the outstanding shares of Common Stock.
Limitation of Liability
Pursuant to the VSCA, each director of the Company is required to discharge
his duties in accordance with his good faith business judgment of the best
interest of the Company. In addition, Virginia law provides that a transaction
with the Company in which a director or officer of the Company has a direct or
indirect interest is not voidable by the Company solely because of the
director's or officer's interest in the transaction if (i) the material facts
of the transaction and the director's interest are disclosed to or known by
the directors and the transaction is authorized, approved or ratified by the
disinterested directors, (ii) the material facts of the transaction and the
director's interest are disclosed to or known by the shareholders entitled to
vote and the transaction is authorized, approved or ratified by the
shareholders, or (iii) the transaction is established to have been fair to the
Company.
The Articles of Incorporation and the VSCA contain provisions which require
the Company to indemnify an officer or director against liability incurred in
any proceeding to which he is a party because he is an officer or director if
(i) he conducted himself in good faith, (ii) he believed (A) in the case of
conduct in his official capacity with the Company, that his conduct was in its
best interests, or (B) in all other cases, that his conduct was at least not
opposed to its best interests, and (iii) in the case of any criminal
proceeding, he had no reasonable cause to believe that his conduct was
unlawful.
The Articles of Incorporation of the Company also contain a provision which
eliminates the liability of a director or officer to the Company or its
shareholders for monetary damages for any breach of duty as a director or
officer. This provision does not eliminate such liability to the extent that
the director or officer engaged in willful misconduct or a knowing violation
of criminal law or of any federal or state securities law.
Unless a determination has been made that indemnification is not
permissible, the Articles of Incorporation also permit the Company to make
advances to and reimburse an officer or director for expenses prior to final
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disposition of the proceeding, upon receipt of a written undertaking from the
director or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he is not entitled to indemnification. The Board of
Directors of the Company also has the authority to extend to any person who is
an employee or agent of the Company, or who is or was serving at the request
of the Company as a director, officer, employee or agent of another entity,
the same indemnification rights possessed by directors and officers, subject
to all of the accompanying conditions and obligations.
The VSCA permits a court, upon application of a director or officer, to
review the Company's determination as to a director's or officer's request for
advances, reimbursement or indemnification. If the court determines that the
director or officer is entitled to such advances, reimbursement or
indemnification, the court may order the Company to make advances and/or
reimbursement for expenses or to provide indemnification.
The Company has purchased and maintains insurance on behalf of all of its
directors and executive officers against liability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.
Amendment
The Articles of Incorporation may be amended by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock, with the
shareholders voting as a class with one vote per share. The Company's Bylaws
may be amended by the Board of Directors or by vote of the holders of a
majority of the outstanding shares of Common Stock.
Operations
The Company is prohibited from acquiring or holding property or engaging in
any activity that would cause the Company to fail to qualify as a REIT.
BUSINESS COMBINATIONS
The VSCA contains provisions restricting "Affiliated Transactions." These
provisions, with several exceptions discussed below, require approval of
Affiliated Transactions (as defined below) between a Virginia corporation and
an Interested Shareholder by an affirmative vote of (A) a majority of the
Disinterested Directors (as defined below) and (B) holders of at least two-
thirds of the voting shares other than shares beneficially owned by the
Interested Shareholder. An Interested Shareholder is any (i) beneficial owner
of more than 10% of any class of its outstanding voting shares or (ii) an
affiliate or associate of the corporation that at any time within the
preceding three years has been an Interested Shareholder of the corporation.
Affiliated Transactions subject to this approval requirement include, without
limitation, (1) mergers and share exchanges with an Interested Shareholder,
(2) dispositions of material corporate assets to or with an Interested
Shareholder not in the ordinary course of business, (3) any guaranty by the
corporation of a material amount of the indebtedness of any Interested
Shareholder not in the ordinary course of business, (4) dispositions to an
Interested Shareholder of a material amount of voting shares of the
corporation except pursuant to a share dividend or the exercise of rights
distributed on a basis affording substantially proportionate treatment to all
holders of the same class or series of voting shares, (5) a dissolution of the
corporation proposed by or on behalf of an Interested Shareholder, or (6) any
reclassification, including, reverse stock split, recapitalization or merger
of the corporation with its subsidiaries which increases the percentage of
voting shares owned beneficially by an Interested Shareholder by more than 5%.
A Disinterested Director means, with respect to a particular Interested
Shareholder, a member of the corporation's board of directors who was (A) a
member on the date on which an Interested Shareholder became an Interested
Shareholder and (B) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the Disinterested
Directors then on the Board. The statute requires that an Affiliated
Transaction with an Interested Shareholder occurring three years or more after
the Interested Shareholder becomes an Interested Shareholder must be approved
by the affirmative vote of (1) the holders of two-thirds of the voting shares
other than those beneficially owned by the Interested Shareholder or (2) a
majority of the Disinterested Directors.
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The special voting requirements do not apply to Affiliated Transactions
proposed after the three year period has expired if the transaction satisfies
the fair-price requirements of the statute. In general, the fair-price
requirement provides that in a two-step acquisition transaction, the
Interested Shareholder must pay the shareholders in the second step either the
same amount of cash or the same amount and type of consideration paid to
acquire the Virginia corporation's shares in the first step.
None of the foregoing limitations and special voting requirements applies to
a transaction with an Interested Shareholder (i) whose acquisition of shares
making such person an Interested Shareholder was approved by a majority of the
Virginia corporation's Disinterested Directors, (ii) who was an Interested
Shareholder on the date the Company became subject to these provisions by
virtue of its having 300 shareholders of record, (iii) who became an
interested Shareholder as a result of acquiring shares by gift, testamentary
bequest or the laws of descent and distribution or (iv) generally, who became
an Interested Shareholder inadvertently.
These provisions may have the effect of deterring certain takeovers of
Virginia corporations. In addition, the statute provides that, by affirmative
vote of a majority of the voting shares other than shares owned by an
Interested Shareholder, a corporation can adopt an amendment to its Articles
of Incorporation or Bylaws providing that the Affiliated Transactions
provisions shall not apply to the corporation.
CONTROL SHARE ACQUISITIONS
The VSCA also provides that shares acquired in a transaction that would
cause the acquiring person's voting strength to cross any of three thresholds
(20%, 33% or 50%) have no voting rights unless granted by a majority vote of
shares not owned by the acquiring person or any officer or employee-director
of the Company. An acquiring person may require the Company to hold a special
meeting of shareholders to consider the matter within 50 days of its receipt
of the request by such acquiring person to hold such meeting. The Articles of
Incorporation contain a provision exempting any and all acquisitions of the
Company's shares of capital stock from the foregoing provisions of the VSCA.
There can be no assurance that this provision will not be amended or
eliminated in the future.
OTHER MATTERS
The Common Stock is listed on the NYSE, under the symbol "PAH." The transfer
agent and registrar for the Common Stock is American Stock Transfer & Trust
Company.
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POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflict of interest and certain other activities. The
policies with respect to these activities have been determined by the Board of
Directors of the Company and may be amended or revised from time to time at
the discretion of the Board of Directors without a vote of the shareholders of
the Company, except that (i) changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements and (ii)
certain policies with respect to competition are imposed pursuant to contracts
that cannot be amended without the consent of all parties thereto.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate
In addition to the Hotels, the Company intends to acquire equity interests
in hotels and related properties throughout the United States and, on a
limited basis, elsewhere in North America. Additional acquisitions could be
made directly or by the Operating Partnership or other entities controlled by
the Company, if any exist. The Company's investment objective is to maximize
its Cash Available for Distribution and enhance shareholder value by acquiring
additional hotels that meet one or more of the Company's investment criteria,
by participating in increased revenue from the Hotels and any subsequently
acquired hotels through participating leases, and, under appropriate
circumstances, by developing selected additional hotels.
Although the Company presently anticipates that additional investments in
hotel properties will be made through the Operating Partnership, additional
investments may be made directly by the Company or other entities controlled
by the Company, if any exist. Such investments may be financed, in whole or in
part, with excess cash flow, borrowings or subsequent issuances of shares of
Common Stock or other securities issued by the Company or entities controlled
by the Company.
Development of Hotel Properties
Although management of the Company currently believes acquisitions of
existing hotel properties provide the best opportunities for growth, the
Company intends to evaluate from time to time, and may undertake, attractive
opportunities to develop new hotels or expand existing hotels. Management
believes it has the capability and the expertise to develop successful hotel,
resort and conference center properties.
Investments in Other Entities
The Company also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness that may have
priority over the equity interest of the Company.
Investments in Real Estate Mortgages and Securities of Other Issuers
While the Company emphasizes equity real estate investments, it may, in its
discretion, invest in mortgage and other real estate interests, including
securities of REITs and other issuers. The Company currently has no limit on
the amount or percentage of assets represented by one investment or investment
type. The Company does not presently intend to invest in securities of REITs
or other issuers. The Company also does not presently intend to trade or
underwrite securities or to make investments for the purpose of exercising
control over other issuers. The Company may invest in participating or
convertible mortgages if it concludes that by doing so it may benefit from the
cash flow or any appreciation in the value of the subject property. Such
mortgages are similar to equity participations, because they permit the lender
to either participate in increasing revenues from the property or convert some
or all of the mortgage to equity.
FINANCING
The Company intends to make additional investments in hotel properties and
may incur indebtedness to make such investments or to meet the distribution
requirements imposed by the REIT provisions of the Code, to the extent that
cash flow from the Company's investments and working capital is insufficient.
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To ensure that the Company has sufficient liquidity to conduct its
operations, including making investments in additional hotel properties and
funding its anticipated distribution obligations and financing costs, the
Company has access to the Line of Credit. Borrowings under the Line of Credit
have been utilized to purchase the Recent Acquisitions, and additional funds
may be used to acquire additional properties. The Company may seek to arrange
other borrowings to fund investments in additional hotel properties or for
other purposes. 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. The
Line of Credit will be secured by qualifying subsequently acquired properties
that are purchased with borrowings under the Line of Credit. The Company
intends to limit its consolidated indebtedness to an amount no more than 40%
of the Company's total market capitalization.
Borrowings may be incurred through the Operating Partnership or the Company.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Operating Partnership may be in the form of
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments, financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Operating
Partnership. Such indebtedness may be recourse to all or any part of the
property of the Company or the Operating Partnership, or may be limited to the
particular property to which the indebtedness relates. The proceeds from any
borrowings by the Company or the Operating Partnership may be used for the
payment of distributions or dividends, working capital, to refinance existing
indebtedness or to finance acquisitions, expansions, additions or renovations
of hotel properties. See "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements."
If the Board of Directors determines to raise additional equity capital, the
Board will have the authority, without shareholder approval, to issue
additional shares of Common Stock or Preferred Shares in any manner (and on
such terms and for such consideration) as it deems appropriate, including in
exchange for property. Existing shareholders have no preemptive right to
purchase shares issued in any such offering, and any such offering might cause
a dilution of a shareholder's investment in the Company.
The Company may make investments other than as previously described,
although it does not currently intend to do so.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain agreements
designed to minimize potential conflicts of interest. The Company's Board of
Directors is subject to certain provisions of Virginia law, which are designed
to eliminate or minimize certain potential conflicts of interest. However,
there can be no assurance that these policies always will be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
shareholders.
Articles of Incorporation and Bylaw Provisions
The Company's Articles of Incorporation, with limited exceptions, require
that a majority of the Company's Board of Directors be comprised of persons
who are not officers or employees of the Company, affiliates of officers or
employees of the Company or affiliates of any advisor to the Company under an
advisory agreement, any lessee or contract manager of any property of the
Company, any of its subsidiaries, or any partnership which is an affiliate of
the Company (each such person, an "Independent Director"). The Articles of
Incorporation provide that such provisions relating to Independent Directors
may not be amended, altered, changed or repealed without the affirmative vote
of all of the Independent Directors or the affirmative vote of the holders of
not less than 75% of the outstanding shares of capital stock of the Company
entitled to vote. In addition, the Company's Bylaws provide that any action
pertaining to any transaction (a) involving the Company must be approved by a
majority of the directors and (b) in which the Company is purchasing, selling,
leasing or mortgaging any real
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estate asset, making a joint venture investment or engaging in any other
transaction in which an advisor, director or officer of the Company, any
affiliated lessee or affiliated contract manager of any property of the
Company or any affiliate of the foregoing, has any direct or indirect
interest, must be approved by the affirmative vote of a majority of the
Independent Directors.
The Operating Partnership
A conflict of interest may arise between the Company, as a general and
limited partner of the Operating Partnership, and the other Limited Partners
of the Operating Partnership, which may include affiliates of Patriot
American, due to the differing potential tax liability to the Company and the
other Limited Partners from the sale of Hotels to the Operating Partnership
resulting from the differing tax bases of the Company and such affiliates in
such properties. In an effort to address this and other potential conflicts of
interest, the Company's Bylaws provide that the Company's decisions with
respect to the sale of a Hotel purchased from an affiliate of Patriot American
must be made by the Independent Directors. The Partnership Agreement gives PAH
GP, as general partner of the Operating Partnership, full, complete and
exclusive discretion in managing and controlling the business of the Operating
Partnership and in making all decisions affecting the business and assets of
the Operating Partnership.
Provisions of Virginia Law
Pursuant to Virginia law, each director is subject to restrictions relating
to misappropriation of corporate opportunities for himself or his affiliates
which such director learned of solely as a result of his service as a member
of the Board of Directors of the Company. In addition, Virginia law provides
that a transaction with the Company in which a director or officer of the
Company has a direct or indirect interest is not voidable by the Company
solely because of the director's or officer's interest in the transaction if
(i) the material facts of the transaction and the director's interest are
disclosed to or known by the directors and the transaction is approved,
authorized or ratified by the disinterested directors, (ii) the material facts
of the transaction and the director's interest are disclosed to or known by
the shareholders entitled to vote and the transaction is authorized, approved
or ratified by the shareholders, or (iii) the transaction is established to
have been fair to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer shares of capital stock or other
securities and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. As described under
"Shares Available for Future Sale," the Company may (but is not obligated to)
issue shares of Common Stock to holders of OP Units upon exercise of the
Redemption Rights (as defined below). The Company has not engaged in trading,
underwriting or agency distribution or sale of securities of other issuers,
nor has the Company invested in the securities of other issuers other than the
Operating Partnership for the purpose of exercising control. The Company has
made loans to third parties, including PAH Ravinia and the Lessees. In the
future the Company may make loans to third parties, including, without
limitation, to joint ventures in which it participates. The Company intends to
make investments in such a way that it will not be treated as an investment
company under the Investment Company Act of 1940, as amended.
At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code or in
final, temporary and currently proposed Treasury regulations promulgated under
the Code ("Treasury Regulations"), the Company's Board of Directors determines
that it is no longer in the best interests of the Company to qualify as a
REIT.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves in amounts that the Board
of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
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SHARES AVAILABLE FOR FUTURE SALE
At July 23, 1996, the Company had outstanding (or reserved for issuance upon
redemption or exchange of OP Units or pursuant to the 1995 Plan) 19,980,976
shares of Common Stock. In addition to OP Units issued to the Company, the
Operating Partnership had outstanding an aggregate of 3,502,328 OP Units. The
shares of Common Stock issued in the Initial Offering are freely tradeable by
persons, other than "Affiliates" of the Company, without restriction under the
Securities Act, subject to certain limitations on ownership set forth in the
Articles of Incorporation. See "Description of Capital Stock--Articles of
Incorporation and Bylaw Provisions--Restrictions on Transfer."
Pursuant to the Partnership Agreement, the Limited Partners, other than PAH
LP received rights (the "Redemption Rights") that enable them to cause the
Operating Partnership to redeem each OP Unit (other than the Preferred OP
Units) 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 may be
exercised (subject to the Lock-up Agreements), at any time after October 2,
1996. See "Partnership Agreement--Redemption Rights." Pursuant to the purchase
agreement for the Preferred OP Units, the holders of the Preferred OP Units
have the right to exchange their Preferred OP Units for shares of Common Stock
after three years from the date of issuance. See "Developments Since the
Initial Offering--Financing Activities."
With respect to the OP Units issued in connection with the Formation
Transactions and in connection with the acquisition of the Holiday Inn Lenox,
the Company only has the right to elect to purchase such OP Units offered for
redemption for shares of Common Stock pursuant to an effective registration
statement with respect to the issuance of such shares. The Company has agreed
to register shares of Common Stock issuable upon the redemption of OP Units
issued in connection with the acquisitions of the WestCoast Portfolio and the
Wyndham Greenspoint Hotel or the exchange of Preferred OP Units issued in
connection with the Private Placement. The Company may agree with future
sellers of hotel properties to register shares of Common Stock issuable upon
the redemption of OP Units or the conversion of securities convertible into
shares of Common Stock.
The Company has reserved an aggregate of 1,000,000 shares of Common Stock
for issuance under the 1995 Plan. The Company intends to file a registration
statement on Form S-8 with respect to the shares of Common Stock issuable
under the 1995 Plan and the shares of Common Stock issuable under the
Directors' Plan. Shares of Common Stock issued after the effective date of any
such registration statement on Form S-8 upon the exercise of options granted
under the 1995 Plan will be available for sale in the public market without
restriction to the extent that they are held by persons who are not affiliates
of the Company and, to the extent that they are held by affiliates, pursuant
to Rule 144 under the Securities Act, without observance of the holding period
requirement.
The Company's Common Stock trades on the NYSE under the Symbol "PAH". No
prediction can be made as to the effect, if any, that the Offering, or future
sales of shares, or the availability of shares for future sale, will have on
the market price prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, may affect
adversely prevailing market prices of the Common Stock. See "Risk Factors--
Market for Common Stock" and "Partnership Agreement--Transferability of
Interests."
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
MANAGEMENT
The Operating Partnership has been organized as a Virginia limited
partnership pursuant to the terms of the Partnership Agreement. Pursuant to
the Partnership Agreement, PAH GP, a wholly owned subsidiary of the Company,
as the sole general partner of the Operating Partnership (the "General
Partner"), has full, exclusive and complete responsibility and discretion in
the management and control of the Operating Partnership, and the Limited
Partners in their capacity as such have no authority to transact business for,
or participate in the management activities or decisions of, the Operating
Partnership. However, any amendment to the Partnership Agreement that would
(i) affect the Redemption Rights, (ii) adversely affect the Limited Partners'
rights to receive cash distributions, (iii) alter the Operating Partnership's
allocations of income and loss or (iv) impose on the Limited Partners any
obligations to make additional contributions to the capital of the Operating
Partnership, requires the consent of Limited Partners other than PAH LP
holding more than 50% of the OP Units held by such Limited Partners.
TRANSFERABILITY OF INTERESTS
PAH GP and PAH LP may not voluntarily withdraw from the Operating
Partnership or transfer or assign their interests in the Operating Partnership
unless the transaction in which such withdrawal or transfer occurs results in
the Limited Partners' (other than PAH LP) receiving property in an amount
equal to the amount they would have received had they exercised their
Redemption Rights immediately prior to such transaction, or unless the
successors to PAH GP and PAH LP contribute substantially all of their assets
to the Operating Partnership in return for an interest in the Operating
Partnership. A person may not be admitted as a substitute or successor General
Partner unless a majority-in-interest of the Limited Partners (other than PAH
LP) consent in writing to the admission of such substitute or successor
General Partner, which consent may be withheld in the sole discretion of such
Limited Partners. With certain limited exceptions, the Limited Partners may
not transfer their interests in the Operating Partnership, in whole or in
part, without the written consent of the General Partner, which consent may be
withheld in the sole discretion of the General Partner.
CAPITAL CONTRIBUTION
The Company, through PAH GP and PAH LP, contributed to the Operating
Partnership substantially all of the net proceeds of the Initial Offering, in
consideration of which PAH GP received a 1.0% general partnership interest and
PAH LP received approximately a 83.6% limited partnership interest in the
Operating Partnership. The Partnership Agreement provides that if the
Operating Partnership requires additional funds at any time or from time to
time in excess of funds available to the Operating Partnership from borrowing
or capital contributions, the Company may borrow such funds from a financial
institution or other lender and lend such funds to the Operating Partnership
on the same terms and conditions as are applicable to the Company's borrowing
of such funds. Under the Partnership Agreement, the Company generally is
obligated to contribute, through PAH GP and PAH LP, the proceeds of a share
offering as additional capital to the Operating Partnership. Moreover, the
Company is authorized, through PAH GP and PAH LP, to cause the Operating
Partnership to issue partnership interests for less than fair market value if
the Company has concluded in good faith that such issuance is in the best
interests of the Company and the Operating Partnership. If the Company so
contributes additional capital to the Operating Partnership, PAH GP and PAH LP
will receive additional OP Units and their percentage interests in the
Operating Partnership will be increased on a proportionate basis based upon
the amount of the additional capital contribution and the value of the
Operating Partnership at the time of such contribution. Conversely, the
percentage interests of the Limited Partners, other than PAH LP, will be
decreased on a proportionate basis upon the contribution of additional capital
by the Company.
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REDEMPTION RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners, other than PAH
LP, received the Redemption Rights, which enable them to cause the Operating
Partnership to redeem each OP Unit 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 may not be exercised, however, if and to the extent that the delivery
of Common Stock upon exercise of such rights (regardless of whether the
Company would exercise its rights to deliver Common Stock) would (i) result in
any person owning, directly or indirectly, shares of Common Stock in excess of
the Ownership Limitation (or the Look-Through Ownership Limitation, if
applicable), (ii) result in shares of capital stock of the Company being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, 10% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of shares of Common Stock by such redeeming Limited Partner to
be "integrated" with any other distribution of shares of Common Stock for
purposes of complying with the Securities Act. The Redemption Rights may be
exercised (subject to the Lock-up Agreements), at any time after October 2,
1996, provided that not more than two redemptions by any Unitholder may occur
during each calendar year, and each Limited Partner may not exercise the
Redemption Right in respect of less than 1,000 OP Units or, if such Limited
Partner holds less than 1,000 OP Units, all of the OP Units held by such
Limited Partner. Prior to October 2, 1996, the Redemption Right may be
exercised (but only for cash) by a lender to whom any OP Units may have been
pledged, provided that such pledge was permissible in light of the Lock-up
Agreements. In the future, it may become necessary to place additional
restrictions on the exercise of Redemption Rights in order to assure that the
Operating Partnership does not become a "publicly traded partnership" that is
treated as a corporation for federal income tax purposes. See "Federal Income
Tax Considerations--Tax Aspects of the Operating Partnership and the
Subsidiary Partnerships." The aggregate number of shares of Common Stock
issuable upon exercise of the Redemption Rights is 2,839,937. The number of
shares of Common Stock issuable upon exercise of the Redemption Rights will be
adjusted upon the occurrence of share splits, mergers, consolidations or
similar pro rata share transactions, which otherwise would have the effect of
diluting the ownership interests of the Limited Partners or the shareholders
of the Company. See "Shares Available for Future Sale."
REGISTRATION RIGHTS
For a description of the Company's obligation to register shares of its
Common Stock, see "Shares Available for Future Sale."
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that enables the Company to satisfy the requirements for
being classified as a REIT, to avoid any federal income or excise tax
liability imposed under the Code and to ensure that the Operating Partnership
will not be classified as a "publicly traded partnership" for purposes of
section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership pays all
administrative costs and expenses of the Company, PAH GP and PAH LP (the
"Company Expenses") and the Company Expenses are treated as expenses of the
Operating Partnership. The Company Expenses generally include (i) all expenses
relating to the formation and continuity of existence of the Company, PAH GP
and PAH LP, (ii) all expenses relating to the public offering and registration
of securities by the Company, (iii) all expenses associated with the
preparation and filing of any periodic reports by the Company under federal,
state or local laws or regulations, (iv) all expenses associated with
compliance by the Company, PAH GP and PAH LP with laws, rules and regulations
promulgated by any regulatory body and (v) all other operating or
administrative costs of PAH GP incurred in the ordinary course of its business
on behalf of the Operating Partnership. The Company Expenses, however, do not
include any administrative and operating
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costs and expenses incurred by the Company that are attributable to hotel
properties or partnership interests in a Subsidiary Partnership that are owned
by the Company directly. The Company currently does not own any hotels
directly.
DISTRIBUTIONS AND ALLOCATIONS
The Partnership Agreement provides that the Operating Partnership distribute
cash from operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the Operating Partnership's property
in connection with the liquidation of the Operating Partnership) on a
quarterly (or, at the election of the General Partner, more frequent) basis,
in amounts determined by the General Partner in its sole discretion, to the
partners in accordance with their respective percentage interests in the
Operating Partnership. Upon liquidation of the Operating Partnership, after
payment of, or adequate provision for, debts and obligations of the Operating
Partnership, including any partner loans, any remaining assets of the
Operating Partnership will be distributed to all partners with positive
capital accounts in accordance with their respective positive capital account
balances. If the General Partner has a negative balance in its capital account
following a liquidation of the Operating Partnership, it will be obligated to
contribute cash to the Operating Partnership equal to the negative balance in
its capital account.
Profit and loss of the Operating Partnership for each fiscal year of the
Operating Partnership is generally allocated among the partners in accordance
with their respective interests in the Operating Partnership. Taxable income
and loss will be allocated in the same manner, subject to compliance with the
provisions of Code sections 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2050, or until
sooner dissolved upon the (i) bankruptcy, dissolution or withdrawal of the
General Partner (unless the Limited Partners elect to continue the Operating
Partnership), (ii) sale or other disposition of all or substantially all the
assets of the Operating Partnership, (iii) redemption of all limited
partnership interests in the Operating Partnership (other than those held by
PAH LP), or (iv) election by the General Partner.
TAX MATTERS
Pursuant to the Partnership Agreement, the General Partner is the tax
matters partner of the Operating Partnership and, as such, has authority to
handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
PREFERRED OP UNITS
In connection with the Private Placement, the Operating Partnership issued
662,391 Preferred OP Units. The Preferred OP Units pay distributions equal to
103% of the current annual dividend paid on the outstanding Common Stock,
subject to increase or decrease by the dollar amount of any increase or
decrease in the dividend paid on the Common Stock. In addition, if, for any
taxable year of the Operating Partnership ending on or before December 31,
1998, that portion of the Preferred OP Units holder's distributive share of
Operating Partnership taxable income which consists of "unrelated business
taxable income" as defined in section 512(a)(1) of the Code exceeds twenty
percent (the "UBTI Threshold") (any such excess, the "Excess UBTI") then the
Preferred OP Unit holder will be entitled to an additional distribution from
the Operating Partnership with respect to such taxable year equal to the
product of (i) the Excess UBTI multiplied by (ii) the federal tax rate
applicable to the Excess UBTI. Prior to the third anniversary of issuance, the
Preferred OP Units generally will not be convertible into Common Stock, except
under certain limited circumstances. On or after the third anniversary of
issuance, the holders may exchange their Preferred OP Units for shares of
Common Stock on a one-for-one basis, subject to adjustment and to an ownership
limitation of 4.9% of all outstanding Common Stock. After the tenth
anniversary of issuance, the Company may exchange the Preferred OP Units for
shares of Common Stock. The foregoing exchange rights are in lieu of the
conversion rights in the Partnership Agreement, which are not applicable to
the Preferred OP Units, with the exception of the anti-dilution provisions.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Stock. Goodwin,
Procter & Hoar llp has acted as counsel to the Company and has reviewed this
summary and is of the opinion that it fairly summarizes the federal income tax
consequences that are likely to be material to a holder of the Common Stock.
The discussion does not address all aspects of taxation that may be relevant
to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Goodwin, Procter & Hoar
llp are based on current provisions of the Code, Treasury Regulations, the
legislative history of the Code, existing administrative rulings and practices
of the Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company will make an election to be taxed as a REIT under sections 856
through 860 of the Code. The Company believes that it is organized and
operates in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that the Company will operate in a manner so as to
qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
In the opinion of Goodwin, Procter & Hoar llp, commencing with the taxable
year ending December 31, 1995, the Company has been organized and operated in
conformity with the requirements for qualification and taxation as a REIT
under the Code, and the Company's proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation as a REIT
under the Code. Investors should be aware, however, that opinions of counsel
are not binding upon the Service or any court. It must be emphasized that
Goodwin, Procter & Hoar llp's opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters, including representations regarding the nature of the Company's
properties, the Participating Leases, and the future conduct of the Company's
business. Moreover, such qualification and taxation as a REIT depends upon the
Company's ability to meet on a continuing basis, through actual annual
operating results, the distribution levels, stock ownership, and other various
qualification tests imposed under the Code discussed below. Goodwin, Procter &
Hoar llp will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual
results
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of the Company's operation for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify
as a REIT, see "Federal Income Tax Considerations--Failure to Qualify."
As a REIT, the Company generally is not subject to federal corporate income
tax on its net income that is distributed currently to its shareholders. That
treatment substantially eliminates the "double taxation" of income (i.e.,
taxation at both the corporate and shareholder levels) that generally results
from investment in a corporation. However, the Company will be subject to
federal income tax in the following circumstances. First, the Company will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" that is held primarily for
sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held
primarily for sale to customers in the ordinary course of business), such
income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), and has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate-level tax) in a transaction in which the basis of the asset
in the Company's hands is determined by reference to the basis of the asset
(or any other asset) in the hands of the C corporation and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then to
the extent of such asset's "built-in gain" (i.e., the excess of the fair
market value of such asset at the time of acquisition by the Company over the
adjusted basis in such asset at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in Treasury
Regulations that have not yet been promulgated). The results described above
with respect to the recognition of "built-in gain" assume that the Company
would make an election pursuant to IRS Notice 88-19 if it were to make any
such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding capital stock of which is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of each taxable year
(the "5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and to maintain REIT status; (viii) that uses a calendar
year for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. The Company
believes that it has issued sufficient Common Stock with sufficient diversity
of ownership to allow it to satisfy requirements (v) and (vi). In addition,
the Company's Articles of Incorporation provide for restrictions regarding
transfer of the Common Stock that are intended to assist the
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Company in continuing to satisfy the share ownership requirements described in
(v) and (vi) above. Such transfer
restrictions are described in "Description of Capital Stock--Articles of
Incorporation and Bylaw Provisions-- Restrictions on Transfer."
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or
a portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares
of a REIT in proportion to their actuarial interests in the pension trust for
purposes of the 5/50 Rule.
The Company has two wholly-owned subsidiary corporations, PAH GP and PAH LP.
The Company also may have additional corporate subsidiaries in the future.
Code section 856(i) provides that a corporation that is a "qualified REIT
subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a "qualified REIT
subsidiary" shall be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at
all times during the period such corporation was in existence. Thus, in
applying the requirements described herein, the Company's "qualified REIT
subsidiaries" are ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiaries are treated as assets, liabilities
and items of income, deduction, and credit of the Company. PAH GP and PAH LP
have been formed as "qualified REIT subsidiaries."
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share (based on the REIT's interest in partnership capital) of the assets of
the partnership and will be deemed to be entitled to the gross income of the
partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in
the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests, described below. Thus, the
Company's proportionate share of the assets, liabilities and items of income
of the Operating Partnership and the Subsidiary Partnerships are treated as
assets and gross income of the Company for purposes of applying the
requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
three requirements relating to the Company's gross income that must be
satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or
temporary investment income. Second, at least 95% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property or temporary investments, and
from dividends, other types of interest, and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. Third, not
more that 30% of the Company's gross income (including gross income from
prohibited transactions) for each taxable year may be gain from the sale or
other disposition of (i) stock or securities held for less than one year, (ii)
dealer property that is not foreclosure property and not otherwise eligible
for a regulatory safe harbor, and (iii) certain real property held for less
than four years (apart from involuntary conversions and sales of foreclosure
property). The specific application of these tests to the Company is discussed
below.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person; provided, however,
that an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the Company, or an owner of 10% or more
of the Company, directly or constructively owns 10% or more of such tenant (a
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"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are
not otherwise considered "rendered to the occupant."
Pursuant to the Participating Leases, the Lessees lease from the Operating
Partnership or a Subsidiary Partnership the land, buildings, improvements,
furnishings, and equipment comprising the Hotels (except for the Crowne Plaza
Ravinia Hotel), for periods ranging from 10 to 12 years. The Participating
Leases provide that the Lessees will be obligated to pay to the Operating
Partnership or a Subsidiary Partnership (i) the greater of Base Rent or
Participating Rent (collectively, the "Rents") and (ii) Additional Charges or
other expenses as defined in the Participating Lease Agreements. Participating
Rent is calculated by multiplying fixed percentages by various revenue
categories for each of the Hotels. Both Base Rent and the thresholds in the
Participating Rent formulas will be adjusted for inflation (with the exception
of the hotels in the WestCoast Portfolio for which Base Rent increases as
specified in the NorthCoast Participating Leases). Base Rent accrues and is
required to be paid monthly. Participating Rent is payable monthly, with
monthly adjustments based on actual results.
In order for Base Rent, Participating Rent, and Additional Charges to
constitute "rents from real property," the Participating Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Participating Leases are true leases depends on
an analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement,
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required simply to use its best efforts
to perform its obligations under the agreement), and (iv) the extent to which
the property owner retains the risk of loss with respect to the property
(e.g., whether the lessee bears the risk of increases in operating expenses or
the risk of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property. In addition, Code section 7701(e)
provides that a contract that purports to be a service contract (or a
partnership agreement) is treated instead as a lease of property if the
contract is properly treated as such, taking into account all relevant
factors, including whether or not: (i) the service recipient is in physical
possession of the property, (ii) the service recipient controls the property,
(iii) the service recipient has a significant economic or possessory interest
in the property (e.g., the property's use is likely to be dedicated to the
service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in
value, the recipient shares in any appreciation in the value of the property,
the recipient shares in savings in the property's operating costs, or the
recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts
or substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient,
and (vi) the total contract price does not substantially exceed the rental
value of the property for the contract period. Since the determination whether
a service contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive in every case.
The Company believes, however, that the Participating Leases are properly
treated as true leases for federal income tax purposes.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Participating Leases that discuss whether
such leases constitute true leases for federal income tax purposes. Therefore,
there can be no complete assurance that the Service will not assert
successfully a contrary position. If the Participating Leases are
recharacterized as
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service contracts or partnership agreements, rather than true leases, part or
all of the payments that the Operating Partnership and the Subsidiary
Partnerships receive from the Lessees would not be considered rent or would
not otherwise satisfy the various requirements for qualification as "rents
from real property." In that case, the
Company likely would not be able to satisfy either the 75% or 95% gross income
tests and, as a result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Participating Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in a Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). If a portion of the Rents from a particular hotel
property does not qualify as "rents from real property" because the amount
attributable to personal property exceeds 15% of the total Rents for a taxable
year, the portion of the Rents that is attributable to personal property will
not be qualifying income for purposes of either the 75% or 95% gross income
tests. Thus, if such Rents attributable to personal property, plus any other
nonqualifying income, during a taxable year exceed 5% of the Company's gross
income during the year, the Company would lose its REIT status. With respect
to each Hotel (or interest therein) that the Operating Partnership acquires in
exchange for OP Units, the initial adjusted bases of both the real and
personal property comprising such Hotel generally will be the same as the
adjusted bases of such property in the hands of the previous owner. With
respect to each Hotel (or interest therein) that the Operating Partnership
acquires for cash, the aggregate initial adjusted bases of the real and
personal property comprising such Hotel generally will equal the cash
consideration paid and such bases generally will be allocated among real and
personal property based on relative fair market values. With respect to each
Hotel, the Company believes that the Adjusted Basis Ratio for the Hotel is
less than 15% or that any nonqualifying income attributable to excess personal
property will not jeopardize the Company's ability to qualify as a REIT. The
Participating Leases provide that the Adjusted Basis Ratio for each Hotel
shall not exceed 15%. The Participating Leases further provide that the
Lessees will cooperate in good faith and use their best efforts to prevent the
Adjusted Basis Ratio for any Hotel from exceeding 15%, which cooperation may
include the purchase by Lessee at fair market value of enough personal
property at such Hotel so that the Adjusted Basis Ratio for such Hotel is less
than 15%. Finally, amounts in the Company's reserve for capital expenditures
may not be expended to acquire additional personal property for a Hotel to the
extent that such acquisition would cause the Adjusted Basis Ratio for that
Hotel to exceed 15%. There can be no assurance, however, that the Service
would not challenge the Company's calculation of an Adjusted Basis Ratio, or
that a court would not uphold such assertion. If such a challenge were
successfully asserted, the Company could fail to satisfy the 95% or 75% gross
income test and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Participating Rent must not be based in whole or in part
on the income or profits of any person. The Participating Rent, however, will
qualify as "rents from real property" if it is based on percentages of
receipts or sales and the percentages (i) are fixed at the time the
Participating Leases are entered into, (ii) are not renegotiated during the
term of the Participating Leases in a manner that has the effect of basing
Participating Rent on income or profits, and (iii) conform with normal
business practice. More generally, the Participating Rent will not qualify as
"rents from real property" if, considering the Participating Leases and all
the surrounding circumstances, the arrangement does not conform with normal
business practice, but is in reality used as a means of basing the
Participating Rent on income or profits. Since the Participating Rent is based
on fixed percentages of the gross revenues from the Hotels that are
established in the Participating Leases, and the Company has represented that
the percentages (i) will not be renegotiated during the terms of the
Participating Leases in a manner that has the effect of basing the
Participating Rent on income or profits and (ii) conform with normal business
practice, the Participating Rent should not be considered based in whole or in
part on the income or profits of any person. Furthermore, the Company has
represented that, with respect to other hotel properties that it acquires in
the future, it will not charge rent for any property that is based in whole or
in part on the income or profits of any person (except by reason of being
based on a fixed percentage of gross revenues, as described above).
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A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of any Lessee. The constructive ownership rules generally provide that,
if 10% or more in value of the stock of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the
stock owned, directly or indirectly, by or for such person. The
Company initially will not own any stock of the Lessees. The Limited Partners
of the Operating Partnership may acquire Common Stock (at the Company's
option) by exercising their Redemption Rights. The Partnership Agreement,
however, provides that a redeeming limited partner may not exercise its
Redemption Right if and to the extent, the delivery of Common Stock upon the
exercise of such rights would cause the Company to own, actually or
constructively, 10% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. The Articles
of Incorporation likewise prohibit a shareholder of the Company from owning
Common Stock or Preferred Shares that would cause the Company to own, actually
or constructively, 10% or more of the ownership interests in a tenant of the
Company's, the Operating Partnership's or a Subsidiary Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. Thus, the
Company should never own, actually or constructively, 10% of more of a Lessee.
Furthermore, the Company has represented that, with respect to other hotel
properties that it acquires in the future, it will not rent any property to a
Related Party Tenant. However, because the Code's constructive ownership rules
for purposes of the Related Party Tenant rules are broad and it is not
possible to monitor continually direct and indirect transfers of Common Stock,
no absolute assurance can be given that such transfers or other events of
which the Company has no knowledge will not cause the Company to own
constructively 10% or more of the Initial Lessee at some future date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services
to the tenants of the Hotels, or manage or operate the Hotels, other than
through an independent contractor who is adequately compensated and from whom
the Company itself does not derive or receive any income. Provided that the
Participating Leases are respected as true leases, the Company should satisfy
that requirement, because the Operating Partnership or a Subsidiary
Partnership, as applicable, is not performing any services other than
customary ones for the Lessees. Furthermore, the Company has represented that,
with respect to other hotel properties that it acquires in the future, it will
not perform noncustomary services with respect to the tenant of the property.
If the Rents from a particular hotel property do not qualify as "rents from
real property" because either (i) the Participating Rent is considered based
on income or profits of a Lessee, (ii) the Company owns, actually or
constructively, 10% or more of a Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor, none of the
Rents from that hotel property would qualify as "rents from real property." In
that case, the Company likely would lose its REIT status because it would be
unable to satisfy either the 75% or 95% gross income tests.
In addition to the Rents, the Lessees are required to pay to the Operating
Partnership or a Subsidiary Partnership, as applicable, Additional Charges. To
the extent that Additional Charges represent either (i) reimbursements of
amounts that the Lessor is obligated to pay to third parties or (ii) penalties
for nonpayment or late payment of such amounts, Additional Charges should
qualify as "rents from real property." To the extent that Additional Charges
represent interest that is accrued on the late payment of the Rents or
Additional Charges, such Additional Charges may qualify as "rents from real
property." To the extent such Additional Charges representing interest are not
treated as "rents from real property," they should be treated as interest that
qualifies for the 95% gross income test.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Furthermore, to the extent that interest from a
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loan that is based on the residual cash proceeds from sale of the property
securing the loan constitutes a "shared appreciation provision" (as defined in
the Code), income attributable to such participation feature will be treated
as gain from the sale of the secured property.
Any gross income derived from a prohibited transaction is taken into account
in applying the 30% income test necessary to qualify as a REIT (and the net
income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition (whether by the
Company, the Operating Partnership or a Subsidiary Partnership) of property
(other than foreclosure property) that is held primarily for sale to customers
in the ordinary course of a trade or business. All inventory required in the
operation of the Hotels will be owned by the Lessees under the terms of the
Participating Leases. Accordingly, the Company believes no asset owned by the
Company, the Operating Partnership or a Subsidiary Partnership is held for
sale to customers and that a sale of any such asset will not be in the
ordinary course of business of the Company, the Operating Partnership or a
Subsidiary Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company will attempt to
comply with the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the safe-
harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the
ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real
property) and any personal property incident to such real property (i) that is
acquired by a REIT as the result of such REIT having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was a default (or
default was imminent) on a lease of such property or on an indebtedness that
such property secured and (ii) for which such REIT makes a proper election to
treat such property as foreclosure property. However, a REIT will not be
considered to have foreclosed on a property where such REIT takes control of
the property as a mortgagee-in-possession and cannot receive any profit or
sustain any loss except as a creditor of the mortgagor. Under the Code,
property generally ceases to be foreclosure property with respect to a REIT on
the date that is two years after the date such REIT acquired such property (or
longer if an extension is granted by the Secretary of the Treasury). The
foregoing grace period is terminated and foreclosure property ceases to be
foreclosure property on the first day (i) on which a lease is entered into
with respect to such property that, by its terms, will give rise to income
that does not qualify under the 75% gross income test or any amount is
received or accrued, directly or indirectly, pursuant to a lease entered into
on or after such day that will give rise to income that does not qualify under
the 75% gross income test, (ii) on which any construction takes place on such
property (other than completion of a building, or any other improvement, where
more than 10% of the construction of such building or other improvement was
completed before default became imminent), or (iii) which is more than 90 days
after the day on which such property was acquired by the REIT and the property
is used in a trade or business which is conducted by the REIT (other than
through an independent contractor from whom the REIT itself does not derive or
receive any income). As a result of the rules with respect to foreclosure
property, if a Lessee defaults on its obligations under a Participating Lease
for a Hotel, the Company terminates the Lessee's leasehold interest, and the
Company is unable to find a replacement lessee for such Hotel within 90 days
of such foreclosure, gross income from hotel operations conducted by the
Company from such Hotel would cease to qualify for the 75% and 95% gross
income tests unless the Company employs an independent contractor to manage
the Hotel. In such event, the Company likely would be unable to satisfy the
75% and 95% gross income tests and, thus, would fail to qualify as a REIT.
It is possible that, from time to time, the Company, the Operating
Partnership or a Subsidiary Partnership will enter into hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor
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contracts, futures or forward contracts, and options. To the extent that the
Company, the Operating Partnership or a Subsidiary Partnership enters into an
interest rate swap or cap contract to hedge any variable rate indebtedness
incurred to acquire or carry real estate assets, any periodic income or gain
from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. Furthermore, any such contract would
be considered a "security" for purposes of applying the 30% gross income test.
To the extent that the Company, Operating Partnership or a Subsidiary
Partnership hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those
transactions will be treated for purposes of the various income tests that
apply to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT. If the
Company fails to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, it may nevertheless qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. Those relief
provisions will be generally available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed
with respect to the net income attributable to the excess of 75% or 95% of the
Company's gross income over its qualifying income in the relevant category,
whichever is greater. No such relief is available for violations of the 30%
income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," including, in cases where the Company raises new capital through
stock or long-term (at least five-year) debt offerings, temporary investments
in stock or debt instruments during the one-year period following the
Company's receipt of such capital. The term "real estate assets" includes
interests in real property, interests in mortgages on real property to the
extent the mortgage balance does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset
requirement, the term "interest in real property" includes an interest in land
and improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings
or structures), a leasehold in real property, and an option to acquire real
property (or a leasehold in real property). Second, of the investments not
included in the 75% asset class, the value of any one issuer's securities
owned by the Company may not exceed 5% of the value of the Company's total
assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities (except for its ownership interest in the
Operating Partnership, a Subsidiary Partnership, the stock of PAH GP and PAH
LP, or the stock of any other corporate subsidiary with respect to which it
has held 100% of the stock at all times during the subsidiary's existence).
For purposes of the asset requirements, the Company is deemed to own its
proportionate share of the assets of the Operating Partnership and each
Subsidiary Partnership, rather than its partnership interests in the Operating
Partnership and each Subsidiary Partnership. The Company believes that, as of
the date of the Offering, (i) at least 75% of the value of its total assets
are represented by real estate assets, cash and cash items (including
receivables), and government securities and (ii) it does not own any
securities that do not satisfy the 75% asset requirement. In addition, the
Company does not intend to acquire or dispose, or cause the Operating
Partnership or a Subsidiary Partnership to acquire or dispose, of assets in
the future in a way that would cause it to violate either asset requirement.
If the Company should fail to satisfy the asset requirements at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition
of any particular asset or was not wholly or partly caused by such an
acquisition (i.e., the discrepancy arose from changes in the market values of
its assets). If the
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condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax thereon at regular ordinary and capital gains corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% nondeductible excise tax on the excess of such required distribution
over the amounts actually distributed. The Company intends to make timely
distributions sufficient to satisfy all annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. In addition, the Company
may incur expenditures (such as repayment of loan principal) that do not give
rise to a deduction. Therefore, the Company may have less cash available for
distribution than is necessary to meet its annual 95% distribution requirement
or to avoid corporate income tax or the excise tax imposed on certain
undistributed income. In such a situation, the Company may find it necessary
to arrange for short-term (or possibly long-term) borrowings or to raise funds
through the issuance of additional shares of common or preferred stock.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, in order to be able to elect to
be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding capital stock. The Company intends to
comply with such requirements.
Partnership Anti-Abuse Rule
The U.S. Department of the Treasury recently issued a final regulation (the
"Anti-Abuse Rule"), under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain abusive
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in
connection with a transaction (or series of related transactions) with a
principal purpose of substantially reducing the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of
the
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Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business
(including investment) activities though a flexible arrangement that
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring any entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all
of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the
claimed tax benefits resulting from the transaction. A reduction in the
present value of the partners' aggregate federal tax liability through the use
of a partnership does not, by itself, establish inconsistency with the intent
of the Partnership Provisions. The Anti-Abuse Rule is effective for all
transactions relating to a partnership occurring on and after May 12, 1994.
The Anti-Abuse Rule contains an example in which a corporation that elects to
be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners
have the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption.
The example concludes that the use of the partnership is not inconsistent with
the intent of the Partnership Provisions and, thus, cannot be recast by the
Service. However, the Redemption Rights do not conform in all respects to the
redemption rights contained in the foregoing example. Moreover, the Anti-Abuse
Rule is extraordinarily broad in scope and is applied based on an analysis of
all of the facts and circumstances. As a result, there can be no assurance
that the Service will not attempt to apply the Anti-Abuse Rule to the Company.
If the conditions of the Anti-Abuse Rule are met, the Service is authorized to
take appropriate enforcement action, including disregarding the Operating
Partnership for federal tax purposes or treating one or more of the partners
as nonpartners. Any such action potentially could jeopardize the Company's
status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company
also will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock that
for U.S. federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) an estate or trust the income of which is
subject to U.S. federal income taxation regardless of its source.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
the shareholder has held his Common Stock. However, corporate shareholders may
be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Common Stock, but rather will
reduce
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the adjusted basis of such stock. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted
basis of a shareholder's Common Stock, such distributions will be included in
income as long-term capital gain (or short-term capital gain if the Common
Stock has been held for one year or less) assuming the Common Stock is a
capital asset in the hands of the shareholder. In addition, any distribution
declared by the Company in October, November, or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and
received by the shareholder on December 31 of such year, provided that the
distribution is actually paid by the Company during January of the following
calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the shareholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such) will be treated as investment income only if
the shareholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify shareholders after the close of
the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital,
and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Stock has been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Stock by a shareholder who
has held such stock for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other Common Stock is
purchased within 30 days before or after the disposition.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the Service the amount
of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company.
The Service issued proposed regulations in April 1996 regarding the backup
withholding rules. These proposed regulations would alter the current system
of backup withholding compliance. See "Federal Income Tax Considerations--
Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their UBTI. While many investments in real estate generate UBTI, amounts
distributed by
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the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of Common Stock
with debt, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17), and (20), respectively, of Code section
501(c) are subject to different UBTI rules, which generally will require them
to characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the
Company's stock is required to treat a percentage of the dividends from the
Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross
income derived by the Company from an unrelated trade or business (determined
as if the Company were a pension trust) divided by the gross income of the
Company for the year in which the dividends are paid. The UBTI rule applies to
a pension trust holding more than 10% of the Company's stock only if (i) the
UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason
of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding stock of the Company in proportion to
their actuarial interests in the pension trust, and (iii) either (A) one
pension trust owns more than 25% of the value of the Company's stock or (B) a
group of pension trusts individually holding more than 10% of the value of the
Company's stock collectively own more than 50% of the value of the Company's
stock.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no
attempt has been made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current
or accumulated earnings and profits of the Company. Such distributions
ordinarily will be subject to a withholding tax equal to 30% of the gross
amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common
Stock is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will
be subject to federal income tax at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such distributions (and also may
be subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder
that is a non-U.S. corporation). The Company expects to withhold U.S. income
tax at the rate of 30% on the gross amount of any such distributions made to a
Non-U.S. Shareholder unless (i) a lower treaty rate applies and any required
form evidencing eligibility for that reduced rate is filed with the Company or
(ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming
that the distribution is effectively connected income. The Service issued
proposed regulations in April 1996 that would modify the manner in which the
Company complies with the withholding requirement.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's shares of Common
Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares of Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings
and profits, the entire amount of any
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distribution normally will be subject to withholding at the same rate as a
dividend. However, a Non-U.S. Shareholder can file a claim for refund with the
Service for the overwithheld amount to the extent it is determined
subsequently that a distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Shareholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits
tax in the hands of a non-U.S. corporate shareholder not entitled to treaty
relief or exemption. The Company is required to withhold 35% of any
distribution that is designated by the Company as a capital gains dividend.
The amount withheld is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock
was held directly or indirectly by non-U.S. persons. The Company believes that
it is a "domestically controlled REIT," and, therefore, sales of shares of
Common Stock are not subject to taxation under FIRPTA. However, because the
shares of Common Stock are traded publicly, no complete assurance can be given
that the Company is actually a "domestically controlled REIT" and no assurance
can be given that the Company will continue to be a "domestically controlled
REIT." Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the Common Stock is effectively connected
with the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-
U.S. Shareholder will be subject to the same treatment as U.S. shareholders
with respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident
alien individual who was present in the United States for 183 days or more
during the taxable year and certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of Common Stock were to be subject to
taxation under FIRPTA, the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals, and the possible application of the 30%
branch profits tax in the case of non-U.S. corporations).
NON-U.S. SHAREHOLDERS SHOULD BE AWARE THAT LEGISLATIVE PROPOSALS HAVE BEEN
MADE THAT WOULD HAVE SUBJECTED NON-U.S. PERSONS TO U.S. TAX IN CERTAIN
CIRCUMSTANCES ON THEIR GAINS FROM THE SALE OF STOCK IN U.S. CORPORATIONS.
THERE CAN BE NO ASSURANCE THAT A SIMILAR PROPOSAL WILL NOT BE ENACTED INTO LAW
IN A FORM DETRIMENTAL TO FOREIGN HOLDERS OF THE COMMON STOCK.
STATE AND LOCAL TAXES
The Company, PAH GP, PAH LP, the Operating Partnership, a Subsidiary
Partnership or the Company's shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The state tax
treatment of the Company and the shareholders in such jurisdictions may differ
from the federal income tax treatment described above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws upon and investment in the
Common Stock.
In particular, the State of Texas imposes a franchise tax upon corporations
that do business in Texas. The Company is organized as a Virginia corporation
and has an office in the State of Texas. PAH LP is organized as
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a Virginia corporation and has no contacts with the State of Texas other than
ownership of its limited partnership interest in the Operating Partnership.
The Operating Partnership is registered in the State of Texas as a foreign
limited partnership qualified to transact business in Texas.
The Texas franchise tax is imposed on a corporation doing business in Texas
with respect to the corporation's "taxable capital" (generally, financial
accounting net worth, with certain adjustments) and its "taxable earned
surplus" (generally, a corporation's federal taxable income, with certain
adjustments) apportioned to the State of Texas. The franchise tax on "net
taxable capital" ("taxable capital" apportioned to Texas) is imposed at the
rate of 0.25% of a corporation's net taxable capital. The franchise tax rate
on "net taxable earned surplus" ("taxable earned surplus" apportioned to
Texas) is 4.5%. The Texas franchise tax is generally equal to the greater of
the tax on "net taxable capital" and the tax on "net taxable earned surplus."
The Texas franchise tax is not applied on a consolidated group basis. Any
Texas franchise tax that the Company, PAH GP or PAH LP is required to pay will
reduce the Cash Available for Distribution by the Company to its shareholders.
A corporation's "taxable capital" and "taxable earned surplus" are
apportioned to Texas based on a fraction, the numerator of which is the
corporation's gross receipts from business done in Texas, and the denominator
of which is the corporation's gross receipts from its entire business. For
purposes of determining the source of gross receipts, dividends and interest
received by a corporation are generally allocated to the domicile of the
debtor or payor. Thus, interest and dividends received by a corporation from
another corporation will not be treated as gross receipts from business done
in Texas unless the payor is incorporated in Texas (although dividends
received from another member of a consolidated group are not taken into
account as a gross receipt or earned surplus for purposes of computing the
franchise tax on net taxable earned surplus). Distributions received from a
partnership by a corporation that is a partner in the partnership will be
included in a corporation's gross receipts for purposes of apportioning the
corporation's "taxable capital" and "taxable earned surplus" to Texas. For
calculating the tax on net taxable capital, receipts reflecting the
corporation's share of net profits from a partnership are apportioned to Texas
if the partnership's principal place of business (the location of its day-to-
day operations) is in Texas; however, if the corporation's share of the gross
receipts from the partnership is treated as revenue of the corporation under
generally accepted accounting principles, then the receipts of the partnership
are apportioned based on normal apportionment rules as if the receipts were
received directly by the corporation. This method is not allowed for
corporations using the federal income tax method. For purposes of the tax on
net earned surplus, receipts are apportioned as though the corporation
directly received the payment.
The office of the Texas State Comptroller of Public Accounts (the
"Comptroller"), the agency that administers the Texas franchise tax, has
issued a regulation providing that a corporation is not considered to be doing
business in Texas for Texas franchise tax purposes merely because the
corporation owns an interest as a limited partner in a limited partnership
that does business in Texas. The same regulation provides, however, that a
corporation is considered to be doing business in Texas if it owns an interest
as a general partner in a partnership that does business in Texas. This
regulation applies only for purposes of the net taxable capital component of
the Texas franchise tax. The Comptroller has not issued a similar regulation
with regard to the net taxable earned surplus component. The Comptroller also
has expressed informally its view that a corporation is not considered to be
doing business in Texas for Texas franchise tax purposes merely because the
corporation owns stock in another corporation that does business in Texas.
In accordance with these pronouncements by the Comptroller, PAH GP is
treated as doing business in Texas because it is the general partner of the
Operating Partnership and the Operating Partnership does business in Texas.
Accordingly, PAH GP is subject to the Texas franchise tax. The Company is
treated as doing business in Texas because it has an office in Texas.
Accordingly, the Company is subject to the Texas franchise tax. However, the
Company's only source of gross receipts for Texas franchise tax purposes is
dividends from its two wholly-owned Virginia subsidiaries, PAH GP and PAH LP.
Since dividends are sourced to the state of domicile of the distributing
corporation for gross receipts apportionment purposes (or are eliminated for
purposes of apportioning taxable earned surplus since they would be paid by an
affiliate) the Company does not anticipate that any significant portion of its
"taxable capital" or "taxable earned surplus" will be apportioned to Texas.
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As a result, the Company's Texas franchise tax liability should not be
substantial. Further, based on the pronouncements by the Comptroller, PAH LP
will not be treated as doing business in Texas merely as a result of its
status as a limited partner of the Operating Partnership. As long as PAH LP is
not otherwise doing business in Texas, PAH LP will not be subject to the Texas
franchise tax.
There can be no assurance that the Comptroller will agree that PAH LP is not
doing business in Texas for Texas franchise tax purposes. First, the
Comptroller could revoke the pronouncements described above and contend that
the activities of PAH LP constitute the doing of business in Texas. Second, it
is not clear whether the Comptroller considers these pronouncements equally
applicable to tax on net taxable earned surplus. Third, the Comptroller could
contend that (i) some activity of PAH LP other than its ownership of a limited
partnership interest in the Operating Partnership will constitute the doing of
business in Texas, despite the avoidance of contacts with the State of Texas,
or (ii) in light of the overall structure of the Company, PAH LP and PAH GP,
the pronouncements otherwise are inapplicable.
The Operating Partnership and the Subsidiary Partnerships are not subject to
the Texas franchise tax under the laws in existence at the time of this
Prospectus. There can be no assurance, however, that the Texas legislature,
which will not meet again in regular session until 1997, will not in the
future expand the scope of the Texas franchise tax to apply to limited
partnerships such as the Operating Partnership or a Subsidiary Partnership.
Gardere & Wynne, L.L.P., special tax counsel to the Company ("Special Tax
Counsel"), has reviewed the discussion in this section with respect to Texas
franchise tax matters and is of the opinion that it accurately summarizes the
Texas franchise tax matters expressly described herein. Special Tax Counsel
expresses no opinion on any other tax considerations affecting the company or
a holder of Common Stock, including, but not limited to, other Texas franchise
tax matters not specifically discussed above.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in
the Operating Partnership and the Subsidiary Partnerships (each of the
Operating Partnership and the Subsidiary Partnerships is referred to herein as
a "Hotel Partnership"). The discussion does not cover state or local tax laws
or any federal tax laws other than income tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive share of
each Hotel Partnership's income and to deduct its distributive share of each
Hotel Partnership's losses only if each Hotel Partnership is classified for
federal income tax purposes as a partnership rather than as an association
taxable as a corporation. An organization formed as a partnership will be
treated as a partnership, rather than as a corporation, for federal income tax
purposes if it (i) has no more than two of the four corporate characteristics
that the Treasury Regulations use to distinguish a partnership from a
corporation for tax purposes and (ii) is not a "publicly traded" partnership.
Those four characteristics are continuity of life, centralization of
management, limited liability, and free transferability of interests. A
publicly traded partnership is a partnership whose interests are traded on an
established securities market or are readily tradable on a secondary market
(or the substantial equivalent thereof). A publicly traded partnership will
not be taxed as a corporation, however, if 90% or more of its gross income
consists of "qualifying income" under Section 7704(d) of the Code which
generally includes any income that is qualifying income for purposes of the
REIT 95% gross income test (including rents from real property).
In 1988, the Service issued a notice ("Notice 88-75") providing limited safe
harbors from the definition of a publicly traded partnership in advance of the
issuance of Treasury Regulations. Pursuant to one of those safe harbors (the
"Private Placement Exclusion"), interests in a partnership are not treated as
readily tradable on a secondary market or the substantial equivalent thereof
if (i) all of the partnership interests are issued in a transaction that is
not registered under the Securities Act of 1933, as amended, and (ii) the
partnership does not
have more than 500 partners (taking into account as a partner each person who
indirectly owns an interest in the partnership through a partnership, grantor
trust, or S corporation). Upon the closing of the Initial Offering, each Hotel
Partnership satisfied the Private Placement Exclusion.
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The U.S. Department of the Treasury recently issued final regulations (the
"PTP Regulations") that significantly modified the Private Placement
Exclusion. Under the PTP Regulations, the Private Placement Exclusion does not
apply if the partnership has more than 100 partners at any time during its
taxable year (taking into account as a partner each person who indirectly owns
an interest in the partnership through a partnership, grantor trust, or S
corporation, but only if (i) substantially all of the value of the indirect
owner's interest in the intermediate entity is attributable to the
intermediate entity's interest in the partnership and (ii) a principal purpose
of the tiered arrangement is to permit the partnership to satisfy the 100
partner limitation). According to their terms, the PTP Regulations will not
apply to partnerships operating before December 4, 1995 until the earlier of
January 1, 2006 or the date on which the partnership adds a "substantial new
line of business." Until that time, existing partnerships may rely on the
terms of Notice 88-75.
The Company believes that the Hotel Partnerships have satisfied and
currently satisfy the requirements of the Private Placement Exclusion under
both the terms of Notice 88-75 and the PTP Regulations. In addition, the
Company believes that it has operated and will continue to operate so that
more than 90% of the income for each Hotel Partnership is qualifying income
under section 7704(d) of the Code. Consequently, the Company believes that
none of the Hotel Partnerships will be treated as corporations under the
publicly traded partnership rules.
If for any reason one of the Hotel Partnerships were taxable as a
corporation, rather than as a partnership, for federal income tax purposes,
the Company would not be able to satisfy the income and asset requirements for
REIT status. See "Federal Income Tax Considerations-Requirements for
Qualification-Income Tests" and "--Requirements for Qualification--Asset
Tests." In addition, any change in a Hotel Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur a tax liability without any related cash distribution. See "Federal
Income Tax Considerations--Requirements for Qualification--Distribution
Requirements." Further, items of income and deduction of such Hotel
Partnership would not pass through to its partners, and its partners would be
treated as stockholders for tax purposes. Consequently, such Hotel Partnership
would be required to pay income tax at corporate tax rates on its net income,
and distributions to its partners would constitute dividends that would not be
deductible in computing such Hotel Partnership's taxable income.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is
required to take into account its allocable share of each Hotel Partnership's
income, gains, losses, deductions, and credits for any taxable year of such
Hotel Partnership ending within or with the taxable year of the Company,
without regard to whether the Company has received or will receive any
distribution from such Hotel Partnership.
Tax Allocations With Respect to Contributed Properties. Pursuant to section
704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal
income tax purposes in a manner such that the contributor is charged with, or
benefits from, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution. The
Department of the Treasury recently issued regulations requiring partnerships
to use a "reasonable method" for allocating items affected by section 704(c)
of the Code and outlining several reasonable allocation methods.
Under the partnership agreement for each Hotel Partnership (each a "Hotel
Partnership Agreement"), depreciation or amortization deductions of the Hotel
Partnership generally will be allocated among the partners in accordance with
their respective interests in the Hotel Partnership, except to the extent that
the Hotel Partnership is required under Code section 704(c) to use a method
for allocating tax depreciation deductions attributable to the Initial Hotels
or other contributed properties that results in the Company receiving a
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disproportionately large share of such deductions. In addition, gain on sale
of an Initial Hotel or of a Hotel purchased by a Hotel Partnership, in whole
or in part with interests in the Hotel Partnership will be specially allocated
to the Limited Partners who sold the Hotel to the extent of any "built-in"
gain with respect to such Hotel for federal income tax purposes. Depending on
the allocation method elected under Code section 704(c), it is possible that
the Company (i) may be allocated lower amounts of depreciation deductions for
tax purposes with respect to contributed Hotels than would be allocated to the
Company if such Hotels were to have a tax basis equal to their fair market
value at the time of contribution and (ii) may be allocated taxable gain in
the event of a sale of such Hotels in excess of the economic profit allocated
to the Company as a result of such sale. These allocations possibly could
cause the Company to recognize taxable income in excess of cash proceeds,
which might adversely affect the Company's ability to comply with the REIT
distribution requirements, although the Company does not anticipate that this
event will occur. The Board of Directors has adopted a policy that any
decision to sell a Hotel purchased from an affiliate of Patriot American will
be made by a majority of the Independent Directors. See "Risk Factors--
Conflicts of Interest--Sale of Hotels."
PAH RAVINIA
The Operating Partnership owns directly 100% of the nonvoting stock of PAH
Ravinia, and the Operating Partnership owns indirectly 4% of the voting common
stock of PAH Ravinia. Such stock represents in the aggregate a 99.04% economic
interest in PAH Ravinia. The Operating Partnership also holds a $36 million
first mortgage note on the Crowne Plaza Ravinia and $4.5 million second
mortgage note on such hotel. By virtue of its ownership of OP Units, the
Company is considered to own its pro rata share of such stock and mortgage
notes.
As noted above, for the Company to qualify as a REIT the Company's pro rata
share of the value of the equity and unsecured debt securities of PAH Ravinia
held by the Operating Partnership may not exceed 5% of the total value of the
Company's assets. In addition, the Company may not own more than 10% of the
voting securities of PAH Ravinia. The Company does not own (directly or
indirectly) 10% of the voting securities of PAH Ravinia. In addition, the
Company believes its pro rata share of the value of the equity securities of
PAH Ravinia does not exceed 5% of the total value of the Company's assets. The
Company also believes that the two mortgage notes on the Crowne Plaza Ravinia
held by the Operating Partnership (i) are properly treated as debt for tax
purposes and (ii) are secured by sufficient real property to qualify as "real
estate assets" exempt from the 5% limitation. If the Service were to
successfully challenge these determinations, however, the Company likely would
fail to qualify as a REIT.
PAH Ravinia will not qualify as a REIT and will pay federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
will reduce amounts available for distribution by PAH Ravinia, which in turn
will reduce amounts available for distribution to the Company's stockholders.
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UNDERWRITING
Subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters for whom PaineWebber
Incorporated, Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc., Goldman,
Sachs & Co., Montgomery Securities and Smith Barney Inc. are acting as
representatives of the Underwriters (the "Representatives") has severally
agreed to purchase from the Company, the respective number of shares of Common
Stock set forth opposite their respective names. Under the Underwriting
Agreement, the Underwriters are obligated to purchase all such shares of
Common Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK
------------
<S> <C>
PaineWebber Incorporated........................................... 687,500
Bear, Stearns & Co. Inc............................................ 687,500
Dean Witter Reynolds Inc........................................... 687,500
Goldman, Sachs & Co................................................ 687,500
Montgomery Securities.............................................. 687,500
Smith Barney Inc................................................... 687,500
Alex. Brown & Sons Incorporated.................................... 110,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 110,000
A. G. Edwards & Sons, Inc.......................................... 110,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 110,000
Oppenheimer & Co., Inc............................................. 110,000
Prudential Securities Incorporated................................. 110,000
Salomon Brothers Inc............................................... 110,000
Doft & Co., Inc.................................................... 55,000
Fahnestock & Co. Inc............................................... 55,000
First Equity Corporation of Florida................................ 55,000
Edward D. Jones & Co............................................... 55,000
Ladenburg, Thalmann & Co., Inc..................................... 55,000
McDonald & Company Securities, Inc................................. 55,000
Moors & Cabot, Inc................................................. 55,000
Pennsylvania Merchant Group, Ltd................................... 55,000
Muriel Siebert & Co., Inc.......................................... 55,000
Sutro & Co. Incorporated........................................... 55,000
Unterberg Harris................................................... 55,000
---------
Total.......................................................... 5,500,000
=========
</TABLE>
The Representatives have advised the Company that they propose to offer the
Common Stock to the public at the Offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not
in excess of $0.90 per share of Common Stock. The Underwriters may allow, and
such dealers may re-allow, a discount not in excess of $0.10 per share of
Common Stock on sales to certain other brokers and dealers. After the
Offering, the Offering price, concession and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to 825,000 additional
shares of Common Stock to cover over-allotments, if any, at the Offering
price, less the underwriting discount set forth on the cover page of this
Prospectus. If the Underwriters exercise this option, each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the Common
Stock initially offered hereby.
The Common Stock has not been qualified for sale under the securities laws
of Canada or any province or territory of Canada. The Common Stock is not
being offered for sale and may not be sold, directly or indirectly, in Canada,
or to any resident thereof, except pursuant to exemptions for qualification
under applicable Canadian federal or provincial law. The Underwriters will not
offer the Common Stock in Canada or to any Canadian resident except pursuant
to an exemption from the requirement to file a prospectus in any province of
Canada of which such offer is made.
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In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company has agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any shares of Common Stock, or any
securities convertible into, or exercisable, exchangeable or redeemable for,
shares of Common Stock for a period of 90 days from the date hereof, without
the prior consent of PaineWebber Incorporated.
The Underwriters do not intend to exercise discretion in confirming sales to
any account over which they otherwise have discretionary authority.
The Common Stock is traded on the NYSE under the symbol "PAH." In order to
maintain the requirements for listing the shares of Common Stock on the NYSE,
the Underwriters have undertaken to sell lots of 100 or more shares of Common
Stock.
In connection with the Initial Offering, the Company closed the Line of
Credit with Paine Webber Real Estate. In connection with the May, 1996
increase in the maximum amount available under the Line of Credit, the Company
paid Paine Webber Real Estate a fee in the amount of $350,000, and the Company
has agreed to pay Paine Webber Real Estate an additional fee in the amount of
$225,000 at such time as the aggregate principal amount outstanding under the
Line of Credit and the Greenspoint Loan exceeds $200,000,000.
In connection with the acquisition of the Wyndham Greenspoint Hotel, Paine
Webber Real Estate has extended the $22.0 million Greenspoint Loan and has
received a fee in the amount of $330,000.
EXPERTS
The Consolidated Financial Statements of Patriot American Hospitality, Inc.
as of December 31, 1995 and for the period October 2, 1995 (inception of
operations) through December 31, 1995 and the related financial statement
schedules included in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included elsewhere herein and in the Registration Statement.
The Combined Financial Statements of the Initial Hotels as of December 31,
1994 and for each of the years in the two-year period ended December 31, 1994
and the period January 1, 1995 through October 1, 1995, included in this
Prospectus and the Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included
elsewhere herein and in the Registration Statement, which is based in part on
the reports of Coopers & Lybrand L.L.P., independent accountants, as set forth
in their respective reports thereon for Certain of the Initial Hotels and Troy
Hotel Investors. The Financial Statements of Buckhead Hospitality Joint
Venture as of December 31, 1995 and for the year then ended and the related
financial statement schedule included in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included elsewhere herein and in the
Registration Statement. The Combined Financial Statements of Gateway Hotel
Limited Partnership and Wenatchee Hotel Limited Partnership as of December 31,
1995 and for the year then ended and the related financial statement schedule
included in this Prospectus and the Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included elsewhere herein and in the Registration Statement. The
individual Statements of Direct Revenue and Direct Operating Expenses for each
of the Plaza Park Suites Hotel, Roosevelt Hotel and Lexington Hyatt Regency
Hotel for the year ended December 31, 1995 included in this Prospectus and the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included elsewhere herein and
in the Registration Statement. Each of the above referenced financial
statements have been so included in reliance upon such reports given on their
authority as experts in accounting and auditing.
The CHC Lease Partners financial statements as of December 31, 1995 and for
the period inception (October 2, 1995) through December 31, 1995 included in
this Prospectus and the Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
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The Financial Statements of Troy Park Associates as of December 29, 1994 and
for the period January 1, 1994 through December 29, 1994 and the year ended
December 31, 1993, the Financial Statements of Newporter Beach Hotel
Investments L.L.C. as of December 31, 1995 and for the period from March 10,
1995 to December 31, 1995 and the Combined Financial Statements of the Wyndham
Portfolio Hotels as of December 31, 1994 and 1995 and for the years then
ended, included in this Prospectus and the Registration Statement have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their reports thereon included elsewhere herein and in the Registration
Statement. Such financial statements have been so included in reliance upon
such report given on their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar llp, Boston, Massachusetts, a
limited liability partnership including professional corporations. In
addition, the description of federal income tax consequences contained in the
section of the Prospectus entitled "Federal Income Tax Considerations" is
based on the opinion of Goodwin, Procter & Hoar llp, Boston, Massachusetts,
which will rely, as to all Texas franchise tax matters, upon the opinion of
Gardere & Wynne, L.L.P. Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas,
Texas and Washington, D.C. has advised the Company on certain real estate
matters. Thomas S. Foley, a director, is a partner in Akin, Gump, Strauss,
Hauer & Feld, L.L.P. The validity of the shares of Common Stock offered hereby
will be passed upon for the Underwriters by White & Case, New York, New York.
Goodwin, Procter & Hoar llp and White & Case will rely on Hunton & Williams,
Richmond, Virginia as to certain matters of Virginia law.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-11 (of which this Prospectus is a part) under
the Securities Act with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Securities and Exchange
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference and the exhibits and schedules hereto. For
further information regarding the Company and the shares of Common Stock
offered hereby, reference is hereby made to the Registration Statement and
such exhibits and schedules.
The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Securities and Exchange Commission (the
"Commission") can be inspected and copies obtained from the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following regional offices of the Commission: 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained by mail from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Company is required to file reports and other information with the
Commission pursuant to the Exchange Act, in addition to any other legal or
NYSE requirements. The Company furnishes its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year. The Company includes in such reports annual
audited and quarterly unaudited financial statements for the Lessees.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Additional Charges" means certain amounts of money, including interest
accrued on any late payments, that the Lessees are obligated to pay to the
Company in addition to Base Rent or Participating Rent, pursuant to the
Participating Leases.
"Adjusted Basis Ratio" means, for each Hotel, the ratio that the average of
the aggregate adjusted bases of both the real and personal property comprising
the Hotel bears at the beginning and at the end of a taxable year.
"ADR" means average daily room rate.
"ADS" means alternative depreciation system.
"Anti-Abuse Rule" means the proposed regulation issued by the United States
Treasury Department under the Partnership Provisions that would authorize the
Service, in certain "abusive" transactions involving partnerships, to
disregard the form of a transaction and recast it for federal tax purposes as
it deems appropriate.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the Company.
"Base Rent" means the fixed obligation of the Lessees to pay a sum certain
in monthly rent under each of the Participating Leases.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Amended and Restated Bylaws of the Company.
"Cash Available for Distribution" means funds from operations adjusted for
certain non-cash items, less reserves for capital expenditures.
"CHC" means CHC International, Inc., a Florida corporation, and its
subsidiaries.
"CHC Lease Partners" means CHC Lease Partners, a Delaware-based general
partnership owned by CHC and a principal of Gencom that leases the Initial
Hotels, the Tremont House Hotel, the Holiday Inn Lenox and the Del Mar Hilton.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the shares of common stock, no par value, of the
Company.
"Company" means Patriot American Hospitality, Inc., a Virginia corporation,
together with PAH GP, Inc., PAH LP, Inc. and Patriot American Hospitality
Partnership, L.P. and any subsidiaries thereof.
"Comptroller" means the office of the Texas State Comptroller of Public
Accounts.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 100).
"Directors' Plan" means the Patriot American Hospitality, Inc. Non-Employee
Directors' Incentive Plan.
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"Doubletree Hotels" means Doubletree Hotels Corporation, a Phoenix, Arizona-
based hotel management company, and a subsidiary of Doubletree Corporation.
"Doubletree Lessee" means DTR North Canton, Inc.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"F, F & E" means furniture, fixtures and equipment.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Formation Transactions" means the principal transactions in connection with
the formation of the Company and the acquisition of the Initial Hotels by the
Operating Partnership.
"Franchise Licenses" means those franchise licenses relating to the
franchised Hotels.
"Funds from operations" means 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 and joint ventures.
"GAH" means GAH-II, L.P. (doing business under the trade name Gencom
American Hospitality) and GAH REIT Management Company, L.P. and their
respective subsidiaries, which are hotel management affiliates of Gencom and
CHC.
"Gencom" means the Gencom group of companies.
"Gencom Interests" means Gencom Interests, Inc., a corporation owned by
Karim Alibhai and members of his family.
"General Partner" means PAH GP, as general partner of the Operating
Partnership.
"Hotel Partnership" means the Operating Partnership or any Subsidiary
Partnership.
"Hotels" means the hotels owned by the Company.
"Hyatt" means Hyatt Corporation.
"Independent Director" means a director of the Company who is not an officer
or employee of the Company, any affiliate of an officer or employee or any
affiliate of (i) any advisor to the Company under an advisory agreement, (ii)
any lessee of any property of the Company, (iii) any subsidiary of the Company
or (iv) any partnership which is an affiliate of the Company.
"Initial Hotels" means the 20 hotels acquired by the Company in the
Formation Transactions.
"Initial Offering" means the Company's initial public offering of 14,605,000
shares of Common Stock in October 1995.
"Lease Master Agreement" means the agreement between the Operating
Partnership and CHC Lease Partners which sets forth the terms of CHC Lease
Partners' required capitalization and certain other matters.
"Lessees" means the entities independent from the Company which lease the
Hotels from the Operating Partnership pursuant to the Participating Leases.
"Limited Partners" means the limited partners of the Operating Partnership.
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"LIBOR" means the London Interbank Offered Rate.
"Line of Credit" means the Company's line of credit facility with Paine
Webber Real Estate.
"Lock-up Periods" means the period of time ranging from one to two years
after the Initial Offering for which the officers and directors of the
Company, and certain other persons have agreed, subject to certain limited
exceptions, not to offer to sell, contract to sell or otherwise dispose of
Common Stock (or Securities convertible into shares of Common Stock) without
the prior written consent of PaineWebber Incorporated.
"Look-Through Ownership Limitation" means the ownership of more than 15% of
any class of the Company's outstanding capital stock by mutual funds and
certain other entities.
"Management Agreements" means generally the agreements between the Lessees
and the Operators providing for the management by such Operators of the
Hotels.
"Metro Hotels" means Metro Joint Venture, d/b/a Metro Hotels, a Dallas-based
hotel company that manages the Holiday Inn Select North Dallas and the Embassy
Suites, Hunt Valley.
"Metro Lease Partners" means Metro Hotels Leasing Corporation, a Dallas-
based hotel company that leases the Embassy Suites, Hunt Valley.
"Minimum Net Worth" means the minimum net worth that CHC Lease Partners is
required to maintain under the Lease Master Agreement.
"NAREIT" means National Association of Real Estate Investment Trusts, Inc.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
"NorthCoast" means NorthCoast Hotels L.L.C., a recently-formed company owned
by a consortium of investors including WestCoast Hotels and Sunmakers Travel
Group that leases the hotels in the WestCoast Portfolio and the Hyatt Regency,
Lexington from the Company.
"NorthCoast Master Agreement" means the agreement between the Operating
Partnership and NorthCoast which sets forth certain terms related to
NorthCoast's leasing of hotels from the Operating Partnership.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of the shares of Common Stock.
"OP Units" means units of limited partnership interest in the Operating
Partnership, including Preferred Units of limited partnership interest.
"Operating Partnership" means Patriot American Hospitality Partnership,
L.P., a limited partnership organized under the laws of the Commonwealth of
Virginia.
"Operators" means the hotel management entities that operate the Hotels
pursuant to the Management Agreements.
"Ownership Limitation" means the ownership of more than 9.8% of any class of
the Company's outstanding capital stock.
"PAH GP" means PAH GP, Inc., a Virginia corporation and wholly-owned
subsidiary of the Company, which is the sole general partner of the Operating
Partnership.
125
<PAGE>
"PAH LP" means PAH LP, Inc., a Virginia corporation and wholly-owned
subsidiary of the Company, which is a Limited Partner of the Operating
Partnership.
"Participating Leases" mean the operating leases between the Lessees and the
Operating Partnership pursuant to which the Lessees lease certain of the
Hotels from the Operating Partnership.
"Participating Rent" means rent based on percentages of room revenue, food
and beverage revenue and telephone and other revenue payable by the Lessees
pursuant to the Participating Leases.
"Partnership Agreement" means the partnership agreement relating to the
Operating Partnership, as amended and restated.
"Partnership Provisions" means the partnership provisions of the Code.
"Patriot American" means the Patriot American group of companies.
"Preferred Shares" means the shares of preferred stock of the Company, no
par value.
"Preferred OP Units" means the preferred OP Units issued in the Private
Placement.
"Private Placement" means the private placement of the Preferred OP Units
and shares of Common Stock to an institutional investor in May 1996.
"Redemption Rights" means, pursuant to the Partnership Agreement, the rights
of the Limited Partners, other than PAH LP, to cause the Operating Partnership
to redeem their OP Units in exchange for cash or, at the Company's election,
shares of Common Stock.
"REIT" means real estate investment trust as defined in section 856 of the
Code.
"Related Party Tenant" under the Code means, with respect to the Company, a
tenant of which the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more.
"Rents" means, collectively, Base Rent and Participating Rent.
"REVPAR" means room revenue per available room and is determined by dividing
room revenue by available rooms for the applicable period.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Special Tax Counsel" means Gardere & Wynne, L.L.P., special tax counsel to
the Company.
"Subsidiary Partnerships" means the partnerships owning the Radisson New
Orleans Hotel, the Bourbon Orleans Hotel, the Embassy Suites, Hunt Valley and
the Marriott Hotel, Troy, Michigan.
"Total market capitalization" means the sum of (i) the aggregate market
value of the outstanding Common Stock, assuming full redemption of OP Units in
the Operating Partnership into Common Stock, plus (ii) the total debt of the
Company.
"Treasury Regulations" means the final, temporary and proposed tax
regulations promulgated under the Code.
"UBTI" means unrelated business taxable income.
"VSCA" means the Virginia Stock Corporation Act.
126
<PAGE>
"WestCoast Hotels" means WestCoast Hotels, Inc., a hotel management company
based in Seattle, Washington that manages five of the six Hotels in the
WestCoast Portfolio.
"WestCoast Portfolio" means the six hotel portfolio consisting of the
WestCoast Plaza Park Suites Hotel, the WestCoast Roosevelt Hotel, the
WestCoast Gateway Hotel, the Hyatt Newporter Hotel, the WestCoast Long Beach
Hotel and Marina and the WestCoast Wenatchee Center Hotel.
"Wyndham" means Wyndham Hotel Corporation, a national hotel company based in
Dallas, Texas, together with its subsidiary Wyndham Management Corporation,
the entity that manages the Wyndham Greenspoint Hotel and the Wyndham Garden-
Midtown.
"Wyndham Lessee" means Crow Hotel Lessee, Inc., an entity formed by members
of the Trammel Crow family.
"Wyndham Master Agreement" means the agreement between the Operating
Partnership and the Wyndham Lessee which sets forth certain terms related to
the Wyndham Lessee's leasing of hotels from the Operating Partnership.
127
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PATRIOT AMERICAN HOSPITALITY, INC.:
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1995 (unaudited).................................... F-3
Pro Forma Condensed Consolidated Statement of Operations for the twelve
months ended March 31,
1996 (unaudited)....................................................... F-5
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1996 (unaudited)................................ F-7
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996
(unaudited)............................................................ F-9
Report of Independent Auditors--Ernst & Young LLP....................... F-11
Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996
(unaudited)............................................................ F-12
Consolidated Statements of Operations for the period October 2, 1995
(inception of operations) through December 31, 1995 and for the three
months ended March 31, 1996 (unaudited)................................ F-13
Consolidated Statements of Shareholders' Equity for the period October
2, 1995 (inception of operations) through December 31, 1995 and for the
three months ended March 31, 1996 (unaudited).......................... F-14
Consolidated Statements of Cash Flows for the period October 2, 1995
(inception of operations) through December 31, 1995 and for the three
months ended March 31, 1996 (unaudited)................................ F-15
Notes to Consolidated Financial Statements.............................. F-16
Financial Statement Schedules:
Schedule III--Real Estate and Accumulated Depreciation................ F-27
Notes to Schedule III................................................. F-28
Schedule IV--Mortgage Loans on Real Estate............................ F-29
LESSEES:
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 (unaudited).......................................... F-30
Pro Forma Condensed Combined Statement of Operations for the twelve
months ended March 31, 1996 (unaudited)................................ F-31
Pro Forma Condensed Combined Statement of Operations for the three
months ended March 31, 1996 (unaudited)................................ F-32
CHC LEASE PARTNERS:
Report of Independent Certified Public Accountants--Price Waterhouse
LLP.................................................................... F-33
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)... F-34
Statements of Operations for the period from inception (October 2, 1995)
to December 31, 1995 and for the three months ended March 31, 1996
(unaudited)............................................................ F-35
Statements of Partners' Capital for the period from inception (October
2, 1995) to December 31, 1995 and for the three months ended March 31,
1996 (unaudited)....................................................... F-36
Statements of Cash Flows for the period from inception (October 2, 1995)
to December 31, 1995 and for the three months ended March 31, 1996
(unaudited)............................................................ F-37
Notes to Financial Statements........................................... F-38
INITIAL HOTELS COMBINED FINANCIAL STATEMENTS:
Report of Independent Auditors--Ernst & Young LLP....................... F-42
Report of Independent Accountants--Coopers & Lybrand L.L.P. ............ F-43
Report of Independent Accountants--Coopers & Lybrand L.L.P. ............ F-44
Combined Balance Sheet as of December 31, 1994.......................... F-45
Combined Statements of Operations for the period from January 1, 1995 to
October 1, 1995 and for the years ended December 31, 1994 and 1993 and
for the three months ended March 31, 1995 (unaudited).................. F-46
Combined Statements of Partners' and Owners' Equity for the period from
January 1, 1995 to October 1, 1995 and for the years ended December 31,
1994 and 1993 ......................................................... F-47
Combined Statements of Cash Flows for the period from January 1, 1995 to
October 1, 1995 and the years ended December 31, 1994 and 1993 and for
the three months ended March 31, 1995 (unaudited) ..................... F-48
Notes to Combined Financial Statements.................................. F-49
TROY PARK ASSOCIATES:
Report of Independent Accountants--Coopers & Lybrand L.L.P. ............ F-57
Balance Sheet as of December 29, 1994................................... F-58
Statements of Operations and Partners' Equity for the period from
January 1, 1994 to December 29,
1994 and for the year ended December 31, 1993.......................... F-59
Statements of Cash Flows for the period from January 1, 1994 to December
29, 1994 and for the year ended December 31, 1993...................... F-60
Notes to Financial Statements........................................... F-61
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
BUCKHEAD HOSPITALITY JOINT VENTURE:
Report of Independent Auditors--Ernst & Young LLP...................... F-67
Balance Sheets as of December 31, 1995 and February 29, 1996 (unau-
dited)................................................................ F-68
Statements of Operations for the year ended December 31, 1995, the
three months ended March 31, 1995 (unaudited) and the period January
1, 1996 through February 29, 1996 (unaudited)......................... F-69
Statements of Venturers' Capital for the year ended December 31, 1995
and the period January 1, 1996 through February 29, 1996 (unaudited).. F-70
Statements of Cash Flows for the year ended December 31, 1995, the
three months ended March 31,
1995 (unaudited) and the period January 1, 1996 through February 29,
1996 (unaudited)...................................................... F-71
Notes to Financial Statements.......................................... F-72
Financial Statement Schedule:
Schedule III--Real Estate and Accumulated Depreciation............... F-76
Notes to Schedule III................................................ F-77
GATEWAY HOTEL LIMITED PARTNERSHIP AND WENATCHEE HOTEL LIMITED
PARTNERSHIP--COMBINED FINANCIAL STATEMENTS:
Report of Independent Auditors--Ernst & Young LLP...................... F-78
Combined Balance Sheets as of December 31, 1995 and March 31, 1996 (un-
audited).............................................................. F-79
Combined Statements of Operations for the year ended December 31, 1995,
and the three months ended March 31, 1995 and 1996 (unaudited)........ F-80
Combined Statements of Partners' Capital for the year ended December
31, 1995 and the three months ended March 31, 1996 (unaudited)........ F-81
Combined Statements of Cash Flows for the year ended December 31, 1995
and the three months ended March 31, 1995 and 1996 (unaudited)........ F-82
Notes to Combined Financial Statements................................. F-83
Financial Statement Schedule:
Schedule III--Real Estate and Accumulated Depreciation............... F-89
Notes to Schedule III................................................ F-90
NEWPORTER BEACH HOTEL INVESTMENTS, L.L.C.:
Report of Independent Accountants--Coopers & Lybrand L.L.P. ........... F-91
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).. F-92
Statements of Operations and Members' Equity for the period from March
10, 1995 through December 31, 1995 and the three months ended March
31, 1996 (unaudited).................................................. F-93
Statements of Cash Flows for the period from March 10, 1995 through De-
cember 31, 1995 and the three months ended March 31, 1996 (unaudited). F-94
Notes to Financial Statements.......................................... F-95
PLAZA PARK SUITES HOTEL:
Report of Independent Auditors--Ernst & Young LLP...................... F-100
Statements of Direct Revenue and Direct Operating Expenses for the year
ended December 31, 1995 and the three months ended March 31, 1995 and
1996 (unaudited)...................................................... F-101
Notes to Statements of Direct Revenue and Direct Operating Expenses.... F-102
ROOSEVELT HOTEL:
Report of Independent Auditors--Ernst & Young LLP...................... F-105
Statements of Direct Revenue and Direct Operating Expenses for the year
ended December 31, 1995 and the three months ended March 31, 1995 and
1996 (unaudited)...................................................... F-106
Notes to Statements of Direct Revenue and Direct Operating Expenses.... F-107
LEXINGTON HYATT REGENCY HOTEL:
Report of Independent Auditors--Ernst & Young LLP...................... F-110
Statements of Direct Revenue and Direct Operating Expenses for the year
ended December 31, 1995 and the three months ended March 31, 1995 and
1996 (unaudited)...................................................... F-111
Notes to Statements of Direct Revenue and Direct Operating Expenses.... F-112
WYNDHAM PORTFOLIO HOTELS:
Report of Independent Accountants--Coopers & Lybrand L.L.P. ........... F-116
Combined Balance Sheets as of December 31, 1995 and 1994 and March 31,
1996 (unaudited)...................................................... F-117
Combined Statements of Income for the years ended December 31, 1995 and
1994 and for the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................ F-118
Combined Statements of Changes in Partners' Deficit for the years ended
December 31, 1995 and 1994 and the three months ended March 31, 1996
(unaudited)........................................................... F-119
Combined Statements of Cash Flows for the years ended December 31, 1995
and 1994 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................ F-120
Notes to Combined Financial Statements................................. F-121
</TABLE>
F-2
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA FINANCIAL STATEMENTS
The Company's unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1995, the twelve months ended March
31, 1996 and the three months ended March 31, 1996 are presented as if the
Initial Offering, Formation Transactions, Recent Acquisitions, Private
Placement, and current Offering had occurred as of January 1, 1995 and carried
forward through each period presented. Such pro forma information is based in
part upon the Consolidated Statements of Operations of the Company, and the
Pro Forma Condensed Combined Statements of Operations of the Lessees. Such
information should be read in conjunction with the Financial Statements listed
in the Index at page F-1 of this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
The following 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 the beginning of the periods presented, nor do they purport to represent
the results of operations for future periods. Further, the unaudited Pro Forma
Condensed Consolidated Statement of Operations for the interim period ended
March 31, 1996 is not necessarily indicative of the results of operations for
the full year.
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------------------
COMPANY INITIAL RECENT PRIVATE COMPANY
HISTORICAL (A) OFFERING (B) ACQUISITIONS (C) PLACEMENT (D) OFFERING (E) PRO FORMA
-------------- ------------ ---------------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $10,582 $31,970 (F) $33,369 (F) $ -- $ -- $75,921
Interest and other
income................ 513 -- (460)(G) -- -- 53
------- ------- ------- ------- ------- -------
Total revenue.......... 11,095 31,970 32,909 -- -- 75,974
------- ------- ------- ------- ------- -------
Expenses:
Real estate and
personal property
taxes, and casualty
insurance............. 901 2,726 (H) 3,301 (H) -- -- 6,928
Ground lease expense... -- -- 1,351 (I) -- -- 1,351
General and
administrative........ 607 2,268 (J) 275 (J) -- -- 3,150
Interest expense....... 89 116 16,621 (K) (3,102)(K) (11,347)(K) 2,377
Depreciation and
amortization.......... 2,590 7,257 (L) 8,193 (L) -- -- 18,040
------- ------- ------- ------- ------- -------
Total expenses......... 4,187 12,367 29,741 (3,102) (11,347) 31,846
------- ------- ------- ------- ------- -------
Operating income....... 6,908 19,603 3,168 3,102 11,347 44,128
Equity in earnings of
unconsolidated
subsidiary............ 156 -- 3,418(M) -- -- 3,574
------- ------- ------- ------- ------- -------
Income before
extraordinary items
and minority
interest.............. 7,064 19,603 6,586 3,102 11,347 47,702
Minority interest...... (968) (2,685)(N) (1,734)(N) (1,339)(N) (95)(N) (6,821)
Extraordinary items,
net of minority
interest.............. (737) 737 (O) -- -- -- --
------- ------- ------- ------- ------- -------
Net income applicable
to common
shareholders.......... $ 5,359 $17,655 $ 4,852 $ 1,763 $11,252 $40,881
======= ======= ======= ======= ======= =======
Net income per common
share................. $ 0.37 $ 1.95
======= =======
Weighted average number
of shares
outstanding........... 14,675 20,979
======= =======
</TABLE>
F-3
<PAGE>
- --------
(A) Represents the Company's historical results of operations from the date of
the Initial Offering, October 2, 1995, through December 31, 1995.
Historical results of operations include revenue and expenses from the
date of acquisition for certain of the Recent Acquisitions (Embassy
Suites, Hunt Valley and Crowne Plaza Ravinia) which were acquired prior to
December 31, 1995.
(B) Represents adjustments to the Company's results of operations assuming the
Initial Offering and Formation Transactions occurred at the beginning of
the period presented.
(C) Represents adjustments to the Company's results of operations assuming the
Recent Acquisitions occurred at the beginning of the period presented.
(D) Represents adjustments to the Company's results of operations assuming the
Private Placement occurred at the beginning of the period presented.
(E) Represents adjustments to the Company's results of operations assuming the
Offering occurred at the beginning of the period presented.
(F) Represents lease payments from the Lessees to the Operating Partnership
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the Hotels for the
period presented.
(G) Represents the elimination of interest income earned on the proceeds from
the exercise of the underwriters' over-allotment in connection with the
Initial Offering.
(H) Represents real estate and personal property taxes, and casualty insurance
to be paid by the Operating Partnership.
(I) Represents ground lease payments with respect to certain of the Recent
Acquisitions.
(J) Represents salaries, insurance, travel, audit, legal and other expenses
associated with operating as a public company. Also includes annual
amortization of unearned management stock compensation computed on a
straight-line basis over the three-year vesting period.
(K) Represents adjustments to interest expense incurred on the portion of the
borrowings under the Line of Credit which were or are expected to be
repaid with proceeds from the Private Placement and Offering. The proceeds
from the Line of Credit were used, in part, to purchase the Recent
Acquisitions.
(L) Represents depreciation on the Hotels of $17,924 and amortization of $116.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5-7 years for furniture and equipment. These estimated useful lives are
based on management's knowledge of the properties and hotel industry in
general. Amortization of franchise fees is computed using the straight-
line method over the terms of the related franchise agreement.
(M) Represents equity in income of the unconsolidated subsidiary which owns
the Crowne Plaza Ravinia Hotel.
(N) Represents the adjustments to minority interest assuming the Initial
Offering, Recent Acquisitions, Private Placement and Offering occurred at
the beginning of the period presented. In connection with the Initial
Offering the minority interest percentage was 13.7%. Subsequent to the
Recent Acquisitions the minority percentage was 16.2%. Subsequent to the
Private Placement the minority interest percentage was 18.5%. Subsequent
to the Offering the minority interest percentage will be approximately
14.3%.
(O) In connection with the Initial Offering and Formation Transactions, the
Company incurred prepayment penalties and charged-off deferred financing
costs associated with mortgage notes which were repaid. These
extraordinary items have been eliminated for purposes of the pro forma
presentation.
F-4
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------------------
COMPANY INITIAL RECENT PRIVATE COMPANY
HISTORICAL (A) OFFERING (B) ACQUISITIONS (C) PLACEMENT (D) OFFERING (E) PRO FORMA
-------------- ------------ ---------------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $22,953 $20,879 (F) $32,901 (F) $ -- $ -- $76,733
Interest and other
income................ 605 -- (473)(G) -- -- 132
------- ------- ------- ------- -------- -------
Total revenue......... 23,558 20,879 32,428 -- -- 76,865
------- ------- ------- ------- -------- -------
Expenses:
Real estate and
personal property
taxes, and casualty
insurance............. 1,983 1,795 (H) 3,217 (H) -- -- 6,995
Ground lease expense... 77 -- 1,285 (I) -- -- 1,362
General and
administrative........ 1,548 1,327 (J) 275 (J) -- -- 3,150
Interest expense....... 690 73 15,870 (K) (3,066)(K) (11,216)(K) 2,351
Depreciation and
amortization.......... 5,428 4,807 (L) 7,882 (L) -- -- 18,117
------- ------- ------- ------- -------- -------
Total expenses........ 9,726 8,002 28,529 (3,066) (11,216) 31,975
------- ------- ------- ------- -------- -------
Operating income...... 13,832 12,877 3,899 3,066 11,216 44,890
Equity in earnings of
unconsolidated
subsidiary............ 1,518 -- 2,394 (M) -- -- 3,912
------- ------- ------- ------- -------- -------
Income before
extraordinary items
and minority
interest............. 15,350 12,877 6,293 3,066 11,216 48,802
Minority interest...... (2,126) (1,741)(N) (1,725)(N) (1,361)(N) (26)(N) (6,979)
Extraordinary items,
net of minority
interest.............. (737) 737 (O) -- -- -- --
------- ------- ------- ------- -------- -------
Net income applicable
to common
shareholders......... $12,487 $11,873 $ 4,568 $ 1,705 $ 11,190 $41,823
======= ======= ======= ======= ======== =======
Net income per common share................................................................... $ 1.99
=======
Weighted average number of shares outstanding................................................. 20,979
=======
</TABLE>
- --------
(A) Represents the Company's historical results of operations from the date of
the Initial Offering, October 2, 1995, through March 31, 1996. Historical
results of operations include revenue and expenses from the date of
acquisition for certain of the Recent Acquisitions (Embassy Suites, Hunt
Valley and the Crowne Plaza Ravinia which were acquired prior to December
31, 1995, and the Tremont House Hotel, Holiday Inn Lenox and the Del Mar
Hilton which were acquired prior to March 31, 1996).
(B) Represents adjustments to the Company's results of operations assuming the
Initial Offering and Formation Transactions occurred at the beginning of
the period presented.
(C) Represents adjustments to the Company's results of operations assuming the
Recent Acquisitions occurred at the beginning of the period presented.
(D) Represents adjustments to the Company's results of operations assuming the
Private Placement occurred at the beginning of the period presented.
F-5
<PAGE>
(E) Represents adjustments to the Company's results of operations assuming the
Offering occurred at the beginning of the period presented.
(F) Represents lease payments from the Lessees to the Operating Partnership
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the Hotels for the
period presented.
(G) Represents the elimination of interest income earned on the proceeds from
the exercise of the underwriters' over-allotment in connection with the
Initial Offering.
(H) Represents real estate and personal property taxes, and casualty insurance
to be paid by the Operating Partnership.
(I) Represents ground lease payments with respect to certain of the Recent
Acquisitions.
(J) Represents salaries, insurance, travel, audit, legal and other expenses
associated with operating as a public company. Also includes annual
amortization of unearned management stock compensation computed on a
straight-line basis over the three-year vesting period.
(K) Represents adjustments to interest expense incurred on the portion of the
borrowings under the Line of Credit which were or are expected to be
repaid with proceeds from the Private Placement and Offering. The proceeds
from the Line of Credit were used, in part, to purchase the Recent
Acquisitions.
(L) Represents depreciation on the Hotels of $18,001 and amortization of $116.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5-7 years for furniture and equipment. These estimated useful lives are
based on management's knowledge of the properties and the hotel industry
in general. Amortization of franchise fees is computed using the straight-
line method over the terms of the related franchise agreement.
(M) Represents equity in income of the unconsolidated subsidiary which owns
the Crowne Plaza Ravinia Hotel.
(N) Represents the adjustments to minority interest assuming the Initial
Offering, Recent Acquisitions, Private Placement and Offering occurred at
the beginning of the period presented. In connection with the Initial
Offering the minority interest percentage was 13.7%. Subsequent to the
Recent Acquisitions the minority percentage was 16.2%. Subsequent to the
Private Placement the minority interest percentage was 18.5%. Subsequent
to the Offering the minority interest percentage will be approximately
14.3%.
(O) In connection with the Initial Offering and Formation Transactions, the
Company incurred prepayment penalties and charged-off deferred financing
costs associated with mortgage notes which were repaid. These
extraordinary items have been eliminated for purposes of the pro forma
presentation.
F-6
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------
COMPANY RECENT PRIVATE COMPANY
HISTORICAL (A) ACQUISITIONS (B) PLACEMENT(C) OFFERING (D) PRO FORMA
-------------- ---------------- ------------ ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Participating lease
revenue............... $12,371 $7,612 (E) $ -- $ -- $19,983
Interest and other
income................ 92 -- -- -- 92
------- ------ ----- ------ -------
Total revenue......... 12,463 7,612 -- -- 20,075
------- ------ ----- ------ -------
Expenses:
Real estate and
personal property
taxes, and casualty
insurance............. 1,082 759 (F) -- -- 1,841
Ground lease expense... 77 255 (G) -- -- 332
General and
administrative........ 941 69 (H) -- -- 1,010
Interest expense....... 601 3,446 (I) (744)(I) (2,723)(I) 580
Depreciation and
amortization.......... 2,838 1,691 (J) -- -- 4,529
------- ------ ----- ------ -------
Total expenses........ 5,539 6,220 (744) (2,723) 8,292
------- ------ ----- ------ -------
Operating income...... 6,924 1,392 744 2,723 11,783
Equity in earnings of
unconsolidated
subsidiary............ 1,362 (K) -- -- -- 1,362
------- ------ ----- ------ -------
Income before minority
interest............. 8,286 1,392 744 2,723 13,145
Minority interest...... (1,158) (411)(L) (360)(L) 49 (L) (1,880)
------- ------ ----- ------ -------
Net income applicable
to common
shareholders......... $ 7,128 $ 981 $ 384 $2,772 $11,265
======= ====== ===== ====== =======
Net income per common
share................ $ 0.48 $ 0.54
======= =======
Weighted average
number of shares
outstanding.......... 14,734 20,979
======= =======
</TABLE>
- --------
(A) Represents the Company's historical results of operations for the three
months ended March 31, 1996. Historical results of operations include
revenue and expenses for certain of the Recent Acquisitions (Embassy
Suites, Hunt Valley and the Crowne Plaza Ravinia which were acquired prior
to December 31, 1995, and the Tremont House Hotel, Holiday Inn Lenox and
the Del Mar Hilton which were acquired prior to March 31, 1996).
(B) Represents adjustments to the Company's results of operations assuming the
Recent Acquisitions occurred at the beginning of the period presented.
(C) Represents adjustments to the Company's results of operations assuming the
Private Placement occurred at the beginning of the period presented.
(D) Represents adjustments to the Company's results of operations assuming the
Offering occurred at the beginning of the period presented.
(E) Represents lease payments from the Lessees to the Operating Partnership
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the Hotels for the
period presented.
F-7
<PAGE>
(F) Represents real estate and personal property taxes, and casualty insurance
to be paid by the Operating Partnership.
(G) Represents ground lease payments with respect to certain of the Recent
Acquisitions.
(H) Represents salaries, insurance, travel, audit, legal and other expenses
associated with operating as a public company. Also includes annual
amortization of unearned management stock compensation computed on a
straight-line basis over the three year vesting period.
(I) Represents adjustments to interest expense incurred on the portion of the
borrowings under the Line of Credit, which were or are expected to be
repaid with proceeds from the Private Placement and Offering. The proceeds
from the Line of Credit were used, in part, to purchase the Recent
Acquisitions.
(J) Represents depreciation on the Hotels of $4,500 and amortization of $29.
Depreciation is computed using the straight-line method and is based upon
the estimated useful lives of 35 years for buildings and improvements and
5-7 years for furniture and equipment. These estimated useful lives are
based on management's knowledge of the properties and the hotel industry
in general. Amortization of franchise fees is computed using the straight-
line method over the terms of the related franchise agreement.
(K) Represents equity in income of the unconsolidated subsidiary which owns
the Crowne Plaza Ravinia Hotel.
(L) Represents the adjustments to minority interest assuming the Initial
Offering, Recent Acquisitions, Private Placement and Offering occurred at
the beginning of the period presented. In connection with the Initial
Offering the minority interest percentage was 13.7%. Subsequent to the
Recent Acquisitions the minority percentage was 16.2%. Subsequent to the
Private Placement the minority interest percentage was 18.5%. Subsequent
to the Offering the minority interest percentage will be approximately
14.3%.
F-8
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
The unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as
if the acquisition of the Recent Acquisitions completed after March 31, 1996
and the application of the proceeds of the current Offering and the Private
Placement had occurred on March 31, 1996. Such information is based on the
consolidated balance sheet of the Company and should be read in conjunction
with the Consolidated Financial Statements of the Company listed in the Index
at page F-1 of this Prospectus. In management's opinion, all adjustments
necessary to reflect the effects of these transactions have been made.
The following unaudited Pro Forma Condensed Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of March 31, 1996, nor does it purport to
represent the future financial position of the Company.
<TABLE>
<CAPTION>
COMPANY COMPANY
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ----------- ---------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
Net investments in hotel properties...... $306,552 $172,599 (B) $479,151
Cash and cash equivalents................ 8,098 (764)(C) 7,334
Receivables.............................. 3,768 -- 3,768
Inventory................................ 1,219 609 (D) 1,828
Investment in unconsolidated subsidiary.. 4,561 -- 4,561
Notes and other receivables from uncon-
solidated subsidiary.................... 40,866 -- 40,866
Deferred expenses, net................... 1,825 350 (E) 2,175
Prepaid expenses and other .............. 2,689 (818)(F) 1,871
-------- -------- --------
Total assets............................ $369,578 $171,976 $541,554
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of credit and mortgage debt......... $ 50,250 $(23,389)(G) $ 26,861
Dividends and distributions payable...... 8,235 -- 8,235
Accounts payable and accrued expense..... 3,881 2,515 (H) 6,396
Minority interest........................ 45,485 27,252 (I) 72,737
Shareholders' equity:
Common stock............................ -- -- --
Additional paid-in capital.............. 264,503 165,598 (J) 430,101
Unearned executive compensation......... (1,185) -- (1,185)
Distributions in excess of earnings..... (1,591) -- (1,591)
-------- -------- --------
Total shareholders' equity.............. 261,727 165,598 427,325
-------- -------- --------
Total liabilities and shareholders' eq-
uity................................... $369,578 $171,976 $541,554
======== ======== ========
</TABLE>
- --------
(A) Reflects the Company's historical consolidated balance sheet at March 31,
1996, which includes certain of the Recent Acquisitions (Embassy Suites,
Hunt Valley, Crowne Plaza Ravinia, Tremont House Hotel, Holiday Inn Lenox
and the Del Mar Hilton) which were acquired prior to March 31, 1996.
(B) Reflects the acquisitions of the West Coast Portfolio in April 1996 for
cash of $73,630, $8,800 in OP Units and $2,000 of a deferred purchase
obligation. Also reflects the acquisition of the Hyatt Regency, Lexington
in May 1996 for $14,320 in cash, the acquisition of the Doubletree
Denver/Boulder Hotel in June 1996 for $12,520 in cash, and the acquisition
of the Wyndham Greenspoint and Wyndham Garden-Midtown for $60,960 and $500
in value of OP Units. Also reflects the capitalization of prepaid
acquisition costs of $818, net of escrows of $340. An estimated $609 of
the aggregate purchase price has been allocated to inventory.
F-9
<PAGE>
(C) Represents the following proposed transactions:
<TABLE>
<S> <C>
Proceeds of the Offering......................................... $ 155,375
Expenses of the Offering......................................... (11,225)
Proceeds of the Private Placement................................ 40,000
Expenses of the Private Placement................................ (600)
Repayment of outstanding indebtedness under the Line of Credit,
including amounts incurred subsequent to the balance sheet date
for certain of the Recent Acquisitions.......................... (183,200)
Payment of acquisition-related costs for certain hotels.......... (764)
Payment of loan costs associated with the modification of the
Line of Credit.................................................. (350)
---------
$ (764)
=========
</TABLE>
(D) Increase reflects inventory which is being purchased by the Company in
connection with the acquisition of certain hotels.
(E) Increase reflects the capitalization of loan costs associated with the
modification of the Line of Credit.
(F) Decrease represents the capitalization of prepaid acquisition costs to
investment in hotel properties.
(G) Decrease represents the following proposed transactions:
<TABLE>
<S> <C>
Indebtedness incurred subsequent to the balance sheet date to ac-
quire certain of the Recent Acquisitions, including mortgage debt
of $22 million related to the Wyndham Greenspoint Hotel.......... $159,811
Repayment of a portion of the Line of Credit with proceeds of the
Offering and Private Placement................................... (183,200)
--------
$(23,389)
========
</TABLE>
(H) Increase represents the following transactions:
<TABLE>
<S> <C>
Accrual of deferred purchase obligation in connection with the
acquisition of certain hotels...................................... $ 2,000
Accrual of certain liabilities assumed in connection with the
acquisition of certain hotels...................................... 515
-------
$ 2,515
=======
</TABLE>
(I) Represents the following transactions:
<TABLE>
<S> <C>
Proceeds of the sale of OP Units in the Private Placement........ $ 18,133
Expenses of the Private Placement related to the sale of OP
Units........................................................... (181)
Issuance of OP Units to acquire certain hotels................... 9,300
--------
$ 27,252
========
(J) Represents the following transactions:
Proceeds of the Offering......................................... $155,375
Payment of Offering expenses by the Company...................... (11,225)
Proceeds of the sale of shares in the Private Placement.......... 21,867
Expenses of the Private Placement related to the sales of shares. (419)
--------
$165,598
========
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Patriot American Hospitality,
Inc.:
We have audited the accompanying consolidated balance sheet of Patriot
American Hospitality, Inc. as of December 31, 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the period October 2, 1995 (inception of operations) through December 31,
1995. Our audit also included the financial statement schedules listed in the
Index at Item 35(a). These consolidated financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Patriot
American Hospitality, Inc. as of December 31, 1995, and the consolidated
results of its operations and its cash flows for the period October 2, 1995
(inception of operations) through December 31, 1995, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Dallas, Texas
January 31, 1996, except for Note 13,
as to which the date is March 4, 1996
F-11
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotel properties, net................... $265,759 $306,552
Cash and cash equivalents (including capital improve-
ment reserves of $1,091 in 1995 and $1,806 in 1996).. 4,769 8,098
Lease revenue receivable.............................. 2,260 2,279
Receivables from selling entities..................... 1,765 1,489
Investment in unconsolidated subsidiary............... 4,263 4,561
Mortgage notes and other receivables from unconsoli-
dated subsidiary..................................... 40,855 40,866
Inventory............................................. 1,035 1,219
Deferred expenses, net of accumulated amortization of
$88 in 1995 and $184 in 1996......................... 1,852 1,825
Prepaid expenses and other assets..................... 1,666 2,689
-------- --------
Total assets...................................... $324,224 $369,578
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit....................... $ 9,500 $ 50,250
Dividends and distributions payable................... 8,154 8,235
Accounts payable and accrued expenses................. 3,179 1,782
Due to unconsolidated subsidiary...................... 91 2,099
Minority interest in Operating Partnership............ 41,522 45,485
Commitments and contingencies......................... -- --
Shareholders' equity:
Preferred stock, no par value, 20,000,000 shares au-
thorized, no shares issued and outstanding......... -- --
Common stock, no par value, 200,000,000 shares au-
thorized, 14,665,935 shares issued and outstanding. -- --
Paid-in capital..................................... 264,808 264,503
Unearned executive compensation, net of accumulated
amortization of $71 in 1995 and $237 in 1996....... (1,351) (1,185)
Distributions in excess of earnings................. (1,679) (1,591)
-------- --------
Total shareholders' equity........................ 261,778 261,727
-------- --------
Total liabilities and shareholders' equity........ $324,224 $369,578
======== ========
</TABLE>
See accompanying notes.
F-12
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD
OCTOBER 2, 1995
(INCEPTION OF THREE
OPERATIONS) MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1995 1996
--------------- -----------
(UNAUDITED)
<S> <C> <C>
Revenue:
Participating lease revenue...................... $10,582 $12,371
Interest and other income........................ 513 92
------- -------
Total revenue.................................. 11,095 12,463
------- -------
Expenses:
Real estate and personal property taxes and casu-
alty insurance.................................. 901 1,082
Ground lease expense............................. -- 77
General and administrative....................... 607 941
Interest expense................................. 89 601
Depreciation and amortization.................... 2,590 2,838
------- -------
Total expenses................................. 4,187 5,539
------- -------
Income before equity in earnings of unconsolidated
subsidiary, minority interest and extraordinary
items............................................. 6,908 6,924
Equity in earnings of unconsolidated subsidiary.. 156 1,362
------- -------
Income before minority interest and extraordinary
items............................................. 7,064 8,286
Minority interest in Operating Partnership....... (968) (1,158)
------- -------
Income before extraordinary items.................. 6,096 7,128
Extraordinary loss from early extinguishment of
debt, net of minority interest.................. (737) --
------- -------
Net income applicable to common shareholders....... $ 5,359 $ 7,128
======= =======
Net income per common share:
Income before extraordinary items................ $ 0.42 $ 0.48
Extraordinary items.............................. (0.05) --
------- -------
Net income applicable to common shareholders..... $ 0.37 $ 0.48
======= =======
Weighted average number of common shares and common
share equivalents outstanding..................... 14,675 14,734
======= =======
</TABLE>
See accompanying notes.
F-13
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNEARNED DISTRIBUTIONS
NUMBER OF PAID-IN EXECUTIVE IN EXCESS
SHARES CAPITAL COMPENSATION OF EARNINGS TOTAL
---------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock, net of offering
expenses............... 14,605,000 $313,170 $ -- $ -- $313,170
Acquisition of interests
from affiliates........ -- (19,357) -- -- (19,357)
Predecessor basis of
interests acquired from
affiliates............. -- 1,840 -- -- 1,840
Issuance of OP Units to
non-affiliates......... -- 9,363 -- -- 9,363
Minority interest at
closing of Offering.... -- (41,670) -- -- (41,670)
Issuance of shares to
executive officers..... 59,375 1,425 (1,422) -- 3
Issuance of shares to
directors.............. 1,560 37 -- -- 37
Net income.............. -- -- -- 5,359 5,359
Amortization of unearned
executive compensation. -- -- 71 -- 71
Dividends declared,
$0.48 per share........ -- -- -- (7,038) (7,038)
---------- -------- ------- ------- --------
Balance, December 31,
1995................... 14,665,935 $264,808 $(1,351) $(1,679) $261,778
Initial public offering
issuance costs
(unaudited)............ -- (305) -- -- (305)
Net income (unaudited).. -- -- -- 7,128 7,128
Amortization of unearned
executive compensation
(unaudited)............ -- -- 166 -- 166
Dividends declared,
$0.48 per share
(unaudited)............ -- -- -- (7,040) (7,040)
---------- -------- ------- ------- --------
Balance, March 31, 1996
(unaudited)............ 14,665,935 $264,503 $(1,185) $(1,591) $261,727
========== ======== ======= ======= ========
</TABLE>
See accompanying notes.
F-14
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
OCTOBER 2,
1995
(INCEPTION OF
OPERATIONS) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 5,359 $ 7,128
Adjustments to reconcile net income to net cash provided by
operating
activities:
Depreciation................................ 2,529 2,808
Amortization of unearned executive
compensation............................... 71 166
Amortization of deferred loan costs......... 27 43
Other amortization.......................... 61 53
Payment of interest on notes receivable from
unconsolidated subsidiary.................. -- 1,064
Equity in earnings of unconsolidated
subsidiary................................. (156) (1,362)
Minority interest in income of Operating
Partnership................................ 968 1,158
Extraordinary items......................... 737 --
Changes in assets and liabilities:
Lease revenue receivable.................... (2,260) (19)
Mortgage notes and other receivables from
unconsolidated subsidiary.................. -- (12)
Deferred expenses........................... (292) --
Prepaid expenses and other assets........... (589) (361)
Accounts payable and other accrued expenses. 1,163 (1,664)
--------- --------
Net cash provided by operating activities. 7,618 9,002
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and related
working capital assets....................... (260,665) (38,550)
Improvements and additions to hotel
properties................................... (609) (1,198)
Collection of receivables from selling
entities..................................... -- 354
Prepaid acquisition costs..................... (598) (503)
Investment in mortgage notes receivable from
unconsolidated subsidiary.................... (40,500) --
Advances (to) from unconsolidated subsidiary.. (87) 2,009
Investment in unconsolidated subsidiary....... (4,238) --
Investment in other note receivable........... (101) --
Principal payment received on other note
receivable................................... -- 50
Payment of organization costs................. (150) --
--------- --------
Net cash used in investing activities..... (306,948) (37,838)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of
initial public offering costs................ 314,013 (305)
Borrowings under line of credit............... 9,500 40,750
Payments to acquire interests of affiliates in
the Initial Hotels........................... (18,879) --
Payment of deferred loan costs................ (361) (68)
Prepayment penalties on assumed mortgage
loans........................................ (174) --
Payment of other prepaid expenses............. -- (58)
Dividends and distributions paid.............. -- (8,154)
--------- --------
Net cash provided by financing activities. 304,099 32,165
--------- --------
Net increase in cash and cash equivalents....... 4,769 3,329
Cash and cash equivalents at beginning of
period......................................... -- 4,769
--------- --------
Cash and cash equivalents at end of period...... $ 4,769 $ 8,098
========= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest...... $ -- $ 620
========= ========
</TABLE>
See accompanying notes.
F-15
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND FOR THE PERIOD THEN ENDED
ARE UNAUDITED)
1. ORGANIZATION:
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. The remaining Initial
Offering proceeds were used to finance acquisitions of two additional hotel
investments, provide for renovations to existing hotels and for general
working capital. 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.
During the first quarter of 1996, the Company acquired three additional
hotel properties, utilizing approximately $32,500 in cash drawn on its Line of
Credit and issuing 167,012 OP Units in connection with the purchases. At March
31, 1996, the Operating Partnership owned interests in 25 hotels and the
Company owned an approximate 85.5% 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 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
rent or participating rent, plus certain additional charges as applicable (the
"Participating Leases"). One of the Company's hotels is leased under a similar
Participating Lease agreement to Metro Hotels Leasing Corporation ("Metro
Lease Partners" and herein collectively with CHC Lease Partners, the
"Lessees"). The Crowne Plaza Ravinia Hotel acquisition was structured without
a lessee.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The 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.
F-16
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Investment in Hotel Properties
The hotel properties are stated at cost. Depreciation is computed using the
straight-line method based upon estimated useful lives of the assets of 35
years for the buildings and improvements and 5 to 7 years for furniture,
fixtures and equipment.
The acquisition of affiliated interests in the Initial Hotels has been
recorded at predecessor cost. Cash payments to acquire the interests of
predecessor owners who are deemed to be affiliates of the Company have been
reflected as a reduction of shareholders' equity in the accompanying
consolidated financial statements.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, the Company would record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
No such impairment losses have been recognized to date.
Repairs and maintenance of hotel properties owned by the Company are paid by
the Lessees. Major renewals and betterments are capitalized.
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.
Investment in Unconsolidated Subsidiary
The Company's investment in PAH Ravinia, Inc. ("PAH Ravinia"), the entity
which owns the Crowne Plaza Ravinia Hotel, is accounted for using the equity
method of accounting. The Company owns an approximately 99% non-voting
interest. The voting interests are owned by a partnership in which the Company
has a 4% interest. The Company's share of the net income of PAH Ravinia is
included in the Company's consolidated statements of operations.
Inventory
Inventory consists of food, beverages, china, linen, glassware and
silverware and is stated at cost (see Note 6).
Deferred Expenses
Deferred expenses consist of organization costs, franchise fees, leasing
costs, and loan costs. Amortization of organization costs is computed using
the straight-line method over five years. Franchise costs are amortized using
the straight-line method over the terms of the related franchise agreements.
Leasing costs are amortized to participating lease revenue over the lives of
the leases. Loan costs related to the Company's line of credit are amortized
to interest expense on a straight-line basis over the three-year term of the
loan.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of prepaid insurance, property
taxes and deposits and pre-acquisition costs associated with hotels under
purchase consideration. Other assets includes a promissory note receivable
from Metro Lease Partners related to its initial capitalization. Monthly
payments of interest only at a rate of 10% per annum are due until maturity on
November 15, 1998. The balance of the note receivable was $101 at December 31,
1995, and $51 at March 31, 1996.
F-17
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Revenue Recognition
The Operating Partnership leases its hotel properties to the Lessees
pursuant to separate Participating Leases. Lease income is recognized when
earned from the Lessees under the Participating Leases.
Earnings per Share
Earnings per share is computed based upon the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding
during the period presented. The per share computations include options to
purchase common stock which were outstanding during the period. The number of
shares outstanding related to the options has been calculated by application
of the "treasury stock" method.
Dividends
The Company intends to pay regular quarterly dividends in order to maintain
its REIT status under the Internal Revenue Code. Payment of such dividends is
dependent upon receipt of distributions from the Operating Partnership.
Stock Compensation
The Financial Accounting Standards Board recently issued Statement 123,
Accounting for Stock-Based Compensation. This Statement, which is effective
beginning in 1996, provides the alternative of adopting Statement 123 or
remaining under the existing requirements of APB 25. The Company has elected
to continue to account for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.
Income Taxes
The Company intends to qualify to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code effective with its taxable period
ended December 31, 1995. Under the Internal Revenue Code, if certain
requirements are met in a taxable year, a corporation that is treated as a
REIT will generally not be subject to federal income tax with respect to
income which it distributes to its shareholders. The Company has declared
dividends in excess of its taxable income for 1995, and such dividends were
paid in January 1996. Accordingly, no provision for income taxes has been
reflected in the 1995 consolidated statement of operations. For federal income
tax purposes, 1995 dividends amounted to $0.48 per share, of which 26% is
considered a return of capital.
Earnings and profits which determine the taxability of dividends to
shareholders, differ from net income reported for financial reporting purposes
due to differences for federal tax purposes in the estimated useful lives used
to compute depreciation and the carrying value (basis) of the investment in
hotel properties. Additionally, certain costs associated with the Initial
Offering are treated differently for federal tax purposes than for financial
reporting purposes.
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.
Concentrations
The Company invests exclusively in hotel properties. The hotel industry is
highly competitive and the Company's hotel investments are subject to
competition from other hotels for guests. Each of the Company's
F-18
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
hotels competes for guests primarily with other similar hotels in its
immediate vicinity and other similar hotels in its geographic market. The
Company believes that brand recognition, location, the quality of the hotel
and services provided, and price are the principal competitive factors
affecting its hotel investments.
In 1995, the Company earned rents under the Participating Leases of $10,582,
(net of leasing cost amortization of $23), of which all but $150 was earned
from the Participating Leases with CHC Lease Partners. In addition, 94% of
future minimum rent amounts due under leases outstanding at December 31, 1995
relate to the Participating Leases with CHC Lease Partners. The Company must
rely on the Lessees to generate sufficient cash flow from operation of the
hotels to enable the Lessees to meet rent obligations under the Participating
Leases.
At December 31, 1995, the Company had cash balances with banks in excess of
the Federal Deposit Insurance Corporation's insured limits totaling $4,666.
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
of the Hotels in the second and third quarters of a calendar year. Seasonal
variations in revenues at the Company's hotels may cause quarterly
fluctuations in the Company's lease revenues.
Interim Unaudited Financial Information
The consolidated financial statements as of and for the three months ended
March 31, 1996 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended March 31, 1996 are not necessarily indicative of
the results that may be expected for a full year.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
3. INVESTMENT IN HOTEL PROPERTIES:
On October 2, 1995, the Company, through the Operating Partnership, used
approximately $263,600 of the net proceeds of the Initial Offering and $47,685
in OP Units (including $38,322 in OP units paid to affiliates) to acquire the
20 Initial Hotels (including certain working capital assets) and repay
existing mortgage and other indebtedness of the Initial Hotels. In connection
with the assumption and repayment of mortgage indebtedness on certain of these
properties, the Company assumed $680 in unamortized deferred financing costs
which were written off upon repayment of the debt, and paid $174 in mortgage
prepayment penalties. These amounts have been reported as extraordinary items
in the accompanying financial statements for the period ended December 31,
1995. At December 31, 1995 and March 31, 1996, the Company has aggregate
receivables of $1,765 and $1,489, respectively, from the Selling Entities
which represents amounts due to the Company relating to the final proration of
current assets acquired in connection with the acquisition of the Initial
Hotels.
On November 15, 1995, the Company, through the Operating Partnership,
completed the acquisition of the Embassy Suites Hotel in Hunt Valley, Maryland
for cash (including closing costs) of approximately $15,951. The purchase was
funded with a portion of the remaining net proceeds from the Company's Initial
Offering.
On January 16, 1996, the Company acquired the 288-room Tremont House Hotel
in Boston, Massachusetts for a purchase price (including closing costs) of
approximately $16,397. The purchase was financed primarily
F-19
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
with funds drawn on the Line of Credit. The hotel is leased to CHC Lease
Partners for a period of 11 years pursuant to a Participating Lease.
On March 4, 1996, the Company acquired the 297-room Holiday Inn Lenox in
Atlanta, Georgia for approximately $7,279 in cash plus 167,012 OP Units
(valued at approximately $4,000 based upon the market price of the Company's
common stock on the date of contract). The hotel is subject to a 73-year
ground lease. The cash portion of the purchase price was financed with funds
drawn on the Line of Credit. The hotel is leased to CHC Lease Partners for a
period of 12 years pursuant to a Participating Lease.
On March 27, 1996, the Company also acquired the 245-room Del Mar Hilton
Hotel in San Diego, California for a purchase price (including closing costs)
of approximately $14,872. The purchase was financed primarily with funds drawn
on the Line of Credit. The hotel is leased to CHC Lease Partners for a period
of 11 years pursuant to a Participating Lease.
As of December 31, 1995, the Company, through the Operating Partnership,
owned 21 hotel properties aggregating 4,429 guest rooms. As of March 31, 1996,
the Company, through the Operating Partnership, owns 24 hotel properties
aggregating 5,259 guest rooms. Two properties are located in Florida (261
rooms), two in Georgia (547 rooms), two in Louisiana (970 rooms), one in
Maryland (223 rooms), one in Massachusetts (288 rooms), two in Michigan (506
rooms), one in New York (113 rooms), three in Ohio (412 rooms), one in
California (245 rooms) and nine in Texas (1,694 rooms). In addition, the
Company owns a 99% interest, through an unconsolidated subsidiary, in a 495-
room hotel property located in Georgia (see Note 4).
Investment in hotel properties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land................................................... $ 23,893 $ 27,569
Building and improvements.............................. 218,239 254,249
Furniture, fixtures and equipment...................... 26,156 30,071
-------- --------
268,288 311,889
Less accumulated depreciation.......................... (2,529) (5,337)
-------- --------
$265,759 $306,552
======== ========
</TABLE>
4. INVESTMENT IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED SUBSIDIARY:
On December 1, 1995, the Company, through the Operating Partnership,
acquired an approximate 99% ownership interest in PAH Ravinia, a Virginia
corporation, for $4,458. PAH Ravinia acquired the 495-room Crowne Plaza
Ravinia Hotel in Atlanta, Georgia (the "Crowne Plaza Ravinia").
As part of the financing for the acquisition of the Crowne Plaza Ravinia,
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.
F-20
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
The Crowne Plaza Ravinia is not operated by a lessee. The hotel is being
managed by Holiday Inns, Inc. for a period of ten years (with two renewal
terms of five years each) pursuant to a management agreement between PAH
Ravinia and Holiday Inns, Inc. Under the terms of the management agreement,
Holiday Inns, Inc. receives base management fees equal to 4% of gross room
revenue, a portion of which is subordinated to the payment of a return on PAH
Ravinia's invested capital, as defined, of 10.5% per annum. The management
agreement also provides for payment of an incentive management fee to Holiday
Inns, Inc., subject to PAH Ravinia's receipt of an aggregate 12.5% per annum
return on invested capital. Under the terms of the management agreement, PAH
Ravinia is required to maintain capital improvement reserves equal to 4.0% of
total revenues.
The following summarizes the financial information for PAH Ravinia:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Financial Position:
Total assets....................................... $46,739 $49,154
======= =======
Total liabilities.................................. $42,424 $44,538
======= =======
Total equity....................................... $ 4,315 $ 4,616
======= =======
<CAPTION>
DECEMBER 1,
1995 THREE
(INCEPTION) MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Summary Operations:
Total revenue...................................... $ 1,737 $ 5,865
======= =======
Gross profit....................................... $ 829 $ 3,563
======= =======
Net loss (income).................................. $ (194)(a) $ 301(a)
======= =======
</TABLE>
- --------
(a) The Company's share of earnings from its unconsolidated subsidiary was
$156 in 1995 and $1,362 in 1996 after elimination of interest expense
related to the mortgage notes payable to the Company.
5. LINE OF CREDIT:
The Operating Partnership has 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. The Line of Credit is collateralized by a first mortgage lien on
certain of the hotels. As of December 31, 1995 and March 31, 1996, the Company
had $9,500 and $50,250, respectively, outstanding on its Line of Credit.
Additional hotels, including subsequent acquisitions, may be required to be
pledged in order to increase availability under the Line of Credit to the
maximum of $165,000. The Line of Credit, which expires October 1, 1998, bears
interest on the outstanding balance at a rate equal to the 30-day LIBOR rate,
plus 1.90%. LIBOR was 5.69% at December 31, 1995 and 5.31% at March 31, 1996.
The weighted average interest rate incurred by the Company during 1995 and
1996 under this borrowing was 7.71% and 7.40%, respectively.
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
F-21
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
covenants at December 31, 1995 and March 31, 1996. The unused commitment under
the Line of Credit at December 31, 1995 and March 31, 1996 is $155,500 and
$114,750, respectively, subject to certain restrictions and provisions of the
Line of Credit Agreement.
6. PARTICIPATING LEASES:
The Company has leased the hotels under the Participating Leases to the
Lessees through 2007. Minimum future rental income under these noncancelable
operating leases as of December 31, 1995 for the next five years and
thereafter is as follows:
<TABLE>
<CAPTION>
YEAR RENT AMOUNT
---- -----------
<S> <C>
1996.......................................................... $ 35,889
1997.......................................................... 36,158
1998.......................................................... 36,429
1999.......................................................... 36,702
2000.......................................................... 36,978
2001 and thereafter........................................... 222,116
--------
$404,272
========
</TABLE>
The Participating Leases obligate the Company to establish a reserve for
capital improvements and the replacement and refurbishment of furniture,
fixtures and equipment. The Company and the Lessees agree on the use of funds
in these reserves, and the Company has the right to approve the Lessees'
annual and long-term capital expenditures budgets. The amount of such reserves
are to average 4.0% of total revenues for the hotels. At December 31, 1995 and
March 31, 1996, $1,091 and $1,806, respectively, of cash is reserved for
capital improvements, net of capital improvements made to date.
The Company is responsible for payment of (i) real estate and personal
property taxes on its hotel investments (except to the extent that personal
property associated with the hotels is owned by the Lessees), (ii) casualty
insurance on the hotels and (iii) business interruption insurance on the
hotels. The Lessees are required to pay for all liability insurance on the
Company's hotels, with extended coverage, including comprehensive general
public liability, workers' compensation and other insurance appropriate and
customary for properties similar to the Company's hotels with the Company as
an additional named insured.
Upon acquisition of the Initial Hotels, the Company acquired the hotel
inventories with an estimated fair value of $2,035, which were transferred to
CHC Lease Partners for its use in the operation of the hotels. Under the
Participating Leases. CHC Lease Partners is obligated to return an equivalent
inventory to the Company at the end of the respective lease terms, less
$1,000. The $1,000, which represents a lease inducement, has been recorded as
a reduction in inventory and an increase in deferred expenses and is being
amortized to Participating Lease revenue over the lives of the leases. In
connection with the acquisition of three hotels during 1996, the Company
transferred additional inventory to CHC Lease Partners.
7. COMMITMENTS AND CONTINGENCIES:
Office Lease
The Company has entered into an agreement with an affiliate to provide the
Company with office space and limited support personnel for the Company's
headquarters for an annual fee of approximately $100. The term of the
agreement is through February 1999.
F-22
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Employment Agreements
At December 31, 1995, the Company has entered into employment agreements
with each of Messrs. Nussbaum, Lattin and Stewart, three of the Executive
Officers of the Company, for a term of three years. The agreements provide for
annual base compensation with any increases approved by the Compensation
Committee of the Board of Directors. Upon termination of employment other than
for cause, the employment agreements provide for severance benefits in an
amount to be determined by the Compensation Committee.
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.
8. RELATED PARTY TRANSACTIONS:
As described in Note 4, the Company, through the Operating Partnership,
loaned $40,500 in the form of mortgage notes to PAH Ravinia as part of the
financing for PAH Ravinia's acquisition of the Crowne Plaza Ravinia. The
Company recognized $3 of interest income in 1995 and $11 of interest income
for the three months ended March 31, 1996 related to such mortgage notes
(excluding $351 and $1,064 of such interest eliminated for financial reporting
purposes in 1995 and 1996, respectively). Accrued interest on the mortgage
notes receivable and other receivables from PAH Ravinia at December 31, 1995
and March 31, 1996 was $264 and $366, respectively.
9. MINORITY INTEREST
The Operating Partnership has 2,324,312 and 2,491,324 OP Units outstanding
as of December 31, 1995 and March 31, 1996, respectively (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 October 2, 1996. However, certain holders of OP
Units, including directors and officers of the Company, are restricted from
exercising their Redemption Rights for periods ranging from one to two years
after the closing of the Initial Offering. The OP Units issued in connection
with the acquisition of the Holiday Inn Lenox have similar restrictions on
transfer for one year from the date of issuance. 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.
10. SHAREHOLDERS' EQUITY:
Capital Stock
The Company's board of directors has authorized the issuance of up to
20,000,000 shares of preferred stock in one or more series. The number of
shares in each series and the designation, powers, preferences and rights of
each such series and the qualifications, limitations or restrictions thereof
have not been established. As of March 31, 1996, no preferred stock was
issued.
The Company was initially capitalized through the issuance of 1,425 shares
of no par value common stock to three of the Company's executive officers for
which the executive officers paid nominal consideration. In connection with
the Initial Offering, the Company declared an approximate 41-to-1 stock split
of its outstanding common shares, resulting in the issuance of an additional
57,950 shares of common stock to such executive officers. The aggregate value
of $1,425 (based upon the initial public offering price of $24.00 per share),
less
F-23
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
cash received of $3, has been recorded as unearned executive compensation and
was initially amortized over the five-year vesting period. In response to an
independent consultant review of executive compensation in March 1996, 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. The vesting
period was reduced from five years to three years and the amortization period
of the unearned executive compensation was revised accordingly.
In October 1995, the Company completed its Initial Offering of 14,605,000
shares. In December 1995, the Company also issued an aggregate 1,560 shares of
common stock to its non-employee directors in payment of one-half of their
annual retainer (as provided for in the directors' stock incentive plan
described in further detail below). As of December 31, 1995 and March 31,
1996, the Company has 14,665,935 shares of common stock outstanding.
On December 20, 1995, the Company declared a $0.48 per common share dividend
to holders of record on December 29, 1995. Concurrent with the dividend
declaration, the Operating Partnership authorized distributions in the same
amount. The dividend and distributions were paid on January 30, 1996.
On March 26, 1996, the Company declared a $0.48 per common share dividend to
holders of record on March 29, 1996. Concurrent with the dividend declaration,
the Operating Partnership authorized distributions in the same amount. The
dividend and distributions were paid on April 30, 1996.
Stock Incentive Plans
The Company has adopted the 1995 Incentive Plan (the "1995 Plan") and the
Non-Employee Directors' Incentive Plan (the "Directors' Plan") for the purpose
of (i) attracting and retaining employees, directors and others, (ii)
providing incentives to those deemed important to the success of the Company,
and (iii) associating the interests of these individuals with the interests of
the Company and its shareholders through opportunities for increased stock
ownership.
The 1995 Plan. Under the 1995 Plan, employees of the Company are eligible to
receive stock options, stock awards or performance shares, subject to certain
restrictions. All awards under the 1995 Plan are determined by the
Compensation Committee of the Board of Directors and a maximum of 1,000,000
shares of common stock may be issued under the 1995 Plan. Upon completion of
the Initial Offering, 500,000 options were granted to purchase shares of
common stock of the Company. Each option is exercisable at an amount equal to
the initial public offering price of $24.00 per share. Of the options granted,
27,780 vested immediately, while the remaining options become exercisable at
various dates through January 1, 2005. As of March 31, 1996, no options had
been exercised.
The Directors' Plan. The Directors' Plan provides for the award of common
shares to each eligible non-employee director of the Company. Each eligible
director who was a member of the Board as of September 27, 1995, was awarded
nonqualified options to purchase 7,500 shares of common stock on that date
(each such director, a "Founding Director"). The options granted to Founding
Directors have an exercise price equal to the initial public offering price of
$24.00 and vested immediately. Each eligible director who was not a Founding
Director (a "Non-Founding Director") will receive nonqualified options to
purchase 7,500 shares of common stock upon their election to the Board. On the
date of each annual meeting of the Company's shareholders, beginning with the
shareholders' meeting in 1996, each non-employee director then in office will
receive an additional grant of nonqualified options to purchase 2,500 shares
of common stock, with the maximum aggregate number of shares subject to
options to be granted to each non-employee director being 17,500. The exercise
price of options under future grants will be 100% of the fair market value of
the common stock on the date of grant. The exercise price may be paid in cash,
cash equivalents acceptable to the Compensation Committee, common stock or a
combination thereof. Options granted under the Directors' Plan are exercisable
for ten years from the date of grant. As of March 31, 1996, no options had
been exercised.
F-24
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
The Directors' Plan also provides for the annual award of common stock to
each eligible director in payment of one-half of the annual retainer of $13
payable to each such director. The number of shares awarded will be determined
based upon the fair market value of the stock at the date of the grant. Such
shares vest immediately upon grant and are nonforfeitable. In 1995, 1,560
common shares with an aggregate value of $37 were granted to the Founding
Directors.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires disclosure
about the fair value for all financial instruments, whether or not recognized,
for financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1995 and March 31, 1996. Considerable judgment is necessary to
interpret market data and develop estimated fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts which
could be realized on disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Management estimates that the fair value of (i) accounts receivable,
accounts payable and accrued expenses approximate carrying value due to the
relatively short maturity of these instruments; (ii) the notes receivable
approximate carrying value based upon effective borrowing rates for issuance
of debt with similar terms and remaining maturities; and (iii) the borrowings
under the Line of Credit approximate carrying value as the Line of Credit
accrues interest at floating interest rates based on market.
12. NONCASH INVESTING AND FINANCING ACTIVITIES:
October 2, 1995 (inception of operations) through December 31, 1995:
<TABLE>
<S> <C>
In connection with the Initial Offering and acquisition of the Initial
Hotels, the following assets and liabilities were assumed:
Deferred expenses, net of write-off of deferred financing costs
of $679........................................................ $ 127
Prepaid expenses and other assets............................... 313
Accrued real estate and personal property taxes................. (1,102)
In connection with the Company's investment in unconsolidated sub-
sidiary:
Accrued stock subscription...................................... $ (220)
Accrued receivables from unconsolidated subsidiary, net of
payables of $43................................................ 354
In connection with the Initial Offering and acquisition of the
Initial Hotels:
Predecessor basis of interests acquired from affiliates......... $ 1,840
Issuance of OP Units to non-affiliates.......................... 9,363
Distribution of note receivable as consideration................ (479)
Minority interest at closing of the Initial Offering............ (41,670)
Accrued Initial Offering costs.................................. (843)
Dividends and distributions declared and payable.................. $ 8,154
Issuance of shares to directors................................... $ 37
Accrued acquisition and other costs............................... $ 28
Three Months Ended March 31, 1996:
In connection with the acquisition of hotel properties, the following assets
and liabilities were assumed:
Receivables from selling entities............................... $ (78)
Prepaid expenses and other assets............................... (151)
Accounts payable and accrued liabilities........................ 267
Issuance of OP Units in connection with the acquisition of hotel
properties....................................................... $ 4,000
</TABLE>
F-25
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
13. SUBSEQUENT EVENTS:
Hotel Properties Acquired
On January 16, 1996, the Company acquired the 288-room Tremont House Hotel
in Boston, Massachusetts for a purchase price (including closing costs) of
approximately $16,397. The purchase was financed primarily with funds drawn on
the Line of Credit. The Tremont House Hotel is leased to CHC Lease Partners
for a period of 11 years pursuant to a Participating Lease.
On March 4, 1996, the Company acquired the 297-room Holiday Inn Lenox in
Atlanta, Georgia for approximately $7,279 in cash, plus 167,012 OP Units
(valued at approximately $4,000 based upon the market price of the Company's
common stock on the date of contract). The hotel is subject to a 73-year
ground lease. The cash portion of the purchase price was financed with funds
drawn on the Line of Credit. The hotel is leased to CHC Lease Partners for a
period of 12 years pursuant to a Participating Lease. On March 27, 1996, the
Company acquired the 245-room Del Mar Hilton Hotel in San Diego, California
for a purchase price (including closing costs) of approximately $14,872. The
purchase was financed primarily with funds drawn on the Line of Credit. The
hotel is leased to CHC Lease Partners.
In April 1996, the Company acquired a six-hotel portfolio with a total of
1,239 guest rooms located in Washington and California for an aggregate
purchase price of approximately $84,500, including a deferred purchase
obligation of $2,000. The purchase was funded with proceeds from the Company's
Line of Credit and the issuance of 331,577 OP Units (valued at approximately
$8,800 based on the market price of the Company's common stock on the date of
contract). These hotels are leased to NorthCoast L.L.C., a newly formed
Seattle-based hotel company.
Line of Credit
In April 1996, the maximum amount available under the Line of Credit was
increased from $165,000 to $250,000 and certain modifications were made
thereby increasing the Company's ability to borrow under the Line of Credit.
Potential Acquisitions
The Company has entered into non-binding purchase and sale agreements to
acquire the 365-room Hyatt Regency in Lexington, Kentucky for a purchase price
of approximately $14,000, the 492-room Bonaventure Hotel & Spa in Fort
Lauderdale, Florida for a purchase price of approximately $16,200 (plus the
assumption of certain operating liabilities) and the 362-room Marriott
WindWatch Hotel in Long Island, New York for a purchase price of approximately
$30,000. In addition, the Company has entered into a letter of intent
agreement to acquire a portfolio of five Wyndham and Wyndham Garden hotels
containing an aggregate 1,141 guest rooms for a purchase price of
approximately $96,000. The Wyndham hotel properties are located in the
Houston, Dallas, Atlanta, Detroit and Chicago metropolitan areas. 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.
Private Placement
In May 1996, the Company sold an aggregate of approximately $40,000 of
securities to an institutional investor, who purchased the securities on
behalf of two owners. 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, all outstanding Preferred OP
Units will be converted into common stock.
F-26
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT WHICH CARRIED
INITIAL COST ACQUISITION AT CLOSE OF PERIOD(A)
-------------------- ----------------- ----------------------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND ACCUMULATED YEAR
DESCRIPTION ENCUMBERANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION(C)(D) BUILT
----------- ------------- ------- ------------ ---- ------------ --------- ------------------------ ------------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL SERVICE
HOTELS:
Bourbon Orleans
New Orleans,
Louisiana....... (b) $ 1,942 $ 14,209 $ $ $ 1,942 $ 14,209 $ 16,151 $ 99 1800s
Holiday Inn
Select North
Dallas
Farmers Branch,
Texas........... (b) 3,045 15,786 3,045 15,786 18,831 126 1979
Hilton Cleveland
Independence,
Ohio............ (b) 2,760 12,264 2,760 12,264 15,024 102 1980
Crockett Hotel
San Antonio,
Texas........... (b) 1,936 12,130 1,936 12,130 14,066 96 1909
Marriott Hotel
Troy, Michigan.. (b) 1,790 29,220 1,790 29,220 31,010 211 1990
Four Points by
Sheraton
Saginaw,
Michigan........ (b) 773 6,451 773 6,451 7,224 49 1984
Radisson Hotel
New Orleans,
Louisiana....... (b) 2,463 23,630 2,463 23,630 26,093 136 1924
Radisson Hotel &
Suites
Dallas, Texas... (b) 1,011 8,276 1,011 8,276 9,287 59 1986
Radisson Town &
Country
Houston, Texas.. (b) 655 9,725 655 9,725 10,380 69 1986
Aristocrat Hotel
Dallas, Texas... (b) 144 7,806 144 7,806 7,950 54 1925
Holiday Inn
Northwest
Houston, Texas.. (b) 333 2,324 333 2,324 2,657 17 1982
Holiday Inn
Northwest Plaza
Austin, Texas... (b) 1,424 9,323 1,424 9,323 10,747 67 1984
Holiday Inn
San Angelo,
Texas........... (b) 428 3,982 428 3,982 4,410 29 1984
Holiday Inn
Sebring,
Florida......... 626 2,387 626 2,387 3,013 19 1983
Fairmont Hotel
San Antonio,
Texas........... -- 2,957 -- 2,957 2,957 21 1906
Embassy Suites
Hunt Valley,
Maryland........ 529 13,872 529 13,872 14,401 51 1985
LIMITED SERVICE
HOTELS:
Hampton Inn
Jacksonville,
Florida......... 285 4,355 285 4,355 4,640 32 1985
Hampton Inn
Rochester, New
York............ 104 7,829 104 7,829 7,933 54 1986
Hampton Inn
Cleveland
Airport
North Olmsted,
Ohio............ 236 5,483 236 5,483 5,719 39 1986
Hampton Inn
Canton, Ohio.... 350 4,315 350 4,315 4,665 33 1985
CONFERENCE
CENTER:
Peachtree Exec.
Conf. Center
Peachtree City,
Georgia......... (b) 3,059 21,915 3,059 21,915 24,974 145 1984
------- -------- ---- ---- --------- ---------- ---------- ------
$23,893 $218,239 $-- $-- $ 23,893 $ 218,239 $ 242,132 $1,508
======= ======== ==== ==== ========= ========== ========== ======
<CAPTION>
DATE OF
DESCRIPTION ACQUISITION
----------- -----------
<S> <C>
FULL SERVICE
HOTELS:
Bourbon Orleans
New Orleans,
Louisiana....... 1995
Holiday Inn
Select North
Dallas
Farmers Branch,
Texas........... 1995
Hilton Cleveland
Independence,
Ohio............ 1995
Crockett Hotel
San Antonio,
Texas........... 1995
Marriott Hotel
Troy, Michigan.. 1995
Four Points by
Sheraton
Saginaw,
Michigan........ 1995
Radisson Hotel
New Orleans,
Louisiana....... 1995
Radisson Hotel &
Suites
Dallas, Texas... 1995
Radisson Town &
Country
Houston, Texas.. 1995
Aristocrat Hotel
Dallas, Texas... 1995
Holiday Inn
Northwest
Houston, Texas.. 1995
Holiday Inn
Northwest Plaza
Austin, Texas... 1995
Holiday Inn
San Angelo,
Texas........... 1995
Holiday Inn
Sebring,
Florida......... 1995
Fairmont Hotel
San Antonio,
Texas........... 1995
Embassy Suites
Hunt Valley,
Maryland........ 1995
LIMITED SERVICE
HOTELS:
Hampton Inn
Jacksonville,
Florida......... 1995
Hampton Inn
Rochester, New
York............ 1995
Hampton Inn
Cleveland
Airport
North Olmsted,
Ohio............ 1995
Hampton Inn
Canton, Ohio.... 1995
CONFERENCE
CENTER:
Peachtree Exec.
Conf. Center
Peachtree City,
Georgia......... 1995
</TABLE>
See accompanying notes to this schedule on the following page.
F-27
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO SCHEDULE III
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
OCTOBER 2, 1995
THROUGH
DECEMBER 31,
1995
---------------
<S> <C>
(a)Reconciliation of Real Estate:
Balance at beginning of period..................................... $ --
Additions during period:
Acquisitions..................................................... 242,132
Improvements..................................................... --
--------
Balance at end of period........................................... $242,132
========
(b) This hotel collateralizes the Company's Line of Credit which had an
outstanding balance of $9,500 at December 31, 1995.
(c)Reconciliation of Accumulated Depreciation:
Balance at beginning of period..................................... $ --
Depreciation for period.......................................... 1,508
--------
Balance at end of period........................................... $ 1,508
========
(d) Depreciation is computed on buildings and improvements based upon
a useful life of 35 years.
</TABLE>
F-28
<PAGE>
PATRIOT AMERICAN HOSPITALITY, INC.
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
LOANS
SUBJECT TO
PERIODIC FACE CARRYING DELINQUENT
INTEREST MATURITY PAYMENT PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTION RATE DATE TERMS LIENS MORTGAGES MORTGAGES(A) INTEREST
----------- -------- ----------------- -------------- ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
10.25% November 28, 1998 Monthly None $36,000 $36,000 None
payments of
Promissory note, interest only
collateralized by a are required.
first lien deed of Principal
trust on the Crowne payable in
Plaza Ravinia full at
Hotel. maturity.
12.5% November 28, 1998 Monthly $36,000 4,500 4,500 None
payments of ------- -------
Promissory note, interest only
collateralized by a are required.
second lien deed of Principal
trust on the Crowne payable in
Plaza Ravinia full at
Hotel. maturity.
$40,500 $40,500
======= =======
</TABLE>
- --------
(a) Reconciliation of Mortgage Loans on Real Estate for the period October 2,
1995 (inception of operations) to December 31, 1995:
<TABLE>
<S> <C>
Balance at beginning of period.................................... $ --
New mortgage loans................................................ 40,500
-------
Balance at end of period.......................................... $40,500
=======
</TABLE>
For federal income tax purposes, the aggregate cost of investments in
mortgage loans on real estate is the carrying amount as disclosed in the
schedule.
F-29
<PAGE>
LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------
LESSEE INITIAL RECENT LESSEE
HISTORICAL (A) OFFERING (B) ACQUISITIONS (C) PRO FORMA
-------------- ------------ ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Room................... $21,508 $65,193 $72,164 $158,865
Food and beverage...... 8,649 21,871 30,517 61,037
Conference center...... 576 1,858 -- 2,434
Telephone and other.... 1,732 5,860 7,215 14,807
------- ------- ------- --------
Total revenue......... 32,465 94,782 109,896 237,143
------- ------- ------- --------
Expenses:
Departmental costs and
expenses.............. 12,172 35,215 44,033 91,420
General and administra-
tive.................. 2,714 8,061 9,930 20,705
Ground lease expense... -- -- 1,259 1,259
Repairs and mainte-
nance................. 1,476 4,456 5,498 11,430
Utilities.............. 1,320 4,107 4,460 9,887
Marketing.............. 2,928 8,763 8,687 20,378
Insurance.............. 191 716 698 1,605
Participating lease
payments.............. 10,582 31,970 (D) 33,369 (D) 75,921
------- ------- ------- --------
Total expenses........ 31,383 93,288 107,934 232,605
------- ------- ------- --------
Income before lessee
income (expenses).... 1,082 1,494 1,962 4,538
Dividend and interest
income................ 198 (E) -- -- 198
Management fees........ (536) (1,165)(F) (2,965)(F) (4,666)
Lessee general and ad-
ministrative.......... (235) (542)(G) (401)(G) (1,178)
------- ------- ------- --------
Net income (loss)..... $ 509 $ (213) $(1,404) $ (1,108)
======= ======= ======= ========
</TABLE>
- --------
(A) Represents the historical results of operations of CHC Lease Partners from
October 2, 1995 (inception) and Metro Lease Partners results of operations
from November 15, 1995 (inception) through December 31, 1995.
(B) Represents adjustments to the Lessee's results of operations assuming the
Initial Offering and Formation Transactions occurred at the beginning of
the period presented.
(C) Represents adjustments to the Lessee's results of operations assuming the
Recent Acquisitions occurred at the beginning of the period presented.
(D) Represents Participating Lease payments calculated on a pro forma basis by
applying the provisions of the Participating Leases to the historical
revenue of the Hotels.
(E) Includes dividend income on approximately 250,000 Units in the Operating
Partnership which form a portion of the required capitalization of CHC
Lease Partners. Pro forma amounts exclude additional dividend income of
approximately $456,000 (based upon the Operating Partnership's
distributions to date) expected to be earned on approximately 300,000
Units held by certain Lessees, and pro forma interest income earned on
invested cash balances.
(F) Represents management fees paid to the Operators under the terms of their
respective management agreements with the Lessees.
(G) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-30
<PAGE>
LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------
LESSEE INITIAL RECENT LESSEE
HISTORICAL (A) OFFERING (B) ACQUISITIONS (C) PRO FORMA
-------------- ------------ ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Room................... $46,816 $42,951 $71,142 $160,909
Food and beverage...... 16,889 14,259 30,216 61,364
Conference center...... 1,221 1,159 -- 2,380
Telephone and other.... 4,105 4,003 7,163 15,271
------- ------- ------- --------
Total revenue......... 69,031 62,372 108,521 239,924
------- ------- ------- --------
Expenses:
Departmental costs and
expenses.............. 25,490 23,666 43,375 92,531
General and administra-
tive.................. 5,720 5,603 10,103 21,426
Ground lease expense... -- -- 1,273 1,273
Repairs and mainte-
nance................. 3,102 3,036 5,276 11,414
Utilities.............. 2,868 2,801 4,358 10,027
Marketing.............. 6,251 5,998 8,300 20,549
Insurance.............. 420 469 690 1,579
Participating lease
payments.............. 22,953 20,879 (D) 32,901 (D) 76,733
------- ------- ------- --------
Total expenses........ 66,804 62,452 106,276 235,532
------- ------- ------- --------
Income (loss) before
lessee income (ex-
penses).............. 2,227 (80) 2,245 4,392
Dividend and interest
income................ 408 (E) -- -- 408
Management fees........ (1,160) (547)(F) (3,032)(F) (4,739)
Lessee general and ad-
ministrative.......... (420) (364)(G) (394)(G) (1,178)
------- ------- ------- --------
Net income (loss)..... $ 1,055 $ (991) $(1,181) $ (1,117)
======= ======= ======= ========
</TABLE>
- --------
(A) Represents the historical results of operations of CHC Lease Partners from
October 2, 1995 (inception) and Metro Lease Partners results of operations
from November 15, 1995 (inception) through March 31, 1996.
(B) Represents adjustments to the Lessee's results of operations assuming the
Initial Offering and Formation Transactions occurred at the beginning of
the period presented.
(C) Represents adjustments to the Lessee's results of operations assuming the
Recent Acquisitions occurred at the beginning of the period presented.
(D) Represents Participating Lease payments calculated on a pro forma basis by
applying the provisions of the Participating Leases to the historical
revenue of the Hotels.
(E) Includes dividend income on approximately 250,000 Units in the Operating
Partnership which form a portion of the required capitalization of CHC
Lease Partners. Pro forma amounts exclude additional dividend income of
approximately $336,000 (based upon the Operating Partnership's
distributions to date) expected to be earned on approximately 300,000
Units held by certain Lessees, and pro forma interest income earned on
invested cash balances.
(F) Represents management fees paid to the Operators under the terms of their
respective management agreements with the Lessees.
(G) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-31
<PAGE>
LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------
LESSEE RECENT LESSEE
HISTORICAL (A) ACQUISITIONS (B) PRO FORMA
-------------- --------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Room....................... $25,308 $15,241 $40,549
Food and beverage.......... 8,240 6,673 14,913
Conference center.......... 645 -- 645
Telephone and other........ 2,373 1,606 3,979
------- ------- -------
Total revenue............. 36,566 23,520 60,086
------- ------- -------
Expenses:
Departmental costs and ex-
penses.................... 13,318 9,660 22,978
General and administrative. 3,006 2,509 5,515
Ground lease expense....... -- 289 289
Repairs and maintenance.... 1,626 1,169 2,795
Utilities.................. 1,548 941 2,489
Marketing.................. 3,323 1,847 5,170
Insurance.................. 229 166 395
Participating lease pay-
ments..................... 12,371 7,612 (C) 19,983
------- ------- -------
Total expenses............ 35,421 24,193 59,614
------- ------- -------
Income (loss) before les-
see income (expenses).... 1,145 (673) 472
Dividend and interest in-
come...................... 210 (D) -- 210
Management fees............ (624) (476)(E) (1,100)
Lessee general and adminis-
trative................... (185) (95)(F) (280)
------- ------- -------
Net income (loss)......... $ 546 $(1,244) $ (698)
======= ======= =======
</TABLE>
- --------
(A) Represents the historical results of operations of CHC Lease Partners and
Metro Lease Partners for the three months ended March 31, 1996.
(B) Represents adjustments to the Lessee's results of operations assuming the
Recent Acquisitions occurred at the beginning of the period presented.
(C) Represents Participating Lease payments calculated on a pro forma basis by
applying the provisions of the Participating Leases to the historical
revenue of the Hotels.
(D) Includes dividend income on approximately 250,000 Units in the Operating
Partnership which form a portion of the required capitalization of CHC
Lease Partners. Pro forma amounts exclude additional dividend income of
approximately $24,000 (based upon Operating Partnership's distributions to
date) expected to be earned on approximately 300,000 Units held by certain
Lessees, and pro forma interest income earned on invested cash balances.
(E) Represents management fees paid to the Operators under the terms of their
respective management agreements with the Lessees.
(F) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
F-32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of CHC Lease Partners:
In our opinion, the accompanying balance sheet and the related statements of
operations, partners' capital and of cash flows present fairly, in all
material respects, the financial position of CHC Lease Partners at December
31, 1995, and the results of its operations and its cash flows for the period
(inception) October 2, 1995 to December 31, 1995 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
March 4, 1996
Miami, Florida
F-33
<PAGE>
CHC LEASE PARTNERS
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 9,385 $10,182
Accounts receivable, net of allowance for doubtful
accounts of $142 in 1995 and $188 in 1996.......... 5,833 6,684
Inventories......................................... 2,136 2,401
Prepaid expenses.................................... 441 1,009
------- -------
Total current assets.............................. 17,795 20,276
Investments........................................... 5,100 5,100
Deposits.............................................. 71 115
------- -------
Total assets...................................... $22,966 $25,491
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable.................................... $ 2,202 $ 2,253
Accrued rent due to Patriot American Hospitality
Partnership, L.P. ................................. 2,260 2,279
Due to affiliates, net.............................. 138 511
Accrued payroll..................................... 2,219 2,271
Taxes payable....................................... 1,556 1,795
Guest deposits...................................... 958 1,829
Accrued expenses and other liabilities.............. 2,012 2,478
------- -------
Total current liabilities......................... 11,345 13,416
Due to Patriot American Hospitality Partnership, L.P.. 1,035 1,219
Lease inducement...................................... 977 954
------- -------
Total liabilities................................. 13,357 15,589
Commitments and contingencies (Note 2)................ -- --
Partners' capital..................................... 9,609 9,902
------- -------
Total liabilities and partners' capital........... $22,966 $25,491
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
CHC LEASE PARTNERS
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 2, 1995) THREE
TO MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
----------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Room........................................... $21,092 $24,260
Food and beverage.............................. 8,524 7,998
Conference center.............................. 576 645
Telephone and other............................ 1,703 2,295
------- -------
Total revenue................................ 31,895 35,198
------- -------
Expenses:
Departmental costs and expenses................ 11,949 12,765
Participating lease payments................... 10,432 11,918
General and administrative..................... 2,655 2,883
Repairs and maintenance........................ 1,436 1,544
Utilities...................................... 1,290 1,496
Marketing...................................... 2,865 3,174
Insurance...................................... 191 220
------- -------
Total expenses............................... 30,818 34,000
------- -------
Income before lessee income (expense)........ 1,077 1,198
------- -------
Dividend and interest income................... 198 210
Management fees................................ (536) (597)
Lessee general and administrative expenses..... (230) (178)
------- -------
Total lessee expense......................... (568) (565)
------- -------
Net income................................... $ 509 $ 633
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
CHC LEASE PARTNERS
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<S> <C>
Initial capitalization at inception..................................... $9,100
Net income.............................................................. 509
------
Balance, December 31, 1995.............................................. 9,609
Net income (unaudited).................................................. 633
Distribution (unaudited)................................................ (340)
------
Balance, March 31, 1996 (unaudited)..................................... $9,902
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
CHC LEASE PARTNERS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 2, 1995) THREE
TO MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
----------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 509 $ 633
Adjustments to reconcile net income to net
cash provided by operating activities:
Recognition of lease inducement............. (23) (23)
Provision for losses on accounts receivable. 142 46
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable......................... (3,282) (897)
Inventories................................. (101) 255
Prepaid expenses and other assets........... (178) (544)
Increase (decrease) in:
Accounts payable............................ 1,306 51
Accrued rent due to Patriot American
Hospitality Partnership, L.P. ............. 2,260 19
Due to affiliates........................... 138 373
Accrued payroll............................. 1,219 52
Taxes payable............................... 1,265 239
Guest deposits.............................. (182) 871
Accrued expenses and other liabilities...... 1,517 (674)
------- -------
Net cash provided by operating activities....... 4,590 401
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquired cash at inception and under new
operating leases ............................ 795 736
------- -------
Net cash provided by investing activities....... 795 736
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial capitalization........................ 4,000 --
Partnership distribution...................... -- (340)
------- -------
Net cash provided by (used in) financing
activities..................................... 4,000 (340)
------- -------
Net increase in cash and cash equivalents....... 9,385 797
Cash and cash equivalents at beginning of
period......................................... -- 9,385
------- -------
Cash and cash equivalents at end of period...... $ 9,385 $10,182
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Initial capitalization in units of limited
partnership interest......................... $ 5,100
=======
Assumption of assets and liabilities upon
consummation of participating lease
agreements with Patriot American Hospitality
Partnership, L.P.
Acquired cash............................... $ 795 736
Inventories................................. 2,035 336
Other assets................................ 3,027 68
Lease inducement............................ (1,000) --
Due to Patriot American Hospitality
Partnership, L.P. ......................... (1,035) (320)
Other liabilities........................... (3,822) (820)
------- -------
Net assets.................................. $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND FOR THE PERIOD THEN ENDED
ARE UNAUDITED)
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"). Patriot American Hospitality, Inc. (the "Company"),
through its subsidiaries, owns approximately 86.3% of the Operating
Partnership at December 31, 1995 and 85.5% at March 31, 1996. 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.
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, 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, conference center revenue and telephone and other
revenues of each of the Initial Hotels.
The Initial Hotels consist of fifteen full service hotels, four limited
service hotels and one executive conference center. Seventeen of the twenty
Initial 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 Initial Hotels under franchise licenses.
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. As of March 31, 1996, CHC Lease Partners operates
twenty-three hotels.
At March 31, 1996, 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles. Significant accounting policies are summarized
below.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
CHC Lease Partners' fiscal year ends on November 30, however, these
financial statements have been prepared as of and for the period inception
(October 2, 1995) to December 31, 1995 and as of and for the three months
ended March 31, 1996.
F-38
<PAGE>
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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.
Investments
Investments consist of 250,001 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 October 2, 1996, 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. In addition, the OP Units
are also subject to additional restrictions as to transfer until October 2,
1997. Under the participating lease agreements CHC Lease Partners has
collaterally assigned 166,668 OP Units to the Operating Partnership. The OP
Units are stated at lower of cost or market based upon the fair market value
of Company common stock with an appropriate discount for any restrictions
imposed on the OP Units.
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, CHC Lease Partners is not subject to taxation on income. The
federal and state income tax consequences of CHC Lease Partners' profits and
losses accrue to the partners.
Concentration of Credit Risk
Financial instruments which potentially subject CHC Lease Partners 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. CHC
Lease Partners places its cash with high quality financial institutions,
however, at December 31, 1995 and March 31, 1996 CHC Lease Partners 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 of potential fluctuations in the value of Company
common stock. Management believes the credit risk related to the OP Units is
minimal.
Fair Value of Financial Instruments
The following notes summarize the major methods and assumptions used in
estimating fair values of financial instruments:
F-39
<PAGE>
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Cash and Cash Equivalents. The carrying amount approximates fair value due
to the relatively short period to maturity of these instruments.
Investments. The fair value of the OP Units is estimated based upon the
quoted market price of Company common stock less a discount of approximately
15% for the restrictions imposed on the OP Units. The carrying amount of the
OP Units approximates fair value.
Interim Unaudited Financial Information
The financial statements as of and for the three months ended March 31, 1996
are unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for a full year.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
CHC Lease Partners at December 31, 1995 has future lease commitments to the
Operating Partnership under the participating lease agreements through the
year 2007. Minimum future rental payments under these noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- --------
<S> <C>
1996................................................................... $ 34,079
1997................................................................... 34,334
1998................................................................... 34,592
1999................................................................... 34,851
2000................................................................... 35,113
Thereafter............................................................. 208,746
--------
$381,715
========
</TABLE>
CHC Lease Partners incurred base rents of $6,801 and participating rents of
$3,654 during the period inception (October 2, 1995) to December 31, 1995 and
incurred base rents of $7,321 and participating rents of $4,620 during the
three months ended March 31, 1996. Of the total rent incurred during 1996,
approximately $617 related to three leases which commenced during the first
quarter. At December 31, 1995 and March 31, 1996, CHC Lease Partners owed the
Operating Partnership $2,260 and $2,279, 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
December 31, 1995, the balance of the lease inducement and the inventory due
to the Operating Partnership were $977 and $1,035, respectively, and at March
31, 1996 these amounts were $954 and $1,219, respectively.
CHC Lease Partners has 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 19 of the 20 Initial Hotels as of December 31, 1995, and
22 of the 23 hotels as of March 31, 1996. 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 leased ranging from 2.25% to 2.50%,
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. If, after
payment of management fees at the contract rate, CHC Lease Partners would be
deficient in participating lease payments to the Operating Partnership under
any of the participating lease agreements in any year, CHC and GAH would be
required to refund and forego management fees for each of the hotels which are
deficient in participating lease payments. If after the management fees are
refunded and foregone, CHC Lease Partners would
F-40
<PAGE>
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
still be deficient in participating lease payments under any of the
participating lease agreements, CHC and GAH would be required to pay CHC Lease
Partners up to 50% of the management fees earned by CHC and GAH respectively,
except for one CHC managed hotel. Management fees incurred under these
management agreements were $460 during the period inception (October 2, 1995)
to December 31, 1995 and $516 for the three months ended March 31, 1996.
Included in due to affiliates, net at December 31, 1995 were amounts for
management fees under these management agreements due from CHC and owed to GAH
of $46 and $43, respectively. At March 31, 1996, amounts owed to CHC and GAH
under these management agreements were $27 and $309, respectively.
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 $141 for
the period inception (October 2, 1995) to December 31, 1995 and $149 for the
three months ended March 31, 1996. At December 31, 1995 and March 31, 1996,
the amount due CHC for these costs was $141 and $175, respectively.
During the three months ended March 31, 1996, CHC Lease Partners made
distributions to its partners of $340.
3. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The unaudited pro forma statements of operations are presented as if the
leases and the operation of the Initial Hotels had commenced on January 1,
1994. 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, 1994,
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 dividend income on 250,001 OP Units and interest
income associated with working capital balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Rooms............................................... $ 79,054 $ 86,284
Food and beverage................................... 30,157 30,396
Conference center................................... 2,149 2,434
Telephone and other................................. 6,669 7,563
----------- -----------
Total revenue..................................... 118,029 126,677
----------- -----------
Expenses:
Departmental costs and expenses..................... 45,527 47,164
Participating lease payments........................ 37,985 42,402
General and administrative.......................... 10,029 10,715
Repairs and maintenance............................. 5,886 5,892
Utilities........................................... 5,497 5,397
Marketing........................................... 10,241 11,628
Insurance........................................... 958 908
----------- -----------
Total expenses.................................... 116,123 124,106
----------- -----------
Income before lessee expenses......................... 1,906 2,571
Lessee expenses....................................... (2,087) (2,473)
----------- -----------
Net income (loss)................................... $ (181) $ 98
=========== ===========
</TABLE>
4. SUBSEQUENT EVENTS:
During the first quarter of 1996, CHC Lease Partners and the Operating
Partnership entered into two operating leases for two 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. The base rent for the two hotels should total
approximately $4,721 for 1996, subject to completion of planned renovations
and other activities.
F-41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners and Owners of the Initial Hotels:
We have audited the accompanying combined balance sheet of the Initial
Hotels (described in Note 1) as of December 31, 1994, and the related combined
statements of operations, partners' and owners' equity, and cash flows for the
period January 1, 1995 through October 1, 1995 and for the years ended
December 31, 1994 and 1993. These combined financial statements are the
responsibility of the management of the Initial Hotels. Our responsibility is
to express an opinion on these financial statements based on our audits. We
did not audit the financial statements of certain of the Initial Hotels and
Troy Hotel Investors, which statements reflect total assets constituting 37%
of the combined total assets as of December 31, 1994 and total revenues
constituting 41%, 32% and 35% of the combined total revenues for the period
January 1, 1995 through October 1, 1995 and for the years ended December 31,
1994 and 1993, respectively. Such financial statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for such hotels, is based solely on the
reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the combined financial position of the Initial Hotels as of
December 31, 1994, and the combined results of their operations and their cash
flows for the period January 1, 1995 through October 1, 1995 and for the years
ended December 31, 1994 and 1993, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Dallas, Texas
February 16, 1996
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners, Owners and Affiliates of Certain of the Initial Hotels and
CHC International, Inc.:
We have audited the accompanying combined balance sheet of Certain of the
Initial Hotels (as described in Note 1) as of December 31, 1994, and the
related combined statements of operations, equity (deficit), and cash flows
for the period from January 1, 1995 to October 1, 1995 and for the years ended
December 31, 1994 and 1993. These combined financial statements are the
responsibility of the management of Certain of the Initial Hotels. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Certain of the
Initial Hotels as of December 31, 1994, and the combined results of their
operations and their cash flows for the period from January 1, 1995 to October
1, 1995 and for the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Fort Lauderdale, Florida
January 15, 1996
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partners Troy Hotel Investors:
We have audited the accompanying balance sheet of Troy Hotel Investors (a
limited partnership) as of October 1, 1995 and the related statements of
income, partners' equity and cash flows for the period from January 1, 1995
through October 1, 1995. These financial statements are the responsibility of
the management and owners of Troy Hotel Investors. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Troy Hotel Investors as of
October 1, 1995 and the results of its operations and its cash flows for the
period from January 1, 1995 through October 1, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 9, the Partnership sold substantially all of its assets
and liabilities on October 2, 1995. The financial statements do not reflect
the effects of the sale. The partners intend to dissolve the Partnership
in 1996.
Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
January 17, 1996
F-44
<PAGE>
INITIAL HOTELS
COMBINED BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Investment in hotel properties:
Land............................................................... $ 17,122
Building and improvements.......................................... 115,529
Furniture and equipment............................................ 50,105
--------
182,756
Less accumulated depreciation...................................... (33,722)
--------
Net investment in hotel properties................................... 149,034
Cash and cash equivalents............................................ 8,290
Cash held in escrow.................................................. 3,148
Accounts receivable, net, including receivables from affiliates of
$753................................................................ 5,086
Inventories.......................................................... 1,126
Deferred expenses, net............................................... 2,947
Prepaids and other assets............................................ 1,488
--------
$171,119
========
LIABILITIES AND PARTNERS' AND OWNERS' EQUITY
Mortgages and other notes payable, including $800 due to an affili-
ate................................................................. $131,095
Capital lease obligations............................................ 2,284
Accounts payable, trade.............................................. 6,294
Accrued expenses and other liabilities............................... 5,348
Amounts due to affiliates............................................ 6,836
--------
151,857
Commitments and contingencies........................................ --
Partners' and owners' equity......................................... 19,262
--------
$171,119
========
</TABLE>
See accompanying notes.
F-45
<PAGE>
INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, THREE
YEARS ENDED 1995 MONTHS
DECEMBER 31, THROUGH ENDED
----------------- OCTOBER 1, MARCH 31,
1993 1994 1995 1995
------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue from hotel operations:
Room................................ $57,504 $ 69,969 $65,192 $22,242
Food and beverage................... 20,168 23,770 21,872 7,613
Conference center................... 1,970 2,149 1,858 699
Telephone and other................. 4,660 5,593 5,860 1,857
------- -------- ------- -------
Total revenue..................... 84,302 101,481 94,782 32,411
------- -------- ------- -------
Expenses:
Departmental costs and expenses..... 33,362 38,461 35,850 11,806
General and administrative.......... 8,407 9,716 8,895 2,686
Repairs and maintenance............. 4,835 5,288 4,455 1,419
Utilities........................... 4,544 4,920 4,107 1,307
Marketing........................... 7,342 8,764 8,769 2,821
Management fees paid to affiliates.. 3,065 3,739 3,995 1,488
Interest expense.................... 9,609 11,197 11,674 4,904
Real estate and personal property
taxes, and insurance............... 3,539 3,786 3,413 1,128
Depreciation and amortization....... 6,649 8,832 7,694 2,649
------- -------- ------- -------
Total expenses.................... 81,352 94,703 88,852 30,208
------- -------- ------- -------
Income before sale of assets and
extraordinary item............... 2,950 6,778 5,930 2,203
Gain (loss) on sale of assets....... (41) 170 -- --
------- -------- ------- -------
Income before extraordinary item.. 2,909 6,948 5,930 2,203
Extraordinary item--loss on extin-
guishment of debt.................. -- -- (1,803) (1,803)
------- -------- ------- -------
Net income........................ $ 2,909 $ 6,948 $ 4,127 $ 400
======= ======== ======= =======
</TABLE>
See accompanying notes.
F-46
<PAGE>
INITIAL HOTELS
COMBINED STATEMENTS OF PARTNERS' AND OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET COMBINED
EQUITY
------------
<S> <C>
Balance, December 31, 1992......................................... $ 24,739
Net income....................................................... 2,909
Cash contributions............................................... 8,587
Cash distributions............................................... (22,093)
--------
Balance, December 31, 1993......................................... 14,142
Net income....................................................... 6,948
Capital contributions............................................ 9,239
Distribution of receivables from partners........................ (200)
Cash distributions............................................... (10,867)
--------
Balance, December 31, 1994......................................... 19,262
Net income....................................................... 4,127
Capital contributions............................................ 268
Contribution of debt to capital.................................. 4,145
Redemption of partner interests.................................. (8,021)
Cash distributions............................................... (9,261)
--------
Balance October 1, 1995............................................ $ 10,520
========
</TABLE>
See accompanying notes.
F-47
<PAGE>
INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, THREE
YEARS ENDED 1995 MONTHS
DECEMBER 31, THROUGH ENDED
------------------ OCTOBER 1, MARCH 31,
1993 1994 1995 1995
-------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income........................ $ 2,909 $ 6,948 $ 4,127 $ 400
Adjustments to reconcile net in-
come to net cash provided by op-
erating activities:
Depreciation and amortization... 6,649 8,832 7,694 2,649
Amortization of deferred loan
costs.......................... 189 167 225 58
Amortization of discount on note
payable........................ 468 429 172 171
Expenses financed by term debt.. -- -- 250 250
Loss (gain) on sale of assets... 41 (170) -- --
Loss on extinguishment of debt.. -- -- 1,803 1,803
Changes in assets and liabilities,
net of effects of hotel property
change in ownership:
Cash held in escrow............. 14 27 (189) (2)
Accounts receivable, net........ (762) (910) (1,459) (2,073)
Inventories..................... 135 (61) 16 (33)
Prepaid and other assets........ (243) (28) (2) (1,041)
Accounts payable and other ac-
crued expenses................. 2,264 1,331 1,083 (252)
Payables to affiliates.......... (187) 288 (332) 72
-------- -------- ------- -------
Net cash provided by operating
activities................... 11,477 16,853 13,388 2,002
-------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Restricted funds (reserved) used
for acquisition of property and
equipment........................ 422 (487) 55 189
Acquisition of hotel properties... (9,518) (8,055) -- --
Improvements and additions to ho-
tel properties................... (8,065) (7,610) (4,665) (1,253)
Proceeds from the sale of assets.. -- 254 -- --
Hotel property change in owner-
ship............................. (4,498) -- -- --
Payment of organizational costs... (514) -- -- --
-------- -------- ------- -------
Net cash used in investing ac-
tivities..................... (22,173) (15,898) (4,610) (1,064)
-------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Proceeds from issuance of
mortgages and other notes
payable.......................... 26,918 9,192 13,217 12,500
Principal payments on mortgages
and other notes payable.......... (6,048) (5,944) (11,257) (9,888)
Payment of financing costs........ (114) (439) (320) (279)
Payments on capital lease obliga-
tions............................ (97) (275) (1,319) (1,181)
Proceeds from advances from affil-
iates............................ 4,219 -- 75 --
Payments on advances from affili-
ates............................. -- (53) (561) (695)
Proceeds from loans from affili-
ates............................. 403 -- -- --
Payments on loans from affiliates. (563) (372) (317) --
Capital contributions............. 8,587 9,239 268 33
Distributions paid................ (22,093) (10,867) (9,261) (1,529)
-------- -------- ------- -------
Net cash provided by (used in)
financing activities......... 11,212 481 (9,475) (1,039)
-------- -------- ------- -------
Net change in cash and cash equiva-
lents.............................. 516 1,436 (697) (101)
Cash and cash equivalents at begin-
ning of period..................... 6,338 6,854 8,290 8,290
-------- -------- ------- -------
Cash and cash equivalents at end of
period............................. $ 6,854 $ 8,290 $ 7,593 $ 8,189
======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for in-
terest............................. $ 8,842 $ 10,240 $10,816 $ 4,805
======== ======== ======= =======
</TABLE>
See accompanying notes.
F-48
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(AMOUNTS AND DISCLOSURES FOR THE PERIOD ENDED MARCH 31, 1995 ARE UNAUDITED)
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 Invest- Bourbon Orleans Hotel--New Orleans,
ors, LP................ 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)(3)
Crockett Hospitality, Crockett Hotel--San Antonio, Texas
Inc.................... 206 5/90
Troy Hotel Investors, Marriott Troy Hotel--Troy, Michigan
LP..................... 350 12/94
Tri-City Associates..... Four Points by Sheraton--Saginaw,
Michigan 156 N/A(2)(3)
1500 Canal Street In- Radisson New Orleans Hotel--New
vestors, LP............ Orleans, Louisiana 759 9/92
Chartwell Properties, Radisson Hotel & Suites--Dallas, Texas
Inc.................... 198 2/90
Town & Country Hospital- Radisson Suites (Town & Country)--
ity, Co................ Houston, Texas 173 11/89
Main Street Hospitality, Holiday Inn Aristocrat--Dallas, Texas
LP..................... 172 11/92
290 Ventures, LP........ Holiday Inn Northwest Plaza--Houston,
Texas 193 9/90
Travis Real Estate Holiday Inn Northwest Plaza--Austin,
Group, JV.............. Texas 193 1/92
San Angelo Hospitality, Holiday Inn--San Angelo, Texas
LP..................... 148 1/93
Sebring Hospitality, LP. Holiday Inn--Sebring, Florida 148 8/93
Fairmount Hospitality, Fairmount Hotel--San Antonio, Texas
LP..................... 37 10/92
-----
3,509
-----
LIMITED SERVICE HOTELS:
Hotel Group of Jackson- Hampton Inn Jacksonville Airport--
ville, JV.............. Jacksonville, Florida 113 1985(1)(3)
North Coast Rochester Hampton Inn--Rochester, New York
Limited Partnership.... 113 1986(1)(3)
Great Northern Inns Com- Hampton Inn Cleveland Airport--North
pany, L.P.............. Olmsted, Ohio 113 N/A(2)(3)
North Coast Inns Co. Hampton Inn--Canton, Ohio
Ltd.................... 108 N/A(2)(3)
-----
447
-----
EXECUTIVE CONFERENCE
CENTER:
MWL Peachtree........... Peachtree Executive Conference
Center--Peachtree City, Georgia 250 4/93(3)
-----
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.
(3) Collectively "Certain of the Initial Hotels".
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.
F-49
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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% 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. For those hotels owned by the Primary Contributors or their
affiliates, the accompanying combined financial statements include the results
of operations subsequent to the date of acquisition of each respective hotel.
For those hotels managed by the Primary Contributors or their affiliates, the
combined financial statements include the results of operations for all
periods presented (since these hotels were managed by the Primary Contributors
or their affiliates during all periods).
The Marriott Hotel was acquired by one of the Primary Contributors on
December 30, 1994. The accompanying financial statements include the financial
position and results of operations of the Marriott Hotel from the date of
acquisition.
The accompanying financial statements have been prepared for the period from
January 1, 1995 to October 1, 1995, (the day before the acquisition of the
Initial Hotels by the Operating Partnership) and for the years ended December
31, 1993 and 1994. Unless otherwise specified, all references to a year in the
financial statements are for the periods stated above.
F-50
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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
The combined statements of operations and cash flows for the three months
ended March 31, 1995 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
All highly liquid investments with an original maturity date of three months
or less when purchased are considered to be cash equivalents.
Cash Held in Escrow
Cash held in escrow consists primarily of amounts for taxes and insurance
remitted to the lenders which hold the mortgages on the hotel facilities.
Concentration of Credit Risk
At December 31, 1994, the Initial Hotels have cash balances with banks in
excess of the Federal Deposit Insurance Corporation's insured limits totalling
$5,385.
Inventories
Inventories, consisting of food, beverages, china, linens and glassware, are
stated at the lower of cost (generally, first-in, first-out) or market.
Initial Hotel Properties
The Initial Hotel properties are stated at the lower of cost or net
realizable value. Depreciation is computed using the straight-line method
based upon the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements......................................... 30-40
Furniture and equipment............................................ 5-7
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, management of the Initial Hotels records impairment losses
on long-lived assets used in operations when events and circumstances indicate
that the assets
F-51
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those assets. No such
impairment losses have been recognized to date.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
Deferred Expenses
Deferred expenses consist primarily of franchise fees, organization costs
and deferred loan costs. Amortization of franchise fees is computed using the
straight-line method over the terms of the related franchise agreements.
Organization costs are amortized on a straight-line basis over five years.
Deferred loan costs are amortized to interest expense on a straight-line basis
over the term of the loan.
Income Taxes
The Selling Entities are not subject to federal or state income taxes;
however, they must file informational income tax returns and the partners or
shareholders must take income or loss of the Selling Entities into
consideration when filing their respective tax returns.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
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.
3. MORTGAGES AND OTHER NOTES PAYABLE:
Mortgage Loans
Mortgage loans payable is comprised of 21 loans as of December 31, 1994,
each of which are generally collateralized by a first lien deed of trust and
assignment of rents. Mortgage loans payable consists of both interest-only and
amortizing loans which mature at various dates through November 2011. Seven of
the mortgage loans totalling $81,103 as of December 31, 1994 and $84,686 as of
March 31, 1995 have fixed interest rates ranging from 6.0% to 12.0%. Variable
rate mortgage loans payable at December 31, 1994 and March 31, 1995 total
approximately $47,029 and $49,238, respectively. Interest rates on the
variable rate debt are generally based on prime or LIBOR rates which were 8.5%
and 6.0%, respectively, at December 31, 1994 and were 9.0% and 6.1%,
respectively, at March 31, 1995. Certain of the mortgage obligations are
personally guaranteed by certain partners of the Selling Entities.
Other Notes Payable
Other Notes Payable is comprised of six notes as of December 31, 1994 and
March 31, 1995 totaling $2,963 and $6,083, respectively. The proceeds from the
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.
F-52
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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.
4. 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 $1,598, $2,458, $2,315, and $875 for 1993, 1994 and 1995, and
the three months ended March 31, 1995, respectively. 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. The 17 hotels will continue to be operated under
franchise agreements with the same franchisors with remaining terms in excess
of ten years.
Operating Leases
Equipment, vehicles and land are leased under noncancelable operating lease
agreements expiring at varying intervals through July 2069. Following is a
schedule of future minimum rental payments required under these leases as of
December 31, 1994:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1995.............................................................. $ 543
1996.............................................................. 419
1997.............................................................. 309
1998.............................................................. 219
1999.............................................................. 140
2000 and thereafter............................................... 4,000
------
$5,630
======
</TABLE>
F-53
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Rental expense was approximately $397, $504, $489 and $178 for 1993, 1994
and 1995, and the three months ended March 31, 1995, respectively.
Capital Leases
The Initial Hotels lease furniture, fixtures and equipment under capital
lease agreements expiring at varying intervals through December 1999.
Depreciation of assets recorded under capital leases is included in
depreciation and amortization in the accompanying combined financial
statements. Future minimum payments under capital lease obligations as of
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1995............................................................. $ 730
1996............................................................. 684
1997............................................................. 637
1998............................................................. 578
1999............................................................. 235
------
Total Minimum lease payments..................................... 2,864
Less: amounts representing interest.............................. (580)
------
Present value of minimum lease payments.......................... $2,284
======
</TABLE>
Contingencies
Certain entities included in the Initial Hotels are subject to various legal
proceedings and claims that arise in the ordinary course of business. These
matters are generally covered by insurance. While the resolution of these
matters cannot be predicted with certainty, management believes that the final
outcome of such matters will not have a material adverse effect on the
financial position or results of operations of the Operating Partnership or
the Company, notwithstanding potential insurance recovery.
5. 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.
F-54
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Fees paid to affiliated entities for management (including asset and
incentive management fees) and other services provided to the Initial Hotels
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1993 1994 1995 1995
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Management fees............................... $2,766 $3,068 $3,512 $1,287
Incentive management fees..................... 273 605 374 184
Asset management fees......................... 26 66 109 17
Construction supervisory fees................. 170 313 80 --
Accounting and other fees..................... 107 367 116 94
------ ------ ------ ------
$3,342 $4,419 $4,191 $1,582
====== ====== ====== ======
</TABLE>
Accounting and other fees are included in general and administrative costs
and construction supervisory fees are included in buildings and improvements
in the accompanying financial statements. Unpaid fees are included in amounts
due to affiliates.
Certain of the Selling Entities have received working capital loans or
advances from owners or their affiliates. These loans bear interest at rates
ranging from 5% to 14% at December 31, 1994 and mature at various dates
through March 1997. The advances are non-interest bearing and are generally
due on demand. Loans and advances from owners and their affiliates of $5,598
and $560, respectively, at December 31, 1994 are included in amounts due to
affiliates. Interest expense related to these loans is $385, $649, $182, and
$136 for 1993, 1994 and 1995, and the three months ended March 31, 1995,
respectively. In addition, certain of the Selling Entities have made non-
interest bearing advances to affiliates totalling $753 at December 31, 1994.
Loans and advances from affiliates were repaid in connection with the
Offering.
6. CHANGES IN OWNERSHIP:
In April 1993, Peachtree Executive Conference Center ("Peachtree") was
acquired from an unaffiliated third party. This transaction resulted in a net
increase in the net assets of the property of approximately $4,498. Peachtree
has been managed by an affiliate of CHC during all periods presented and,
therefore, the accompanying financial statements include the results of
operations of Peachtree both prior to and subsequent to the change 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 Offering.
In June 1995, one of the Primary Contributors acquired the interests of his
partners in the Holiday Inn Northwest Houston. 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
$3,772 has been reflected as a redemption of partner interests in the
accompanying financial statements.
F-55
<PAGE>
INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized, for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1994. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash Equivalents
Management estimates that the fair value of cash equivalents approximate
carrying value due to the relatively short maturity of these instruments.
Mortgages and Other Notes Payable
Management estimates that the fair value of mortgages and other notes
payable approximate carrying value based upon the Initial Hotels' effective
borrowing rate for issuance of debt with similar terms and remaining
maturities.
8. NON CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1993 and 1994, the Selling Entities
incurred capital lease obligations of $368 and $1,746, respectively, in the
acquisition of equipment.
The Holiday Inn Select North Dallas was acquired in 1993 subject to a
mortgage note payable of $8,793.
During 1994, receivables of $200 were distributed to a current owner. In
December 1994, an affiliate of one of the Primary Contributors acquired
substantially all of the assets of the Marriott Hotel, subject to mortgage and
other indebtedness of $14,679.
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.
During 1995, partners' interest in two hotels were redeemed for notes
payable totaling $8,021.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the General Partners
Troy Park Associates:
We have audited the accompanying balance sheet of Troy Park Associates (a
limited partnership) as of December 29, 1994 and the related statements of
operations and partners' equity and cash flows for the period from January 1,
1994 to December 29, 1994 and for the year ended December 31, 1993. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1, the Partnership sold substantially all of its assets
and liabilities on December 30, 1994. As a result of the sale, the Partnership
recorded a provision for impairment of long-lived assets of $11,503,536 in the
accompanying financial statements. The accompanying financial statements have
been prepared through the date prior to the sale of the Hotel. The partners
intend to dissolve the Partnership in 1995.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Troy Park Associates as of
December 29, 1994, and the results of its operations and its cash flows for
the period from January 1, 1994 to December 29, 1994 and for the year ended
December 31, 1993 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
February 7, 1995
F-57
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 29, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net............................................ $19,497
Restricted cash........................................................ 758
Receivables, net....................................................... 975
Inventories............................................................ 148
Prepaid expenses and other............................................. 274
Deferred expenses, net................................................. 83
Due from related parties............................................... 649
-------
Total assets......................................................... $22,384
=======
LIABILITIES AND PARTNERS' EQUITY
Long-term debt......................................................... $20,048
Accounts payable trade................................................. 167
Due to related parties................................................. 939
Accrued expenses....................................................... 1,105
Customer deposits...................................................... 72
Capital lease obligations.............................................. 10
-------
Total liabilities.................................................... 22,341
Partners' equity....................................................... 43
-------
Total liabilities and partners' equity............................... $22,384
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1994 TO DECEMBER 29, 1994 AND
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1993 1994
------------ ------------
<S> <C> <C>
Revenue:
Room revenue.............. $ 7,966 $ 9,085
Food and beverage......... 6,123 6,387
Other..................... 1,014 1,076
------- --------
Total revenue........... 15,103 16,548
------- --------
Expenses:
Property operating costs
and expenses............. 2,361 2,798
Food and beverage......... 4,573 4,814
General and administra-
tive..................... 1,113 1,189
Repairs and maintenance... 528 598
Utilities................. 578 577
Advertising, promotion and
franchise fees........... 1,648 1,667
Management fees........... 604 617
Interest expense.......... 3,304 2,368
Real estate, personal
property taxes and insur-
ance..................... 818 800
Depreciation and amortiza-
tion..................... 2,043 2,207
Equipment rent............ 128 142
Provision for impairment
of long-lived assets..... -- 11,504
------- --------
Total expenses.......... 17,698 29,281
------- --------
Net loss before extraordi-
nary item.................. (2,595) (12,733)
Extraordinary item--extin-
guishment of debt.......... 16,655 --
------- --------
Net (loss) income........... 14,060 (12,733)
Partners' equity (deficit):
Beginning of period....... (1,284) 12,776
------- --------
End of period............. $12,776 $ 43
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1994 TO DECEMBER 29, 1994 AND
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1993 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................. $ 14,060 $ (12,733)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for impairment of long lived assets.... -- 11,504
Gain on extinguishment of debt................... (16,655) --
Interest expense financed by term debt........... 2,755 --
Amortization of loan costs....................... 191 122
Depreciation and amortization.................... 2,043 2,207
Interest earned on restricted funds.............. (7) --
Changes in assets and liabilities:
Cash in escrow................................... (51) (75)
Accounts receivable.............................. (321) 16
Inventories...................................... 2 (32)
Prepaids and other............................... (127) 93
Accounts payable, trade.......................... (237) 96
Accrued interest payable......................... (1,814) (111)
Accrued expenses................................. 195 48
Customer deposits................................ (20) 40
Due from related parties......................... -- (527)
-------- ---------
Net cash provided by operating activities...... 14 648
-------- ---------
INVESTING ACTIVITIES:
Purchase of equipment, furniture and fixtures...... (277) (289)
Funds restricted for future acquisition of property
and equipment..................................... (460) (496)
Restricted funds used for property and equipment... 355 289
Interest earned on restricted funds................ 7 --
-------- ---------
Net cash used in investing activities.......... (375) (496)
-------- ---------
FINANCING ACTIVITIES:
Increase in deferred financing fees................ (953) (29)
Proceeds from issuance of debt..................... 20,250 --
Payments on long-term debt......................... (20,111) (202)
Payment on capital leases.......................... (52) (56)
Payments on advances from related parties.......... 806 --
-------- ---------
Net cash used in financing activities.......... (60) (287)
-------- ---------
Net decrease in cash and equivalents................. (421) (135)
Cash and equivalents, beginning of period............ 556 135
-------- ---------
Cash and equivalents, end of period.................. $ 135 $ --
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ 2,172 $ 2,357
======== =========
</TABLE>
Noncash activities:
Accrued interest of $2,755 on a term loan was converted to principal during
1993.
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Troy Park Associates (TPA) is a limited partnership with ITH-THO Associates
(ITH-THO), as general partner, and Interstate/Troy Associates (ITA), as
limited partner. The partners of ITH-THO are Interstate Hotels Corporation
#1018 (IHC #1018), which is owned by a partner of ITA, as general partner, and
ITA, as limited partner.
TPA owns the Troy Marriott Hotel (Hotel) located in Troy, Michigan, which
opened in March 1990. The Hotel is a 350-room property operated by Interstate
Hotels Corporation #204 (IHC #204), as agent, pursuant to a management
agreement effective November 1, 1988. IHC #204 is an affiliate of ITA and ITH-
THO. The financial statements include all of the transactions of TPA and of
the Hotel.
On September 30, 1994, a purchase and sale agreement was entered into
between TPA and Troy Hotel Investors, L.P. (THI) to sell all the assets of the
Hotel, except for approximately $263 in accounts receivable, and all the
related liabilities of the Hotel, except for the second mortgage and the
advances from partners of $133, to THI for $7,250. The partners of THI are AP-
GP Troy Hotel Partners, L.P. (AP-GP) and IHC #1018, as general partners, and
AP/Troy Hotel Partners, L.P. (AP/Troy), Hilltop Investment Partnership, L.P.
(HIP), and IHC Associates, L.P. (IHA), as limited partners. AP-GP is an
affiliate of AP/Troy, the holder of the second mortgage (Note 6). HIP and IHA
are affiliates of ITA and ITH-THO. The sale was consummated effective December
30, 1994. The partners intend to dissolve the Partnership in 1995.
As a result of the sale of the Hotel, TPA recorded a provision for
impairment of long-lived assets of $11,504 in the 1994 statement of operations
and partners' equity for the difference between the book value of the assets
and liabilities sold and the sale price.
The accompanying financial statements have been prepared for the period from
January 1, 1994 to December 29, 1994, the day before the sale of the Hotel,
and for the year ended December 31, 1993. Unless otherwise specified, all
references to a year in the financial statements are for the periods stated
above.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out (FIFO) method of accounting.
Property and Equipment
Prior to December 29, 1994, property and equipment were recorded at cost and
were depreciated primarily on the straight-line method over their estimated
useful lives. Expenditures for maintenance and repairs were expensed as
incurred. The cost and the related accumulated depreciation applicable to
property no longer in service were eliminated from the accounts and any gain
or loss thereon was included in operations.
Deferred Expenses
Deferred expenses consist of loan acquisition costs, initial franchise fees
and preopening costs which are being amortized on the straight-line basis over
periods ranging from 5 to 25 years.
F-61
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Cash and Cash Equivalents
For purposes of the statements of cash flows, all unrestricted, highly
liquid investments purchased with a maturity of three months or less are
considered to be cash equivalents. No collateral or other security is provided
on cash deposits, other than $100 of deposits for each financial institution
insured by the Federal Deposit Insurance Corporation.
Income Tax Status
Partnerships are not subject to state and federal income taxes. Accordingly,
net income or loss and any available tax credits are allocated to the partners
in proportion to their income and loss rates of participation.
Balance Sheet Presentation
The balance sheet of TPA is presented as unclassified to conform to industry
practice for real estate entities.
Reclassifications
Certain amounts in the 1993 financial statements have been reclassified to
conform to the presentation adopted in 1994.
2. RELATED PARTY TRANSACTIONS:
The Hotel is operated as a Marriott Hotel pursuant to a franchise agreement
(Agreement) dated July 18, 1989 between IHC #204, as franchisee, and Marriott
International, as franchisor. The initial term of the Agreement is 25 years
and can be extended, by the mutual consent of the parties and on the then
current terms of Marriott International franchise agreements, for five
successive five-year terms. The Agreement requires ongoing fees, which
comprise royalty expense in the statements of operations and partners' equity,
amounting to 6% of room revenues and 3% of certain food and beverage revenues.
In addition, other fees paid to Marriott International include a national
advertising campaign fee of .8% of room revenues, as well as fees for a
national reservation system, networking, honored guest awards and other
promotional programs. These other fees amounted to approximately $848 in 1994
and $838 in 1993.
Prior to December 23, 1993, the management agreement discussed in Note 1
provided for a management fee of 4% of gross revenues on the first $30,000 of
gross revenues earned by the Hotel. Pursuant to the mortgage payable agreement
discussed in Note 6, the management agreement was amended to provide for a
management fee of 3% of gross revenues and an incentive fee, payable annually
in arrears, of .5% of gross revenues if operating profit before debt service
exceeds $3,000. The management fees earned by IHC #204 were approximately $526
in 1994 and $604 in 1993. Incentive fees totaling approximately $83 were
earned during 1994. There were no incentive fees earned during 1993.
Additionally, the management agreement and franchise agreement provide that
cash from operations be restricted for the future acquisition or for the
replacement of property and equipment based on a percentage of gross hotel
revenues each year (3% in 1994 and 1993). Similar restrictions apply to
interest earned on such funds.
Travel, telephone, legal, computer and other direct expenses approximating
$73 and $70 were recorded during 1994 and 1993, respectively, for services
provided for or expenses incurred on behalf of the Hotel by Interstate Hotels
Corporation (IHC), an affiliate of IHC #204.
F-62
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Continental Design and Supplies, Inc. (CDS), which is also an affiliate of
IHC #204, provides the Hotel with certain services related to the purchase of
equipment and gift shop merchandise. In connection with these services, the
Hotel is charged a fee based on percentage of the price of equipment purchased
and gift shop revenues. Such fees incurred by the Hotel amounted to
approximately $6 in 1994 and $21 in 1993.
At December 29, 1994, noninterest bearing advances amounting to $133 were
payable to a current partner and to a former partner of ITA. These advances
are payable on demand.
In 1993, TPA received an advance of $806 from IHC which remained at December
29, 1994. No interest was paid on the advance in 1994 or 1993. In addition,
included in amounts receivable was $166 of amounts advanced to IHC. Such
amount was repaid in January 1995.
3. INVENTORIES:
Inventory as of December 29, 1994 was composed of $33 food, $53 beverage and
$62 general supplies.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 29, 1994:
<TABLE>
<S> <C>
Land............................................................ $ 3,175
Building and improvements....................................... 30,566
Furniture, fixtures and equipment............................... 5,406
-------
39,147
Less accumulated depreciation................................... 8,884
Provision for impairment of long-lived assets................... 10,766
-------
$19,497
=======
</TABLE>
As a result of the sale of the Hotel on December 30, 1994, the Partnership
recorded a provision for impairment for the difference between the book value
of assets and liabilities sold and the sale price. See Note 1 for further
discussion.
5. DEFERRED EXPENSES:
The components of deferred expenses at December 29, 1994 and their
amortization periods were as follows:
<TABLE>
<S> <C>
Preopening costs (5 years)....................................... $1,192
Loan acquisition costs (5 to 7 years)............................ 860
Franchise fees (25 years)........................................ 105
------
2,157
Less accumulated amortization.................................... 1,336
Provision for impairment......................................... 738
------
$ 83
======
</TABLE>
F-63
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Term debt and capital lease obligations consisted of the following at
December 29, 1994:
<TABLE>
<S> <C>
First mortgage.................................................. $12,798
Second mortgage................................................. 7,250
Capital lease obligations for various equipment at imputed in-
terest rates of 10.5% to 11% due in 1995....................... 10
-------
$20,058
=======
</TABLE>
In December 1993, TPA borrowed $13,000 on a first mortgage and $7,250 on a
second mortgage and paid $20,111 of the proceeds to extinguish the outstanding
principal balance of $33,162 and accrued interest of $3,604 on its then term
loan and release all collateral and any claims or rights arising under the
term loan agreement. The extinguishment resulted in a gain of $16,655 which is
presented as an extraordinary item in the 1993 statement of operations and
partners' equity. The first mortgage accrues interest at a rate of 425 basis
points over the LIBOR rate and is payable in varying monthly principal and
interest payments. The LIBOR rate in effect at December 29, 1994 was 5.98%.
The mortgage obligation matures on January 1, 2001 when all unpaid principal
and interest amounts will be due and payable.
The first mortgage agreement also provides for excess cash flow, as defined,
to be applied to the prepayment of the debt in the event that certain minimum
coverage ratios of net income to debt service expense are not maintained.
There were no prepayments required during 1994 or 1993.
Additionally, the first mortgage agreement requires TPA to transfer certain
amounts into an escrow account to be used for payments of insurance and taxes.
The second mortgage is with AP/Troy. The second mortgage accrued interest,
which was payable quarterly, at 90% of net cash flows, as defined, until such
interest rate equaled a rate of 15%; at 75% of net cash flows until such
interest rate equaled a rate of 25% and at 65% of net cash flows thereafter.
Under the terms of the loan agreement, the second mortgage was convertible to
90% equity interest in the partnership if certain conditions, as described in
the mortgage agreement, were met by July 1, 1994. The agreement matured July
1, 1994 and was extended to the earlier of 30 days following the satisfaction
of the conditions or January 1, 1995. These conditions were not met and on
September 30, 1994, TPA entered into a sales agreement with THI to sell the
Hotel. As discussed in Note 1, the Hotel was sold on December 30, 1994 and the
note was paid with the proceeds from the sale of the Hotel.
Two of the partners and an affiliate of one of the partners of TPA have
provided certain financial guarantees not to seek protection under bankruptcy
or other similar laws.
The mortgage agreements contain certain restrictive covenants including
limitations on the assumption of additional indebtedness, changes in the
partnership agreements and changes of the managing agent of the Hotel (IHC
#204).
The first and second mortgages are collateralized by substantially all of
the assets of the Hotel, not specifically collateralizing the capital lease
obligations.
F-64
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Aggregate scheduled maturities of term debt and capital lease obligations
for the next five years ending December 31, 1999 are as follows:
<TABLE>
<S> <C>
1995............................................................. $ 7,464
1996............................................................. 247
1997............................................................. 274
1998............................................................. 304
1999............................................................. 338
Thereafter....................................................... 11,431
-------
$20,058
=======
</TABLE>
7. OPERATING PROFIT:
Operating profit, by department, was as follows:
<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Rooms...................................................... $6,211 $7,054
Food and beverage.......................................... 1,550 1,572
Gift shop.................................................. 39 33
Telephone.................................................. 241 307
Other...................................................... 150 173
------ ------
$8,191 $9,139
====== ======
</TABLE>
8. EMPLOYEE BENEFITS:
The Hotel participated in the following employee benefit plans sponsored by
IHC:
The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Trust) provides employees of IHC and certain of its affiliates
including IHC #204 (the Company) with group health insurance benefits. The
group policies provide for a "minimum premium plan" whereby IHC is self-
insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits.
For the period January 1, 1994 through July 31, 1994, the Hotel paid a
premium to the Trust based on the estimated conventional premium. Effective
August 1, 1994, the Hotel paid the premiums directly to IHC. These premiums
may be prospectively adjusted to consider actual claims experience. The Hotel
incurred expenses of approximately $245 in 1994 and $194 in 1993 related to
the plan. The Trust is exempt from federal income tax under Section 501(c)(8)
of the Internal Revenue Code as a voluntary employees' beneficiary
association.
The Company maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's
attainment of 21 years of age and on the completion of one year of service
with the Company. Employer contributions are based on a percentage of employee
contributions. Participants may make voluntary contributions to the plan of up
to 6% of their compensation, as defined. The Hotel incurred expenses of
approximately $60 in 1994 and $46 in 1993 related to the plan.
The Company sponsors certain other employee benefit plans, which change from
time to time, but generally provide for incentive bonuses and deferred
compensation to certain key employees of IHC #204 and the Hotel. These
compensation awards are dependent on the Hotel's performance and other
established criteria. The Hotel incurred expenses of approximately $150 in
1994 and $117 in 1993 related to these plans.
F-65
<PAGE>
TROY PARK ASSOCIATES
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. OPERATING LEASES:
The Hotel accounts for various equipment leases as operating leases. Total
rental expense amounted to approximately $142 in 1994 and $128 in 1993. The
following is a schedule of future minimum lease payments under these leases:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1995.............................................................. $ 59
1996.............................................................. 35
1997.............................................................. 14
----
$108
====
</TABLE>
F-66
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Patriot American Hospitality, Inc.
We have audited the accompanying balance sheet of Buckhead Hospitality Joint
Venture, a Texas Joint Venture, as of December 31, 1995, and the related
statements of operations, venturers' capital, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in Item
35(a) of this Registration Statement. These financial statements and schedule
are the responsibility of the Joint Venture's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Buckhead Hospitality Joint
Venture, a Texas Joint Venture, as of December 31, 1995 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
March 5, 1996
F-67
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 29,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotel property, at cost
Building and improvements.......................... $ 750,127 $ 750,127
Furniture and equipment............................ 1,318,684 1,385,527
---------- ----------
2,068,811 2,135,654
Less accumulated depreciation........................ (262,646) (297,389)
---------- ----------
Net investment in hotel property..................... 1,806,165 1,838,265
Cash and cash equivalents............................ 225,015 1,204,531
Cash held in escrow deposits......................... 60,176 60,176
Accounts receivable, net............................. 152,612 140,835
Inventories.......................................... 12,159 10,978
Deferred expenses, net of accumulated amortization of
$58,552 in 1995 and $61,585 in 1996................. 75,372 72,339
Prepaids and other assets............................ 117,563 115,774
---------- ----------
$2,449,062 $3,442,898
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
Mortgage note payable................................ $1,393,750 $1,381,250
Capital lease obligations............................ 71,028 67,579
Accounts payable, trade.............................. 181,566 156,529
Advance deposits..................................... 186,274 871,222
Accrued expenses and other liabilities............... 147,904 308,155
Due to affiliate..................................... 20,680 37,858
---------- ----------
2,001,202 2,822,593
Commitments.......................................... -- --
Venturers' capital................................... 447,860 620,305
---------- ----------
$2,449,062 $3,442,898
========== ==========
</TABLE>
See accompanying notes.
F-68
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
THREE MONTHS JANUARY 1,
YEAR ENDED ENDED 1996 THROUGH
DECEMBER 31, MARCH 31, FEBRUARY 29,
1995 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue from hotel operations:
Rooms................................. $5,746,314 $1,398,638 $1,170,013
Food and beverage..................... 635,785 163,908 114,641
Telephone and other................... 438,602 106,473 95,645
---------- ---------- ----------
Total revenue....................... 6,820,701 1,669,019 1,380,299
---------- ---------- ----------
Expenses:
Departmental costs and expenses....... 2,122,507 436,552 467,542
General and administrative............ 753,945 153,877 134,913
Repairs and maintenance............... 302,288 69,433 51,012
Utilities............................. 250,333 59,069 51,708
Marketing............................. 753,918 195,419 138,203
Management fees paid to affiliates.... 341,035 83,442 69,150
Interest expense...................... 197,469 45,544 30,533
Real estate and personal property
taxes and insurance.................. 226,141 61,248 50,776
Land lease rent....................... 1,045,137 259,736 177,318
Depreciation and amortization......... 186,948 36,849 36,699
---------- ---------- ----------
Total expenses...................... 6,179,721 1,401,169 1,207,854
---------- ---------- ----------
Net income.............................. $ 640,980 $ 267,850 $ 172,445
========== ========== ==========
</TABLE>
See accompanying notes.
F-69
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
STATEMENTS OF VENTURERS' CAPITAL
<TABLE>
<S> <C>
Balance at December 31, 1994........................................ $(193,120)
Net income.......................................................... 640,980
---------
Balance at December 31, 1995........................................ 447,860
Net income (unaudited).............................................. 172,445
---------
Balance at February 29, 1996 (unaudited)............................ $ 620,305
=========
</TABLE>
See accompanying notes.
F-70
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
THREE MONTHS JANUARY 1,
ENDED 1996 THROUGH
DECEMBER 31, MARCH 31, FEBRUARY 29,
1995 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................ $ 640,980 $267,850 $ 172,445
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 186,948 36,849 36,699
Amortization of deferred loan costs. 9,047 1,616 1,077
Write-off of refinancing fees....... 160,750 -- --
Changes in operating assets and
liabilities
Cash held in escrow................. 29,582 -- --
Accounts receivable................. 59,955 (36,506) 11,777
Inventories......................... (752) 614 1,181
Prepaid and other assets............ 2,129 (12,031) 1,789
Accounts payable and accrued
expenses........................... (35,845) 47,811 135,214
Advance deposits.................... 118,874 37,782 684,948
Payables to affiliates.............. 5,941 15,668 17,178
---------- -------- ----------
Net cash provided by operating
activities....................... 1,177,609 359,653 1,062,308
---------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements and additions to hotel... (448,695) (35,052) (66,843)
---------- -------- ----------
Net cash used in investing
activities....................... (448,695) (35,052) (66,843)
---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage and
other notes payable.................. (129,663) (37,636) (12,500)
Payments on capital lease obligations. (16,247) (1,585) (3,449)
Payments of refinancing fees.......... (160,750) -- --
Payments on advances from affiliate... (61,053) -- --
---------- -------- ----------
Net cash used in financing
activities....................... (367,713) (39,221) (15,949)
---------- -------- ----------
Net increase in cash and cash
equivalents............................ 361,201 285,380 979,516
Cash (cash overdraft) and cash
equivalents at beginning of period..... (136,186) (136,186) 225,015
---------- -------- ----------
Cash and cash equivalents at end of
period................................. $ 225,015 $149,194 $1,204,531
========== ======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for
interest............................... $ 204,530 $ 60,036 $ 29,456
========== ======== ==========
NONCASH INVESTING AND FINANCING
ACTIVITIES
Property and equipment financed under
capital leases......................... $ 87,275 $ 42,506 $ --
========== ======== ==========
</TABLE>
See accompanying notes.
F-71
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1995 AND FEBRUARY 29, 1996 AND THE
PERIODS THEN ENDED ARE UNAUDITED)
1. ORGANIZATION
On November 9, 1993, Buckhead Hotels, Inc. (BHI), and Buckhead Ventures,
Inc. (BVI), formed the Buckhead Hospitality Joint Venture (the "Venture"), a
Texas Joint Venture to acquire, own, and operate the Holiday Inn--Lenox Hotel,
a full-service 297-room hotel located in Atlanta, Georgia (the "Hotel"). BHI
and BVI each own 50% of the Joint Venture, of which BHI is the managing
venturer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Cash held in Escrow
Cash held in escrow consists primarily of amounts escrowed for taxes.
Inventories
Inventories, consisting of food and beverages, are stated at the lower of
cost (generally, first-in, first-out) or market.
Hotel Property
The hotel property is stated at the lower of cost or net realizable value.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets of 40 years for building and improvements and seven
years for furniture and equipment.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, the Venture would record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
No such impairment losses have been recognized to date by the Venture.
Capitalization Policy
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
Deferred Expenses
Deferred expenses consist of loan costs and organizational costs.
Organizational costs are being amortized on a straight-line basis over a five
year period. Deferred loan costs are amortized to interest expense on a
straight-line basis over the life of the related note payable.
Income Taxes
The Venture is not subject to federal or state income taxes; however, it
must file informational income tax returns and the venturers must take income
or loss of the Venture into consideration when filing their respective tax
returns.
F-72
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
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.
Concentration of Credit Risk
At December 31, 1995 and February 29, 1996, the Venture had cash balances
with a bank in excess of the Federal Deposit Insurance Corporation's insured
limit by $25,323 and $1,097,573, respectively.
Interim Unaudited Financial Information
The accompanying financial statements as of February 29, 1996 and for the
three months ended March 31, 1995 and the period January 1, 1996 through
February 29, 1996 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of interim
periods are not necessarily indicative of the results to be obtained for a
full year.
3. MORTGAGE NOTE PAYABLE
Mortgage note payable consists of a note payable to General Innkeeping
Acceptance Corporation (GIAC), collateralized by a leasehold deed and security
agreement on substantially all of the Venture's assets. Interest is payable
monthly at a rate of prime plus 3.5%. At December 31, 1995 and February 29,
1996, the prime rate was 8.5% and 8.25%, respectively. In addition to
interest, a loan administration and servicing fee equal to .25% per annum of
the outstanding balance is payable monthly to GIAC.
Principal payments of $6,250 are due monthly, with the remaining balance
payable due upon maturity at September 1, 2001. The scheduled principal
payments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1996............................................................ $ 75,000
1997............................................................ 75,000
1998............................................................ 75,000
1999............................................................ 75,000
2000............................................................ 75,000
Thereafter...................................................... 1,018,750
----------
$1,393,750
==========
</TABLE>
In 1995, the Venture paid $160,750 of loan fees while negotiating a possible
refinancing of their debt. The Venture elected not to execute the refinancing,
therefore the related fees were expensed in full and are included in general
and administrative expense in the accompanying financial statements.
4. VENTURERS' CAPITAL
At inception, each venturer contributed $325,000. The Joint Venture
agreement requires that each venturer make matching pro rata additional
contributions, provided that no venturer should be obligated to make
F-73
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
contributions in excess of $100,000 in any fiscal year. No contributions were
made during 1995 or during the period ended February 29, 1996.
Net income of the Joint Venture is allocated to BHI and BVI in accordance
with the Joint Venture agreement.
Distributions of cash from operations are to be made in accordance with the
Joint Venture ownership interests after the close of each six-month period,
subject to any restrictions imposed by loan agreements and after creating such
reasonable reserves as the Venturers' deem appropriate. No distributions were
made in 1995 or during the period ended February 29, 1996.
5. COMMITMENTS
Franchise Agreement
Under the terms of the hotel franchise agreement expiring in August 2009,
payment for royalty fees, marketing fees, reservation fees and other fees are
payable monthly. Fees are generally computed based on percentages of gross
revenues. Additionally, monthly computer system fees and terminal maintenance
fees are payable monthly to Holiday Inns Franchising, Inc. pursuant to
additional agreements. Total fees incurred for these services during the year
ended December 31, 1995, the three months ended March 31, 1995 and the period
January 1, 1996 through February 29, 1996 were approximately $406,000,
$100,917 and $69,064, respectively.
Capital Lease Obligations
The Venture leases equipment under capital lease agreements expiring on
varying intervals through 1999. Depreciation of assets recorded under capital
leases is included in depreciation and amortization in the accompanying
financial statements. Future minimum payments under capital lease obligations
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996............................................................. $ 29,403
1997............................................................. 29,403
1998............................................................. 15,824
1999............................................................. 11,298
--------
85,928
Less: amounts representing interest.............................. (14,900)
--------
Present value of minimum lease payments.......................... $ 71,028
========
</TABLE>
Land and Operating Leases
Land and equipment are leased under noncancellable operating leases expiring
at varying intervals through June 2069. The land lease provides for annual
increases in the lease payments based upon changes in the Consumer Price
Index.
F-74
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum payments required under these leases as of December 31, 1995
(excluding future CPI adjustments) are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996........................................................... $ 1,067,722
1997........................................................... 1,065,807
1998........................................................... 1,064,000
1999........................................................... 1,064,000
2000........................................................... 1,064,000
Thereafter..................................................... 72,884,000
-----------
$78,209,529
===========
</TABLE>
Rental expense incurred during the year ended December 31, 1995, for the
three months ended March 31, 1995 and during the period from January 1, 1996
through February 29, 1996 under these leases was approximately $1,070,333,
$269,428 and $180,884, respectively.
6. RELATED PARTY TRANSACTIONS
The Hotel is operated by BHI. The Joint Venture agreement provides for a
monthly management fee of 5% of gross income, of which 3.5% is paid to BHI and
the remaining 1.5% is paid to BVI. Due to affiliates at December 31, 1995 and
February 29, 1996 represents accrued management fees.
Accounting and other fees of $3,000 per month are paid to Westminster
Hotels, an affiliate of BHI. These fees are included in general and
administrative expenses in the accompanying financial statements.
During 1995, the Venture repaid 1994 advances of $61,053 from Chartwell
Properties Joint Venture, an affiliate of BHI.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized, for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1995. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of financial instruments. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
Management estimates that the fair value of (i) accounts receivable,
accounts payable, advanced deposits and accrued expenses approximate carrying
value due to the relatively short maturity of these instruments; (ii) mortgage
notes payable approximate carrying value based upon the Venture's effective
borrowing rate for issuance of debt with similar terms and remaining
maturities; (iii) capital lease obligations approximate carrying value based
on the Venture's effective borrowing rate for financing the purchase of
similar equipment under similar terms.
8. SUBSEQUENT EVENT
On March 5, 1996, the Venture sold the Hotel and related assets to Patriot
American Hospitality Partnership, L.P. ("Patriot") for approximately $7.2
million in cash and 167,012 limited partnership units in Patriot with a value
of approximately $4.0 million on the date of contract.
F-75
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT WHICH
INITIAL COST ACQUISITION CARRIED AT CLOSE OF PERIOD (A)
----------------- ----------------- ---------------------------------
ACCUMULATED DATE
BUILDING & BUILDING & BUILDING & DEPRECIATION OF
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL (B)(C) ACQUISITION
----------- ------------ ---- ------------ ---- ------------ --------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn--
Lennox.......... $1,393,750 $-- $680,000 $-- $70,127 $ -- $ 750,127 $ 750,127 $39,410 1993
</TABLE>
See accompanying notes to this schedule on the following page.
F-76
<PAGE>
BUCKHEAD HOSPITALITY JOINT VENTURE
NOTES TO SCHEDULE III
<TABLE>
<S> <C>
(a)Reconciliation of Real Estate:
Balance at January 1, 1995......................................... $709,577
Additions during year:
Acquisitions....................................................... --
Improvements....................................................... 40,550
--------
Balance at December 31, 1995....................................... $750,127
========
(b)Reconciliation of Accumulated Depreciation:
Balance at January 1, 1995......................................... $ 21,249
Depreciation expense............................................... 18,161
--------
Balance at December 31, 1995....................................... $ 39,410
========
(c)Depreciation is computed on the straight-line method over an esti-
mated useful life of 40 years
</TABLE>
F-77
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Patriot American Hospitality, Inc.
We have audited the accompanying combined balance sheet of the Gateway Hotel
Limited Partnership and Wenatchee Hotel Limited Partnership (the
"Partnerships") as of December 31, 1995 and the related combined statements of
operations, partners' capital and cash flows for the year then ended. Our
audit also included the financial statement schedule listed in Item 35(a) of
this Registration Statement. These combined financial statements and schedule
are the responsibility of management of the Partnerships. Our responsibility
is to express an opinion on these combined financial statements and schedule
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Partnerships as of December 31, 1995 and the combined results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
March 1, 1996, except for Note 7,
as to which the date is April 2, 1996
F-78
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND WENATCHEE HOTEL LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotel properties, at cost:
Land............................................... $ 1,781,500 $ 1,781,500
Buildings and improvements......................... 8,139,143 8,141,102
Furniture and equipment............................ 2,384,047 2,402,139
----------- -----------
12,304,690 12,324,741
Less accumulated depreciation........................ (2,641,501) (2,799,334)
----------- -----------
Net investment in hotel properties................... 9,663,189 9,525,407
Cash and cash equivalents............................ 481,898 159,059
Accounts receivable, net............................. 323,974 356,127
Inventories.......................................... 37,558 41,599
Deferred expenses, net of accumulated amortization of
$558,092 in 1995 and $567,509 in 1996............... 265,094 309,984
Prepaid and other assets............................. 35,463 6,373
----------- -----------
$10,807,176 $10,398,549
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and other notes payable.................... $ 9,870,215 $ 9,815,674
Accounts payable and accrued liabilities............. 404,354 466,551
Due to affiliates.................................... 132,082 125,000
----------- -----------
10,406,651 10,407,225
Commitments.......................................... -- --
Partners' capital.................................... 400,525 (8,676)
----------- -----------
$10,807,176 $10,398,549
=========== ===========
</TABLE>
See accompanying notes.
F-79
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND WENATCHEE HOTEL LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1995 1995 1996
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenue from hotel operations:
Rooms................................... $4,275,525 $ 856,663 $ 892,814
Food and beverage....................... 2,177,558 523,820 471,271
Telephone and other..................... 358,520 83,191 83,773
---------- ---------- ----------
Total revenue......................... $6,811,603 $1,463,674 $1,447,858
---------- ---------- ----------
Expenses:
Departmental costs and expense.......... 3,178,873 737,552 730,409
General and administrative.............. 771,821 178,052 207,167
Repairs and maintenance................. 233,196 56,218 59,748
Utilities............................... 266,819 67,019 74,887
Marketing, including $106,888, $21,417
and $22,320, respectively, paid to
affiliates............................. 352,562 71,902 92,365
Management and consulting fees paid to
affiliates............................. 185,750 40,625 166,097
Interest expense........................ 839,685 207,948 197,356
Real estate and personal property taxes,
and insurance.......................... 182,234 52,000 46,775
Depreciation and amortization........... 654,144 169,184 162,755
---------- ---------- ----------
Total expenses........................ 6,665,084 1,580,500 1,737,559
---------- ---------- ----------
Net income (loss)......................... $ 146,519 $ (116,826) $ (289,701)
========== ========== ==========
</TABLE>
See accompanying notes.
F-80
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
COMBINED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<S> <C>
Balance at December 31, 1994........................................ $ 454,006
Cash distributions.................................................. (200,000)
Net income.......................................................... 146,519
---------
Balance at December 31, 1995........................................ $ 400,525
Cash distributions (unaudited)...................................... (119,500)
Net loss (unaudited)................................................ (289,701)
---------
Balance at March 31, 1996 (unaudited)............................... $ (8,676)
=========
</TABLE>
See accompanying notes.
F-81
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ 146,519 $(116,826) $(289,701)
Adjustments to reconcile net income to net
cash provided by
(used in) operating activities:
Depreciation and amortization........... 654,144 169,184 162,755
Amortization of deferred loan costs..... 23,548 5,888 4,495
Changes in operating assets and
liabilities:
Accounts receivable..................... (139,761) (71,038) (32,153)
Inventories............................. 1,279 (1,643) (4,041)
Deferred expenses....................... -- -- (54,307)
Prepaid and other assets................ (19,693) 7,439 29,090
Accounts payable and accrued
liabilities............................ 10,297 101,566 62,197
Due to affiliates....................... (160,287) 14,922 (7,082)
--------- --------- ---------
Net cash provided by (used in)
operating activities................. 516,046 109,492 (128,747)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements and additions to hotel
properties............................... (123,402) (7,948) (20,051)
--------- --------- ---------
Net cash used in investing activities. (123,402) (7,948) (20,051)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgages and other
notes payable............................ (252,997) (61,286) (54,541)
Advances from affiliate................... 17,289 -- --
Advances to affiliate..................... (50,000) (50,000) --
Repayment of advances from affiliate...... 140,000 -- --
Cash distributions paid................... (200,000) -- (119,500)
--------- --------- ---------
Net cash used in financing activities. (345,708) (111,286) (174,041)
--------- --------- ---------
Net increase/(decrease) in cash and cash
equivalents.............................. 46,936 (9,742) (322,839)
Cash and cash equivalents beginning of
period..................................... 434,962 434,962 481,898
--------- --------- ---------
Cash and cash equivalents end of period..... $ 481,898 $ 425,220 $ 159,059
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest.. $ 809,496 $ 202,060 $ 174,007
========= ========= =========
</TABLE>
See accompanying notes.
F-82
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS AND DISCLOSURES FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 ARE UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
The Gateway Hotel Limited Partnership owns the WestCoast Gateway Hotel (the
"Gateway Hotel") located in Seattle, Washington. The Gateway Hotel is a full
service hotel with 145 guest rooms, approximately 625 square feet of meeting
space and one food and beverage outlet located next to the hotel which is
leased to a third party. WestCoast Hotels, Inc. constructed the Gateway Hotel,
which commenced operations in August 1990.
During July 1991, Wenatchee Hotel Limited Partnership acquired the WestCoast
Wenatchee Center Hotel (the "Wenatchee Hotel") in Wenatchee, Washington, which
is centrally located between the Columbia River and Cascade Mountains. The
Wenatchee Hotel is a full-service hotel with 147 guest rooms and one food and
beverage outlet. The Wenatchee Hotel is located next to the Wenatchee Center
(the "Center") which offers approximately 40,000 square feet of convention,
banquet and meeting space. The Center is managed by the Wenatchee Hotel
Limited Partnership.
The Gateway Hotel Limited Partnership and the Wenatchee Hotel Limited
Partnership are collectively referred to as the "Partnerships" and the Gateway
Hotel and Wenatchee Hotel are collectively referred to as the "Hotels."
Basis of Presentation
The accompanying financial statements are presented on a combined basis
since the Partnerships are owned in part and managed by owners or affiliates
of WestCoast Hotels, Inc. All significant intercompany transactions have been
eliminated in the combined presentation.
Interim Unaudited Financial Information
The accompanying combined financial statements as of March 31, 1996 and for
the three months ended March 31, 1995 and 1996 are unaudited; however, in the
opinion of management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the combined financial
statements have been included. The results of interim periods are not
necessarily indicative of the results to be obtained for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Inventories
Inventories, consisting of food and beverage, are stated at the lower of
cost (generally, first-in, first-out) or market.
F-83
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Hotel Properties
The Hotels are stated at the lower of cost or net realizable value.
Depreciation is computed using the straight-line method based upon the assets'
estimated useful lives which range from 31 to 39 years for buildings and
improvements, and 5 to 10 years for furniture and equipment.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, the Partnerships would record impairment losses on long-
lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
No such impairment losses have been recognized to date.
Capitalization Policy
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
Deferred Expenses
Deferred expenses consist primarily of deferred loan costs and pre-opening
costs. Deferred loan costs are amortized to interest expense on a straight-
line basis over the term of the respective loan. Pre-opening costs are
amortized on a straight-line basis over five years.
Income Taxes
The partnerships are not subject to federal or state income taxes; however,
they must file informational income tax returns and the partners must take
income or losses of the partnerships into consideration when filing their
respective tax returns.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
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.
Concentration of Credit Risk
At December 31, 1995 and March 31, 1996, the Partnerships have cash balances
and other short term investments with banks in excess of the Federal Deposit
Insurance Corporation's insured limits totaling $335,288 and $19,996,
respectively.
Seasonality
The hotel industry is seasonal in nature. Generally, revenues at the Hotels
are greater in the second and third quarters of a calendar year.
3. MORTGAGES AND OTHER NOTES PAYABLE
The Partnerships have mortgages and other notes payable with interest rates
ranging from 7.96% to 9.72%. Interest costs totaled $788,517 for the year
ended December 31, 1995 and $202,060 and $192,863 for the three months ended
March 31, 1995 and 1996, respectively.
F-84
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage Loans Payable
Mortgage loans payable is comprised of three loans as of December 31, 1995
and March 31, 1996, and mature at various dates through May 31, 2021. Two of
the mortgage loans payable totaling $8,909,593 as of December 31, 1995 have
fixed rates of interest ranging from 7.96% to 8.0% and are collateralized by a
first lien deed of trust and assignment of rents. The remaining mortgage loan
payable totaling $110,000 is a non-interest bearing loan scheduled to mature
May 31, 1996 and is secured by a second lien deed of trust and assignment of
rents. As of December 31, 1995, approximately $6,860,000 of the mortgage
obligations were personally guaranteed by certain partners of the
Partnerships.
Other Notes Payable
Other notes payable is comprised of three notes as of December 31, 1995,
totaling $850,622. The proceeds from the notes were generally used to finance
improvements to the Wenatchee Hotel. The notes, which mature at various dates
through May 31, 2021, bear interest at rates ranging from 9.00% to 9.72%.
Certain of the notes totaling approximately $509,000 are personally guaranteed
by the partners.
The scheduled principal payments related to the outstanding mortgage loans
payable and other notes payable at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1996............................................................ $ 768,786
1997............................................................ 211,129
1998............................................................ 5,711,141
1999............................................................ 47,835
2000............................................................ 52,151
2001 and thereafter............................................. 3,079,173
----------
$9,870,215
==========
4. COMMITMENTS
Operating Leases
Equipment and vehicles are leased under noncancelable operating leases
expiring at varying intervals through August 1999. The following is a schedule
of future minimum rental payments required under these leases as of December
31, 1995:
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1996............................................................ $ 57,338
1997............................................................ 31,251
1998............................................................ 18,564
1999............................................................ 6,286
----------
$ 113,439
==========
</TABLE>
Rental expense, which totaled $80,637 for the year ended December 31, 1995,
and $19,909 and $18,149 for the three months ended March 31, 1995 and 1996,
respectively, is included in general and administrative expenses in the
accompanying financial statements.
F-85
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Reservation Agreement
The Partnerships have entered into agreements with a national hotel company
to provide the Hotels with a national reservations system. The agreements are
for terms of ten years expiring in November 2001, which coincide with the term
of the joint marketing agreement with an affiliate, and provide for a
reservation fee based on the prior year's experience rating. Reservation fees,
which totaled $54,813 for the year ended December 31, 1995, and $6,079 and
$4,007 for the three months ended March 31, 1995 and 1996, respectively, are
included in departmental costs and expenses in the accompanying financial
statements.
Restaurant and Other Lease Agreements
The Gateway Hotel has an agreement with a third party to lease the
restaurant facilities adjacent to the hotel for an initial term of ten years
expiring in July 2000, with an option to extend the lease three consecutive
times for a period of five years each. The tenant may terminate the agreement
upon 90 days written notice. The agreement provides for monthly lease payments
equal to the greater of 5.25% of gross sales, as defined, or $6,016 adjusted
annually for the increase in the Consumer Price Index ("CPI"). The tenant is
to reimburse Gateway Hotel for a portion of the real estate taxes, as defined
in the agreement, and also provides for a monthly allowance of $500 to the
Gateway Hotel to promote the restaurant. Income from the restaurant lease
totaled $103,286 for the year ended December 31, 1995, and $23,838 and $23,853
for the three months ended March 31, 1995 and 1996, respectively, and is
included in telephone and other income in the accompanying financial
statements.
Additionally, the Gateway Hotel leases space for an antenna to a third
party. The lease expires November 30, 1997 and has an option to extend for
three consecutive periods of five years each, with monthly lease payments of
$700. Income from this lease totaled $8,400 for the year ended December 31,
1995, and $2,100 for the three months ended March 31, 1995 and 1996, and is
included in telephone and other income in the accompanying financial
statements.
Franchise Agreement
In 1992, the Wenatchee Hotel acquired the right to use a licensed trade mark
associated with the operation of its restaurant. The agreement, with an
initial term of two years, automatically renews for successive one year
periods unless Wenatchee Hotel is in default of the agreement. Monthly royalty
fees equal to 2% of the restaurant's gross sales, as defined, are paid by the
hotel under this agreement. Royalty fees, which totalled $27,053 for the year
ended December 31, 1995, and $6,776 and $5,976 for the three months ended
March 31, 1995 and 1996, respectively, are included in departmental costs and
expenses in the accompanying financial statements.
Management Contract for Convention Center
The Wenatchee 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 Wenatchee Hotel pays the City fees based on
the greater of $50,000 annually, adjusted for the increase in CPI, or a
percentage of gross revenues as follows: (1) 10% of catering revenue, (2) 10%
of alcoholic beverages revenue, up to $150,000, and 15% thereafter, (3) 25% of
revenue from space rental, and (4) 25% of vending and other miscellaneous
revenue.
Fees paid to the City totaled $119,086 for the year ended December 31, 1995,
and $26,684 and $24,627 for the three months ended March 31, 1995 and 1996,
respectively, and are included in general and administrative expenses in the
accompanying financial statements.
F-86
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Labor Agreement
Effective August 1, 1994, the Wenatchee Hotel entered into an agreement with
Local 400 of the Spokane Hotel Employees and Restaurant Employees Union which
outlines contract wages and working conditions for all Wenatchee Hotel
employees. The agreement expires July 31, 1997.
5. RELATED PARTY TRANSACTIONS
The Hotels are currently operated under management agreements with WestCoast
Hotels, Inc., a company affiliated through common ownership.
The Gateway Hotel's management agreement provides for a term of 20 years
expiring December 2008. Management fees are based on 4% of gross revenues, as
defined. Additionally, the Gateway Hotel has contracted with an affiliate to
provide the Gateway Hotel with certain consulting and marketing services. The
agreement provides for a monthly consulting fee equal to 1.5% of gross sales,
as defined.
The Wenatchee Hotel's management agreement provides for a term of 5 years
expiring November 1996, with management fees of $4,000 per month. Management
fees for the three months ended March 31, 1996 include $100,000 in
discretionary management fees paid to an affiliate.
The Partnerships have entered into a joint marketing agreement with an
affiliate to use the name "WestCoast" and the related commercial symbols and
to advertise and promote the WestCoast Hotels. The agreements are for terms of
ten years and provide for a monthly marketing fee equal to 2.5% of gross room
sales, as defined.
Fees paid to affiliates are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1995 1995 1996
------------ ------------------
<S> <C> <C> <C>
Management Fees............................ $148,182 $40,625 $143,597
Consulting Fees............................ 37,568 -- 22,500
Marketing Fees............................. 106,888 21,417 22,320
-------- -------- ---------
$292,638 $62,042 $188,417
======== ======== =========
</TABLE>
Non-interest bearing advances were made to an affiliate during 1994 and 1995
totaling $90,000 and $50,000, respectively, which were repaid in 1995.
The Gateway Hotel has a note payable to an affiliate which provided working
capital for the hotel, with an outstanding balance of $125,000 at December 31,
1995. The note is non-interest bearing and matures on December 31, 1996. The
note payable is included in due to affiliates in the accompanying financial
statements.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized, for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1995 and March 31, 1996. Considerable judgment is necessary to
interpret market data and develop estimated fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts which
could be realized on disposition of financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
F-87
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Management estimates that the fair value of (i) accounts receivable,
accounts payable and accrued liabilities approximate carrying value due to the
relatively short maturity of these instruments, and (ii) mortgages and other
notes payable approximate carrying value based upon the Partnerships'
effective borrowing rate for issuance of debt with similar terms and remaining
maturities.
7. SUBSEQUENT EVENT
On April 2, 1996, the Partnerships sold the Hotels to Patriot American
Hospitality Partnership, L.P. ("Patriot") for an aggregate purchase price of
approximately $18,715,000, including 48,355 limited partnership units in
Patriot with a face value of $1,283,825 on the date of contract. Additionally,
the terms of the Purchase agreement provide for the payment to the
Partnerships of up to $465,400 in additional consideration upon the
achievement of certain operating results in 1997.
F-88
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND WENATCHEE HOTEL LIMITED PARTNERSHIP
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COSTS CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT WHICH CARRIED AT
INITIAL COST TO ACQUISITION CLOSE OF PERIOD(A)
----------------------- ---------------------- ----------------------------------- ACCUMULATED
BUILDINGS & BUILDINGS AND BUILDINGS AND DEPRECIATION
ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL (B)(C)
DESCRIPTION ------------ ---------- ------------ -------- ------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
West Coast
Gateway Hotel
Seattle,
Washington....... $5,995,992 $1,307,500 $5,014,616 $-- $ 32,874 $1,307,500 $5,047,490 $6,354,990 $ 807,558
Wenatchee Center
Hotel Wenatchee,
Washington....... 3,023,601 474,000 2,774,346 -- 317,307 474,000 3,091,653 3,565,653 440,261
---------- ---------- ---------- -------- -------- ---------- ---------- ---------- ----------
Total........... $9,019,593 $1,781,500 $7,788,962 $-- $350,181 $1,781,500 $8,139,143 $9,920,643 $1,247,819
========== ========== ========== ======== ======== ========== ========== ========== ==========
<CAPTION>
YEAR
BUILT/
DATE OF
ACQUISITION
DESCRIPTION -----------
<S> <C>
West Coast
Gateway Hotel
Seattle,
Washington....... 1990
Wenatchee Center
Hotel Wenatchee,
Washington....... 1991
Total...........
</TABLE>
See accompanying notes.
F-89
<PAGE>
GATEWAY HOTEL LIMITED PARTNERSHIP AND
WENATCHEE HOTEL LIMITED PARTNERSHIP
NOTES TO SCHEDULE III
<TABLE>
<S> <C>
(a)Reconciliation of Real Estate:
Balance at December 31, 1994..................................... $8,121,137
Additions during the year........................................ 18,006
----------
Balance at December 31, 1995..................................... $8,139,143
==========
(b)Reconciliation of Accumulated Depreciation:
Balance at December 31, 1994..................................... $ 989,907
Depreciation expense............................................. 257,912
----------
Balance at December 31, 1995..................................... $1,247,819
==========
(c) Depreciation is computed on the straight line method over
estimated useful lives which range from 31 to 39 years.
</TABLE>
F-90
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members
Newporter Beach Hotel Investments L.L.C.
We have audited the accompanying balance sheet of Newporter Beach Hotel
Investments L.L.C. (a limited liability company) (the "Company") as of
December 31, 1995, and the related statements of operations and members'
equity and cash flows for the period from March 10, 1995 to December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Newporter Beach Hotel
Investments L.L.C. (a limited liability company) as of December 31, 1995, and
the results of its operations and its cash flows for the period from March 10,
1995 to December 31, 1995, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
March 8, 1996
F-91
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Property and equipment, net........................... $ 7,137,057 $ 7,076,140
Cash and cash equivalents............................. 1,511,398 1,900,354
Receivables, net of allowance for doubtful accounts of
$35,000.............................................. 1,365,055 1,393,719
Inventories........................................... 78,172 72,545
Prepaid expenses and other assets..................... 195,987 301,907
Deferred expenses, net................................ 332,760 311,842
----------- -----------
Total assets...................................... $10,620,429 $11,056,507
=========== ===========
LIABILITIES AND MEMBERS' EQUITY:
Note payable.......................................... $ 4,943,367 $ 4,901,594
Accounts payable...................................... 711,276 717,437
Accrued payroll....................................... 584,429 393,780
Accrued vacation...................................... 290,804 305,815
Customer deposits..................................... 315,619 293,485
Accrued expenses...................................... 77,541 51,247
----------- -----------
Total liabilities................................. 6,923,036 6,663,358
----------- -----------
Commitments and contingencies
Members' equity....................................... 3,697,393 4,393,149
----------- -----------
Total liabilities and members' equity............. $10,620,429 $11,056,507
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MARCH 10, FOR THE THREE
1995 THROUGH MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Rooms............................................. $ 8,412,969 $2,869,650
Food and beverage................................. 6,198,045 1,719,750
Telephone and other............................... 1,096,057 324,853
----------- ----------
Total revenues.................................. 15,707,071 4,914,253
----------- ----------
Expenses:
Rooms............................................. 1,971,810 669,133
Food and beverage................................. 4,364,206 1,225,471
Telephone......................................... 321,122 97,186
Lease expense..................................... 789,055 252,721
Other departmental expenses....................... 313,729 86,369
General and administrative........................ 1,031,958 368,174
Management fees................................... 752,754 190,426
Advertising and promotion......................... 1,316,742 419,435
Utilities......................................... 478,574 112,610
Repairs and maintenance........................... 1,205,650 361,267
Real estate, personal property taxes and insur-
ance............................................. 471,835 148,732
Interest.......................................... 362,167 89,282
Depreciation and amortization..................... 630,076 197,691
----------- ----------
Total expenses.................................. 14,009,678 4,218,497
----------- ----------
Net income...................................... 1,697,393 695,756
Members' equity, beginning of period................ -- 3,697,393
Cash contributions.................................. 3,000,000 --
Cash distributions.................................. (1,000,000) --
----------- ----------
Members' equity, end of period...................... $ 3,697,393 $4,393,149
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MARCH 10, FOR THE THREE
1995 THROUGH MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income........................................ $ 1,697,393 $ 695,756
Depreciation and amortization expense............. 630,076 197,691
Adjustments to reconcile net income to net cash
provided (used) by operating activities (net of
the effects of the acquisition discussed in
Note 2):
Receivables, net................................ (1,213,839) (28,664)
Inventories..................................... 8,722 5,627
Prepaid expenses and other assets............... (13,045) (105,920)
Accounts payable................................ 711,276 6,161
Accrued expenses................................ 570,057 (201,932)
Customer deposits............................... 31,728 (22,134)
----------- ----------
Net cash provided by operating activities..... 2,422,368 546,585
----------- ----------
Cash flows used by investing activities:
Cash paid for hotel acquisition................... (6,837,450) --
Expenditures for property and equipment........... (814,256) (115,856)
----------- ----------
Net cash used by investing activities......... (7,651,706) (115,856)
----------- ----------
Cash flows provided (used) by financing activities:
Cash contributions by members..................... 3,000,000 --
Cash distributions to members..................... (1,000,000) --
Proceeds from note payable........................ 5,000,000 --
Principal payments on note payable................ (56,633) (41,773)
Expenditures for loan acquisition costs........... (202,631) --
----------- ----------
Net cash provided (used) by financing activi-
ties......................................... 6,740,736 (41,773)
----------- ----------
Net increase in cash.......................... 1,511,398 388,956
Cash and cash equivalents, beginning of period...... -- 1,511,398
----------- ----------
Cash and cash equivalents, end of period............ $ 1,511,398 $1,900,354
=========== ==========
Supplementary Disclosure of Cash Flow Information:
Cash paid during the period for interest.......... $ 362,167 $ 89,282
=========== ==========
Cash paid during the period for taxes............. $ 800 $ --
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 10, 1995 THROUGH DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis Of Presentation:
Newporter Beach Hotel Investments L.L.C. (the "Company") was formed in the
State of Washington on December 28, 1994 as a limited liability company
pursuant to the terms of the Limited Liability Company Agreement of Newporter
Beach Hotel Investments L.L.C. The primary purpose of the Company is to
acquire for investment and operation the Hyatt Newporter (the "Hotel") and
conduct other business activities related to the Hotel. The Company will
continue until the earlier of December 28, 2024, the unanimous agreement of
the members to dissolve the Company or the sale or other disposition of
substantially all of the assets of the Company. In general, members are not
personally liable for any debts or losses of the Company that exceed their
respective capital contributions, except as discussed in Note 6, and Company
losses are allocated to the members in proportion to their capital
contributions. As of December 31, 1995, the Company's members consisted of
December Investments L.L.C. (55%), Aspen Orange L.L.C. (27.5%) and WestCoast
Acquisitions, Inc. (17.5%).
As discussed in Note 2, the Company acquired the Hotel on March 10, 1995
from CSL Newporter, Ltd., whose general partner, Columbia Savings and Loan
Association, was in receivership of the Resolution Trust Corporation. The
accompanying financial statements include all of the transactions of the
Company and of the Hotel as of December 31, 1995 and for the period between
March 10, 1995 through December 31, 1995.
Interim Financial Information (Unaudited):
The financial statements at March 31, 1996, and for the three months then
ended, are unaudited but include all adjustments (consisting of normal
recurring accruals only) which management considers necessary to present
fairly the Company's financial position as of March 31, 1996, and the results
of operations and cash flows for the three months then ended.
Management Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property And Equipment:
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred. Upon retirement or other disposal, the
asset cost and related accumulated depreciation are removed from the accounts,
and the net amount less any proceeds, is charged or credited to income. The
Company provides for depreciation on the straight-line method over the
following estimated useful lives of the respective assets:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.......................................... 24-39
Furniture, fixtures and equipment................................... 5
</TABLE>
The Company periodically reviews the Hotel property to determine if its
carrying costs will be recovered from future operations and, accordingly,
whether a reduction in carrying value should be recorded. No such reductions
have occurred to date.
F-95
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1995 THROUGH DECEMBER 31, 1995
Cash And Cash Equivalents:
Cash and cash equivalents consist primarily of cash in banks and money
market funds. All highly liquid investments with a maturity date of three
months or less when acquired are considered to be cash equivalents.
Inventories:
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out (FIFO) method of accounting.
Deferred Expenses:
Deferred expenses consist of hotel acquisition costs and loan origination
fees which are being amortized on the straight-line basis over five years,
which approximates the effective interest method.
Income Taxes:
The Company is treated as a partnership for federal and state income tax
purposes. No provisions have been made for federal and state income taxes in
the accompanying financial statements since such taxes, if any, are the
responsibility of the respective members.
Revenue Recognition:
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
Impact Of New Accounting Standards:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of." This statement is
effective for financial statements for fiscal years beginning after December
15, 1995. Management believes that adoption of this standard will not have a
material effect on the financial position or results of operations of the
Company.
2. ACQUISITION:
On March 10, 1995, the Company purchased the Hotel, a 410-room hotel in
Newport Beach, California, pursuant to a Purchase and Sale Agreement effective
January 17, 1995 for $7,100,000. The acquisition has been accounted for by the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based on the
estimated fair values at the date of acquisition as determined by the
Company's management. The estimated fair values of assets and liabilities
acquired in conjunction with this acquisition are summarized as follows:
<TABLE>
<S> <C>
Property and equipment........................................ $6,889,000
Receivables, net.............................................. 151,216
Inventories................................................... 86,894
Prepaid expenses and other assets............................. 182,942
Deferred expenses............................................. 194,006
Accrued liabilities........................................... (382,717)
Customer deposits............................................. (283,891)
----------
Net cash paid for acquisition............................. $6,837,450
==========
</TABLE>
F-96
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1995 THROUGH DECEMBER 31, 1995
In conjunction with this acquisition, the Company obtained a $5,000,000 note
payable as discussed in Note 6.
The operating results of this acquisition are included in the Company's
results of operations from the date of acquisition, March 10, 1995.
3. PROPERTY AND EQUIPMENT:
Property and equipment, net consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Building and improvements..................................... $5,093,538
Furniture, fixtures and equipment............................. 2,609,718
----------
7,703,256
Less, Accumulated depreciation................................ (566,199)
----------
$7,137,057
==========
4. INVENTORIES:
Inventories consisted of the following at December 31, 1995:
Food.......................................................... $ 27,283
Beverage...................................................... 50,889
----------
$ 78,172
==========
5. DEFERRED EXPENSES:
Deferred expenses, net consisted of the following at December 31, 1995:
Hotel acquisition costs....................................... $ 346,637
Loan origination fees......................................... 50,000
----------
396,637
Less, Accumulated amortization................................ (63,877)
----------
$ 332,760
==========
</TABLE>
6. NOTE PAYABLE:
The Company has a $5,000,000 note payable which is collateralized by a deed
of trust on the real and personal property reflected in the accompanying
balance sheet caption "property and equipment, net." This note is subordinate
to the lien of the Ground Lease discussed in Note 7. In addition, the note
payable is guaranteed by the members of the L.L.C. described in Note 1. The
note payable generally bears interest at the lender's prime rate plus .5%
(8.375% at December 31, 1995) and matures on April 1, 2000. Principal and
interest is payable in monthly installments sufficient to repay the unpaid
principal balance of the note in 300 months. Since the note payable matures on
April 1, 2000, a substantial portion of the note will be due on the maturity
date.
The related loan agreement contains various financial and nonfinancial
covenants that, among other things, require the Company to maintain a current
ratio of 1.25 to 1.00 and limit the aggregate amount of capital expenditures
that can be made by the Company. As of December 31, 1995, the Company was in
compliance with all covenants.
F-97
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1995 THROUGH DECEMBER 31, 1995
At December 31, 1995, the note payable had an outstanding principal balance
of $4,943,367 and there was no accrued interest payable.
The scheduled principal payments related to the note payable are as follows
as of December 31, 1995:
<TABLE>
<S> <C>
1996........................................................... $ 104,627
1997........................................................... 123,648
1998........................................................... 134,411
1999........................................................... 146,110
2000........................................................... 4,434,571
----------
$4,943,367
==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Hyatt Agreement:
In conjunction with the acquisition of the Hotel described in Note 2, the
Company executed an Assignment and Assumption of Management Agreement on March
10, 1995 with CSL Newporter Ltd. to assume a June 9, 1989 management agreement
with Hyatt Corporation ("the Hyatt Agreement"). The Hyatt Agreement expires on
December 31, 1999, with four ten-year renewal periods. The Hyatt Agreement
provides for the payment of a management fee to Hyatt Corporation consisting
of a basic fee of 3.5% of gross receipts, as defined in the Hyatt Agreement,
an additional basic fee of .5% of gross receipts, as defined in the Hyatt
Agreement, and an incentive fee of 10% of the amount by which profit, as
defined in the Hyatt Agreement, exceeds $2,000,000. Management fees pursuant
to the above were $690,254 during the period from March 10, 1995 through
December 31, 1995.
In addition, the Hyatt Agreement provides for the allocation of certain
advertising, marketing and reservation related expenses incurred by Hyatt
Corporation to all hotels within the Hyatt chain. These expenses are allocated
based on the total rooms available during the year. In addition, Hyatt
Corporation bills the Hotel on a monthly basis for systems support, training
and human resources related programs and other expenses that directly benefit
the Hotel. During the period from March 10, 1995 through December 31, 1995,
the Hotel incurred expenses of $275,199 related to these allocations, and, at
December 31, 1995, $3,819 is owed to Hyatt Corporation related to these
allocations.
The Hyatt Agreement also requires that a fund for the replacement of and
additions to the Hotel's furniture, fixtures and equipment be maintained in an
interest bearing account. Per the terms of the Hyatt Agreement, the Hotel is
required to fund this account in amounts equal to 4% of gross receipts, as
defined in the Hyatt Agreement, through July 16, 1996, and 5% of gross
receipts, as defined in the Hyatt Agreement, thereafter. As of December 31,
1995, the balance in this account is $3,553 and is included in cash and cash
equivalents in the accompanying balance sheets.
WestCoast Agreement:
The Company also has a management agreement with WestCoast Hotels, owner of
WestCoast Acquisitions, Inc. (the "WestCoast Agreement"). Under the terms of
the WestCoast Agreement, WestCoast Hotels provides certain consulting,
accounting and administrative services to the Company for a monthly management
fee of $6,250. Management fees paid pursuant to this agreement totaled $62,500
during the period from March 10, 1995 through December 31, 1995, and as of
December 31, 1995, $6,250 is owed to WestCoast Hotels.
F-98
<PAGE>
NEWPORTER BEACH HOTEL INVESTMENTS L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM MARCH 10, 1995 THROUGH DECEMBER 31, 1995
Ground Lease:
In conjunction with the acquisition of the Hotel described in Note 2, the
Company executed an Assignment and Assumption of Ground Lease on March 10,
1995 with CSL Newporter Ltd. to assume an operating lease for the rental of
land on which the Hotel is situated. The term of the lease is for the period
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
$722,000.
Upon expiration of the term of this lease, or any earlier termination caused
by default or breach by the Company, as defined in the lease agreement, the
Company is required to surrender the leased land and all improvements
constructed and installed thereon. Removable furniture, fixtures and equipment
is required to be returned to the Company by the lessor.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized, for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1995. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amount which could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash Equivalents:
Management estimates that the fair value of cash equivalents approximate
carrying value due to the relatively short maturity of these instruments and
their high liquidity.
Note Payable:
Management estimates that the fair value of the note payable approximates
carrying value based upon the Company's effective borrowing rate for issuance
of debt with similar terms and remaining maturities.
Customer Deposits:
Management estimates that the fair value of customer deposits approximates
carrying value based on their short-term nature.
9. CREDIT RISK:
At December 31, 1995, the Company had cash balances in financial
institutions that were in excess of the federally-insured limit of $100,000.
10. SUBSEQUENT EVENT:
In March 1996, the Company and Patriot American Hospitality Partnership,
L.P. executed a Purchase and Sale Agreement that provides for the sale of the
Hotel in exchange for $16,998,000 in cash.
F-99
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders ofPatriot American Hospitality,
Inc.
We have audited the accompanying Statement of Direct Revenue and Direct
Operating Expenses of the Plaza Park Suites Hotel (the "Property") for the
year ended December 31, 1995. This statement is the responsibility of the
Property's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement of Direct Revenue and
Direct Operating Expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Statement of Direct Revenue and Direct Operating Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement of Direct Revenue and Direct Operating Expenses. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying Statement of Direct Revenue and Direct Operating Expenses
has been prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission for inclusion in the registration
statement on Form S-11 of Patriot American Hospitality, Inc. as described in
Note 1, and is not intended to be a complete presentation of the Property's
revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the direct revenue and direct operating expenses as
described in Note 1 of the Plaza Park Suites Hotel for the year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Dallas, Texas
February 28, 1996, except for Note 5, Ernst & Young LLP
as to which the date is April 2, 1996
F-100
<PAGE>
PLAZA PARK SUITES HOTEL
STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED MARCH 31,
DECEMBER 31, -----------------------------
1995 1995 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Direct revenue from hotel opera-
tions:
Rooms............................. $5,551,569 $ 1,087,970 $ 1,112,808
Food and beverage................. 73,439 11,295 5,373
Telephone and other............... 456,159 105,515 112,074
---------- -------------- --------------
Total direct revenue............ 6,081,167 1,204,780 1,230,255
---------- -------------- --------------
Direct operating expenses:
Departmental costs and expenses... 1,605,769 365,298 374,212
General and administrative........ 452,216 89,288 129,133
Repairs and maintenance........... 194,862 40,345 44,843
Utilities......................... 154,010 39,365 38,333
Advertising and promotion......... 333,277 80,368 72,811
Consulting and marketing.......... 120,000 30,000 30,000
Real estate and personal property
taxes, and insurance............. 219,912 57,387 64,980
---------- -------------- --------------
Total direct operating expenses. 3,080,046 702,051 754,312
---------- -------------- --------------
Direct revenue in excess of di-
rect operating expenses........ $3,001,121 $ 502,729 $ 475,943
========== ============== ==============
</TABLE>
See accompanying notes.
F-101
<PAGE>
PLAZA PARK SUITES HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES
(AMOUNTS AND DISCLOSURES FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 ARE UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
The Plaza Park Suites Hotel (the "Property"), located in downtown Seattle,
Washington, is a limited-service hotel with 194 rooms and approximately 1,350
square feet of meeting space. The Property is owned by the Plaza Park Suites,
Inc. (the "Corporation"). The Property was constructed in 1989 by the
Corporation in conjunction with a condominium project which is adjacent to the
Property.
Basis of Presentation
The accompanying Statements of Direct Revenue and Direct Operating Expenses
(the "Statements") have been prepared to substantially comply with the rules
and regulations of the Securities and Exchange Commission for business
combinations accounted for as a purchase. The accompanying Statements include
revenue and expenses directly related to the operations of the Property as
reflected in the records of the Property's management company. The
accompanying Statements, rather than full audited financial statements, are
presented for the Property because the Property was acquired from an
unaffiliated third party in a negotiated transaction and the seller would not
provide complete records supporting the historical costs, indebtedness and
equity. Additionally, the Property, along with an adjacent condominium
project, was constructed by the Corporation, which maintains its financial
records for both facilities on a combined basis. Because it was not
practicable to obtain full audited financial statements for the Property, the
presentation does not include all revenue and expenses of the Corporation, as
they relate to the Property, such as: 1) interest or other income earned on
investments, 2) depreciation expense related to long-lived and short-lived
assets (including the Property and related improvements), 3) amortization
expense related to organizational costs or other deferred expenses of the
Corporation, 4) interest expense incurred on indebtedness of the Property and
amortization of deferred loan costs, and 5) certain Corporation related
general and administrative expenses. Therefore, the Statements are not
representative of the actual operations of the Property for the periods
presented. Included in Note 6 is certain unaudited financial information
related to the items discussed above.
Interim Unaudited Financial Information
The accompanying statements of Direct Revenue and Direct Operating Expenses
for the three months ended March 31, 1995 and 1996 are unaudited; however, in
the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the statement of
Direct Revenue and Direct Operating Expenses for these interim periods have
been included. The results of interim periods are not necessarily indicative
of the results to be obtained for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capitalization Policy
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
Seasonality
The hotel industry is seasonal in nature. Generally, revenue at the Property
is greater in the second and third quarters of a calendar year.
F-102
<PAGE>
PLAZA PARK SUITES HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
3. COMMITMENTS
Operating Leases
Equipment and vehicles are leased under noncancelable operating leases
expiring at varying intervals through June 1999. The following is a schedule
of future minimum rental payments required under these leases as of December
31, 1995:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1996............................................................. $35,823
1997............................................................. 33,275
1998............................................................. 2,265
1999............................................................. 863
-------
$72,226
=======
</TABLE>
Rental expense was approximately $7,956 for the year ended December 31,
1995, and $771 and $8,182 for the three months ended March 31, 1995 and 1996,
respectively, and is included in general and administrative expenses in the
accompanying Statements.
Consulting and Marketing Agreement
The Corporation has entered into an agreement with WestCoast Hotels, Inc. to
provide consulting and marketing services to the Property. The agreement,
which is on a month-to-month basis, provides for a monthly fee of $10,000.
Consulting and marketing fees totalled $120,000 for the year ended December
31, 1995, and $30,000 for the three months ended March 31, 1995 and 1996.
Reservation Agreement
The Corporation has entered into an agreement with a national hotel company
to provide the Property with a national reservations system. The agreement
coincides with the marketing agreement and provides for an annual reservation
fee based on the prior year's experience rating. Reservation fees totalled
$20,107 for the year ended December 31, 1995, and $3,503 and $6,836 for the
three months ended March 31, 1995 and 1996, respectively, and are included in
departmental costs and expenses in the accompanying Statements.
4. RELATED PARTY TRANSACTION
The Corporation has entered into a management agreement with Alper
NorthWest, Inc. ("Alper"), a company affiliated with the Corporation, to
manage the operations of the Property. A management fee is currently not paid
to Alper, however Alper is reimbursed for certain executive and accounting
salaries. Total reimbursements to Alper were $84,000 for the year ended
December 31, 1995, and $13,500 and $18,500 for the three months ended March
31, 1995 and 1996, respectively, and are included in general and
administrative expenses in the accompanying Statements.
5. SUBSEQUENT EVENT
On April 2, 1996, the Corporation sold the Property to Patriot American
Hospitality Partnership, L.P. ("Patriot") for approximately $25,328,000 in
cash. Additionally, the terms of the purchase agreement provide for the
payment to the Corporation of up to $672,300 in additional consideration upon
the achievement of certain operating results in 1997.
F-103
<PAGE>
PLAZA PARK SUITES HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
6. UNAUDITED FINANCIAL INFORMATION
The following supplemental financial information has been provided on an
unaudited basis for certain of those expenses which have been omitted from the
accompanying Statements. Supporting information was not provided by the owner.
Additions to furniture, fixtures and equipment ("FF&E") for the Property
totalled $163,000 for the year ended December 31, 1995. Depreciation expense
related to FF&E is computed using the straight-line method based on estimated
useful lives ranging from five to seven years. Estimated depreciation expense
related to FF&E was $367,700 for the year ended December 31, 1995.
Patriot's estimated allocation of the purchase price, including the deferred
purchase consideration, will be $1,515,000 to land, $23,617,300 to building
and improvements, and $868,000 to FF&E. Expected lives for building and
improvements, and FF&E are 35 years and 5 to 7 years, respectively.
F-104
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Patriot American Hospitality, Inc.
We have audited the accompanying Statement of Direct Revenue and Direct
Operating Expenses of the Roosevelt Hotel (the "Property") for the year ended
December 31, 1995. This statement is the responsibility of the Property's
management. Our responsibility is to express an opinion on this statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement of Direct Revenue and
Direct Operating Expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Statement of Direct Revenue and Direct Operating Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement of Direct Revenue and Direct Operating Expenses. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying Statement of Direct Revenue and Direct Operating Expenses
has been prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission for inclusion in the registration
statement on Form S-11 of Patriot American Hospitality, Inc. as described in
Note 1, and is not intended to be a complete presentation of the Property's
revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the direct revenue and direct operating expenses as
described in Note 1 of the Roosevelt Hotel for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 26, 1996, except for Note 5,
as to which the date is April 2, 1996
F-105
<PAGE>
ROOSEVELT HOTEL
STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Direct revenue from hotel operations:
Rooms....................................... $3,604,244 $ 642,453 $ 727,031
Telephone and other......................... 350,690 70,337 79,595
---------- --------- ---------
Total direct revenue...................... 3,954,934 712,790 806,626
---------- --------- ---------
Direct operating expenses:
Departmental costs and expenses............. 992,244 209,886 236,797
General and administrative.................. 387,770 79,950 101,834
Repairs and maintenance..................... 111,720 29,597 31,867
Utilities................................... 136,214 42,296 50,051
Advertising and promotion................... 132,048 30,462 38,038
Marketing fee paid to affiliate............. 90,106 16,061 18,176
Management and incentive fees paid to affil-
iate....................................... 208,658 33,682 37,165
Real estate and personal property taxes, and
insurance.................................. 108,717 28,537 30,643
---------- --------- ---------
Total direct operating expenses........... 2,167,477 470,471 544,571
---------- --------- ---------
Direct revenue in excess of direct
operating expenses....................... $1,787,457 $ 242,319 $ 262,055
========== ========= =========
</TABLE>
See accompanying notes.
F-106
<PAGE>
ROOSEVELT HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES
(AMOUNTS AND DISCLOSURES FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 ARE UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
The Roosevelt Hotel (the "Property"), located in downtown Seattle,
Washington, is a full-service hotel with 151 guest rooms, approximately 2,400
square feet of meeting space and a restaurant which is leased to a third
party. The Property was constructed in 1929, and was completely renovated in
1987 upon its acquisition by the current owner. The Property is owned by the
Roosevelt Hotel Limited Partnership (the "Partnership").
Basis of Presentation
The accompanying Statements of Direct Revenue and Direct Operating Expenses
(the "Statements") have been prepared to substantially comply with the rules
and regulations of the Securities and Exchange Commission for business
combinations accounted for as a purchase. The accompanying Statements include
revenue and expenses directly related to the operations of the Property as
reflected in the records of the Property's management company. The
accompanying Statements, rather than full audited financial statements, are
presented for the Property because the Property was acquired from an
unaffiliated third party in a negotiated transaction and the sellers would not
allow access to records supporting the historical costs, indebtedness and
equity of the Property. Because it was not practicable to obtain full audited
financial statements for the Property, the presentation does not include all
revenue and expenses of the Partnership, as they relate to the property, such
as: 1) interest or other income earned on investments of the Partnership, 2)
depreciation expense related to long-lived and short-lived assets (including
the Property and related improvements), 3) amortization expense related to
organizational costs or other deferred expenses of the Partnership, 4)
interest expense incurred on indebtedness of the Property and amortization of
deferred loan costs, and 5) certain Partnership related general and
administrative expenses. Therefore, the Statements are not representative of
the actual operations of the Property for the periods presented. Included in
Note 6 is certain unaudited financial information related to the items
discussed above.
Interim Unaudited Financial Information
The accompanying Statements of Direct Revenue and Direct Operating Expenses
for the three months ended March 31, 1995 and 1996 are unaudited; however, in
the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the Statements of
Direct Revenue and Direct Operating Expenses for these interim periods have
been included. The results of interim periods are not necessarily indicative
of the results to be obtained for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capitalization Policy
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
Seasonality
The hotel industry is seasonal in nature. Generally, revenue at the Property
is greater in the second and third quarters of a calendar year.
F-107
<PAGE>
ROOSEVELT HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
3. COMMITMENTS
Operating Leases
Equipment and vehicles are leased under noncancelable operating leases
expiring at varying intervals through February 1999. The following is a
schedule of future minimum rental payments required under these leases as of
December 31, 1995:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1996............................................................... $31,272
1997............................................................... 31,272
1998............................................................... 29,204
1999............................................................... 2,802
-------
$94,550
=======
</TABLE>
Rental expense was approximately $32,491 for the year ended December 31,
1995, and $6,469 and $10,119 for the three months ended March 31, 1995 and
1996, respectively, and is included in general and administrative expenses in
the accompanying Statements.
Reservation Agreement
The Partnership has entered into an agreement with a national hotel company
to provide reservation services to the Property. The agreement is required
under the terms of a joint marketing agreement with an affiliate and provides
for reservation fees based on the prior year's experience rating. Reservation
fees totalled $22,144 for the year ended December 31, 1995 and $5,355 and
$5,865 for the three months ended March 31, 1995 and 1996, respectively, and
are included in departmental costs and expenses in the accompanying
Statements.
Restaurant Management Agreement
The Partnership has an agreement with a third party to manage the restaurant
facilities for an initial term of 125 months expiring May 31, 1998 and an
option to extend the agreement for three periods of five years each. The
Property receives monthly income equal to the greater of 5% of the base rental
of $1,500,000 or 5% of actual gross food and beverage revenue, as defined in
the agreement. Additionally, the agreement provides for reimbursement of a pro
rata portion of certain expenses including real estate and personal property
taxes, insurance and utilities. Total income earned under this agreement was
$102,589 for the year ended December 31, 1995, and $21,327 and $23,994 for the
three months ended March 31, 1995 and 1996, respectively, and is included in
telephone and other income in the accompanying Statements.
4. TRANSACTIONS WITH AFFILIATES
The Partnership has entered into a management agreement with an affiliate to
manage the operations of the Property. The agreement is for a term of ten
years expiring July 31, 1999. Management fees are based on 2.5% of gross
revenue, as defined, with a minimum monthly fee of $5,000. In addition, the
agreement provides for an incentive management fee equal to 5.0% of the
hotel's house profit, as defined, to be paid annually. All unpaid fees bear
interest at a rate of 12% per annum until paid.
The Partnership also has an agreement with the general partner of the
Partnership to provide certain services to the Property. The agreement
provides for monthly fees of 1% of gross revenue, as defined, and 1.5% of net
operating income, as defined.
F-108
<PAGE>
ROOSEVELT HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
The Partnership has entered into a joint marketing agreement with an
affiliate to use the affiliate's name and the related commercial symbols, and
to advertise and promote the Property. The agreement, which expires March 31,
1997, provides for a monthly marketing fee equal to 2.5% of gross rooms sales,
as defined.
Fees paid to affiliates under the agreements described above are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Management fee........................... $ 98,871 $ 17,787 $ 19,853
Incentive management fee................. 109,787 15,895 17,312
General partner fee...................... 106,051 19,994 22,567
Marketing fee............................ 90,106 16,061 18,175
-------- --------- ---------
$404,815 $ 69,737 $ 77,907
======== ========= =========
</TABLE>
One floor of the Property and certain office and storage space is leased to
one of the partners at a monthly rate of $2,000. Income earned totalled
$24,000 for the year ended December 31, 1995, and $6,000 for the three months
ended March 31, 1995 and 1996, and is included in telephone and other income
in the accompanying Statements.
5. SUBSEQUENT EVENT
On April 2, 1996, the Partnership sold the Property to Patriot American
Hospitality Partnership, L.P. ("Patriot") for approximately $15,489,000,
including 31,074 limited partnership units in Patriot with a face value of
$825,014 on the date of contract. Additionally, the terms of purchase
agreement provide for the payment to the Partnership of up to $411,200 in
additional consideration upon the achievement of certain operating results in
1997.
6. UNAUDITED FINANCIAL INFORMATION
The following supplemental financial information has been provided by the
Property's management company on an unaudited basis for certain of those
expenses which have been omitted from the accompanying Statements. Supporting
information was not provided by the owner.
The records of the Property's management company reflect interest expense
related to mortgage and other debt of $623,940, $152,086 and $156,542 for the
year ended December 31, 1995 and the three months ended March 31, 1995 and
1996, respectively. The Partnership incurred owner related expenses of
$182,451 for the year ended December 31, 1995, and $40,829 and $80,508 for the
three months ended March 31, 1995 and 1996, respectively.
Additions to furniture, fixtures and equipment ("FF&E") for the Property
totalled $224,858 for the year ended December 31, 1995. Depreciation expense
related to FF&E is computed using the straight-line method based on estimated
useful lives ranging from five to ten years. Estimated depreciation expense
related to FF&E was $199,615 for the year ended December 31, 1995.
Patriot's estimated allocation of the purchase price, including the deferred
purchase consideration, will be $882,000 to land, $14,565,200 to building and
improvements, and $453,000 to FF&E. Expected lives for the building and
improvements and FF&E are 35 years and 5 to 7 years, respectively.
F-109
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders ofPatriot American Hospitality,
Inc.
We have audited the accompanying Statement of Direct Revenue and Direct
Operating Expenses of the Lexington Hyatt Regency Hotel (the "Property") for
the year ended December 31, 1995. This Statement is the responsibility of the
Property's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement of Direct Revenue and
Direct Operating Expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Statement of Direct Revenue and Direct Operating Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement of Direct Revenue and Direct Operating Expenses. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying Statement of Direct Revenue and Direct Operating Expenses
has been prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission for inclusion in the registration
statement on Form S-11 of Patriot American Hospitality, Inc. as described in
Note 1, and is not intended to be a complete presentation of the Property's
revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the direct revenue and direct operating expenses as
described in Note 1 of the Lexington Hyatt Regency Hotel for the year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Dallas, Texas
March 1, 1996
F-110
<PAGE>
LEXINGTON HYATT REGENCY HOTEL
STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------------
1995 1995 1996
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Direct revenue from hotel operations:
Rooms..................................... $ 6,753,465 $1,411,697 $1,600,701
Food and beverage......................... 4,622,156 1,002,684 1,072,485
Telephone and other....................... 527,898 108,526 135,540
----------- ---------- ----------
Total direct revenue.................... 11,903,519 2,522,907 2,808,726
----------- ---------- ----------
Direct operating expenses:
Departmental costs and expenses........... 5,607,430 1,288,974 1,395,698
General and administrative................ 1,097,276 276,321 263,520
Rental expense............................ 689,097 145,659 162,671
Repairs and maintenance................... 539,962 129,381 140,111
Utilities................................. 491,737 108,950 114,306
Advertising and promotion................. 984,163 241,253 240,494
Management and incentive fees paid to af-
filiate.................................. 530,370 113,507 127,778
Real estate and personal property taxes,
and insurance............................ 127,240 38,140 41,614
----------- ---------- ----------
Total direct operating expenses......... 10,067,275 2,342,185 2,486,192
----------- ---------- ----------
Direct revenue in excess of direct oper-
ating expenses......................... $ 1,836,244 $ 180,722 $ 322,534
=========== ========== ==========
</TABLE>
See accompanying notes.
F-111
<PAGE>
LEXINGTON HYATT REGENCY HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES
(AMOUNTS AND DISCLOSURES FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 ARE UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
The Lexington Hyatt Regency Hotel (the "Property"), located in Lexington,
Kentucky, is a full-service hotel with 365 guest rooms and nine suites,
approximately 22,000 square feet of meeting space and a restaurant. The
Property is part of the Lexington Center Complex (the "Complex"), which
includes Civic Center Shops, the Rupp Arena and Heritage Hall. The Property is
leased by Lexington Hotel and Mall Corporation ("LHMC"), a not-for-profit,
non-stock corporate government agency and instrumentality of the Lexington-
Fayette Urban County Government ("LFUCG"). LHMC was formed on November 29,
1990 to acquire and operate certain leasehold interests in the Property, a
retail mall, and a parking facility, all of which are part of the Complex. The
Property is owned by Lexington Center Corporation ("LCC").
Basis of Presentation
The accompanying Statements of Direct Revenue and Direct Operating Expenses
(the "Statements") have been prepared to substantially comply with the rules
and regulations of the Securities and Exchange Commission for business
combinations accounted for as a purchase. The accompanying Statements include
revenue and expenses directly related to the operations of the Property as
reflected in the records of the Property's management company. The
accompanying Statements, rather than full audited financial statements, are
presented for the Property because the Property, along with an adjoining mall
and parking lot, are leased by LHMC, which maintains its financial records for
all three facilities on a combined basis. Because it was not practicable to
separately present complete audited financial statements of the Property, the
presentation does not include all the revenue and expenses recorded by LHMC,
as they relate to the Property, such as: 1) interest or other income earned on
investments of LHMC, 2) depreciation expense related to long-lived and short-
lived assets (including the Property and related improvements), 3)
amortization expense related to organizational costs or other deferred
expenses of LHMC, 4) interest expense incurred on indebtedness of the Property
and amortization of deferred loan costs, and 5) certain LHMC related general
and administrative expenses. Therefore, the Statements are not representative
of the actual operations of the Property for the periods presented. Included
in Note 7, is certain unaudited financial information related to the items
discussed above.
Interim Unaudited Financial Information
The accompanying statements of Direct Revenue and Direct Operating Expenses
for the three months ended March 31, 1995 and 1996 are unaudited; however, in
the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the statement of
Direct Revenue and Direct Operating Expenses for these interim periods have
been included. The results of interim periods are not necessarily indicative
of the results to be obtained for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capitalization Policy
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized.
F-112
<PAGE>
LEXINGTON HYATT REGENCY HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible. Such losses
have been within management's expectations.
3. COMMITMENTS
Capital Lease Obligations
The Property leases furniture, fixtures and equipment under capital leases
expiring at varying intervals through December 1996. Future minimum lease
obligations as of December 31, 1995 are $67,943.
Operating Leases
Equipment and vehicles are leased under non-cancelable operating lease
agreements expiring at varying intervals through May 1999. The following is a
schedule of future minimum rental payments required under these leases as of
December 31, 1995:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1996............................................................. $24,446
1997............................................................. 9,204
1998............................................................. 8,404
1999............................................................. 1,845
-------
$43,899
=======
</TABLE>
Rental expense totalled $122,367 for the year ended December 31, 1995, and
$38,624 and $29,099 for the three months ended March 31, 1995 and 1996,
respectively, and is included in general and administrative expenses in the
accompanying Statements.
Management and Other Agreements
LHMC has an agreement with the Hyatt Corporation to manage the Property. The
agreement expires in 2007 and contains provisions whereby the Hyatt
Corporation may extend the agreement for two additional ten year periods.
Under the terms of the agreement, the Hyatt Corporation receives an annual
basic management fee equal to 5% of gross receipts, except for banquet and
meeting room receipts for which the fee is 3.5%. In addition, in any year that
the Property generates a profit, as defined in the agreement, an amount equal
to the excess of 20% of the profit over the basic fee is payable (none paid
for the year ended December 31, 1995 and the three months ended March 31, 1995
and 1996) to the Hyatt Corporation.
The Property also incurred expenses related to Hyatt Corporate reservation
and chain allocations of $256,500 for the year ended December 31, 1995 and
$63,657 and $65,137 for the three months ended March 31, 1995 and 1996,
respectively, which is included in advertising and promotion in the
accompanying Statements.
4. TRANSACTIONS WITH AFFILIATES
LHMC leases the Property under a 30 year non-cancelable lease expiring in
2007. The lease contains six renewal options for an additional ten years each.
The lease requires monthly rental payments equal to 6% of gross receipts, as
defined in the agreement. In addition, the Property is required to pay 50% of
all cash receipts remaining after the Property's operating expenses, insurance
and debt service. Rent expense totalled $689,097
F-113
<PAGE>
LEXINGTON HYATT REGENCY HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
for the year ended December 31, 1995, and $145,659 and $162,671 for the three
months ended March 31, 1995 and 1996, respectively, and is included in rental
expense in the accompanying Statements.
LHMC also leases a parking facility from LCC on an annual basis for the
Property and an adjoining mall. The lease is automatically renewable for as
long as the Property and mall leases remain in effect. Annual rent expense of
$130,000, payable in equal monthly installments, is due during the first 30
years of the agreement. Rental payments are adjusted annually each January 1
by 33 1/3% of the change in the Consumer Price Index.
The Property's allocated share of the parking facility lease totalled
$87,000 for the year ended December 31, 1995, and $21,750 for the three months
ended March 31, 1995 and 1996, and is included in rental expense in the
accompanying Statements.
In addition, the Property leases restaurant space located within the
Complex, a valet office and storage unit. Rent expense related to the
restaurant, valet office and the storage unit was $57,384, $3,000, and $3,600
for the year ended December 31, 1995, and $14,348, $750, and $900 for the
three months ended March 31, 1995 and 1996, respectively. Rent expense related
to the restaurant and storage unit are included in general and administrative
expense and rent expense related to the valet office is included in
departmental costs and expenses in the accompanying Statements.
The following is a combined schedule of future minimum rental payments
required under the parking facility, restaurant space, valet office and
storage unit leases as of December 31, 1995 (excluding future CPI
adjustments):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1996.......................................................... $ 150,984
1997.......................................................... 150,984
1998.......................................................... 150,984
1999.......................................................... 150,984
2000 and thereafter........................................... 1,207,872
----------
$1,811,808
==========
</TABLE>
5. EMPLOYEE BENEFITS
The Hyatt Corporation maintains a defined benefit savings plan for eligible
employees. LHMC makes annual contributions to the plan equal to 2.1% or 3% of
the participant's annual compensation for hourly and salaried employees,
respectively. In addition, the Hyatt Corporation maintains a 401(k) savings
plan for all eligible employees. Under the 401(k) savings plan, eligible
employees can make pre-tax contributions to the plan ranging from 1-15% of
their annual compensation up to a maximum of $9,240 (subject to certain
exceptions for highly-compensated employees). Eligibility for participation in
both plans is based on the employee's completion of one year of eligible
service, as defined. LHMC made contributions totaling $80,124, $33,124, and
$27,074 for the year ended December 31, 1995, and the three months ended March
31, 1995 and 1996, respectively, which are included in general and
administrative expenses in the accompanying Statements.
6. SUBSEQUENT EVENT
On February 7, 1996, LHMC entered into a contract with Patriot American
Hospitality, L.P. ("Patriot") to sell its leasehold interest in the Property
for approximately $14,000,000.
F-114
<PAGE>
LEXINGTON HYATT REGENCY HOTEL
NOTES TO STATEMENTS OF DIRECT REVENUE AND DIRECT OPERATING EXPENSES--
(CONTINUED)
7. UNAUDITED FINANCIAL INFORMATION
The following supplemental financial information has been provided on an
unaudited basis. Supporting information was not provided by LHMC.
Additions to furniture, fixtures and equipment ("F, F & E") for the Property
totalled $234,000 for the year ended December 31, 1995. Depreciation expense
related to F, F & E is computed using the straight-line method based on
estimated useful lives ranging from five to ten years. Estimated depreciation
expense related to F, F & E was approximately $681,000 for the year ended
December 31, 1995.
Patriot's estimated allocation of the purchase price will be $12,000,000 to
building and improvements, and $2,000,000 to F, F & E. Expected lives for the
building and improvements and F, F & E are 35 years and 5 to 7 years,
respectively.
F-115
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the
Wyndham Portfolio Hotels:
We have audited the accompanying combined balance sheets of the Wyndham
Portfolio Hotels (as defined in Note 1) as of December 31, 1994 and 1995 and
the related combined statements of operations, changes in partners' deficit,
and cash flows for the two years then ended. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Wyndham Portfolio Hotels as of December 31, 1994 and 1995, and its combined
results of operations and its cash flows for the two years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the combined financial statements, certain
partnerships which own Wyndham Portfolio Hotels are highly leveraged. In
addition, the Companies' operating liabilities exceed operating assets by
$31,984,052 and $34,430,419 as of December 31, 1994 and 1995, respectively.
These factors as set forth in Note 1 to the combined financial statements,
raise substantial doubt that certain partnerships which own the Wyndham
Portfolio Hotels will be able to continue collectively or individually as a
going concern. The combined financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Dallas, Texas
June 17, 1996
F-116
<PAGE>
WYNDHAM PORTFOLIO HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 696,166 $ 553,375 $ 360,153
Accounts receivable, net of allow-
ance of $46,838, $16,017 and
$18,089 in 1994, 1995 and 1996.... 1,028,158 1,304,430 2,025,458
Due from Operator.................. -- 78,337 78,337
Due from affiliates................ 200,729 -- --
Inventories........................ 161,488 173,706 161,692
Prepaid expenses................... 69,625 60,494 124,682
------------ ------------ ------------
Total current assets............. 2,156,166 2,170,342 2,750,322
Property and equipment, net.......... 35,870,309 34,987,868 35,041,103
Cash restricted for property and
equipment........................... 364,809 469,919 304,158
Notes receivable from affiliate...... 587,122 937,242 1,076,363
Other assets......................... 378,587 339,573 329,686
------------ ------------ ------------
Total assets..................... $ 39,356,993 $ 38,904,944 $ 39,501,632
============ ============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued ex-
penses............................ $ 3,060,996 $ 2,687,425 $ 2,359,223
Due to affiliates.................. 336 -- --
Due to Operators................... 14,926,805 14,825,100 14,929,044
Deposits........................... 72,081 508,236 1,017,528
Current portion of long-term debt.. 16,080,000 18,580,000 38,550,000
------------ ------------ ------------
Total current liabilities........ 34,140,218 36,600,761 56,855,795
Long-term debt, net of current por-
tion................................ 36,406,425 31,977,864 11,325,904
Accrued interest..................... 6,763,928 8,207,379 8,568,242
------------ ------------ ------------
Total liabilities................ 77,310,571 76,786,004 76,749,941
------------ ------------ ------------
Minority interest.................... -- -- --
Commitments and contingencies (see
Note 10)
Partners' deficit.................... (37,953,578) (37,881,060) (37,248,309)
------------ ------------ ------------
Total liabilities and partners'
deficit......................... $ 39,356,993 $ 38,904,944 $ 39,501,632
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-117
<PAGE>
WYNDHAM PORTFOLIO HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------ ------------------------------
1994 1995 1995 1996
----------- ----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Rooms................. $13,940,390 $14,757,193 $ 3,980,068 $ 4,387,356
Food and beverage..... 8,049,778 7,818,043 2,119,755 2,133,791
Operating departments. 1,608,974 1,564,214 368,548 502,251
----------- ----------- -------------- -------------
Total revenues...... 23,599,142 24,139,450 6,468,371 7,023,398
----------- ----------- -------------- -------------
Operating costs and ex-
penses:
Departmental expenses:
Rooms................. 2,921,223 3,112,222 810,686 926,079
Food and beverage..... 5,488,125 5,374,532 1,383,131 1,434,644
Operating departments. 850,092 778,405 189,348 217,724
Operating expenses:
Administrative and
general.............. 2,826,947 2,579,186 618,312 833,925
Management fees....... 798,951 831,499 213,890 267,289
Sales and marketing... 1,530,577 1,501,927 426,421 474,360
Property operating
costs................ 1,005,343 1,017,040 281,688 279,137
Energy costs.......... 1,054,077 996,609 220,501 264,451
Property insurance and
taxes................ 1,132,906 1,051,431 278,350 288,094
Depreciation and amor-
tization............. 1,638,770 1,501,820 381,900 396,657
Other................. 151,981 45,061 20,155 42,791
----------- ----------- -------------- -------------
Total operating
costs and expenses. 19,398,992 18,789,732 4,824,382 5,425,151
----------- ----------- -------------- -------------
Operating income.... 4,200,150 5,349,718 1,643,989 1,598,247
Interest income......... 36,817 127,306 18,737 28,276
Interest expense........ (4,839,101) (5,404,506) (1,112,344) (993,772)
----------- ----------- -------------- -------------
Net income (loss)... $ (602,134) $ 72,518 $ 550,382 $ 632,751
=========== =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-118
<PAGE>
WYNDHAM PORTFOLIO HOTELS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
<TABLE>
<S> <C>
Balance at January 1, 1994....................................... $(37,351,444)
Net loss....................................................... (602,134)
------------
Balance at December 31, 1994..................................... (37,953,578)
Net income..................................................... 72,518
------------
Balance at December 31, 1995..................................... (37,881,060)
Net income (unaudited)......................................... 632,751
------------
Balance at March 31, 1996 (unaudited)............................ $(37,248,309)
============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-119
<PAGE>
WYNDHAM PORTFOLIO HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------ ------------------------------
1994 1995 1995 1996
----------- ----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ (602,134) $ 72,518 $ 550,382 $ 632,751
Adjustments to recon-
cile net income (loss)
to net cash provided
by operating activi-
ties:
Depreciation and amor-
tization............. 1,638,770 1,501,820 381,900 396,657
Amortization of de-
ferred financing
costs................ 43,817 43,817 10,954 10,954
Provision for uncol-
lectible accounts.... 32,415 (30,821) (37,956) 2,072
Accrued interest ex-
pense................ 1,899,936 1,443,450 360,864 360,863
Changes to operating
assets and liabili-
ties:
Accounts receivable... (157,897) (245,451) (181,145) (723,100)
Due from affiliate.... (200,429) 200,729 200,729 --
Inventories........... 9,738 (12,218) (3,427) 12,014
Prepaid expenses...... 51,381 9,131 (39,316) (64,188)
Other assets.......... (20,617) (4,800) (13,547) (231)
Accounts payable and
accrued expenses..... (15,097) (373,571) (595,437) (328,202)
Deposits.............. (124,487) 436,155 (11,038) 509,292
Due to Operators...... 345,029 (180,042) 56,286 103,944
Due to affiliates..... (360,186) (336) (376,860) --
----------- ----------- -------------- -------------
Net cash provided by
operating activi-
ties............... 2,540,239 2,860,381 302,389 912,826
----------- ----------- -------------- -------------
Cash flows from invest-
ing activities:
Purchase of property
and equipment........ (433,086) (619,381) (74,530) (450,728)
Cash restricted for
property and equip-
ment................. (350,140) (105,110) (54,157) 165,761
Notes receivable from
affiliate............ (587,122) (350,120) -- (139,121)
----------- ----------- -------------- -------------
Net cash used in in-
vesting activities. (1,370,348) (1,074,611) (128,687) (424,088)
----------- ----------- -------------- -------------
Cash flows from financ-
ing activities:
Long-term debt pay-
ments................ (1,450,000) (1,928,561) (270,000) (681,960)
----------- ----------- -------------- -------------
Net cash used in fi-
nancing activities. (1,450,000) (1,928,561) (270,000) (681,960)
----------- ----------- -------------- -------------
Decrease in cash and
cash equivalents....... (280,109) (142,791) (96,298) (193,222)
Cash and cash equiva-
lents at beginning of
period................. 976,275 696,166 696,166 553,375
----------- ----------- -------------- -------------
Cash and cash equiva-
lents at end of period. $ 696,166 $ 553,375 $ 599,868 $ 360,153
=========== =========== ============== =============
Supplemental disclosures
of cash flow informa-
tion:
Cash paid for interest. $ 2,678,202 $ 4,138,765
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-120
<PAGE>
WYNDHAM PORTFOLIO HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION:
The combined financial statements include the accounts of two partnerships,
Houston Greenspoint Hotel Associates (a Texas limited partnership,
"Greenspoint") and Atlanta Midtown Associates (a Texas general partnership,
"Midtown"), which own and operate the Wyndham Greenspoint Hotel in Houston,
Texas and the Wyndham Garden-Midtown, a Wyndham Garden Hotel in Atlanta,
Georgia. Patriot American Hospitality, Inc. intends to acquire the hotel
properties operated by these entities which are referred to herein as the
Wyndham Portfolio Hotels or the "Companies."
A controlling interest in each of the Companies is owned by Crow Family
Members. Crow Family Members or "Crow" as used herein represents Mr. and Mrs.
Trammell Crow, various descendants of Mr. and Mrs. Trammell Crow, and various
corporations, partnerships, trusts and other entities beneficially owned or
controlled by such persons.
Greenspoint which is 50% owned by Crow Family Members is also managed by a
related entity. The remaining 50% of Greenspoint is owned by an unaffiliated
limited partnership, whose ownership interest is reflected in these
statements. Allocated losses to these limited partners exceed their original
investments, accordingly, no balance of minority interest is reflected herein.
All significant intercompany balances and transactions have been eliminated
in combination.
The accompanying combined financial statements have been presented on a
going-concern basis which contemplates the realization of operating assets and
satisfaction of operating liabilities in the normal course of business.
The partnerships which own Wyndham Portfolio Hotels are highly leveraged. In
addition, the Companies' operating liabilities exceed operating assets by
$31,984,052 and $34,430,419 as of December 31, 1994 and 1995, respectively.
These factors raise substantial doubt that certain partnerships which own the
Wyndham Portfolio Hotels will be able to continue collectively or individually
as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Interim Financial Information
The combined balance sheet as of March 31, 1996, the combined statement of
partners' deficit for the three months then ended, and the combined statements
of operations and cash flows for the three months ended March 31, 1995 and
1996, have been prepared by the Companies without audit. In the opinion of
management, all adjustments (which included only normal, recurring
adjustments) necessary to present fairly the combined financial position at
March 31, 1996, and the combined results of operations and cash flows for all
periods presented have been made. The combined results of operations for the
interim periods are not necessarily indicative of the operating results for
the full year.
F-121
<PAGE>
WYNDHAM PORTFOLIO HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
For purposes of reporting cash flows, all highly liquid debt instruments
with original maturities of three months or less are considered to be cash
equivalents.
The Companies maintain cash and cash equivalents in accounts with various
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation.
Inventories
Inventories consist of food, beverages and supplies and are stated at cost,
which approximates market, with cost determined using the first-in, first-out
method.
Property and Equipment
Buildings are carried at cost and depreciated over forty years using the
straight-line method. Furniture and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives,
which range from seven to nine years. Normal repairs and maintenance are
charged to expense as incurred.
In 1995, the Companies adopted Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." Impairment losses are recognized in operating income as
they are determined.
The Companies periodically review their property and equipment to determine
if carrying costs will be recovered from future operating cash flows. In cases
when the Companies do not expect to recover carrying costs, the Companies
recognize an impairment loss. No such losses have been recognized to date.
Other Assets
Other assets include deferred financing costs totaling approximately
$263,621 and $219,804 at December 31, 1994 and 1995, respectively, and are
stated net of related amortization. Amortization of deferred financing costs
is computed using the effective yield method over the lives of the related
loans. The remaining balance totaling approximately $114,966 and $119,764 at
December 31, 1994 and 1995, respectively, is stated at cost and consists
primarily of security deposits.
Income Taxes
The Companies are partnerships and are not taxable entities. Accordingly,
the combined results of their operations are included in the tax returns of
the partners. The partnership tax returns and the amount of allocable income
or loss are subject to examination by federal and state taxing authorities. If
such examinations result in changes to income or loss, the tax liability of
the partners could be changed accordingly.
Revenue Recognition
Room, food and beverage, telephone and other revenues are recognized when
earned.
Self-Insurance
The Companies are self insured for various levels of general and auto
liability, workers' compensation, work related injury and employee medical
coverages. Accrued expenses include the estimated cost for unpaid incurred
claims.
F-122
<PAGE>
WYNDHAM PORTFOLIO HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Costs
The Companies participate in various advertising and marketing programs with
a related party. All costs are expensed in the period incurred. The Companies
recognized advertising expense of $117,401 and $104,087 for the years ended
December 31, 1994 and 1995, respectively.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Land............................................. $ 2,817,835 $ 2,817,835
Buildings and improvements....................... 41,029,243 41,029,243
Furniture, fixtures and equipment................ 16,662,162 17,281,223
------------ ------------
60,509,240 61,128,301
Less accumulated depreciation.................... (24,638,931) (26,140,433)
------------ ------------
$ 35,870,309 $ 34,987,868
============ ============
</TABLE>
4. MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS:
The Companies and Wyndham Hotel Company, Ltd. (the "Operator"), a related
party, entered into management agreements with respect to the hotel properties
that have expiration dates of 2004 (Greenspoint) and 2006 (Midtown). Pursuant
to such management agreements, the Operator receives a base management fee of
3% (Greenspoint) and 4% (Midtown) of gross revenues from hotel operations. In
addition, the Operator receives an incentive management fee on Midtown equal
to 10% of total income after debt service, as defined in the management
agreement. Due to Operators as of December 31, 1994 and 1995 includes $253,217
and $217,170, respectively, of management fees and other expenses payable to
the Operator. As provided for in the management agreements, cash in excess of
amounts required for on-site operations is held in a central account in the
name of an affiliate.
The Companies receive sales and marketing, centralized reservations,
accounting and other support services from affiliates which are reimbursed as
an adjustment to management fees in the normal course of business.
The management agreement of Greenspoint provides for the Caribbean Hotel
Management Company ("CHMC") as the former Operator to advance amounts as
needed for Greenspoint's cash requirements, excluding principal due at
maturity of the Greenspoint debt, on an interest-free basis. As of December
31, 1994 and 1995, Greenspoint owed $14,673,589 and $14,607,930, respectively,
to CHMC related to such advances which is included in due to Operators.
However, cash flow from future hotel operations of Greenspoint may not be
adequate to satisfy the Greenspoint indebtedness to CHMC.
5. NOTES RECEIVABLE--AFFILIATE:
Notes receivable from an affiliate consists of amounts paid by Midtown to a
lender on behalf of Bristol Hotel Associates, Ltd. ("BHA") an affiliate with
debt cross-collateralized by the property of Midtown. The loan bears interest
at prime plus 2%. Interest receivable at December 31, 1994 and 1995 was $9,640
and $25,165, respectively, and is included in accounts receivable. Interest
payments are due semiannually, and the principal balance is due September 30,
2000.
F-123
<PAGE>
WYNDHAM PORTFOLIO HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
---------- ----------
<S> <C> <C>
Accounts payable.......................................... $ 760,699 $ 888,219
Taxes..................................................... 1,133,045 1,145,719
Accrued interest.......................................... 251,391 23,950
Other..................................................... 915,861 629,537
---------- ----------
$3,060,996 $2,687,425
========== ==========
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Midtown--Mortgage loan, a hotel property and
equipment is pledged as collateral, interest pay-
able monthly at variable rates which ranged from
4.78% to 7.55%, and 7.28% to 7.63% during the
years ended December 31, 1994 and 1995. An inter-
est rate hedge comes into effect if the long-term
trigger rate, as defined, exceeds 10.75%. Princi-
pal is due September 30, 2000. Net cash flow, as
defined, is applied to the mortgage principal of
an affiliated cross-collateralized hotel proper-
ty............................................... 9,500,000 9,500,000
Midtown--Note payable to a partner, bearing
interest at a rate consistent with the Midtown
mortgage loan. Payments are limited to cash flow,
as defined, and payable quarterly. Principal and
any unpaid interest is due September 30, 2000.... 3,266,425 2,417,864
Greenspoint--Mortgage loan, a hotel property and
equipment is pledged as collateral, interest pay-
able monthly at 10.25%. Principal due in monthly
installments of $90,000 beginning September 1994,
plus monthly net cash flows, as defined, not to
exceed an aggregate unpaid principal balance of
$1,000,000. The remaining principal is due Janu-
ary 1997......................................... 22,220,000 21,140,000
Greenspoint--Note payable to a related party, col-
lateralized by a subordinated deed of trust,
bearing interest at prime plus 1.25% (9.75% at
December 31, 1995), principal due on demand or,
if no demand is made, on January 1, 1999. Inter-
est payments are limited to cash flow, as de-
fined, and payable within 45 days after the year
end.............................................. 15,000,000 15,000,000
Greenspoint--Note payable to a related party,
bears interest at 10.69%, principal due on Janu-
ary 1, 1996. Interest payments are limited to
cash flow, as defined, and payable within 45 days
after the year end............................... 2,500,000 2,500,000
------------ ------------
52,486,425 50,557,864
Current portion of long-term debt................. (16,080,000) (18,580,000)
------------ ------------
Long-term debt, net of current portion............ $ 36,406,425 $ 31,977,864
============ ============
</TABLE>
The Midtown mortgage loan requires the maintenance of a certain debt
coverage, if debt coverage requirements are not met, quarterly principal
payments of all net operating income, as defined, less interest payable for
the month and less a reasonable reserve not to exceed $200,000 as defined in
the loan agreement are required. If debt coverage is met, then 50% of profits,
as defined, must be remitted to pay principal on the mortgage note of BHA, an
affiliate whose debt is cross collateralized by the property of Midtown. Such
payments are treated as a loan to the affiliate and bear interest at the
lender's prime rate plus 2%. Payments to the lender on behalf of BHA were
$587,122 and $350,120 during 1994 and 1995, respectively.
F-124
<PAGE>
WYNDHAM PORTFOLIO HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The terms of the mortgage notes require the Companies to remit 3% of gross
revenues to a furniture, fixtures and equipment reserve. As of December 31,
1994 and 1995, $364,809 and $469,919 were held in the furniture, fixtures and
equipment reserve.
The mortgage loan agreement of Greenspoint required the Partnership to make
deposits of net cash flows, as defined, into a furniture, fixtures and
equipment reserve from August 1, 1993 through July 31, 1994. Of the total
required deposits of net cash flow from August 1, 1993 through July 1, 1994,
approximately $1,000,000 was used to fund capital expenditures and $880,935
was applied as a principal pay down on the loan. An additional payment of
$119,065 of net cash flows related to August 1994 was also applied to the
principal balance of the loan.
The note payable of Greenspoint to a related party which matured on January
1, 1996 remains outstanding. The Partnership intends to repay this debt with
proceeds of the sale described in Note 11. The related party has guaranteed
$12,000,000 of the Greenspoint mortgage loan.
Accrued interest payable to a related party was $6,993,403 and $8,210,255 as
of December 31, 1994 and 1995, respectively. Interest expense of the Companies
related to notes payable to affiliated individuals was $2,091,069 and
$1,689,612 as of December 31, 1994 and 1995, respectively.
The annual principal requirements for the five years subsequent to December
31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 18,580,000
1997............................................................ 20,060,000
1998............................................................ --
1999............................................................ --
2000............................................................ 11,917,864
Thereafter...................................................... --
------------
$ 50,557,864
============
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
The Companies participate in a 401(k) retirement savings plan. Employees who
are over 21 years of age and have completed one year of service are eligible
to participate in the plan. The Companies match employee contributions up to
4% of an employee's salary. The Companies expensed $4,182 and $6,054 for the
years ended December 31, 1994 and 1995, respectively, related to the plan.
The Companies participate in a self-insured group health plan through a
Voluntary Employee Benefit Association ("VEBA") for their employees. This plan
is funded to the limits provided in the Internal Revenue Code, and liabilities
have been recorded for unpaid claims. Aggregate and stop loss insurance exists
at amounts which limit exposure to the Companies. The Companies have
recognized expenses under the plan of $54,408 and $66,804 for the years ended
December 31, 1994 and 1995, respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Companies have estimated the fair value of its financial instruments at
December 31, 1995 as required by Statement of Financial Accounting Standards
No. 107. The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair values. The carrying values of variable and fixed rate debt are
reasonable estimates of their fair values based on their
F-125
<PAGE>
WYNDHAM PORTFOLIO HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
discounted cash flows at rates currently available to the Companies for debt
with similar terms and remaining maturities. It is impracticable to estimate
the fair value of debt owed to related parties.
10. COMMITMENTS AND CONTINGENCIES:
Greenspoint utilizes certain operating equipment which it leases under
noncancelable agreements which extend beyond one year. Rent expense associated
with these leases was $599,992 in 1994 and $627,798 in 1995. Following is a
schedule of future minimum rental payments required under these operating
leases having initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1995:
<TABLE>
<S> <C>
1996............................................................. $ 723,991
1997............................................................. 616,675
1998............................................................. 555,152
1999............................................................. 388,669
2000............................................................. 388,669
Thereafter....................................................... 2,923,098
-----------
$ 5,596,254
===========
</TABLE>
The Companies are subject to environmental regulations related to the
ownership of real estate (hotels). The cost of complying with the
environmental regulations was not material to the Companies' combined
statements of operations for either of the two years ended December 31, 1995.
The Companies are not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on the Companies'
financial statements.
11. SUBSEQUENT EVENT:
The Companies have entered into a letter of intent with Patriot American
Hospitality, Inc., a third party real estate investment trust ("REIT"). This
transaction, if consummated, will result in the sale or contribution of the
Companies' hotel properties, equipment, inventory and other assets to the REIT
for approximately $60,230,000 in cash and $500,000 in value of units of
limited partnership interest in Patriot American Hospitality Partnership,
L.P., with approximately $3,000,000 of additional consideration being
contingent on operating performance. The hotel properties and equipment will
then be leased by the REIT to a newly formed affiliate of the Companies. Each
lease has an initial term of ten years, with two five-year renewal options.
Annual rent will be equal to the greater of base rent as calculated or a
percentage rent which will be calculated based upon performance of the hotel
properties. Base rent for the hotels is estimated to be approximately
$8,100,000 annually. The leases will require the lessee to pay substantially
all hotel operating expenses except for real estate taxes and property
insurance. The proceeds of the sale will not be sufficient to repay all of the
Companies' outstanding debt.
F-126
<PAGE>
[PICTURE OF PEACHTREE EXECUTIVE CONFERENCE CENTER AMPITHEATER]
[PICTURE OF CROWNE PLAZA RAVINIA BALLROOM]
[PICTURE OF WESTCOAST GATEWAY HOTEL, SEATTLE, WASHINGTON]
[PICTURE OF WYNDHM GARDEN HOTEL-MIDTOWN, ATLANTA, GEORGIA]
[PICTURE OF HYATT NEWPORTER HOTEL POOL]
[PICTURE OF HILTON INN, CLEVELAND SOUTH]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER-
WRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RE-
LATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 16
The Company............................................................... 24
Developments Since the Initial Offering................................... 29
Use of Proceeds........................................................... 32
Price Range of Common Stock and Distribution History...................... 33
Capitalization............................................................ 34
Selected Financial Information............................................ 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
The Hotel Industry........................................................ 51
The Hotels and the Proposed Acquisitions.................................. 52
Formation Transactions.................................................... 72
Management................................................................ 77
Certain Relationships and Transactions.................................... 85
The Lessees and the Operators............................................. 86
Principal Shareholders.................................................... 88
Description of Capital Stock.............................................. 90
Policies and Objectives with Respect to Certain Activities................ 96
Shares Available for Future Sale.......................................... 99
Partnership Agreement..................................................... 100
Federal Income Tax Considerations......................................... 103
Underwriting.............................................................. 120
Experts................................................................... 121
Legal Matters............................................................. 122
Additional Information.................................................... 122
Glossary.................................................................. 123
Index to Financial Statements............................................. F-1
</TABLE>
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,500,000 SHARES
[LOGO OF PATRIOT AMERICAN HOSPITALITY, INC. APPEARS HERE]
PATRIOT AMERICAN
HOSPITALITY, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
PAINEWEBBER INCORPORATED
BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
SMITH BARNEY INC.
----------------
JULY 23, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
