-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rq1B+GNsvmImPIJcRFZb9Lo2wEGzgQg7VHYPmjUY8id6X59k9epEs5wcuexvuTeC wzvDg+UvzLXYrRvPRWaOtw== 0000930661-99-001202.txt : 19990518 0000930661-99-001202.hdr.sgml : 19990518 ACCESSION NUMBER: 0000930661-99-001202 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY INC/DE CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09319 FILM NUMBER: 99625031 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO DATE OF NAME CHANGE: 19970717 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA JOCKEY CLUB DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYNDHAM INTERNATIONAL INC CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS, ROOMING HOUSE, CAMPS & OTHER LODGING PLACES [7000] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09320 FILM NUMBER: 99625032 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO\DE DATE OF NAME CHANGE: 19970723 FORMER COMPANY: FORMER CONFORMED NAME: BAY MEADOWS OPERATING CO DATE OF NAME CHANGE: 19920703 10-Q 1 FORM-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X]JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-9319 Commission File Number 1-9320 PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC. (Exact name of registrant as (Exact name of registrant as specified in its charter) specified in its charter) Delaware 94-0358820 Delaware 94-2878485 (State or other (I.R.S. Employer (State or other (I.R.S. Employer jurisdiction of Identification jurisdiction of Identification incorporation or No.) incorporation or No.) organization) organization) 1950 Stemmons Freeway, Suite 6001 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Dallas, Texas 75207 (Address of principal executive (Address of principal executive offices) (Zip Code) offices) (Zip Code) (214) 863-1000 (214) 863-1000 (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) N/A N/A (Former name, former address and (Former name, former address and former fiscal year, if changed since former fiscal year, if changed since last report) last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of each registrant's classes of common stock, par value $.01 per share, as of the close of business on May 13, 1999, was as follows:
Registrant Number of Shares ---------- ---------------- Patriot American Hospitali- ty, Inc. 239,838,771 Wyndham International, Inc. 239,838,771
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PATRIOT AMERICAN HOSPITALITY, INC. AND PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY INDEX PART I--FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Combined Patriot American Hospitality, Inc. and Wyndham International, Inc.: Condensed Combined Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998...................................................... 3 Condensed Combined Statements of Operations for the three months ended March 31, 1999 and 1998 (unaudited).................................... 4 Condensed Combined Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (unaudited).................................... 5 Patriot American Hospitality, Inc.: Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998.................................................. 6 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 (unaudited).............................. 7 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (unaudited).............................. 8 Wyndham International, Inc.: Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998.................................................. 9 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 (unaudited).............................. 10 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (unaudited).............................. 11 Notes to Condensed Financial Statements as of March 31, 1999 (unaudited).. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 27 Item 3. Qualitative and Quantitative Disclosures about Market Risks....... 41 PART II--OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds......................... 42 Item 6. Exhibits and Reports on Form 8-K: Exhibits................................................................ 42 Reports on Form 8-K..................................................... 42 Signatures................................................................ 43
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. CONDENSED COMBINED BALANCE SHEETS (in thousands, except share amounts)
March 31, December 31, 1999 1998 ----------- ------------ (unaudited) ASSETS Investment in real estate and related improvements and land held for development, net of accumulated depreciation of $302,409 in 1999 and $252,580 in 1998............................................... $5,576,797 $5,585,616 Cash and cash equivalents........................... 131,786 123,085 Restricted cash..................................... 41,014 35,869 Accounts and lease revenue receivable............... 229,204 194,583 Investment in unconsolidated subsidiaries........... 144,884 146,912 Mortgage notes and other receivables from unconsoli- dated subsidiaries................................. 77,536 78,403 Mortgage notes and other receivables................ 41,824 41,334 Management contracts, net of accumulated amortiza- tion of $16,561 in 1999 and $11,258 in 1998........ 193,908 194,014 Leaseholds, net of accumulated amortization of $8,318 in 1999 and $5,989 in 1998.................. 176,714 179,922 Trade names and franchise costs, net of accumulated amortization of $7,886 in 1999 and $6,670 in 1998.. 124,219 125,974 Goodwill and intangibles, net of accumulated amorti- zation of $24,546 in 1999 and $20,895 in 1998...... 555,574 553,889 Deferred expenses, net of accumulated amortization of $39,708 in 1999 and $29,136 in 1998............. 42,275 37,998 Deferred acquisition costs.......................... 18,017 16,144 Inventories......................................... 23,131 23,583 Other assets........................................ 82,166 78,344 ---------- ---------- Total assets.................................... $7,459,049 $7,415,670 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under credit facility, term loans, mort- gage notes and capital leases...................... $3,888,569 $3,857,521 Accounts payable and accrued expenses............... 350,167 313,831 Deposits............................................ 37,247 26,392 Due to unconsolidated subsidiaries.................. 8,084 7,919 Deferred income taxes............................... 112,660 123,463 Minority interest in the Operating Partnerships..... 256,465 253,970 Minority interest in consolidated subsidiaries...... 196,798 229,537 Commitment and contingencies. Shareholders' Equity: Preferred stock, $0.01 par value, authorized: 100,000,000 shares each; shares issued and out- standing: 8,981,886 in 1999 and 1998.............. 90 90 Excess stock (paired shares), $0.01 par value, au- thorized: 750,000,000 shares each; no shares is- sued and outstanding.............................. -- -- Common stock (paired shares), $0.01 par value, au- thorized: 650,000,000 shares each; issued and out- standing: 234,224,527 shares in 1999 and 213,521,647 shares in 1998........................ 4,684 4,270 Additional paid in capital......................... 3,031,108 3,024,540 Receivable from shareholders and affiliates........ (16,541) (16,364) Unearned stock compensation, net of accumulated am- ortization of $17,777 in 1999 and $13,447 in 1998.............................................. (1,472) (5,494) Unrealized loss on securities available for sale... (1,281) (1,245) Unrealized foreign exchange (loss) gain............ (3,723) 2,749 Accumulated deficit and dividend distributions..... (403,806) (405,509) ---------- ---------- Total shareholders' equity...................... 2,609,059 2,603,037 ---------- ---------- Total liabilities and shareholders' equity...... $7,459,049 $7,415,670 ========== ==========
See notes to condensed financial statements. 3 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. CONDENSED COMBINED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended March 31, ----------------------- 1999 1998 -------- -------- Revenue: Hotel revenue...................................... $638,830 $290,644 Participating lease revenue........................ 333 20,565 Racecourse facility and land lease revenue......... 4,561 23,048 Management fee and service fee income.............. 22,791 13,839 Net gain on sale of assets......................... 2,775 -- Interest and other income.......................... 4,560 1,711 -------- -------- Total revenue.................................... 673,850 349,807 -------- -------- Expenses: Hotel expenses..................................... 425,552 188,841 Racing facility operations......................... 3,867 18,184 Real estate and personal property taxes and casualty insurance................................ 20,180 12,011 General and administrative......................... 50,396 17,306 Cost of acquiring license agreements............... 803 -- Interest expense................................... 90,215 35,959 Depreciation and amortization...................... 76,109 35,603 -------- -------- Total expenses................................... 667,122 307,904 -------- -------- Operating income..................................... 6,728 41,903 Equity in earnings of unconsolidated subsidiaries.. 2,701 3,194 -------- -------- Income before income tax provision, minority interests and extraordinary item.................... 9,429 45,097 Income tax provision............................... (8,943) (3,558) -------- -------- Income before minority interests and extraordinary item................................................ 486 41,539 Minority interest in the Operating Partnerships.... 1,958 (3,055) Minority interest in other consolidated subsidiaries...................................... (1,872) (1,356) -------- -------- Income before extraordinary item..................... 572 37,128 Extraordinary loss from early extinguishment of debt, net of minority interest.................... -- (18,716) -------- -------- Net income .......................................... $ 572 $ 18,412 ======== ======== Basic (loss) income (attributable) available to common shareholders: Net income......................................... $ 572 $ 18,412 Adjustment for equity forwards..................... (8,395) -- Preferred stock dividends.......................... (373) -- -------- -------- Basic net (loss) income............................ $ (8,196) $ 18,412 ======== ======== Basic (loss) earnings per common paired share: (Loss) income before extraordinary item............ $ (0.05) $ 0.34 Extraordinary loss................................. -- (0.17) -------- -------- Net (loss) income per common paired share........ $ (0.05) $ 0.17 ======== ======== Diluted (loss) income (attributable) available to common shareholders: Net income......................................... $ 572 $ 18,412 Adjustment for equity forwards..................... (20,033) -- Preferred stock dividends.......................... (373) -- -------- -------- Diluted net (loss) income.......................... $(19,834) $ 18,412 ======== ======== Diluted (loss) earnings per common paired share: (Loss) income before extraordinary item............ $ (0.13) $ 0.32 Extraordinary loss................................. -- (0.16) -------- -------- Net (loss) income per common paired share........ $ (0.13) $ 0.16 ======== ========
See notes to condensed financial statements. 4 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. CONDENSED COMBINED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net income.............................................. $ 572 $ 18,412 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 59,714 28,481 Amortization of unearned stock compensation............ 4,330 1,527 Amortization of deferred loan costs.................... 10,636 3,503 Amortization of management contracts and trade names... 10,123 3,245 Amortization of goodwill and other assets.............. 6,272 3,877 Net gain on sale of assets............................. (2,775) -- Issuance of stock for bonuses and directors' fee....... -- 880 Equity in earnings of unconsolidated subsidiaries...... (2,701) (3,194) Minority interest in Operating Partnerships............ (1,958) 3,055 Minority interest in consolidated subsidiaries......... 1,872 1,356 Deferred income taxes.................................. (10,805) (1,068) Extraordinary loss from early extinguishment of debt... -- 18,716 Changes in assets and liabilities: Accounts and lease revenue receivable and other assets............................................... (32,169) (29,959) Inventories........................................... 459 424 Accounts payable and other accrued expenses........... 37,721 10,000 --------- --------- Net cash provided by operating activities............ 81,291 59,255 --------- --------- Cash flows from investing activities: Acquisition of hotel properties and related working capital assets........................................ (32,258) (281,753) Improvements and additions to hotel properties......... (50,938) (41,205) Net proceeds from asset sales.......................... 19,444 -- Acquisition of management contracts.................... (1,679) -- Cash received in acquisition of hotel leases........... -- 28,976 Collections on other notes receivable.................. 2,431 4,000 Advances on other notes receivable..................... (2,498) -- (Increase) decrease in restricted cash accounts........ (5,145) 4,588 Deferred acquisition costs............................. (1,873) (27,104) Net payments collected from unconsolidated subsidiaries.......................................... 1,874 4,708 Investment in mortgage and other notes receivable...... -- (939) Other.................................................. 5,770 -- --------- --------- Net cash used in investing activities................ (64,872) (308,729) --------- --------- Cash flows from financing activities: Borrowings under credit facility, term loans, mortgage notes and capital lease obligations................... 52,252 504,762 Net repayments on credit facility and other debt....... (21,424) (311,862) Payment of deferred loan costs......................... (12,705) -- Proceeds from issuance of common stock................. -- 123,782 Collections on notes receivable from shareholders and affiliates............................................ -- 2,999 Distribution to minority interest holders.............. (18,759) -- Dividends and distributions paid....................... -- (27,564) Foreign currency translation adjustment................ (6,472) -- Other.................................................. (610) 194 --------- --------- Net cash (used in) provided by financing activities...... (7,718) 292,311 --------- --------- Net increase in cash and cash equivalents................ 8,701 42,837 Cash and cash equivalents at beginning of period......... 123,085 42,431 --------- --------- Cash and cash equivalents at end of period............... $ 131,786 $ 85,268 ========= =========
See notes to condensed financial statements. 5 PATRIOT AMERICAN HOSPITALITY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
March 31, 1999 December 31, 1998 -------------- ----------------- (unaudited) ASSETS Investment in real estate and related improvements and land held for development, net of accumulated depreciation of $259,194 in 1999 and $216,548 in 1998................. $4,951,180 $4,960,429 Cash and cash equivalents..................... 53,492 72,360 Restricted cash............................... 19,511 17,525 Accounts and lease revenue receivable......... 15,187 8,589 Investment in unconsolidated subsidiaries..... 998,553 975,591 Mortgage notes and other receivables from unconsolidated subsidiaries.................. 77,536 78,403 Subscription notes receivable from Wyndham.... 134,378 133,669 Notes and other amounts receivable from Wyndham...................................... 267,951 180,152 Other notes receivable........................ 21,780 20,079 Investment in leaseholds, net of accumulated amortization of $4,825 in 1999 and $3,301 in 1998......................................... 100,564 102,088 Goodwill and other intangibles net of accumulated amortization of $6,874 in 1999 and $5,287 in 1998........................... 136,023 139,240 Deferred expenses, net of accumulated amortization of $36,919 in 1999 and $27,426 in 1998...................................... 42,129 36,900 Deferred acquisition costs.................... 928 1,587 Other assets.................................. 24,192 22,594 ---------- ---------- Total assets.............................. $6,843,404 $6,749,206 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under credit facility, term loans, mortgage notes and capital leases............ $3,643,401 $3,612,076 Subscription notes payable to Wyndham......... 91,278 91,020 Notes and other amounts payable to Wyndham.... 73,280 19,109 Accounts payable and accrued expenses......... 81,379 63,850 Deferred income taxes......................... 37,755 38,912 Due to unconsolidated subsidiaries............ 8,084 7,919 Minority interest in Patriot Partnership...... 225,999 217,924 Minority interest in consolidated subsidiaries................................. 196,798 229,537 Commitments and contingencies. Shareholders' equity: Preferred stock, $0.01 par value; authorized: 100,000,000 shares;shares issued and outstanding: 5,419,532 in 1999 and 1998................................... 54 54 Excess stock, $0.01 par value; authorized: 750,000,000 shares; no shares issued and outstanding................................ -- -- Common stock, $0.01 par value; authorized: 650,000,000 shares; shares issued and outstanding: 234,224,527 shares in 1999 and 213,521,647 shares in 1998................. 2,342 2,135 Additional paid in capital.................. 2,781,901 2,775,722 Receivable from shareholders................ (15,471) (15,254) Unearned stock compensation, net of accumulated amortization of $17,777 in 1999 and $13,447 in 1998........................ (1,472) (5,494) Unrealized foreign exchange gain (loss)..... (4,547) 1,142 Accumulated deficit and dividend distributions.............................. (277,377) (289,446) ---------- ---------- Total shareholders' equity.................. 2,485,430 2,468,859 ---------- ---------- Total liabilities and shareholders' equity.. $6,843,404 $6,749,206 ========== ==========
See notes to condensed financial statements. 6 PATRIOT AMERICAN HOSPITALITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Revenue: Lease revenue............................................. $186,155 $109,649 Gain on sale of asset..................................... 2,985 -- Interest and other income................................. 4,758 3,516 -------- -------- Total revenue............................................ 193,898 113,165 -------- -------- Expenses: Real estate and personal property taxes and casualty insurance................................................ 17,737 11,923 Ground lease expense...................................... 13,622 6,558 General and administrative................................ 20,651 5,282 Cost of acquiring license agreements...................... 803 -- Interest expense.......................................... 86,104 34,251 Depreciation and amortization............................. 52,662 20,497 -------- -------- Total expenses........................................... 191,579 78,511 -------- -------- Operating income........................................... 2,319 34,654 Equity in earnings of unconsolidated subsidiaries.......... 14,612 3,591 -------- -------- Income before income tax provision, minority interests and extraordinary item........................................ 16,931 38,245 Income tax provision....................................... (2,477) (371) -------- -------- Income before minority interests and extraordinary item.... 14,454 37,874 Minority interest in Patriot Partnership................... (729) (3,128) Minority interest in consolidated subsidiaries............. (1,873) (533) -------- -------- Income before extraordinary item........................... 11,852 34,213 Extraordinary loss from early extinguishment of debt, net of minority interest..................................... -- (18,716) -------- -------- Net income................................................. $ 11,852 $ 15,497 ======== ======== Basic income available to common shareholders: Net income............................................... $ 11,852 $ 15,497 Adjustment for equity forwards........................... (8,395) -- Preferred stock dividends................................ (373) -- -------- -------- Basic net income......................................... $ 3,084 $ 15,497 ======== ======== Basic earnings per common share: Income before extraordinary item.......................... $ 0.02 $ 0.31 Extraordinary loss........................................ -- (0.17) -------- -------- Net income per common share............................... $ 0.02 $ 0.14 ======== ======== Diluted (loss) income (attributable) available to common shareholders: Net income............................................... $ 11,852 $ 15,497 Adjustment for equity forwards........................... (20,033) -- Preferred stock dividends................................ (373) -- -------- -------- Diluted net (loss) income................................ $ (8,554) $ 15,497 ======== ======== Diluted (loss) earnings per common share: (Loss) income before extraordinary item................... $ (0.06) $ 0.29 Extraordinary loss........................................ -- (0.16) -------- -------- Net (loss) income per common share........................ $ (0.06) $ 0.13 ======== ========
See notes to condensed financial statements. 7 PATRIOT AMERICAN HOSPITALITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 31, ------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net income............................................... $ 11,852 $ 15,497 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................ 50,531 19,856 Amortization of unearned stock compensation............. 4,330 1,336 Amortization of deferred loan costs..................... 9,236 3,503 Amortization of goodwill and other assets............... 2,132 641 Abandoned transaction costs............................. 676 -- Net gain on sale of assets.............................. (2,985) -- Issuance of stock for bonuses and directors' fee........ -- 675 Deferred income taxes................................... (1,158) -- Equity in earnings of unconsolidated subsidiaries....... (14,612) (3,591) Minority interest in Patriot Partnership................ 729 3,128 Minority interest in consolidated subsidiaries.......... 1,873 533 Extraordinary loss from early extinguishment of debt.... -- 18,716 Changes in assets and liabilities: Accounts and lease revenue receivable and other assets.. (26,865) (25,737) Due from Wyndham........................................ (12,272) (11,892) Accounts payable and other accrued expenses............. 21,534 (2,811) -------- --------- Net cash provided by operating activities............. 45,001 19,854 -------- --------- Cash flows from investing activities: Acquisition of hotel properties and related working capital assets......................................... (32,258) (281,753) Improvements and additions to hotel properties.......... (39,493) (38,333) Net proceeds from real estate sales and acquisitions.... 18,008 -- Collections (advances) on other notes receivable........ (1,278) 4,000 (Increase) decrease in restricted cash accounts......... (1,986) 4,746 Deferred acquisition costs.............................. (17) (2,669) Net payments from (investment in) unconsolidated subsidiaries........................................... (2,305) 4,699 Other................................................... 1,590 -- -------- --------- Net cash used in investing activities................. (57,739) (309,310) -------- --------- Cash flows from financing activities: Borrowings under credit facility, term loans, mortgage notes and capital lease obligations.................... 52,252 504,762 Repay borrowings under credit facility and other debt... (20,813) (307,277) Payment of deferred loan costs.......................... (12,513) -- Principal payments on subscription notes payable to Wyndham................................................ -- (12,875) Proceeds from issuance of common stock.................. -- 117,572 Collections on notes receivable from shareholders....... -- 2,999 Distributions to minority interest holders.............. (18,757) -- Dividends and distributions paid........................ -- (27,113) Foreign currency translation adjustment................. (5,689) -- Other................................................... (610) 194 -------- --------- Net cash (used in) provided by financing activities... (6,130) 278,262 -------- --------- Net decrease in cash and cash equivalents................. (18,868) (11,194) Cash and cash equivalents at beginning of period.......... 72,360 15,355 -------- --------- Cash and cash equivalents at end of period................ $ 53,492 $ 4,161 ======== =========
See notes to condensed financial statements. 8 WYNDHAM INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except share amounts)
March 31, December 31, 1999 1998 ----------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents............................ $ 78,294 $ 50,725 Restricted cash...................................... 21,503 18,344 Accounts receivable.................................. 214,017 185,994 Notes and other receivables from Patriot............. 73,280 19,109 Inventories.......................................... 23,131 23,583 Prepaid expenses and other current assets............ 30,094 28,195 ---------- ---------- Total current assets............................... 440,319 325,950 Investment in real estate and related improvements, net of accumulated depreciation of $43,215 in 1999 and $36,032 in 1998.................................. 625,744 626,103 Investments in unconsolidated subsidiaries............ 86,875 86,812 Subscription notes receivable from Patriot............ 91,278 91,020 Mortgage notes and other receivables.................. 20,044 21,255 Management contract costs, net of accumulated amortization of $16,561 in 1999 and $11,258 in 1998.. 193,908 194,014 Leasehold costs, net of accumulated amortization of $3,493 in 1999 and $2,688 in 1998.................... 76,150 77,834 Trade names and franchise costs, net of accumulated amortization of $7,886 in 1999 and $6,198 in 1998.... 124,219 125,974 Deferred acquisition costs............................ 17,089 14,557 Goodwill, net of accumulated amortization of $17,672 in 1999 and $15,608 in 1998.......................... 419,551 414,649 Deferred expenses, net of accumulated amortization of $2,789 in 1999 and $1,710 in 1998.................... 146 1,098 Other assets.......................................... 27,880 27,555 ---------- ---------- Total assets....................................... $2,123,203 $2,006,821 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses................ $ 268,788 $ 249,981 Participating lease payments payable to Patriot...... 68,887 40,996 Deposits............................................. 37,247 26,392 Notes and other amounts payable to Patriot........... 199,064 139,156 Current portion of mortgage notes and capital lease obligations......................................... 145,169 145,969 ---------- ---------- Total current liabilities.......................... 719,155 602,494 Subscription notes payable to Patriot................. 134,378 133,669 Mortgage notes payable and capital lease obligations.. 99,999 99,476 Deferred income taxes................................. 74,905 84,551 Minority interest in Wyndham Partnership.............. 30,466 36,046 Minority interest in consolidated subsidiaries........ 940,544 915,491 Commitments and contingencies. Shareholders' equity: Preferred stock, $0.01 par value; authorized: 100,000,000 shares; shares issued and outstanding: 3,562,354 in 1999 and 1998.......................... 36 36 Excess stock, $0.01 par value; authorized: 750,000,000 shares; no shares issued and outstanding......................................... -- -- Common stock, $0.01 par value; authorized: 650,000,000 shares; issued and outstanding: 234,224,527 shares in 1999 and 213,521,647 shares in 1998................................................ 2,342 2,135 Additional paid in capital........................... 249,207 248,818 Receivable from shareholders and affiliates.......... (1,070) (1,110) Unrealized loss on securities available for sale..... (1,281) (1,245) Unrealized foreign exchange gain..................... 824 1,607 Accumulated deficit and dividend distributions....... (126,302) (115,147) ---------- ---------- Total shareholders' equity......................... 123,756 135,094 ---------- ---------- Total liabilities and shareholders' equity......... $2,123,203 $2,006,821 ========== ==========
See notes to condensed financial statements. 9 WYNDHAM INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Revenue: Hotel revenue............ $638,830 $290,644 Racecourse facility revenue................. 4,561 23,048 Management fee and service fee income...... 22,918 14,104 Loss on sale of asset.... (210) -- Interest and other income.................. 5,418 2,186 -------- -------- Total revenue........... 671,517 329,982 -------- -------- Expenses: Hotel expenses........... 414,373 182,371 Racecourse facility operations.............. 3,867 18,184 General and administrative.......... 29,745 12,023 Interest expense......... 9,727 5,699 Depreciation and amortization............ 23,447 15,106 Participating lease payments................ 185,822 89,084 -------- -------- Total expenses.......... 666,981 322,467 -------- -------- Operating income.......... 4,536 7,515 Equity in earnings of unconsolidated subsidiaries............. 187 1,720 -------- -------- Income before income tax provision and minority interests................ 4,723 9,235 Income tax provision...... (6,466) (3,187) -------- -------- (Loss) income before minority interests....... (1,743) 6,048 Minority interest in Wyndham Partnership...... 2,687 73 Minority interest in consolidated subsidiaries............. (12,097) (2,941) -------- -------- Net (loss) income......... $(11,153) $ 3,180 ======== ======== Basic net (loss) income per common share......... $ (0.07) $0.03 ======== ======== Diluted net (loss) income per common share......... $ (0.07) $0.03 ======== ========
See notes to condensed financial statements. 10 WYNDHAM INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 31, ----------------- 1999 1998 -------- ------- Cash flows from operating activities: Net (loss) income.......................................... $(11,153) $ 3,180 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation.............................................. 9,184 8,625 Amortization of deferred loan costs....................... 1,400 129 Amortization of management contracts and trade names...... 10,123 3,245 Amortization of goodwill and other........................ 4,140 3,107 Loss on sale of asset..................................... 210 -- Issuance of stock for bonuses and directors' fees......... -- 205 Net payment from unconsolidated subsidiaries.............. -- 9 Deferred income taxes..................................... (9,647) (1,068) Equity in earnings of unconsolidated subsidiaries......... (187) (1,720) Minority interest in Wyndham Partnership.................. (2,687) (73) Minority interest in consolidated subsidiaries............ 12,097 2,941 Changes in assets and liabilities: Accounts receivable and prepaid expenses and other assets................................................... (24,596) (25,520) Other receivables from Patriot............................ 3,727 -- Inventories............................................... 459 424 Accounts payable and other accrued expenses............... 16,185 13,002 Participating lease payments payable to Patriot........... 27,837 21,297 -------- ------- Net cash provided by operating activities............... 37,092 27,783 -------- ------- Cash flows from investing activities: Improvements and additions to hotel properties............ (11,572) (3,137) Net proceeds from asset sales............................. 1,437 -- Increase in restricted cash account....................... (3,152) (158) Change in due to Patriot.................................. -- 11,892 Acquisition of management contracts....................... (1,679) -- Deferred acquisition costs................................ (2,532) (24,435) Cash received upon acquisition of hotel leases............ -- 28,976 Investment in mortgage notes and other notes receivable... (1,220) (939) Collections on other notes receivable..................... 2,431 -- Investment in unconsolidated subsidiaries................. 209 -- Other..................................................... 4,172 -- -------- ------- Net cash (used in) provided by investing activities..... (11,906) 12,199 -------- ------- Cash flows from financing activities: Borrowings under credit facility and term loans........... -- (3,780) Repayment of assumed debt................................. (391) -- Payment of capital lease obligations...................... (220) (805) Proceeds from issuance of common stock.................... 3,970 6,210 Payment of deferred loan costs............................ (192) -- Collections on subscription notes......................... -- 12,875 Foreign currency translation adjustment................... (782) -- Distributions paid........................................ (2) (451) -------- ------- Net cash provided by financing activities............... 2,383 14,049 -------- ------- Net increase in cash and cash equivalents................... 27,569 54,031 Cash and cash equivalents at beginning of period............ 50,725 27,076 -------- ------- Cash and cash equivalents at end of period.................. $ 78,294 $81,107 ======== =======
See notes to condensed financial statements. 11 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) 1. Organization and Basis of Presentation: Patriot American Hospitality, Inc. (collectively with its subsidiaries, "Patriot"), was formed April 17, 1995 as a self-administered real estate investment trust ("REIT") for the purpose of acquiring equity interests in hotel properties. Wyndham International, Inc. (collectively with its subsidiaries, "Wyndham") was formed in connection with Patriot's merger with and into California Jockey Club and Bay Meadows Operating Company on July 1, 1997. Patriot and Wyndham are both Delaware corporations and are collectively referred to as the Companies. The shares of common stock of Patriot are paired and trade together with the shares of common stock of Wyndham as a single unit pursuant to a stock pairing arrangement. The single unit is comprised of one share of common stock of Patriot paired with one share of common stock of Wyndham, and is referred to herein as a paired share. Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole general partner and the holder of a 1% general partnership interest in Patriot American Hospitality Partnership, L.P. (the "Patriot Partnership"). In addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an approximate 87.2% limited partnership interest in the Patriot Partnership. Wyndham owns the 1% general partnership interest and an approximate 86.1% interest in Wyndham International Operating Partnership, L.P. (the "Wyndham Partnership") as of March 31, 1999. The Patriot Partnership and the Wyndham Partnership are collectively referred to as the Operating Partnerships. As of March 31, 1999, Patriot and Wyndham, through the Operating Partnerships and other subsidiaries, owned interests in 177 hotels with an aggregate of over 43,600 guest rooms and leased 118 hotels from third parties with over 15,500 rooms. In addition, Wyndham manages 436 hotels with over 92,000 guest rooms and franchises 12 hotels with over 2,900 guest rooms. Patriot leases all but one of its hotels to Wyndham. Certain of these leases provide for the payment of the greater of base or participating rent, plus certain additional charges, as applicable. Patriot owns interests in eight hotels and 81 leaseholds for hotels leased from third parties through special purpose entities which are non-controlled subsidiaries. Patriot owns the non-voting interest and Wyndham owns the controlling voting interest in each of the non-controlled subsidiaries. As a result of this ownership, the operating results of the non-controlled subsidiaries are combined with those of Wyndham for financial reporting purposes. Patriot accounts for its investment in the non-controlled subsidiaries using the equity method of accounting. Principles of Consolidation The unaudited separate consolidated financial statements include the accounts of Patriot and Wyndham, their respective wholly owned subsidiaries and the partnerships, corporations and limited liability companies in which Patriot or Wyndham own a controlling interest. Partnerships--control is determined in accordance with generally accepted accounting principles ("GAAP"). The condition for control is the ownership of a majority voting interest and the ownership of the general partnership interest. 12 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) Corporations and Limited Liability Companies--control is determined in accordance with GAAP. The condition for control is the ownership of a majority voting interest. The unaudited separate consolidated financial statements of Patriot and Wyndham have also been combined for purposes of financial statement presentation. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in Patriot's and Wyndham's Joint Annual Report on Form 10-K, as amended for the year ended December 31, 1998. Certain prior period amounts have been reclassified to conform to current period presentation. 2. Acquisitions and Disposals: Sale of Bay Meadows Racecourse In February 1999, Patriot sold its interest in the Bay Meadows Racecourse located in San Mateo, California. The Companies received cash proceeds of approximately $3,446 after payment of legal costs and other closing costs. The Companies recognized an estimated impairment loss on assets held for sale of $42,278 related to the racecourse facility in 1998. In connection with the transaction, Patriot terminated its lease to Wyndham for the racecourse facility. The actual loss on the sale of the racecourse facility was $42,766. Sale of Holiday Inn Crockett In March 1999, Patriot sold the Holiday Inn Crockett, realizing net cash proceeds of approximately $18,000 and recognized a gain of approximately $2,985. In connection with the sale, $17,000 of the net proceeds were used to repay a portion of Patriot's term loans. Acquisition In January 1999, Patriot acquired the remaining 25% minority interests in each of the five following hotels; Embassy Suites Schaumburg, the Hilton Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover and the Marriott Tysons Corner from CIGNA. The acquisition of such interests was financed through additional mortgage indebtedness totaling $49,800 and the sale of an additional 10% interest in the Marriott Warner Center. 3. Subscription Notes: In order to effect the issuance of the paired shares of common stock and units of limited partnership interest ("OP units") which were issued in connection with certain of the Companies' mergers, other acquisition transactions, equity transactions and stock dividend payments, Patriot and Wyndham have issued promissory notes to fund issuance of paired shares and OP units. These promissory notes are referred to as subscription notes. 13 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) As of March 31, 1999, Patriot's obligations to Wyndham under the subscription notes totaled $91,278. In connection with each issuance of shares and OP units pursuant to a specific transaction, these subscriptions for shares and OP units are funded through the issuance of promissory notes between the Companies. The notes bear interest ranging from LIBOR plus 1% to 8.75% per annum and mature from 1999 through 2002. As of March 31, 1999, Wyndham's obligations to Patriot under a subscription note totaled $134,378. The notes bear interest ranging from LIBOR plus 1% to 8.75% per annum and mature from 2001 to 2002. 4. Pending Transactions: Interstate's Third-Party Hotel Management Business On May 27, 1998, the Companies and Interstate Hotels Company ("Interstate") entered into a settlement agreement, as amended, with Marriott International, Inc. ("Marriott"), which addressed certain claims asserted by Marriott in connection with the Companies' then proposed merger with Interstate. The settlement agreement provided for the dismissal of litigation brought by Marriott, and allowed the Companies' merger with Interstate to close. In addition to dismissal of the Marriott litigation, the settlement agreement provides for the re-branding of ten Marriott hotels under the Wyndham name, the assumption by Marriott of the management of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and the spin-off by the Companies (subject to extension upon payment of certain fees by the Companies) of the third-party management business which was operated by Interstate no later than May 14, 1999. If the Companies do not complete the spin-off by May 14, 1999, Marriott will be entitled to receive 110% of the fees otherwise due under the submanagement agreements with respect to the ten hotels Marriott will manage pursuant to the submanagement arrangement described above. Additionally, the Companies will be subject to other penalties, including Marriott's right to purchase, subject to third-party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by the Companies at their then appraised values. Moreover, subject to any defenses, the Companies would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of the Marriott-branded hotels to choose an alternative manager for their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with the Companies and enter into a contract with an alternative manager. The Companies would owe liquidated damages on any third- party Marriott-franchised hotel which chooses to convert its brand. The Companies are currently negotiating to extend the deadline for the spin- off, but no formal agreement has been reached as of the date hereof. Securities Purchase Agreement Wyndham and Patriot have entered into an agreement with investors providing for a $1 billion equity investment and related restructuring of the two companies. The Companies have also received a commitment letter for a $2,450,000 credit facility to be put into place upon the completion of the $1 billion equity investment. The new $2,450,000 credit facility will consist of: $1,000,000 of term loans with a seven year term; a $600,000 credit facility with a five year term; and, an $850,000 increasing rate loan facility with a five year term 14 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) which will provide financing which may be redeemed with the proceeds of the issuance of senior unsecured notes. As a condition of the $1 billion equity investment, the Companies are required to restructure their existing organization. Under the contemplated restructuring, a subsidiary of Wyndham will merge with and into Patriot and Patriot will become a wholly-owned subsidiary of Wyndham and new shares of Wyndham will be issued in exchange for the then outstanding shares of Patriot common stock. In addition, the pairing agreement between Wyndham and Patriot will terminate, Patriot's status as a REIT will terminate effective January 1, 1999, and Patriot will become a taxable corporation at that date. The termination of Patriot's REIT status will cause Patriot to permanently lose its special status as a grandfathered paired share REIT. As a result of that transaction, the Company will be required to record a charge for deferred income taxes for the difference between the income tax basis and the recorded carrying value of assets and liabilities. The Company is continuing its analysis of the expected effects of this non-cash charge. Currently the estimate is $750,000, however; this amount could vary when the analysis is completed. In addition, the Company will charge off the value of an intangible asset associated with the paired share structure of approximately $83,600. In the event that the equity and related debt transactions referred to above are not completed, management has determined that additional capital would have to be raised from other sources or the Companies would have to sell significant amounts of assets to produce proceeds sufficient to meet its existing current debt maturity obligations. These asset sales could include resort properties or Wyndham-managed properties in major cities and could negatively impact operations. Management believes these alternatives, if necessary, represent a viable plan to address the Companies' liquidity needs. 5. Credit Facility, Term Loans, Mortgages and Other Notes: Credit Facility and Term Loans The Companies' credit facilities led by the Chase Manhattan Bank and Chase Securities, Inc. and Paine Webber Real Estate Securities, Inc. include a $900,000 revolving credit facility (the "Credit Facility") and a series of term loans in the aggregate amount of up to $1,800,000 (the "Term Loans"). Proceeds from the Credit Facility were used to fund certain of the Companies' mergers, as well as to refinance certain outstanding indebtedness of the Companies. Interest rates are based on the Companies' leverage ratio and may vary from 1.5% to 3% over LIBOR. As of March 31, 1999, the Companies had no additional availability under the Credit Facility. The Credit Facility matures July 2000. The Term Loans mature on June 30, 1999 ($733,000), March 31, 2000 ($450,000), and March 31, 2003 ($599,250). Under the original terms, two of the Term Loans were scheduled to mature on January 31, 1999 ($350 million) and March 31, 1999 ($400 million), respectively. All of the requisite lenders agreed to extend maturity of these two term loans to June 30, 1999, subject to Patriot and Wyndham consummating the securities purchase agreement by that date. In addition to the maturity extensions, the lenders have waived certain debt covenants to June 30, 1999 on which the Companies would have been in default if not waived. If the securities purchase agreement is not consummated by June 30, 1999, or the securities purchase agreement otherwise terminates, the maturity on these two Term Loans will be extended to March 31, 2000, and the Companies will be required to make a $300,000 principal amortization payment by December 31, 1999. Additionally, the Companies will be required to secure the Credit Facility with mortgages and other security interests. 15 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) Paine Webber Mortgage Financing Effective February 15, 1999, the financing arrangement with an affiliate of Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate") whereby such affiliate loaned Patriot $103,000, was amended and extended to the earlier of June 30, 1999 or the closing of the securities purchase agreement. Additionally, the amendment provides for an increase in the rate of interest to LIBOR plus 2.75% per annum. Effective February 15, 1999, the agreements entered into in connection with the acquisition of the Wyndham Emerald Plaza Hotel located in San Diego, California and the Arcadian acquisition, whereby Paine Webber Real Estate provided loans of $35,000 and $160,000, respectively were amended and extended to the earlier of June 30, 1999 or the closing of the securities purchase agreement. Additionally, the amendments provide for an increase in the rate of interest to LIBOR plus 2.75% per annum for the $35,000 loan and to LIBOR plus 5% per annum for the $160,000 loan. Interest Rate Swaps and Caps Patriot enters into interest rate swap and cap agreements to modify the interest characteristics of its outstanding debt. These agreements involve the exchange of amounts based on a variable interest rate for amounts based on fixed interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt using a method which approximates the effective interest method (the accrual accounting method). The related amount payable to or receivable from counterparties is included in accrued expenses or other assets. Patriot also enters into interest rate cap agreements that are designed to limit its exposure to increasing interest rates and are designated as hedges of its outstanding debt. An interest rate cap entitles Patriot to receive a payment from the counterparty equal to the excess, if any, of the hypothetical interest expense (strike price) on a specified notional amount at a current market interest rate over an amount specified in the agreement. The only amount Patriot is obligated to pay the counterparty is an initial premium. The cost of the agreements (the initial premium) is included in other assets and amortized to interest expense ratably during the life of the agreement. The fair value of interest rate swap and cap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Patriot has entered into two additional interest rate swap arrangements during 1999 to swap floating rate LIBOR-based interest rates for a fixed rate interest amount as a hedge against $50,987 of the outstanding balance on specific property related debt. The interest rate swap fixes the LIBOR portion of the debt interest rate at 5.31% per annum through January 2000 ($19,987) and 5.42% per annum through March 2001 ($31,000). At March 31, 1999, Patriot has various interest rate swap arrangements as a hedge against $872,987 of the outstanding balance on the Credit Facility, the Term Loans and specific property related debt. Additionally, Patriot entered into two interest rate cap arrangements as follows; an interest rate cap that limits LIBOR to 7% on up to $1,500,000 of indebtedness through April 2000, and an interest rate cap that limits LIBOR to 6.75% on up to $19,475 of indebtedness through March 2001. 16 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) 6. Comprehensive Income (Loss): SFAS No. 130, "Reporting Comprehensive Income", establishes standards for reporting and displaying comprehensive income (loss) and its components. The Companies adopted SFAS No. 130 beginning with their interim financial statements for the first quarter of 1998. Total comprehensive income (loss) for the periods is as follows: Combined
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- Net income................................................ $ 572 $ 18,412 Unrealized (loss) gain on securities available for sale... (36) 106 Unrealized foreign exchange loss.......................... (6,472) -- --------- --------- Total comprehensive (loss) income......................... $ (5,936) $ 18,518 ========= =========
Patriot
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- Net income................................................ $ 11,852 $ 15,497 Unrealized foreign exchange loss.......................... (5,689) -- --------- --------- Total comprehensive income................................ $ 6,163 $ 15,497 ========= =========
Wyndham
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- Net (loss) income ......................................... $ (11,153) $ 3,180 Unrealized (loss) gain on securities available for sale.... (36) 106 Unrealized foreign exchange loss........................... (783) -- --------- -------- Total comprehensive (loss) income ......................... $(11,972) $ 3,286 ========= ========
17 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) 7. Computation of Earnings Per Share: Earnings per share have been computed as follows: Combined (1)
Three Months Ended Three Months Ended March 31, March 31, -------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Basic Diluted -------------------- -------------------- Income before extraordinary item... $ 572 $ 37,128 $ 572 $ 37,128 Adjustment for equity forwards (2)............................... (8,395) -- (20,033) -- Return on preferred stock ......... (373) -- (373) -- --------- --------- --------- --------- (Loss) income (attributable) available to common stockholders before extraordinary item......... (8,196) 37,128 (19,834) 37,128 Extraordinary loss................. -- (18,716) -- (18,716) --------- --------- --------- --------- Net (loss) income (attributable) available to common stockholders.. $ (8,196) $ 18,412 $ (19,834) $ 18,412 ========= ========= ========= ========= Weighted average number of paired shares outstanding................ 154,990 109,549 154,990 109,549 Dilutive securities: Effect of unvested stock grants.. -- -- -- 872 Dilutive options to purchase paired shares................... -- -- -- 2,024 Dilutive convertible preferred shares.......................... -- -- -- 4,645 Dilutive impact of equity forwards........................ -- -- -- 376 --------- --------- --------- --------- 154,990 109,549 154,990 117,466 ========= ========= ========= ========= (Loss) earnings per paired share: (Loss) income (attributable) available to common stockholders before extraordinary item....... $ (0.05) $ 0.34 $ (0.13) $ 0.32 Extraordinary loss............... -- (0.17) -- (0.16) --------- --------- --------- --------- Net (loss) income................ $ (0.05) $ 0.17 $ (0.13) $ 0.16 ========= ========= ========= =========
- -------- (1) For the three months ended March 31, 1999, the dilutive effect of unvested stock grants of 796, the option to purchase common stock of 15 and 8,423 of preferred shares were not included in the computation of diluted earnings per share because they are anti-dilutive. (2) The adjustment relates to the mark-to-market and yield adjustment for the forward equity contracts which can be settled in cash or stock, at the Companies' option. 18 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) Patriot
Three Months Ended Three Months Ended March 31, March 31, -------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Basic Diluted (1) -------------------- -------------------- Income before extraordinary item.. $ 11,852 $ 34,213 $ 11,852 $ 34,213 Adjustment for equity forwards (2).............................. (8,395) -- (20,033) -- Preferred stock dividends......... (373) -- (373) -- --------- --------- --------- --------- Income (loss) available (attributable) to common stockholders before extraordinary item............................. 3,084 34,213 (8,554) 34,213 Extraordinary loss................ -- (18,716) -- (18,716) --------- --------- --------- --------- Net income (loss) available (attributable) to common stockholders..................... $ 3,084 $ 15,497 $ (8,554) $ 15,497 ========= ========= ========= ========= Weighted average number of common shares outstanding............... 154,990 109,549 154,990 109,549 Dilutive securities: Effect of unvested stock grants......................... -- -- -- 872 Dilutive options to purchase common shares.................. -- -- -- 2,024 Dilutive convertible preferred shares......................... -- -- -- 4,645 Dilutive impact of equity forwards....................... -- -- -- 376 --------- --------- --------- --------- 154,990 109,549 154,990 117,466 ========= ========= ========= ========= Earnings (loss) per share: Income (loss) available (attributable) to common stockholders before extraordinary item............................. $ 0.02 $ 0.31 $ (0.06) $ 0.29 Extraordinary loss.............. -- (0.17) -- (0.16) --------- --------- --------- --------- Net income (loss)............... $ 0.02 $ 0.14 $ (0.06) $ 0.13 ========= ========= ========= =========
- -------- (1) For the three months ended March 31, 1999, the dilutive effect of unvested stock grants of 796, the option to purchase common stock of 15 and 8,423 of preferred shares were not included in the computation of diluted earnings per share because they are anti-dilutive. (2) The adjustment relates to the mark-to-market and yield adjustment for the forward equity contracts which can be settled in cash or stock, at the Companies' option. 19 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) Wyndham
Three Months Ended Three Months Ended March 31, March 31, -------------------- -------------------- 1999 (1) 1998 1999 (1) 1998 -------------------- -------------------- Basic Diluted (2) -------------------- -------------------- Net (loss) income (attributable) available to common stockholders... $ (11,153) $ 3,180 $ (11,153) $ 3,180 ========= ========= ========= ========= Weighted average number of common shares outstanding................. 154,990 109,549 154,990 109,549 Dilutive securities: Effect of unvested stock grants... -- -- -- 872 Dilutive options to purchase common shares.................... -- -- -- 2,024 Dilutive convertible preferred shares........................... -- -- -- 4,645 Dilutive impact of equity forwards......................... -- -- -- 376 --------- --------- --------- --------- 154,990 109,549 154,990 117,466 ========= ========= ========= ========= (Loss) earnings per share: (Loss) income (attributable) available to common stockholders..................... $ (0.07) $ 0.03 $ (0.07) $ 0.03 ========= ========= ========= =========
- -------- (1) Wyndham is in a loss position for the three months ended March 31, 1999. Therefore, the presentation of basic and diluted earnings per share are identical since the securities which could have a dilutive impact on earnings per share are anti-dilutive. (2) For the three months ended March 31, 1999, the dilutive effect of unvested stock grants of 796, the option to purchase common stock of 15 and 8,423 of preferred shares were not included in the computation of diluted earnings per share because they are anti-dilutive. 8. Commitments and Contingencies: Forward Equity Contracts Patriot is party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. Patriot's aggregate obligation under the forward equity transactions was approximately $321.2 million at March 31, 1999. As of such date, Patriot had delivered an aggregate of 79 million shares to the counterparties as collateral in addition to approximately 12.5 million paired shares owned by the counterparties or their affiliates. In a forward equity transaction, a company sells shares of its common stock to an investment bank or similar financial institution. As the same time, the parties enter into a forward contract under which they agree to "settle" the transaction at a stated maturity date based upon the adjusted price of the purchased shares at maturity. During the term of the forward contract, the price of the purchased shares increases at a rate that corresponds to an agreed-upon interest rate. At maturity, the buyer sells a number of shares sufficient to generate proceeds equal to the total adjusted purchase price of the purchased shares. Shares may be sold to the public through an underwritten public offering or by other methods, or to private investors. If the buyer does not receive sufficient proceeds from selling the number of shares that it originally purchased, the company must issue more shares of common stock to the buyer for resale until the obligation has been satisfied. Under the terms of the Companies' forward equity contracts, the Companies may elect to settle their obligation in cash instead of paired shares. 20 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward agreements or to sell paired shares in connection with the forward agreements until the earlier of the closing of the $1 billion equity investment or June 30, 1999. In connection with these standstill agreements, the Companies agreed to pay a 2% fee to the three counterparties. Each of the agreements provided that the standstill obligation would terminate if, among other events, the price of the paired shares fell to a specified threshold. As of the date of this Form 10-Q, the price of the paired shares has fallen below these thresholds. As a result, each of the forward counterparties has the right to require an immediate settlement of its forward equity transaction. As of the date of this Form 10-Q, none of the counterparties has made any sale of paired shares, other than the sale of 754,525 paired shares by one counterparty in December 1998, or required settlement of its forward transaction. However, the Companies cannot assure you that the forward counterparties will not sell paired shares or require settlement in the future. In addition, the Companies have agreed to deliver a total of up to $18,084,488 of paired shares to the counterparties in exchange for the Interstate shares which the counterparties will receive in the spin-off. The counterparties will hold these paired shares as additional collateral under the forward equity agreements. The Companies may settle the forward transactions by delivering either cash or paired shares covered by an effective registration statement. Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure that the bank lenders would consent to any cash settlements prior to the closing of the $1 billion equity investment. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale by one counterparty of an additional 4 million paired shares of which 754,525 paired shares were sold by that counterparty in December 1998. In addition, the Companies filed a registration statement in April 1999 registering an additional 68 million paired shares in connection with the forward equity transactions. If and when the April 1999 registration statement becomes effective, there will be 111.2 million paired shares covered by effective registration statements, representing approximately 14 million paired shares more than the total number of paired shares currently owned or held as collateral by the forward counterparties. The Companies can make no assurance that these registration statements will remain effective or that the Companies will not be required to register more paired shares in connection with the forward equity transactions. Given the current market price of the paired shares, any settlement in paired shares would have severely dilutive effects on the Companies' capital stock. Based on the $5.0625 closing price of the paired shares on April 30, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 65 million paired shares to settle all of the forward equity transactions in full. The number of paired shares required would substantially increase if the market price of the paired shares decreases as a result of the sales of paired shares by the forward counterparties. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors in the $1 billion equity investment will be adjusted downward to the extent that the price recognized by the Companies on the sale is less than $8.75 per share. The Companies intend to settle in full all of the forward transactions with part of the proceeds of the $1 billion equity investment. If the Companies settle the forward transactions in cash, the counterparties must deliver to the Companies all paired shares then owned by them or held by them as collateral under the forward agreement. 21 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) Contingencies On June 29, 1992 an action for trademark infringement was filed in the New York Supreme County of New York, Index No. 17474/92 titled Wyndham Hotel Company, John Mados, and Suzanne Mados et al v. Wyndham Hotel Company. Ltd. The action is based upon the plaintiff's alleged use of the mark "Wyndham" in connection with the Wyndham Hotel located in Manhattan, New York City. The case was tried in May 1996, and an order and partial judgment was entered in March 1998. The order enjoins the Companies' from using the name and mark "Wyndham" in connection with the advertising, promoting, managing or operating a hotel in Manhattan, New York City, and places restrictions on the Companies' use of the name and mark "Wyndham" in all other areas of New York outside of Manhattan. In November 1998, an order was issued clarifying the original order and a final judgment was entered. The Companies filed an appellate brief on February 22, 1999. On January 12, 1999, a purported class action lawsuit was filed on behalf of the stockholders of Patriot and Wyndham in the Delaware Chancery Court. The lawsuit, captioned Charles Fraschilla v. Paul A. Nussbaum, et al., No. 16895NC, names as defendants the directors of Patriot ("Directors"), as well as the investors in the $1 billion equity investment. The lawsuit alleges that the Directors breached their fiduciary duties to Patriot's shareholders with respect to the Companies' financial condition. The lawsuit also alleges that the Directors breached their fiduciary duty to Patriot's shareholders by "effectively selling control" of Patriot to the investors for inadequate consideration and without having adequately considered or explored all other alternatives to this sale or having taken steps to maximize stockholder value. The lawsuit also alleges that the investors aided and abetted the Directors in their purported breaches of fiduciary duty. The plaintiffs seek an unspecified amount of monetary damages from the Directors as well as an injunction preventing the consummation of the deal with the investors. On January 19, 1999, three nearly identical purported class action lawsuits were filed in the same court on behalf of different purported class representatives: (1) Sybil R. Meisel and Steven Langsam, Trustees, No. 16905NC; (2) Crandon Capital Partners, No. 16906NC; and (3) Robert A. Staub, No. 16907NC. In April 1999, the parties entered into a memorandum of understanding to settle these lawsuits. In the memorandum of understanding Wyndham agreed to make the proposed $300 million rights offering no earlier than 60 days after the closing of the $1 billion equity investment and to hold the rights offering open for a period of not less than 30 days. Wyndham also agreed to use good faith efforts to commence the rights offering no later than 120 days after the closing of the $1 billion equity investment. Wyndham will not be required to make the rights offering if: (1) the $1 billion equity investment is not made; (2) the SEC does not declare effective any registration statement with regard to securities of Wyndham to be offered in the rights offering; (3) there is a pending court order, motion, legal proceeding or other action to enjoin, prevent or delay the rights offering; or (4) the rights offering cannot be completed, despite Wyndham's good faith efforts, within 170 days of the closing of the $1 billion investment. The memorandum of understanding and the proposed settlement are conditioned on: (1) the completion of the $1 billion investment; (2) the drafting and execution of a stipulation of settlement and related documents; (3) the completion by plaintiffs of reasonable and appropriate discovery; and (4) final court approval of the settlement and dismissal of the action with prejudice by the court. In the stipulation, the parties will request that the court certify, for purposes of settlement, a non-opt out, binding class of all persons, exclusive of defendants and their affiliates, who owned shares of Patriot on or after December 15, 1998, and their successors in interest and transferrees, through and including the closing of the $1 22 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) billion investment; that the court approve the settlement, including the release of all claims by class members against the defendants; and that the court enter final judgment dismissing with prejudice all claims of the plaintiffs and the class against the defendants. Patriot has agreed to pay an award of attorney's fees and expenses not to exceed $1.25 million to counsel for class plaintiffs if ordered by the court. On February 3, 1999, McNeill Investment Company, Inc. filed a lawsuit against Patriot in the United States District Court for the Western District of Pennsylvania. In the lawsuit, captioned McNeill Investment Company, Inc. v. Patriot American Hospitality, Inc., No 99-165, the plaintiff alleges that Patriot breached its obligations under a registration rights agreement that Patriot became obligated under through its merger transaction with Interstate Hotels Corporation. The plaintiff claims approximately $9 million in damages. Counsel is currently conducting a factual investigation of the claims made in the complaint. Also, counsel is investigating the possibility of settlement with the plaintiff, but if the matter is not settled, it will have to be litigated. Patriot filed an answer denying all liability in response to the complaint. The Companies are currently involved in certain guest and customer claims and other disputes arising in the ordinary course of business. In the opinion of management, the pending litigation will not have a material effect on the financial statements. On May 7, 1999, a purported class action lawsuit was filed on behalf of former shareholders of California Jockey Club and Bay Meadows Operating Company in the United States District Court for the Northern District of California. The lawsuit captioned Johnson, et al. v. Patriot American Hospitality, Inc., et al., C-99-2153-SI, names as defendants Patriot American Hospitality, Inc., Wyndham International, Inc., PAH GP, Inc., PAH LP, Inc., Patriot American Hospitality Partnership, L.P., Wyndham International Operating Partnership, L.P. and PaineWebber Group, Inc. The lawsuit alleges that the named defendants made false and misleading statements concerning the proposed merger in the joint proxy statement/prospectus that was delivered to California Jockey Club and Bay Meadows Operating Company stockholders. The plaintiffs seek an unspecified amount of monetary damages. The Companies have not yet been served with the complaint. 9. Related Party Transactions: Consulting Agreements On February 26, 1999, Patriot, Wyndham and Paul A. Nussbaum entered into a Separation Agreement (the "Separation Agreement") whereby Mr. Nussbaum resigned his position as Chairman of the Board of Directors and Chief Executive Officer of Patriot. Pursuant to the Separation Agreement, Mr. Nussbaum has been named Chairman Emeritus of the Board of Directors of Patriot and will remain as a Director of Wyndham. In accordance with terms of the Separation Agreement, Patriot will: (1) guarantee the repayment of the remaining outstanding principal on Mr. Nussbaum's NationsBank Loan of approximately $7,000 (2) make all interest payments that become due and payable on the NationsBank Loan on or after the date of separation; (3) shall pay severance of $3,200 reduced by any interest payments made by Patriot on the NationsBank Loan through June 30, 1999. Additionally, Mr. Nussbaum's outstanding unvested options to purchase paired shares shall vest and remain fully exercisable for the period of their respective terms and within six months Mr. Nussbaum may elect to 23 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) exchange such options on a Black Scholes neutral basis for new options with an exercise price equal to the fair market value of a Paired Share on the election date. Mr. Nussbaum will also receive 250,000 Paired Shares equally over a three year period and any restrictions will be lifted from existing paired shares held by Mr. Nussbaum. As a condition to receiving the second and third installments of the paired shares, Mr. Nussbaum has agreed to provide non-exclusive consulting services to the Companies for a period of two years following the resignation date. Additionally, Mr. Nussbaum will receive other compensation as provided for in the Separation Agreement. Other Related Party Transactions In 1999, Wyndham amended its management contract for the Wyndham Anatole Hotel to provide that the owners of the hotel may terminate the management contract following the first annual meeting of Wyndham stockholders after the completion of the $1 billion equity investment if Paul Nussbaum continues on the Board of Directors of Wyndham. Additionally, the owners of the Wyndham Anatole Hotel may terminate the management contract if James Carreker ceases to be an executive officer of the Companies. On April 30, 1999, the Companies' option to purchase certain interests in Kinetic Group Limited Partnership, which provides management information services to the Companies, expired without being exercised by the Companies. Kinetic Group Limited Partnership is owned 50% by Trammell Crow Company and 50% by an entity owned by Crow family members and certain of the Companies' senior executive officers. The option was granted to Patriot in connection with the Wyndham merger. 10. Stock Dividends: On January 25, 1999, Patriot paid a stock dividend of $.44 per share of common stock for the fourth quarter of 1998 to shareholders of record on December 30, 1998. Earnings per common share, weighted average shares outstanding and all stock option activity have been restated to reflect the stock dividend. 11. Segment Reporting: The Companies' classify their business into proprietary owned brands and non-proprietary brand hotel divisions, under which they manage the business. Among its proprietary branded hotels, the Company is positioned in the luxury segment under the Grand Bay Hotel & Resorts(R) brand; in the upscale segment under Wyndham(TM); and in the mid-priced segment under the ClubHouse brand. Additionally, the Company offers proprietary branded all-suite accommodations through its upscale Summerfield Suites brand and its mid-priced Sierra Suites brand. Other proprietary hotel brands owned and developed by the Companies include Malmaison, Grand Heritage(R) and Carefree(R). Description of Reportable Segments The Companies have six reportable segments: Wyndham hotel properties, resort properties, all suite properties, non-proprietary branded properties, other proprietary branded hotel properties and other. . Wyndham hotel properties include Wyndham Hotels, Wyndham Gardens and Wyndham Grand Heritage. The Wyndham hotel properties are full-service properties that generally offer a full range of meeting and 24 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) conference facilities and banquet space. Facilities generally include restaurants and lounge areas, gift shops and recreational facilities, including swimming pools. Full-service hotels generally provide a significant array of guest services, including room service, valet services and laundry. . Resort properties include Wyndham Resorts, Grand Bay resort properties and other resort properties. Resorts are designed to offer unique destinations which appeal to today's sophisticated vacation traveler and to blend with their environment, enhancing the natural surroundings with design that fits the locale. Each resort's recreational activities are of the highest caliber and are designated to capitalize on the natural attractions of the location. Many offer a combination of golf, tennis, skiing, health spa, hiking and other sports. . All suite properties include the Summerfield and Sierra Suite properties. The Summerfield and Sierra Suite properties generally target the business travelers who usually anticipate a one to two week stay. The suites generally have limited public space and offer limited food and beverage service. However, the suites provide guests with larger rooms and work space. . Non-proprietary branded properties include all properties which are not Wyndham hotel properties, resort properties, all suite properties or other proprietary branded properties. The properties consist of non Wyndham branded assets such as: Crowne Plaza(R), Embassy Suites(R), Marriott(R), Courtyard by Marriott(R), Sheraton(R) and independents. . Other proprietary branded hotel properties include Malmaison, Grand Heritage, Clubhouse and hotels acquired in the Arcadian acquisition. . Other includes participating lease revenues, racecourse facility revenue and expenses, management fee and service fee income, interest and other income, general and administrative costs, interest expense, depreciation and amortization and other one-time charges. General and administrative costs, interest expenses and depreciation and amortization are not allocated to each reportable segment; therefore, they are reported in the aggregate within this segment. Measurement of segment profit or loss The Companies evaluate performance based on the operating income or loss from each business segment. The accounting policies of the reportable segments are the same as those described in Note 1. Factors Management Used to Identify the Reportable Segments The Companies' reportable segments are determined by brand affiliation and type of property. The reportable segments are each managed separately due to the specified characteristics of each segment.
Non- Other Three Months Ended Wyndham Suite proprietary Proprietary March 31, 1999 Hotels Resorts Properties Branded Branded Other Total ------------------ -------- -------- ---------- ----------- ----------- --------- -------- Total revenue........... $143,296 $159,679 $33,113 $281,121 $21,623 $ 35,018 $673,850 Operating income (loss)................. 41,985 58,143 6,479 64,534 5,555 (169,968) 6,728 Non- Other Three Months Ended Wyndham Suite proprietary Proprietary March 31, 1998 Hotels Resorts Properties Branded Branded Other Total ------------------ -------- -------- ---------- ----------- ----------- --------- -------- Total revenue........... $151,806 $ 74,834 $ -- $ 58,799 $ 5,205 $ 59,163 $349,807 Operating income (loss)................. 43,589 26,799 -- 15,242 1,857 (45,584) 41,903
25 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) March 31, 1999 (dollars in thousands, except for share amounts) (unaudited) The following table represents revenue information by geographic area as of and for the three month period ending March 31, 1999. Revenues are attributed to the United States and its territories and Europe based on the location of hotel properties. The hotel properties in Europe were acquired on April 6, 1998. Prior to this date, all of the Companies' business was attributed to hotel properties located in the United States and its territories.
United States Europe Total ------------- ------- -------- Revenues......................................... $656,743 $17,107 $673,850
12. Subsequent Events: On April 30, 1999, Patriot sold the following hotels; Hampton Inn Rochester, Hampton Inn Jacksonville, Hampton Inn Cleveland, and the Hampton Inn Canton, for net proceeds of approximately $23,469. In April 1999, Patriot acquired the remaining 10% minority interests in each of the four following hotels; the Radisson Akron; the Courtyard Beachwood; the Holiday Inn Westlake; the Radisson Beachwood from IAH Snavely L.L.C. ("Snavely"). In addition, the Companies sold the Holiday Inn Beachwood to Snavely. The transaction generated net proceeds for the Companies of approximately $8,770. On May 7, 1999, Patriot exercised its option to purchase the interest in ISIS 2000, formerly owned by certain related parties and Wyndham senior executive officers, for a cash payment of $3,073. Subsequent to the exercise of the option, Patriot will own 100% of this entity which provides reservations and other services to the Companies. On May 11, 1999, the Companies sold the Holiday Inn Sebring for net proceeds of approximately $4,100. In May 1999, Beacon Capital Partners, L.P. ("Beacon") loaned $25,000 to the Companies. The loan, which bears interest at LIBOR plus 2.5% is due June 30, 1999. The loan is secured by a first mortgage on the Wyndham Batterymarch hotel, a property under construction in Boston, Massachusetts. The Companies paid Beacon a financing fee of 2.50% of the loan principal in May and will pay Beacon an additional fee of 0.75% of the loan principal upon maturity of the loan. 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Companies' Joint Annual Report on Form 10-K, as amended, for the year ended December 31, 1998. Certain statements in this Form 10-Q constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act"). The words "believe", "expect", "anticipate", "intend", "estimate" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Although forward-looking statements reflect management's good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievement of the Companies to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Companies undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Certain factors that might cause a difference include, but are not limited to, risks associated with the availability of equity or debt financing at terms and conditions favorable to the Companies, the willingness of the Companies' existing lenders to refinance, extend or amend the terms of existing indebtedness, the willingness of the counterparties to the Companies' forward equity contracts to enter into settlements regarding those agreements; the Companies' ability to effect sales of assets on favorable terms and conditions; risks associated with the hotel industry and real estate markets in general; and risks associated with debt financing. THE COMPANIES At March 31, 1999, Patriot and Wyndham, directly or through the Operating Partnerships and other subsidiaries, owned interests in 177 hotels totaling over 43,600 rooms and leased 118 hotels from third parties totaling over 15,500 rooms. In addition, Wyndham managed 436 hotels with over 92,000 rooms for third party owners and franchised 12 hotels under the Wyndham, Summerfield or ClubHouse brands. The hotels are diversified by franchise or brand affiliation and serve primarily major U.S. business centers. In addition to hotels catering primarily to business travelers, the Companies' portfolio includes world-class resort hotels and prominent hotels in major tourist destinations. Patriot leases 205 of its owned or leased hotels to Wyndham and one of Patriot's hotels is leased to a third party lessee who is responsible for operating the hotel. Certain of these leases provide for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Leases"). Eighty-nine of the Companies' hotels are owned or leased by special purpose entities (the "Non-Controlled Subsidiaries"). Generally, Patriot owns an approximate 99% non-voting interest and Wyndham owns an approximate 1% controlling voting interest in each of the Non-Controlled Subsidiaries. Therefore, the operating results of the Non-Controlled Subsidiaries are combined with those of Wyndham for financial reporting purposes. Patriot accounts for its investment in the Non-Controlled Subsidiaries using the equity method of accounting. In addition to leasing and managing hotels, Wyndham was also engaged in the business of conducting and offering pari-mutuel wagering on thoroughbred horse racing at the Bay Meadows Racecourse until February 1999, when it sold its interest in this business. Asset Sales and Acquisitions In January 1999, Patriot acquired the remaining 25% minority interests in each of the five following hotels; Embassy Suites Schaumburg, the Hilton Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover 27 and the Marriott Tysons Corner from CIGNA. The acquisition of such interests was financed through additional mortgage indebtedness totaling $49.8 million and the sale of an additional 10% interest in the Marriott Warner Center. Revenues and operating income for the above are not significant. In February 1999, Patriot sold its interest in the Bay Meadows Racecourse located in San Mateo, California. The Companies received cash proceeds of approximately $3.4 million after payment of legal costs and other closing costs. The Companies recognized an estimated impairment loss on assets held for sale of $42.2 million related to the racecourse facility in 1998. In connection with the transaction, Patriot terminated its lease to Wyndham for the racecourse facilities. The actual loss on sale of asset recognized was $42.8 million. In March 1999, Patriot sold the Holiday Inn Crockett, realizing net cash proceeds of approximately $18.0 million and recognized a gain of approximately $3.0 million. In connection with the sale, $17.0 million of the net proceeds were used to repay a portion of Patriot's term loans. In April 1999, Patriot acquired the remaining 10% minority interests in each of the four following hotels; the Radisson Akron; the Courtyard Beachwood; the Holiday Inn Westlake; the Radisson Beachwood from IAH Snavely L.L.C. ("Snavely"). In addition, the Companies sold the Holiday Inn Beachwood to Snavely. The transaction generated net proceeds for the Companies of approximately $8.8 million. On May 7, 1999, Patriot exercised its option to purchase the interest in ISIS 2000 formerly owned by certain related parties and Wyndham senior executive officers, for a cash payment of $3.1 million. Subsequent to the exercise of the option, Patriot will own 100% of this entity which provides reservations and other services to the Companies. On May 11, 1999, the Companies sold the Holiday Inn Sebring for net proceeds of approximately $4,100. Securities Purchase Agreement On February 18, 1999, the Companies, and Apollo Real Estate Advisors III, L.P., Apollo Management IV, L.P., Thomas H. Lee Company, Beacon Capital Partners, L.P. and Rosen Consulting Group entered into a securities purchase agreement pursuant to which the investors will purchase up to $1 billion of a new series B convertible preferred stock of the Operating Company. Under the terms of the securities purchase agreement, the Companies are required to complete a restructuring of the existing paired share REIT structure prior to the investment by the investors. The proposed restructuring plan includes, among other provisions, the following transactions: (1) Patriot will merge into a wholly-owned subsidiary of Wyndham, (2) the pairing agreement between Patriot and Wyndham will terminate, and (3) Patriot will terminate its status as a real estate investment trust effective January 1, 1999. Interstate's Third-Party Hotel Management Business On May 27, 1998, the Companies and Interstate Hotels Company ("Interstate") entered into a settlement agreement with Marriott International, Inc. The settlement agreement was subsequently amended on August 26, 1998, October 29, 1998, January 6, 1999, and March 11, 1999. This agreement addressed certain claims asserted by Marriott in connection with the Companies' then proposed merger with Interstate. The settlement agreement provided for the dismissal of litigation brought by Marriott, and allowed the Companies' merger with Interstate to close on June 2, 1998. In addition to dismissal of the Marriott litigation, the settlement agreement provides for the re-branding of ten Marriott hotels under the Wyndham name, the assumption by Marriott of the management of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and the spin-off by the Companies (subject to extension upon payment of certain fees by the Companies) of the third-party management business which was operated by Interstate no later than May 14, 1999. If the Companies do not complete the spin-off by May 14, 1999, Marriott will be entitled to receive 110% of the fees otherwise due under the submanagement agreements with respect to the ten hotels Marriott will 28 manage pursuant to the submanagement arrangement described above. Additionally, the Companies will be subject to other penalties, including Marriott's right to purchase, subject to third-party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by the Companies at their then appraised values. Moreover, subject to any defenses, the Companies would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of the Marriott-branded hotels to choose an alternative manager for their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with the Companies and enter into a contract with an alternative manager. The Companies would owe liquidated damages on any third- party Marriott-franchised hotel which chooses to convert its brand. The Companies are currently negotiating to extend this deadline for the spin-off, but no formal agreement has been reached as of the date hereof. Forward Equity Contracts Patriot is party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. Patriot's aggregate obligation under the forward equity transactions was approximately $321.2 million at March 31, 1999. As of such date, Patriot had delivered an aggregate of 79 million shares to the counterparties as collateral in addition to approximately 12.5 million paired shares owned by the counterparties of their affiliates. In a forward equity transaction, a company sells shares of its common stock to an investment bank or similar financial institution. At the same time, the parties enter into a forward contract under which they agree to "settle" the transaction at a stated maturity date based upon the adjusted price of the purchased shares at maturity. During the term of the forward contract, the price of the purchased shares increases at a rate that corresponds to an agreed-upon interest rate. At maturity, the buyer sells a number of shares sufficient to generate proceeds equal to the total adjusted purchase price of the purchased shares. Shares may be sold to the public through an underwritten public offering or by other methods, or to private investors. If the buyer does not receive sufficient proceeds from selling the number of shares that it originally purchased, the company must issue more shares of common stock to the buyer for resale until the obligation has been satisfied. Under the terms of the Companies' forward equity contracts, the Companies may elect to settle their obligation in cash instead of paired shares. On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward agreements or to sell paired shares in connection with the forward agreements until the earlier of the closing of the $1 billion equity investment or June 30, 1999. In connection with these standstill agreements, the Companies agreed to pay a 2% fee to the three counterparties. Each of the agreements provided that the standstill obligations would terminate if, among other events, the price of the paired shares fell below a specified threshold. As of the date of this Form 10-Q, the price of the paired shares has fallen below these thresholds. As a result, each of the forward counterparties has the right to require an immediate settlement of its forward equity transaction. As of the date of this Form 10-Q, none of the counterparties had made any sale of paired shares, other than the sale of 754,525 paired shares by one counterparty in December 1998, or required settlement of its forward transaction. However, the Companies cannot assure you that the forward counterparties will not sell paired shares or require settlement in the future. The Companies are currently negotiating to extend the deadline for this spin-off, but no formal agreement has been reached as of the date hereof. In addition, the Companies have agreed to deliver a total of up to $18,084,488 of paired shares to the counterparties in exchange for the Interstate shares which the counterparties will receive in the Spin-Off. The counterparties will hold these paired shares as additional collateral under the forward equity agreements. 29 The Companies may settle the forward transactions by delivering either cash or paired shares covered by an effective registration statement. Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure that the bank lenders would consent to any cash settlements prior to the closing of the $1 billion equity investment. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale of one counterparty of an additional 4 million paired shares of which 754,525 paired shares were sold by that counterparty in December 1998. In addition, the Companies filed a registration statement in April 1999 registering an additional 68 million paired shares in connection with the forward equity transactions. If and when the April 1999 registration statement becomes effective, there will be 111.2 million paired shares covered by effective registration statements, representing approximately 14 million paired shares more than the total number of paired shares currently owned or held as collateral by the forward counterparties. The Companies can make no assurance that these registration statements will remain effective or that the Companies will not be required to register more paired shares in connection with the forward equity transactions. Given the current market price of the paired share, any settlement in paired shares would have severely dilutive effects on the Companies' capital stock. Based on the $5.0625 closing price of the paired shares on April 30, 1999 and assuming an average of 25% selling expenses, the forward counterparties would have to sell approximately 65 million paired shares to settle all of the forward equity transactions in full. The number of paired shares required would substantially increase if the market price of the paired shares decreases as a result of the sales of paired shares by the forward counterparties. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors in the $1 billion equity investment will be adjusted downward to the extent that the price recognized by the Companies on the sale is less than $8.75 per share. The Companies intend to settle in full all of the forward transactions with part of the proceeds of the $1 billion equity investment. If the Companies settle the forward transactions in cash, the counterparties must deliver to the Companies all paired shares then owned by them or held by them as collateral under the forward agreement. PATRIOT AMERICAN HOSPITALITY, INC. Results of Operations: Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998 Patriot's participating lease revenue from the lessees (including Wyndham) for the quarter ended March 31, 1999, increased 70% from $109,649,000 in 1998 to $186,155,000 in 1999. This increase is primarily due to the acquisition of 175 hotel properties during the past twelve months. Patriot directly owned or leased interests in 295 hotel properties as of March 31, 1999 as compared to 120 hotel properties as of March 31, 1998. Interest and other income increased from $3,516,000 in 1998 to $4,758,000 in 1999 which is primarily attributable to subscription notes payable associated with the merger and acquisition of Interstate and Summerfield during 1998 and interest and dividend income earned on cash investments. Real estate and personal property taxes and casualty insurance was $17,737,000 for the three months ended March 31, 1999, compared to $11,923,000 for the three months ended March 31, 1998. This increase is primarily due to the increase in owned and leased hotel properties described above. General and administrative expenses were $20,651,000 for the three months ended March 31, 1999, compared to $5,282,000 for 1998. The increase is primarily attributable to additional general and administrative expenses incurred related to the growth of the Companies' portfolio during 1998 of which the largest component is salaries and wages. For the quarter ended March 31, 1999, general and administrative expenses also include the amortization of unearned stock compensation and the accrual of related costs of $10,182,000. This is due to the acceleration of amortization and the accrual of related costs associated with the severance of certain employees. Also included in general and administrative expenses are the costs associated with evaluating properties and companies which were ultimately not acquired of $1,394,000 in 1999 increasing from $313,000 in 1998. 30 Ground lease expense increased from $6,558,000 for the three months ended March 31, 1998 to $13,622,000 for the three months ended March 31, 1999. This increase is attributable to the acquisition of leasehold interests in hotel properties during 1998. Interest expense for the three months ended March 31, 1999 was $86,104,000 compared to $34,251,000 in 1998. Patriot's outstanding debt obligations as of March 31, 1999 and 1998 were approximately $3.6 billion and $1.6 billion, respectively. The primary components of interest expense for the three months ended March 31, 1999 are $52,628,000 of interest related to the revolving credit facility and term loans, $15,805,000 of interest on mortgage notes, $11,088,000 of amortization of deferred financing costs and $9,412,000 of other interest related to other unsecured notes, capital lease obligations and commitments payable. Interest expense for the three months ended March 31, 1998 consists primarily of $22,558,000 of interest on Patriot's revolving credit facility and term loans, $7,943,000 of interest on mortgage notes, and $3,503,000 of amortization of deferred financing costs. Additionally, Patriot capitalized interest totaling $2,829,000 and $2,195,000 for the three months ended March 31, 1999 and 1998, respectively, associated with major renovations of certain hotel properties. In connection with the sale of Holiday Inn Crockett in 1999, Patriot recognized a gain on sale of assets of $2,985,000 based on the excess cash proceeds received in the sale over book value. Depreciation and amortization expense was $52,662,000 for the three months ended March 31, 1999, compared to $20,497,000 for the same period in 1998. This increase is primarily due to the net increase in owned and leased hotel properties described above. Patriot's share of income from unconsolidated subsidiaries increased to $14,612,000 for the three months ended March 31, 1999, compared to $3,591,000 in 1998. This increase is due to unconsolidated subsidiaries acquired through various mergers and acquisitions during 1998. Minority interest share of income in the Patriot Partnership was $729,000 and $3,128,000 for the three months ended March 31, 1999 and 1998, respectively. The decrease is due to the dilution of the minority interest as a result of the common shares issued in connection with the various mergers occurring during 1998. Minority interest share of income in Patriot's other consolidated subsidiaries was $1,873,000 in 1999 and $533,000 in 1998. The increase is due to the various mergers and acquisitions during 1998. Extraordinary items for debt extinguishment totalled $18,716,000 in 1998 due to the repayment of certain debt obligations of Wyndham Hotel Management Company in 1998. As a result of the factors discussed above, net income was $11,852,000 for the three months ended March 31, 1999, as compared to net income of $15,497,000 for the three months ended March 31, 1998. WYNDHAM INTERNATIONAL, INC. Results of Operations: Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998 Concurrent with the closing of the Cal Jockey merger, the entity now known as Wyndham began leasing four hotels from the Patriot Partnership and commenced its hotel management operations on July 1, 1997. At March 31, 1998, Wyndham leased 94 hotels from Patriot, managing 81 of those hotels, and managed 13 hotels for third parties. As of March 31, 1999, Wyndham leased 205 hotels from Patriot, managing 183 of those hotels, and manages 164 hotels for third parties. For the three months ended March 31, 1999, hotel revenues were $638,830,000 as compared to $290,644,000 in hotel revenues during the three months ended March 31, 1998. Of the approximate $348,186,000 increase, approximately $340,000,000 was due to acquisitions and the remainder was due primarily to revenue increases at the Wyndham branded hotels. Hotel expenses increased from $182,371,000 for the quarter ended March 31, 1998, to $414,373,000 for the quarter ended March 31, 1999. As with revenues, the vast majority of this increase is a result of the increased number of hotels operated by Wyndham. 31 Management fee and service fee income was $22,918,000 and $14,104,000 for the three months ended March 31, 1999 and 1998, respectively. The increase is primarily the result of the acquisition of third party management contracts during 1998 resulting from the Interstate merger and the Summerfield acquisition. Interest and other income increased from $2,186,000 for the three months ended March 31, 1998 to $5,418,000 for the three months ended March 31, 1999. The increase is primarily attributable to the mergers and acquisitions of the hotel management and related businesses of Interstate, Summerfield and Arcadian during 1998, the subscription notes payable from Patriot and interest and dividend income earned on cash investments. Total revenues from the racecourse facility operations (including interest and other income) were $4,561,000 for the quarter ended March 31, 1999 compared to $23,048,000 for the same quarter last year. Total costs and expenses associated with the racecourse operations (including marketing costs, general and administrative expenses and depreciation and amortization expenses) were $3,867,000 for the quarter ended March 31, 1999 compared to $18,184,000 for the same quarter last year. These decreases are due to the above mentioned sale of Bay Meadows racecourse effective February 1999. General and administrative expenses were $29,745,000 for the period compared to $12,023,000 for the same period last year of which salaries and wages is the major component. This increase is due primarily to the overhead required due to growth in the portfolio of managed and leased hotels during 1998. Also, Wyndham recorded costs associated with evaluating properties and companies which were ultimately not acquired of $1,254,000. Depreciation and amortization expense was $23,447,000 for the three months ended March 31, 1999, compared to $15,106,000 for the three months ended March 31, 1998. This increase is primarily due to amortization of goodwill, management contracts and trade names resulting from the mergers and acquisitions of Interstate, Summerfield, Arcadian and WHG of approximately $8,341,000. Participating Lease expense increased to $185,822,000 for the three months ended March 31, 1999 from $89,084,000 for the three months ended March 31, 1998. The increase is due to leases acquired in 1998. As a percentage of hotel revenues, Participating Lease expense remained constant after accounting for the effect of eliminating lease expense and lease revenue with Patriot. Interest expense for the three months ended March 31, 1999 was $9,727,000 compared to $5,699,000 for the same period last year. The increase is primarily attributable to debt obligations related to hotels acquired during 1998. This increase was primarily due to consolidating the WHG transaction results for the full quarter in 1999, whereas in most of the first quarter of 1998, this entity was accounted for using the equity method. Wyndham's share of income from unconsolidated subsidiaries was $187,000 for the three months ended March 31, 1999 compared to $1,720,000 for the three months ended March 31, 1998. The decrease is due to accounting for the WHG transaction using the equity method in 1998, whereas in 1999 the entire quarter was consolidated. The provision for income taxes increased from $3,187,000 for the three months ended March 31, 1998 to $6,466,000 for the three months ended March 31, 1999. The increase is due to the operation of certain special purpose Wyndham controlled subsidiaries which separately report and pay taxes on their taxable income. For federal income tax purposes, the taxable income from these Wyndham controlled subsidiaries can not be consolidated with Wyndham's taxable income or loss and hence can not be offset by operating losses created at Wyndham. Minority interest's share of loss associated with the Wyndham Partnership was $2,688,000 for the three months ended March 31, 1999 as compared to $73,000 for the same quarter last year due to the issuance of operating partnership units for the acquisition of hotels during 1998. 32 Minority interest's share of income in Wyndham's other consolidated subsidiaries was $12,097,000 in 1999 and $2,941,000 in 1998. This increase is due to Patriot's 99.0% ownership in most of the decontrolled subsidiaries consolidated by Wyndham. As a result, the net loss was $11,153,000 for the three months ended March 31, 1999 and the net income was $3,180,000 for the three months ended March 31, 1998. Results of Reporting Segments: For the quarter ended March 31, 1999 compared with the quarter ended March 31, 1998 The Companies' management reviews Patriot's and Wyndham's results of operations on a combined basis. Patriot's revenues and the majority of its expenses are classified in the "other" reportable segment. Patriot classifies real estate and personal property taxes and casualty insurance and ground lease expense with their related hotel operations. Wyndham's results of operations are classified into six reportable segments. Patriot and Wyndham manage the business in six reportable segments. Those segments include Wyndham hotels, resort properties, all suite properties, other proprietary branded properties, non-proprietary branded properties and other. Wyndham hotel properties include Wyndham Hotels, Wyndham Gardens and Wyndham Grand Heritage and represent approximately 21.3% and 43.4% of total revenue for the three months ended March 31, 1999 and 1998, respectively. Total revenue was $143,296,000 compared to $151,806,000 for the quarters ended March 31, 1999 and 1998, respectively. The decrease in revenue is due to reclassifying several hotels between segments in 1999 and due to a 1998 hotel acquisition which causes a combined affect of approximately $14,000,000 when comparing the two quarters. After accounting for this change, there is an approximate 3% growth in revenue. Operating income for the Wyndham hotels was $41,985,000 compared to $43,589,000 for the quarters ended March 31, 1999 and 1998, respectively. After accounting for the change in segments referred to above, operating income increased approximately 6% due to improvements in operating margins. Resort hotel properties including Grand Bay and Wyndham represent approximately 23.7% and 21.4% of total revenue for the quarters ended March 31, 1999 and 1998, respectively. Total revenue was $159,679,000 compared to $74,834,000 for the quarters ended March 31, 1999 and 1998, respectively. The increase is due to the above mentioned reclassification and due to consolidating the results of the WHG transaction for the entire 1999 quarter, whereas in the 1998 quarter, the WHG transaction was accounted for primarily using the equity method of accounting. After accounting for these changes, there is an approximate 4% growth in revenue. Operating income for the resort properties was $58,143,000 compared to $26,799,000 for the quarters ended March 31, 1999 and 1998, respectively. After accounting for the changes in classification and accounting treatment referred to above, there is approximately 11% growth in operating income due to overall improvements in operating margins primarily at the WHG transaction properties. All suite properties including Summerfield and Sierra represent approximately 4.9% of total revenue for the three months ended March 31, 1999. There are no comparable results for 1998 as the portfolio was not acquired until June of 1998. Total revenue and operating income were $33,113,000 and $6,479,000, respectively for the three months ended March 31, 1999. Other proprietary branded properties including Malmaison, Grand Heritage, Clubhouse and hotels acquired in the Arcadian acquisition, represent approximately 3.2% and 1.5% of total revenue for the quarters ended March 31, 1999 and 1998, respectively. Total revenue was $21,623,000 compared to $5,205,000 for the quarters ended March 31, 1999 and 1998, respectively. The increase is due entirely to the acquisition of Arcadian and Malmaison in April of 1998. The Clubhouse portfolio total revenues decreased 13% from 1998 due to the softness caused by overbuilding in the mid market segment. Operating income for these properties was $5,555,000 and $1,857,000 for the quarters ended March 31, 1999 and 1998, respectively. As with revenues, operating income decreased from 1998 for the Clubhouse portfolio, but the acquisition of Malmaison and Arcadian offset this decrease to produce an overall increase. 33 Non proprietary branded properties including Hilton, Holiday Inn, Marriott, Ramada, Radisson, Hampton and other major hotel franchises, represent approximately 41.7% and 16.8% of total revenue for the quarters ended March 31, 1999 and 1998, respectively. Total revenue was $281,121,000 compared to $58,799,000 for the quarters ended March 31, 1999 and 1998, respectively. The increase is due primarily to the acquisition of the owned and leased Interstate properties; the leasehold interests in CHC Lease Partners and North Coast hotels in June and December of 1998, respectively; as well as several other leasehold acquisitions throughout 1998. After accounting for these changes, there was no significant change in revenue from 1998. Operating income for these properties was $64,534,000 and $15,242,000 for the quarters ended March 31, 1999 and 1998, respectively. After accounting for the above acquisitions, operating income was consistent with 1998. Other represents revenue from various operating businesses including management and other service companies, Bay Meadows Race Track and participating lease revenue for one hotel and a parcel of land. Expenses in this segment are primarily interest, depreciation, amortization and corporate general and administrative expenses. Total revenue for the other segment was $35,018,000 compared to $59,163,000 for the quarters ended March 31, 1999 and 1998, respectively. The overall $24,000,000 decrease in this segment's revenue was caused by a combination of increases and decreases. The sale of Bay Meadows Race Track operations and leasehold effective February 1, 1999 reduced revenue by approximately $18,000,000. The purchase of the remaining third party leasehold interests, primarily CHC Lease Partners and North Coast Hotels in June and December of 1998, respectively, reduced participating lease revenue by $20,000,000. Finally a $9,000,000 increase in revenue is due to the acquisition of third party management contracts as a result of the Interstate, Summerfield, CHC and Arcadian mergers. Operating losses for the segment were $170,000,000 and $45,584,000 for the quarters ended March 31, 1999 and 1998, respectively. In addition to the decrease in revenues, the increase in the segment's operating loss is a result of increased expenses resulting from the mergers and acquisitions in 1998. Interest expense increased $54,256,000, depreciation and amortization increased $40,506,000 and corporate general and administrative increased $33,090,000. Approximately $10,182,000 of the corporate general and administrative increase is due to the acceleration of amortization and the accrual of related costs associated with the severance of certain employees. The sale of the Bay Meadows Race Track accounted for an approximate $14,317,000 decrease in expenses. The final difference is the $12,000,000 increase in the elimination of internal management fee revenues and expenses. (This fee is included as an expense in each of the five hotel segments, so the offset is reflected in this segment.) The increase in this elimination amount is due to the acquisitions in 1998. Statistical Information During the period, Patriot's and Wyndham's portfolio of owned and leased hotels, excluding the Interstate third party leases, experienced continued growth in both average daily rate ("ADR") and revenue per available room ("REVPAR") of approximately 4.0% and 3.0% respectively, while occupancy remained relatively stable. Management attributes this growth to continued marketing efforts throughout the portfolio on hotels that have been newly renovated, and repositioned in certain cases, as well as to the current strength of market conditions in the U.S. lodging industry. The following table sets forth certain statistical information for the Companies' owned and leased hotels as of March 31, 1999 and 1998 as if the hotels were owned at the beginning of the periods presented.
Three months ended March 31 ------------------------------------------- Occupancy ADR REVPAR ---------- --------------- --------------- 1999 1998 1999 1998 1999 1998 ---- ---- ------- ------- ------- ------- Wyndham Branded Hotels............ 71.5% 71.9% $139.66 $131.58 $ 99.84 $ 94.66 Grand Bay Hotels & Resorts........ 73.4 75.7 352.70 354.22 258.95 268.09 Summerfield Suites................ 77.4 79.0 120.93 117.98 93.56 93.26 Malmaison......................... 78.8 75.0 89.36 89.26 70.41 66.94 Clubhouse......................... 55.0 64.1 69.55 68.49 38.28 43.88 Arcadian.......................... 56.2 53.6 116.72 110.65 65.61 59.31 Non Proprietary Brands............ 67.3 68.2 96.61 93.39 65.04 63.68 Other............................. 65.5 66.7 98.51 96.35 64.48 64.31 ---- ---- ------- ------- ------- ------- Weighted Average................. 70.2% 70.9% $122.16 $117.40 $ 85.78 $ 83.27
34 COMBINED LIQUIDITY AND CAPITAL RESOURCES Combined cash and cash equivalents as of March 31, 1999 were $172.8 million, including restricted cash of $41.0 million. Combined cash and cash equivalents as of March 31, 1998 were $88.7 million, including capital improvement reserves of $3.4 million. The increase is primarily the result of net cash provided by operating and financing activities exceeding the net cash used in investing activities. Cash Flow Provided by Operating Activities The Companies' principal source of cash to fund operating expenses and distributions to shareholders is cash flow provided by operating activities. Patriot's principal source of revenue is rent payments from the lessees, including Wyndham, under the Participating Leases. Wyndham's principal source of cash flow is from the operation of the hotels that it leases and manages. Wyndham's ability to make the rent payments to Patriot is dependent upon their ability to efficiently manage the hotels and generate sufficient cash flow from operation of the hotels. Combined cash flows from operating activities of the Companies were $81.3 million for the three months ended March 31, 1999, and $59.3 million for the three months ended March 31, 1998. Cash flows from operating activities represent a combination of the collection of rents under participating leases with third party lessees and cash flow generated by the hotels operated by Wyndham. The increase is due primarily to the results of operations or the lease payments for 175 hotels acquired during the last twelve months. Cash Flows From Investing and Financing Activities During the first quarter of 1999, the Companies acquired the remaining 25% interest in five hotels financed with additional mortgage indebtedness of $49.8 million. Additionally, during the first quarter of 1999, Patriot sold its interest in the Bay Meadows racecourse for cash proceeds of $3.4 million. Combined cash flows used in investing activities of the Companies were $64.9 million for the three months ended March 31, 1999, resulting primarily from the acquisition of hotel properties and management companies and renovation expenditures at certain hotels. Combined cash flows used in financing activities of $7.7 million for the three months ended March 31, 1999 were primarily related to repayments on the credit facility and mortgage notes and payments of deferred loan costs. Combined cash flows used in investing activities were $308.7 million for the three months ended March 31, 1998, resulting primarily from the merger and acquisition of hotel properties and management companies and the renovation expenditures at certain hotels. Combined cash flows from financing activities of $292.3 million for the three months ended March 31, 1998 were primarily related to borrowings on the revolving credit facility and mortgage notes and net proceeds from private placement of equity securities, net of payments of dividends and distributions. As of March 31, 1999, the Companies had approximately $875.6 million outstanding under its Credit Facility and $1.8 billion outstanding on the Term Loans. Additionally, the Companies had outstanding letters of credit totaling $24.4 million. As of March 31, 1999, Patriot also had over $984.1 million of mortgage debt outstanding that encumbered 48 hotels and 3 hotels under development and approximately $246.7 million in other debt, resulting in total indebtedness of approximately $3.9 billion. As of March 31, 1999, the Companies had no additional availability under the Credit Facility. The Credit Facility matures July 2000. The Term Loans mature on June 30, 1999 ($733 million); March 31, 2000 ($450 million); and March 31, 2003 ($599.3 million). Forward Equity Transactions. The Companies are parties to forward equity transactions with three counterparties involving the sale of an aggregate of 13.3 million shares as described previously. Settlement under one or more of the forward equity transactions could have adverse effects on the Companies' liquidity or dilutive effects on the Companies' capital stock. Moreover, settlement (whether by reason of a drop in the market price 35 of the paired shares or otherwise) may force the Companies to issue paired shares at a depressed price, which may heighten the dilutive effects on the Companies' capital stock. The dilutive effect of a stock settlement and the adverse liquidity effect of a cash settlement increase significantly as the market price of the paired shares declines below the applicable forward price or reference price. The market price of the paired common stock has dropped significantly below the respective forward prices under the forward equity contracts. As a result, the Companies have delivered an aggregate of 84.7 million shares to the counterparties as collateral, including approximately 4 million shares issued as dividends on the collateral shares, in addition to approximately 12.5 million original paired shares currently owned by the counterparties or their affiliates. Agreements Relating to Existing Credit Facility Patriot and Wyndham's existing credit facility with The Chase Manhattan Bank, Chase Securities, Inc. and PaineWebber Real Estate consists of a $900 million revolving credit facility and a series of term loans in the aggregate amount of $1.8 billion. Interest rates on the existing Credit Facility are based on Patriot's and Wyndham's leverage ratio and vary from 1.5% to 3% over LIBOR. Under the original terms of the Credit Facility, two of the Term Loans were scheduled to mature on January 31, 1999 ($350 million) and March 31, 1999 ($400 million), respectively. All of the requisite lenders under the Credit Facility have agreed to extend the maturity of these two terms loans to June 30, 1999, subject to Patriot and Wyndham consummating the $1 billion equity investment by that date. If the Companies do not consummate the investment by June 30, 1999, or the agreement with the investor group otherwise terminates, the maturity on these two term loans will be extended to March 31, 2000 and the Companies will be required to make a $300 million amortization payment by December 31, 1999. Additionally the Companies will be required to secure the Credit Facility with mortgages and other security interest. Fees of $11.7 million have been paid to the lenders under the Credit Facility in connection with their agreement to extend the maturities of the term loans to June 30, 1999. New Credit Facility Patriot has recently signed a commitment letter with Chase Securities Inc. and The Chase Manhattan Bank for senior credit facilities for Wyndham in the amount of $1.8 billion, comprised of a term loan facility and a revolving loan facility. Definitive agreements relating to the new credit facility are expected to be finalized at the same time that the $1 billion equity investment is consummated. The commitment letter provided that the Chase Manhattan Bank will act as the administrative agent and Chase Securities Inc. will act as the lead arranger for a syndicate of lenders which will provide Wyndham with $1 billion in term loans and up to $800 million under the revolving loan facility, of which a maximum of $560 million may be drawn at the closing of the investment. The term loan facility and the revolving facility carry terms of 7 years and 5 years, respectively. The commitment letter based interest rates for the new credit facility upon LIBOR spreads varying from 1.50% to 3.00% per annum (for the revolving loan facility) and 3.00% to 3.75% per annum (for the term facility), based both on Wyndham's leverage ratio and on whether any increasing rate loans (described below) are outstanding. However, at Wyndham's election or under other specified circumstances, the term loans and revolving loans may instead bear interest at an alternative base rate plus the applicable spread. The alternative base rate is equal to the greater of The Chase Manhattan Bank's prime rate or federal funds rate plus 0.5%, and the alternative spread is 1.0% below the applicable LIBOR spread. Subject to limited agreed-upon exceptions, the New Credit Facility will be guaranteed by the domestic subsidiaries of Wyndham, and will be secured by pledges of equity interests held by Wyndham and its subsidiaries. The proceeds from the term loan facility will be used to finance the restructuring of Wyndham and Patriot. The proceeds from the revolving loan facility will be used for working capital and general corporate purposes. Increasing Rate Loans Wyndham and Patriot have signed a commitment letter with The Chase Manhattan Bank, Chase Securities Inc., Bear, Stearns & Co. Inc., and The Bear Stearns Companies Inc. providing that The Chase Manhattan Bank, 36 The Bear Stearns Companies Inc. and a possible syndicate of other lenders will provide an increasing rate loan facility in the amount of up to $850 million. The increasing rate loans carry a term of 5 years. Interest rates for the increasing rate loans are based on LIBOR spreads and are initially set at 0.25% below the initial LIBOR spread on the term loan facility, but increase by 0.50% every three months, with a cap of LIBOR plus 4.75%. However, under other specified circumstances, interest accrues at an alternate rate equal to the rate borne by three-month treasury securities plus 1.0%, plus the applicable spread. The lenders under the increasing rate loans receive the benefit of the same guarantees and pledges of security provided under the New Credit Facility. The proceeds from the increasing rate loans will be used to finance the restructuring of Wyndham and Patriot. After the six month anniversary of the closing of the $1 billion equity investment, lenders transferring increasing rate loans may exchange the increasing rate loans for exchange notes carrying identical terms to the increasing rate loans. To the extent any increasing rate loans or exchange notes are outstanding 180 days after the closing of the investment, Wyndham must by such date file and maintain a shelf registration statement with the Securities and Exchange Commission allowing the resale of any exchange notes outstanding thereafter. Wyndham may also offer registered substitute notes in exchange for all outstanding increasing rate loans and exchange notes. Wyndham's ability to borrow under its revolving facility is subject to Wyndham's compliance with a number of customary financial and other covenants, including total leverage and interest coverage ratios, limitations on additional indebtedness, and limitations on investments and stockholder dividends. In April 1999, The Chase Manhattan Bank and Chase Securities, Inc. notified the Companies that they were exercising their rights under the "market flex" provisions of the commitment letters to change the terms of the senior credit facilities and the increasing rate loan facility. The total amount of the senior credit facilities was reduced by $200 million to $1.6 billion and the amount of the increasing rate loans was increased by $200 million to $850 million. The revolving credit facility has been reduced from $800 million to $600 million and the maximum that may be drawn at the closing has been reduced from $560 million to $400 million. Wyndham and Patriot have agreed to pay to the agents and the lenders customary fees for a facility of this nature. Renovations and Capital Improvements During the first three months of 1999, the Companies invested approximately $50.9 million in capital improvements. Pursuant to certain of the Participating Leases, Patriot is obligated to establish a reserve for each such hotel for capital improvements, including the periodic replacement or refurbishment of furniture, fixtures and equipment ("FF&E"). Management reserves an average of 4.0% of total hotel revenues, and believes such amounts are sufficient to fund recurring capital expenditures for the hotels. Capital expenditures, exclusive of renovations, may exceed 4.0% of total hotel revenues in a single year. The Companies attempt to schedule renovations and improvements during traditionally lower occupancy periods in an effort to minimize disruption to the hotel's operations. Therefore, management does not believe such renovations and capital improvements will have a material effect on the results of operations of the hotels. Capital expenditures will be financed through capital expenditure reserves or with working capital. Legislation Affecting the Paired Share Structure Patriot's ability to qualify as a REIT is dependent upon its continued exemption from the anti-pairing rules of Section 269B(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 269B(a)(3) of the Code would ordinarily prevent a corporation from qualifying as a REIT if its stock is paired with the stock of a corporation whose activities are inconsistent with REIT status, such as Wyndham. The "grandfathering" rules governing Section 296B generally provide, however, that Section 296B(a)(3) does not apply to a paired REIT if the REIT and its paired operating company were paired on June 30, 1983. There are, however, no 37 judicial or administrative authorities interpreting this "grandfathering" rule in the context of a merger into a grandfathered REIT or otherwise. Moreover, although Patriot's and Wyndham's respective predecessors, Cal Jockey and Bay Meadows, were paired on June 30, 1983, if for any reason Cal Jockey failed to qualify as a REIT in 1983 the benefit of the grand fathering rule would not be available to Patriot and Patriot would not qualify as a REIT for any taxable year. Patriot's exemption from the anti-pairing rules could be lost, or its ability to utilize the paired structure could be revoked or limited, as a result of future legislation. In this regard, legislation to freeze the grandfathered status of paired share REITS such as Patriot was included in the Internal Revenue Service Restructuring and Reform Act of 1998 (the "IRS Reform Act of 1998"), which was signed into law by the President on July 22, 1998. Under the IRS Reform Act of 1998, the anti-pairing rules generally apply to real property interests acquired after March 26, 1998 by Patriot and Wyndham, or a subsidiary or partnership in which a 10% or greater interest is owned by Patriot or Wyndham (collectively, the "REIT Group"), unless (i) the real property interests are acquired pursuant to a written agreement which is binding on March 26, 1998 and all times thereafter or (ii) the acquisition of such real property interests were described in a public announcement or in a filing with the Securities and Exchange Commission on or before March 26, 1998. In addition, the grandfathered status of any property under the foregoing rules will be lost if the rent on a lease entered into or renewed after March 26, 1998, with respect to such property exceeds an arm's length rate. The IRS Reform Act of 1998 also provides that a property held by Patriot or Wyndham that is not subject to the anti-pairing rules would become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (x) the undepreciated cost of the property (prior to the improvement) or (y) in the case of property acquired where there is a substituted basis, the fair market value of the property on the day it was acquired by Patriot and Wyndham. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect as of December 31, 1999 and at all times thereafter. The IRS Reform Act of 1998 generally permits Patriot to continue its current method of operations with respect to its existing assets. However, the legislation would require Patriot to modify its method of operations with respect to newly acquired assets. As described elsewhere in this document, the Companies have entered into an agreement which, if completed, requires the Companies to restructure, and terminate the pairing agreement between Wyndham and Patriot, and Patriot's status as a REIT would terminate effective January 1, 1999. Such a change would mean the Companies would be subject to tax as a C corporation in 1999 and subsequent years. Distributions to shareholders will no longer be deductible or required, and the amount of such distributions is likely to be reduced. The termination of the Companies REIT status will also cause the Companies to permanently lose its special status as a grandfathered paired share REIT. Inflation Operators of hotels in general possess the ability to adjust room rates quickly. However, competitive pressures may limit Wyndham's and the Lessees' ability to raise room rates in the face of inflation. Seasonality The hotel industry is seasonal in nature. Revenues for certain of Patriot's hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in the Companies' revenues. Year 2000 Compliance Many computer systems were not designed to interpret any dates beyond 1999, which could lead to business disruptions in the United States and internationally (the "Year 2000 issue"). The Companies recognize the 38 importance of minimizing the number and seriousness of any disruptions that may occur as a result of Year 2000 and have adopted an extensive compliance program. The Companies' compliance program involves three major program areas: . corporate information technology infrastructure and reservation systems; . other electronic assets such as, but not limited to, automated time clocks, point-of-sale systems, non-information technology systems, including embedded technologies that operate fire-life safety systems, phone systems, energy management systems and other similar systems; and . third parties with whom the Companies conduct business. The Companies are applying a three phase approach to each program area: . Inventory Phase--identify systems and third parties that may be affected by Year 2000 issues; . Assessment Phase--prioritize the inventoried systems and third parties, assess their Year 2000 readiness, plan corrective actions; and . Remediation Phase--implement corrective actions, verify implementation, formulate contingency plans. The Companies engaged a consulting firm to conduct the inventory and assessment phases of the compliance program. The Companies have completed inventory and assessment phases with respect to their corporate information technology infrastructure and reservation systems. The Companies have also completed the inventory and assessment phases with respect to the information technology and other electronic assets that are located in the Companies' hotels, other than some of the hotels which are either managed by Wyndham but not owned by Patriot or owned by Patriot but not leased or operated by Wyndham (the "Third Party Compliance Hotels"). Based on those assessments, the Companies, working with their consultants, determined which systems were not Year 2000 compliant and developed appropriate remediation plans. The Companies have begun the necessary work to remediate those systems at their owned and leased hotels, and at March 31, 1999 had completed 10 percent of that work. The Companies previously engaged a consulting firm to provide the support and additional skills to effect the necessary remediation in sufficient time for testing and any necessary modifications. Of the 93 Third Party Compliance Hotels that were not acquired in the merger with Interstate Hotels (the "Interstate Merger"), at March 31, 1999, 66 Third Party Compliance Hotels had been assessed as part of the Companies' compliance program and the Companies had begun to implement remediation plans at 21 of those hotels. At March 31, 1999, the owners of the other 45 Third Party Compliance Hotels that were assessed have neither taken any action to effect the necessary remediation identified in the assessment nor authorized the Companies to effect the remediation on behalf of the owners. While none of the remaining 27 Third Party Compliance Hotels have been assessed by the Companies, the Companies have been informed by four of the owners that they have completed their own assessments. The Companies are continuing to monitor the status of the Third Party Compliance Hotels and have reminded the owners of the importance of making the Third Party Compliance Hotels Year 2000 compliant in sufficient time to permit adequate testing. The Companies have begun surveying the Year 2000 compliance of the owners of the hotels that are franchised under the Wyndham brand but not managed by Wyndham, and have informed those owners of the appropriate standards to make the equipment operating Wyndham's systems Year 2000 compliant. However, as the systems at the Third Party Compliance Hotels and franchised hotels are not under the Companies' control, the Companies will be required to rely on the information provided by those owners or managers/operators and will not be able to test the assessment or remediation effected by third parties at the Third Party Compliance Hotels or the franchised hotels. The Companies presently expect to expend approximately $34 million in connection with Year 2000 issues. At March 31, 1999, the Companies had incurred $1.75 million in connection with the inventory and assessment phases of their compliance program and $4.6 million to remediate their systems. However, the Companies' anticipated expenditures may increase as the Companies effect the remediation plans. 39 As part of the settlement of litigation arising out of the Interstate Merger, the Companies agreed to contribute to a new company management of the Third Party Compliance Hotels acquired in that merger, and then dispose of substantially all of that new company's stock by means of a spin-off to the Companies' stockholders or otherwise. As the hotels acquired in the Interstate Merger whose management will be contributed to the new company are owned by third parties, the Companies expect those owners to bear all costs related to the inventory, assessment and remediation of those hotels. The Companies identified 5,100 vendors and service providers that provide critical goods and services to the Companies and have requested those parties to provide information concerning their Year 2000 compliance and remediation efforts. At March 31, 1999, 48% of those parties had provided written responses to the Companies. Of those responding parties, the Companies sought clarifying information from less than one percent. None of the respondents indicated that Year 2000 was an issue that would materially disrupt their operations, and most indicated that they are or will become Year 2000 compliant. The Companies were not provided, and did not seek, detailed assessment or remediation plans from their vendors and service providers. Consequently, the Companies cannot evaluate the status or scope of those parties' Year 2000 compliance programs and will not be able to test those parties' compliance. The Companies are continuing to seek information from the parties that have not responded, but cannot guarantee that they will comply with the Companies' requests. As the Companies must rely on information provided by its vendors and service providers, of which more than 50% have not responded, the Companies may not be able to accurately determine the Year 2000 compliance of their vendors and service providers. However, based on responses from those parties that have responded, the Companies believe that their most critical vendors and service providers will not cause the Companies' operations to be materially disrupted as a result of Year 2000 issues. In addition, based on existing responses the Companies have not identified any of their critical vendors as non-compliant. If the Companies determine that a vendor or service provider of critical goods or services is expected to be non-compliant, the Companies will evaluate whether the vendor or service provider could be replaced. Due to the lack of alternative sources, the Companies may be required to remain with non-compliant vendors or service providers. If the Companies identify non-compliant vendors and service providers, they will then determine appropriate contingency plans. The Companies believe that their current compliance program will allow them sufficient time to identify which of their systems and other electronic assets are not Year 2000 compliant and to effect the necessary remediation to avoid substantial problems arising from Year 2000 induced failures. The Companies believe that their reprogramming, upgrading and systems replacements will be implemented by the end of the third quarter of 1999. The Companies believe that this should provide adequate time to further correct any problems that did not surface during the implementation and testing for those systems. Notwithstanding that, the Companies do recognize that some vendors and the owners and managers/operators of the Third Party Compliance Hotels may not comply with their present schedules and could affect the Companies' timing and remediation efforts generally. If the Companies are not successful in implementing their Year 2000 compliance plan, the Companies may suffer a material adverse impact on their consolidated results of operations and financial condition. In addition to those systems within the Companies' control and the control of its vendors and suppliers, there are other systems that could have an impact on the Companies' businesses and which may not be Year 2000 compliant by January 1, 2000. These systems could affect the operations of the air traffic control system and airlines or other segments of the lodging and travel industries, or the economy and travel generally. In addition, these systems could affect the Third Party Compliance Hotels or the hotels franchised under the Companies' brands whose owners and managers/operators are implementing their own compliance programs. These systems are outside of the Companies' control or influence and their compliance may not be verified by the Companies. However, these systems could adversely affect the Companies' financial condition or results of operation. During the second quarter of 1999, the Companies intend to develop contingency plans to address potential Year 2000 induced failures. Because the Companies have no control over third party assessment and remediation efforts, the Companies expect to focus most of their contingency planning on externally caused disruptions. In addition, the Companies will develop their plans on their belief that the consequences of Year 2000 induced 40 failures will be local in nature. These plans will be based on existing contingency plans for operations during storms and other natural disasters. While each hotel will develop a contingency plan, any disruption in utilities or other key local services could disrupt operations of several hotels located in the same geographic area. As part of the Companies' contingency planning, they also expect to evaluate their continued management of the Third Party Compliance Hotels that do not become Year 2000 compliant. FUNDS FROM OPERATIONS Combined Funds from Operations of the Companies (as defined and computed below) was $82.5 million for the three months ended March 31, 1999 and $75.5 million for the three months ended March 31, 1998. The following reconciliation of net income to Funds from Operations illustrates the difference between the two measures of operating performance for the three months ended March 31, 1999 and 1998:
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- (in thousands) Net income............................................... $ 572 $ 18,412 Add: Extraordinary loss from extinguishment of debt......... -- 18,716 Minority interest in the Operating Partnerships........ (1,958) 3,055 Minority interest in consolidated subsidiaries......... (2,000) (479) Depreciation of buildings and improvements and furniture, fixtures and equipment..................... 56,784 27,667 Amortization of goodwill and other assets.............. 8,092 3,869 Amortization of management contracts and trade names... 10,395 3,245 Transaction related severance costs.................... 10,182 -- Cost of acquiring license agreements................... 803 -- Gain on sale of asset.................................. (2,775) -- Other.................................................. 27 -- Adjustment for Funds from Operations of unconsolidated subsidiaries: Equity in earnings of unconsolidated subsidiaries...... (2,701) (3,194) Funds from Operations of unconsolidated subsidiaries... 5,102 4,225 --------- --------- Funds from Operations.................................. $ 82,523 $ 75,516 ========= ========= Weighted average shares and OP Units outstanding: Basic.................................................. 171,420 122,352 ========= ========= Diluted................................................ 180,644 130,269 ========= =========
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS There have been no material changes in the first quarter of 1999. Refer to the Company's discussion in its Annual Report on Form 10-K, as amended, for the year ended December 31, 1998. 41 PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES Recent Sales of Unregistered Securities--None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Item No. Description -------- ----------- 27.1 Financial Data Schedule--Patriot (filed herewith). 27.2 Financial Data Schedule--Wyndham (filed herewith). 99.1 Letter dated May 4, 1999 by and among Patriot American Hospitality, Inc., Wyndham International, Inc., PaineWebber Financial Products Inc. and PaineWebber Incorporated (incorporated by reference to Exhibit 99.25 to Patriot American Hospitality, Inc.'s and Wyndham International, Inc.'s Registration Statement on Form S-3 (Nos. 333- 77271 and 333-77271-01)). 99.2 Letter dated May 4, 1999 by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and NationsBanc Mortgage Capital Corporation (incorporated by reference to Exhibit 99.26 to Patriot American Hospitality, Inc.'s and Wyndham International, Inc.'s Registration Statement on Form S-3 (Nos. 333-77271 and 333-77271- 01)). 99.3 Letter dated May 4, 1999 by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and UBS AG, London Branch (incorporated by reference to Exhibit 99.27 to Patriot American Hospitality, Inc.'s and Wyndham International, Inc.'s Registration Statement on Form S-3 (Nos. 333-77271 and 333-77271-01)).
(b) Reports on Form 8-K: (1) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. filed February 4, 1999 (Nos. 001-09319 and 001-09320), reporting under Item 5 that Patriot and Wyndham received consents from Patriot's bank group to amend the terms of Patriot's $2.7 billion bank credit facility. (2) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. filed February 16, 1999 (Nos. 001-09319 and 001-09320), reporting under Item 5 a press release announcing that Patriot had extended a letter of intent with an investor group, comprised of Thomas H. Lee Company, Apollo Real Estate Advisors, L.P., Apollo Management, L.P., Beacon Capital Partners, Inc., and Rosen Consulting Group, under which the investor group would purchase up to $1 billion of convertible preferred stock. (3) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. filed March 2, 1999 (Nos. 001-09319 and 001- 09320), reporting under Item 5 that Patriot had entered into a definitive securities purchase agreement with a group of investors, including affiliates of Thomas H. Lee Company, Apollo Real Estate Advisors, L.P., Apollo Management, L.P., Beacon Capital Partners, Inc., and Rosen Consulting Group, providing for a $1 billion equity investment in the Companies. (4) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. filed March 3, 1999 (Nos. 001-09319 and 001- 09320), reporting under Item 5 that Paul A. Nussbaum had resigned his position as Chairman of the Board of Directors and Chief Executive Officer of Patriot. (5) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. filed March 26, 1999 (Nos. 001-09319 and 001- 09320), reporting under Item 5 current developments regarding the spin-off of Interstate Hotels Management, Inc. (6) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. filed March 29, 1999 (Nos. 001-09319 and 001- 09320), as amended May 10, 1999, filing under Item 5 the pro forma financial information for the year ended December 31, 1998. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. DATED: May 14, 1999 Patriot American Hospitality, Inc. By /s/ Lawrence S. Jones --------------------------------------- Lawrence S. Jones Executive Vice President and Treasurer (Authorized Officer and Principal Accounting and Financial Officer) Wyndham International, Inc. By /s/ Lawrence S. Jones --------------------------------------- Lawrence S. Jones Executive Vice President and Treasurer (Authorized Officer and Principal Accounting and Financial Officer) 43 EX-27.1 2 FINANCIAL DATA SCHEDULE PATRIOT
5 0000016343 PATRIOT AMERICAN HOSPITALITY, INC. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 73,003 89,885 0 0 15,187 8,589 0 0 0 0 0 0 5,210,374 5,176,977 259,194 216,548 6,843,404 6,749,206 0 0 0 0 0 0 54 54 2,342 2,135 2,483,034 2,466,670 6,843,404 6,749,206 0 0 193,898 113,165 0 0 0 0 105,475 44,260 0 0 86,104 34,251 16,931 38,245 (2,477) (371) 0 0 0 0 0 (18,716) 0 0 11,852 15,497 0.02 0.14 (0.06) 0.13
EX-27.2 3 FINANCIAL DATA SCHEDULE WYNDHAM INTERNATIONAL
5 0000715273 WYNDHAM INTERNATIONA, INC. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 99,797 69,069 0 0 214,017 185,994 0 0 23,131 23,583 440,319 325,950 668,959 662,135 43,215 36,032 2,123,203 2,006,821 719,155 602,494 0 0 0 0 36 36 2,342 2,135 121,378 132,923 2,123,203 2,006,821 638,830 290,644 671,517 329,982 0 0 418,240 200,555 239,014 116,213 0 0 9,727 5,699 4,723 9,235 (6,466) (3,187) 0 0 0 0 0 0 0 0 (11,153) 3,180 (0.07) 0.03 (0.07) 0.03
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