-----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, NsBz+T0o7eBFpyvmMjQrk3XrUwUVD+zojZl9qyShGJASj7Q6nPP3iVZd7TPYDHO9 34nzxGB9NtljSxta8I6Umw== 0000930661-97-001743.txt : 19970718 0000930661-97-001743.hdr.sgml : 19970718 ACCESSION NUMBER: 0000930661-97-001743 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970701 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970717 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA JOCKEY CLUB CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09319 FILM NUMBER: 97641915 BUSINESS ADDRESS: STREET 1: 2600 S DELAWARE ST STREET 2: P O BOX 1117 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4155734514 MAIL ADDRESS: STREET 1: 2600 S DELAWARE ST CITY: SAN MATEO STATE: CA ZIP: 94402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAY MEADOWS OPERATING CO CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09320 FILM NUMBER: 97641916 BUSINESS ADDRESS: STREET 1: 2600 S DELEWARE ST STREET 2: P O BOX 5050 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4155747223 MAIL ADDRESS: STREET 1: 2600 S DELAWARE ST CITY: SAN MATEO STATE: CA ZIP: 94402 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): JULY 1, 1997 PATRIOT AMERICAN HOSPITALITY, INC. (Exact Name of Registrant as specified in its charter) DELAWARE 01-13127 94-0358820 (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation) Number) Identification No.) 3030 LBJ FREEWAY, SUITE 1500, DALLAS, TX 75234 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (972) 888-8000 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY (Exact Name of Registrant as specified in its charter) DELAWARE 01-13127-01 94-2872485 (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation) Number) Identification No.) 3030 LBJ FREEWAY, SUITE 1500, DALLAS, TX 75234 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (972) 888-8000 Item 2. Acquisition or Disposition of Assets - ------- ------------------------------------ On July 1, 1997, pursuant to an Agreement and Plan of Merger, dated as of February 24, 1997, as amended and restated as of May 28, 1997 (the "Merger Agreement") by and among Patriot American Hospitality, Inc., a Virginia corporation ("Patriot"), Patriot American Hospitality Partnership, L.P., a Virginia limited partnership (the "Realty Partnership"), California Jockey Club, a Delaware corporation ("Cal Jockey") and Bay Meadows Operating Company, a Delaware corporation ("Bay Meadows"), Patriot was merged with and into Cal Jockey (the "Merger") with Cal Jockey as the surviving corporation in the Merger. The Merger and the Merger Agreement were approved by the stockholders of Patriot, Cal Jockey and Bay Meadows at their respective Special Meetings of Stockholders held on July 1, 1997. In connection with the Merger, Cal Jockey's name was changed to "Patriot American Hospitality, Inc." (hereinafter, "New Patriot REIT") and Bay Meadows' name was changed to "Patriot American Hospitality Operating Company" (hereinafter, "New Patriot Operating Company"). Pursuant to the Merger Agreement, each issued and outstanding share of common stock, no par value, of Patriot (the "Patriot Common Stock"), was converted, at the effective time, into 0.51895 shares of common stock, $.01 par value, of New Patriot REIT (the "New Patriot REIT Common Stock") and 0.51895 shares of common stock, $.01 par value, of New Patriot Operating Company (the "New Patriot Operating Company Common Stock"), which shares are paired and transferable only as a single unit (as so paired, the "Paired Shares"). In lieu of issuing fractional Paired Shares, the Merger Agreement provided that a holder of Patriot Common Stock otherwise entitled to such fractional Paired Shares became entitled to receive an amount in cash (without interest), rounded to the nearest cent. As a result of the exchange, Patriot stockholders received approximately 22,964,173 Paired Shares in connection with the Merger. The Merger will be accounted for as a reverse acquisition in accordance with Accounting Principles Board Opinion No. 16. Although Cal Jockey and Bay Meadows have issued their Paired Shares to Patriot stockholders and are the surviving legal companies following the Merger, Cal Jockey and Bay Meadows are considered the acquired companies for accounting purposes because the Patriot stockholders became the majority stockholders of New Patriot REIT and New Patriot Operating Company. Therefore, assets and liabilities of the acquired companies (i.e., Cal Jockey and Bay Meadows for such purposes) are revalued to their respective fair market values at the date of the Merger. The financial statements of Patriot American Hospitality, Inc. included in Item 7 will be the historical financial statements of New Patriot REIT in all future filings under the Exchange Act. There was no material relationship between Patriot or its stockholders and either New Patriot REIT, New Patriot Operating Company or any of their respective affiliates, directors or officers, or any associate of a director or officer of Patriot, except as described under the captions "SUMMARY--Interests of Certain Officers and Directors," "RISK FACTORS--Benefits to Certain Directors and Officers of Cal Jockey and Bay Meadows," "THE MERGER AND SUBSCRIPTION-- Interests of Certain Officers and Directors," and "THE MERGER AGREEMENT-- Indemnification" in Cal Jockey's and Bay Meadow's Registration Statement on Form S-4 (File No. 333-28085) effective May 30, 1997 (the "Registration Statement"). Patriot was a self-administered real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code") which owned interests in 60 hotels in 22 states, with an aggregate of 14,060 guest rooms as of July 1, 1997. Upon effectiveness of the Merger, New Patriot REIT succeeded to Patriot's 1% general partnership interest and approximately 82.7% limited partnership interest in the Realty Partnership, and thereby 2 effectively acquired Patriot's hospitality assets described in the Registration Statement. New Patriot REIT intends to continue to use the acquired assets in the same manner and to conduct the same type of business as Patriot did prior to the Merger. Item 7. Financial Statements and Exhibits - ------- --------------------------------- (a) Financial Statements of Business Acquired: The index to the financial information for Patriot American Hospitality, Inc., CHC Lease Partners, NorthCoast Hotels, L.L.C., and PAH RSI, L.L.C. is included on page F-1 of this report. (b) Pro Forma Financial Information: The index to the pro forma financial information for New Patriot REIT, New Patriot Operating Company, the Combined Lessees and Patriot (Pre-Merger) is included on page F-1 of this report. 3 (c) Exhibits: Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger, dated as of February 24, 1997, as amended as restated as of May 28, 1997, by and among Patriot American Hospitality, Inc., Patriot American Hospitality Partnership, L.P., California Jockey Club and Bay Meadows Operating Company (the "Merger Agreement"), attached as annex A to the Joint Proxy Statement/Prospectus contained in the Registration Statement on Form S-4 (No. 333-28085) dated May 30, 1997 filed by California Jockey Club and Bay Meadows Operating Company and incorporated herein by reference. 4.1* Amended and Restated Certificate of Incorporation of Patriot American Hospitality, Inc. 4.2* Amended and Restated Bylaws of Patriot American Hospitality, Inc. 4.3* Amended and Restated Certificate of Incorporation of Patriot American Hospitality Operating Company 4.4* Amended and Restated Bylaws of Patriot American Hospitality Operating Company 99.1* Press release announcing the consummation of the merger of Patriot American Hospitality, Inc. and California Jockey Club. 99.2 The material contained under the captions "SUMMARY--Interests of Certain Officers and Directors," "RISK FACTORS--Benefits to Certain Directors and Officers of Cal Jockey and Bay Meadows," "THE MERGER AND SUBSCRIPTION--Interests of Certain Officers and Directors," and "THE MERGER AGREEMENT--Indemnification," incorporated herein by reference to Cal Jockey's and Bay Meadow's Registration Statement on Form S-4 (File No. 333-28085) dated May 30, 1997. *Filed herewith. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned hereunto duly authorized. Dated: July 11, 1997 PATRIOT AMERICAN HOSPITALITY, INC. /s/ Rex E. Stewart ____________________________________ By: Rex E. Stewart Its: Chief Financial Officer Dated: July 11, 1997 PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY /s/ Rex E. Stewart _____________________________________ By: Rex E. Stewart Its: Chief Financial Officer 5 PATRIOT AMERICAN HOSPITALITY, INC. INDEX TO FINANCIAL INFORMATION FINANCIAL STATEMENTS OF BUSINESS ACQUIRED: Page ---- Patriot American Hospitality, Inc.: Report of Independent Auditors - Ernst & Young LLP................... F-2 Consolidated Balance Sheets as of December 1, 1996 and 1995.......... F-3 Consolidated Statements of Operations for the year ended December 31, 1996 and the period October 2, 1995 (inception of operations) through December 31, 1995........................... F-4 Consolidated Statements of Shareholders' Equity for the year ended December 31, 1996 and the period October 2, 1995 (inception of operations) through December 31, 1995................ F-5 Consolidated Statements of Cash Flows for the year ended December 31, 1996 and the period October 2, 1995 (inception of operations) through December 31, 1995................ F-6 Notes to Consolidated Financial Statements........................... F-8 Consolidated Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996.............................................. F-27 Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996 (unaudited)................................ F-28 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (unaudited)................................ F-29 Notes to Consolidated Financial Statements (unaudited)............... F-30 FINANCIAL STATEMENTS OF LESSEES WITH PROPERTIES SUBJECT TO A NET LEASE: CHC Lease Partners: Report of Independent Certified Public Accountants - Price Waterhouse LLP .............................................. F-39 Balance Sheets as of December 31, 1996 and 1995...................... F-40 Statements of Operations for the twelve months ended December 31, 1996 and for the period inception (October 2, 1995) to December 31, 1995............................. F-41 Statements of Partners' Capital for the twelve months ended December 31, 1996 and for the period inception (October 2, 1995) to December 31, 1995............................................... F-42 Statements of Cash Flows for the twelve months ended December 31, 1996 and for the period inception (October 2, 1995) to December 31, 1995............................. F-43 Notes to Financial Statements........................................ F-45 Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996.................................................. F-49 Statements of Operations for the three months ended March 31, 1997 and 1996 (unaudited).............................................. F-50 Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (unaudited).............................................. F-51 Notes to Financial Statements (unaudited)............................ F-52 NorthCoast Hotels, L.L.C.: Report of Independent Auditors - Ernst & Young LLP................... F-54 Balance Sheet as of December 31, 1996................................ F-55 Statement of Operations for the period April 2, 1996 (inception of operations) through December 31, 1996................ F-56 Statement of Members' Equity for the period April 2, 1996 (inception of operations) through December 31, 1996................ F-57 Statement of Cash Flows for the period April 2, 1996 (inception of operations) through December 31, 1996................ F-58 Notes to Financial Statements........................................ F-59 Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996.................................................. F-64 Statement of Operations for the three months ended March 31, 1997 (unaudited)........................................................ F-65 Statement of Cash Flows for the three months ended March 31, 1997 (unaudited)........................................................ F-66 Notes to Financial Statements (unaudited)............................ F-67 PAH RSI, L.L.C.: Consolidated Balance Sheet as of March 31, 1997 (unaudited).......... F-70 Consolidated Statement of Operations for the period January 16, 1997 (inception of operations) through March 31, 1997 (unaudited)................................................... F-71 Consolidated Statement of Members' Equity for the period January 16, 1997 (inception of operations) through March 31, 1997 (unaudited)................................................... F-72 Consolidated Statement of Cash Flows for the period January 16, 1997 (inception of operations) through March 31, 1997 (unaudited)................................................... F-73 Notes to Consolidated Financial Statements (unaudited)............... F-74 PRO FORMA FINANCIAL INFORMATION: New Patriot REIT and New Patriot Operating Company: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........................... F-81 Pro Forma Condensed Combined Statement Operations for the three months ended March 31, 1997 (unaudited)...................... F-83 Pro Forma Condensed Combined Balance Sheet as of March 31, 1997 (unaudited)........................................................ F-86 New Patriot REIT: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited)........................... F-88 Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 1997 (unaudited)...................... F-89 New Patriot Operating Company: Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited)........................... F-90 Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 1997 (unaudited)...................... F-92 Combined Lessees: Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1996 (unaudited)........................... F-95 Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 1997 (unaudited)...................... F-96 Patriot (Pre-Merger): Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 (unaudited)........................... F-99 Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 1997 (unaudited)...................... F-101 Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997 (unaudited)......................................... F-103 F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Patriot American Hospitality, Inc. We have audited the accompanying consolidated balance sheets of Patriot American Hospitality, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1996 and the period October 2, 1995 (inception of operations) through December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Patriot American Hospitality, Inc. as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for the year ended December 31, 1996 and the period October 2, 1995 (inception of operations) through December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Dallas, Texas January 31, 1997, except for Note 14, as to which the date is March 18, 1997 F-2 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1996 1995 ------------- ---------- ASSETS Investment in hotel properties, net $641,825 $265,759 Cash and cash equivalents, including capital improvement reserves of $2,458 in 1996 and $1,091 in 1995 6,604 4,769 Lease revenue receivable 5,351 2,260 Receivables from selling entities 1,478 1,765 Investment in unconsolidated subsidiaries 11,291 4,263 Mortgage notes and other receivables from unconsolidated subsidiaries 72,209 40,855 Inventory 1,648 1,035 Deferred expenses, net of accumulated amortization of $750 in 1996 and $88 in 1995 3,063 1,852 Prepaid expenses and other assets 17,462 1,666 -------- -------- Total assets $760,931 $324,224 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under line of credit and mortgage note $214,339 $ 9,500 Dividends and distributions payable 13,129 8,154 Accounts payable and accrued expenses 10,117 3,179 Due to unconsolidated subsidiaries 6,034 91 Minority interest in Patriot Partnership 68,562 41,522 Minority interest in other partnerships 11,711 -- Commitments and contingencies -- -- Shareholders' equity: Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, no par value, 200,000,000 shares authorized; shares issued and outstanding were 43,613,496 in 1996 and 29,331,870 in 1995 (1) -- -- Paid-in capital 442,540 264,808 Unearned stock compensation, net of accumulated amortization of $1,139 in 1996 and $71 in 1995 (5,427) (1,351) Retained earnings (distributions in excess of retained earnings) (74) (1,679) -------- -------- Total shareholders' equity 437,039 261,778 -------- -------- Total liabilities and shareholders' equity $760,931 $324,224 ======== ========
- -------------- (1) After restatement to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. See accompanying notes. F-3 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD OCTOBER 2, 1995 (INCEPTION OF OPERATIONS) YEAR ENDED THROUGH DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ------------------------ Revenue: Participating lease revenue $ 75,893 $ 10,582 Interest and other income 600 513 ----------- ----------- Total revenue 76,493 11,095 ----------- ----------- Expenses: Real estate and personal property taxes and casualty insurance 7,150 901 Ground lease expense 1,075 -- General and administrative 4,500 607 Interest expense 7,380 89 Depreciation and amortization 17,420 2,590 ----------- ----------- Total expenses 37,525 4,187 ----------- ----------- Income before equity in earnings of unconsolidated subsidiaries, minority interests and extraordinary item 38,968 6,908 Equity in earnings of unconsolidated subsidiaries 5,845 156 ----------- ----------- Income before minority interests and extraordinary item 44,813 7,064 Minority interest in Realty Partnership (6,767) (968) Minority interest in other partnerships (55) -- ----------- ----------- Income before extraordinary item 37,991 6,096 Extraordinary loss from early extinguishment of debt, net of minority interest -- (737) ----------- ----------- Net income applicable to common shareholders $ 37,991 $ 5,359 =========== =========== Net income per common share (1): Income before extraordinary item $ 1.06 $ 0.21 Extraordinary item -- (0.03) ----------- ----------- Net income applicable to common shareholders $ 1.06 $ 0.18 =========== =========== Weighted average number of common shares and common share equivalents outstanding (1) 35,938 29,350 =========== ===========
- --------------- (1) After restatement to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. See accompanying notes. F-4 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNEARNED STOCK RETAINED NUMBER OF SHARES (1) PAID-IN CAPITAL COMPENSATION EARNINGS TOTAL -------------------- --------------- ------------- --------- ---------- Issuance of common stock, net of offering expenses 29,210,000 $313,170 $ -- $ -- $313,170 Acquisition of interests from affiliates -- (19,357) -- -- (19,357) Predecessor basis of interests acquired from affiliates -- 1,840 -- -- 1,840 Issuance of OP Units to non-affiliates -- 9,363 -- -- 9,363 Minority interest at closing of Initial Offering -- (41,670) -- -- (41,670) Issuance of shares to executive officers 118,750 1,425 (1,422) -- 3 Issuance of shares to directors 3,120 37 -- -- 37 Net income -- -- -- 5,359 5,359 Amortization of unearned stock compensation -- -- 71 -- 71 Common stock dividend declared, $0.24 per share (1) -- -- -- (7,038) (7,038) ---------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 1995 29,331,870 $264,808 $(1,351) $ (1,679) $261,778 Issuance of common stock, net of offering expenses 1,622,786 21,549 -- -- 21,549 Issuance of common stock, net of offering expenses 12,293,400 159,843 -- -- 159,843 Issuance of shares to executive officers 314,800 4,427 (4,427) -- -- Issuance of shares to directors 50,640 754 (717) -- 37 Redemption price of OP Units in excess of book value -- (8,841) -- -- (8,841) Net income -- -- -- 37,991 37,991 Amortization of unearned stock compensation -- -- 1,068 -- 1,068 Common stock dividends declared (1): $0.24 per share -- -- -- (24,937) (24,937) $0.26 per share -- -- -- (11,449) (11,449) ---------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 1996 43,613,496 $442,540 $(5,427) $ (74) $437,039 ========== ======== ======= ======== ========
- --------------- (1) After restatement to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. See accompanying notes. F-5 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD OCTOBER 2, 1995 (INCEPTION OF OPERATIONS) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 37,991 $ 5,359 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 17,302 2,529 Amortization of unearned stock compensation 1,068 71 Amortization of deferred loan costs 431 27 Amortization of lease inducement costs 116 23 Other amortization 118 61 Payment of interest on notes receivable from unconsolidated subsidiaries 4,833 -- Issue common stock to directors 37 -- Equity in earnings of unconsolidated subsidiaries (5,845) (156) Minority interest in income of Realty Partnership 6,767 968 Minority interest in income of other partnerships 55 -- Extraordinary item -- 737 Changes in assets and liabilities: Lease revenue receivable (3,091) (2,260) Deferred expenses -- (292) Prepaid expenses and other assets (1,003) (589) Accounts payable and other accrued expenses 2,741 1,140 Due to unconsolidated subsidiaries (324) -- --------- --------- Net cash provided by operating activities 61,196 7,618 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of hotel properties and related working capital assets (353,217) (260,665) Improvements and additions to hotel properties (21,889) (609) Collection of receivables from selling entities 1,219 -- Prepaid acquisition costs (14,797) (598) Investment in mortgage notes receivable from unconsolidated subsidiaries (31,400) (40,500) Principal payments received on mortgage note receivable 298 -- Advances to unconsolidated subsidiary -- (87) Investment in unconsolidated subsidiary -- (4,238) Investment in other note receivable -- (101) Principal payment received on other note receivable 101 -- Payment of organization costs -- (150) --------- --------- Net cash used in investing activities (419,685) (306,948) --------- ---------
See accompanying notes. F-6 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (IN THOUSANDS)
PERIOD OCTOBER 2, 1995 (INCEPTION OF OPERATIONS) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1996 1995 ------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit 396,302 9,500 Repay borrowings under line of credit (191,463) -- Payments to acquire interests of affiliates in the Initial Hotels -- (18,879) Payment of deferred loan costs (1,189) (361) Prepayment penalties on assumed mortgage loans -- (174) Net proceeds from sale of common stock -- 314,013 Net proceeds of Follow-on Offering 160,305 -- Net proceeds of Private Placement 39,418 -- Payment of initial public offering costs (462) -- Contribution received from minority interest in other partnerships 11,656 -- Payments to redeem OP Units (16,584) -- Dividends and distributions paid (37,659) -- --------- -------- Net cash provided by financing activities 360,324 304,099 --------- -------- Net increase in cash and cash equivalents 1,835 4,769 --------- -------- Cash and cash equivalents at beginning of period 4,769 -- --------- -------- Cash and cash equivalents at end of period $ 6,604 $ 4,769 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 6,938 $ -- ========= ========
See accompanying notes. F-7 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. ORGANIZATION: Patriot American Hospitality, Inc. (collectively with its subsidiaries, "Patriot"), a Virginia corporation, was formed April 17, 1995 as a self- administered real estate investment trust ("REIT") for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Patriot completed an initial public offering (the "Initial Offering") of 29,210,000 shares of its common stock and commenced operations. Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole general partner and the holder of a 1.0% general partnership interest in Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). In addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an approximate 86.3% limited partnership interest in the Realty Partnership, as of December 31, 1996. The Realty Partnership, either directly or through its subsidiaries, acquires and holds the ownership interests in hotel properties, including the 20 hotels purchased upon closing of the Initial Offering (the "Initial Hotels"). In connection with the Initial Offering, Patriot closed on a revolving credit facility (the "Line of Credit") with PaineWebber Real Estate Securities, Inc. ("PaineWebber Real Estate") to be utilized primarily for the acquisition of additional hotels, renovation of certain hotels and for working capital. In consideration for the sale of certain of the hotels acquired by Patriot, certain owners, including certain affiliates of Patriot, elected to receive limited partnership units in the Realty Partnership ("OP Units"). The OP Units received by such owners represent an approximate 12.7% minority equity interest in the Realty Partnership at December 31, 1996. At December 31, 1996, Patriot, through the Realty Partnership and other subsidiaries, owned interests in 46 hotels in 18 states with an aggregate of 11,340 guest rooms. As of December 31, 1996, the Realty Partnership leases each of its hotels, except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel, which are separately owned through special purpose corporations, to lessees who are responsible for operating the hotels (the "Lessees"). Patriot leases 24 of its hotel investments to CHC Lease Partners for staggered terms of ten to twelve years pursuant to separate participating leases providing for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Leases"). Nine of the hotels are leased to NorthCoast Hotels, L.L.C. ("NorthCoast Lessee") under similar Participating Lease agreements. DTR North Canton, Inc. (the "Doubletree Lessee"), a subsidiary of Doubletree Hotels Corporation, leases six hotels and Crow Hotel Lessee, Inc. (the "Wyndham Lessee") leases two hotels under similar Participating Lease agreements. Metro Hotels Leasing Corporation ("Metro Lease Partners") leases one hotel and Grand Heritage Leasing, L.L.C. (the "Grand Heritage Lessee") leases two hotels under similar Participating Lease agreements. The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. The Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel acquisitions were structured without lessees and are managed directly by Holiday Inns, Inc. and Marriott International, Inc., respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of Patriot, its wholly-owned subsidiaries, PAH GP, Inc. and PAH LP, Inc., the Realty Partnership and other partnerships in which Patriot owns at least a 50% controlling interest. All significant intercompany accounts and transactions have been eliminated. Investment in Hotel Properties The hotel properties are stated at cost. Depreciation is computed using the straight-line method based upon estimated useful lives of the assets of 35 years for the buildings and improvements and 5 to 7 years for furniture, fixtures and equipment. F-8 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The acquisition of affiliated interests in the Initial Hotels has been recorded at predecessor cost. In connection with the Initial Offering, cash payments to acquire the interests of predecessor owners who were deemed to be affiliates of Patriot have been reflected as a reduction of shareholders' equity in the accompanying financial statements in 1995. In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, Patriot would record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. No such impairment losses have been recognized to date. Repairs and maintenance of hotel properties owned by Patriot are paid by the Lessees. Major renewals and betterments are capitalized. Interest associated with borrowings used to finance substantial hotel renovations is capitalized and amortized over the estimated useful life of the assets. Interest of $91 was capitalized in 1996. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. Investment in Unconsolidated Subsidiaries Patriot's investments in PAH Ravinia, Inc. ("PAH Ravinia"), the entity which owns the Crowne Plaza Ravinia Hotel, and PAH Windwatch, L.L.C. ("PAH Windwatch"), the entity which owns the Marriott WindWatch Hotel, are accounted for using the equity method of accounting. Patriot owns an approximate 99% non- voting interest in each of these entities. The voting interests of PAH Ravinia and PAH Windwatch are owned by partnerships in which Patriot has a 4% interest. Patriot's share of the net income of PAH Ravinia and PAH Windwatch is included in Patriot's statement of operations. Inventory Inventory consists of food, beverages, china, linen, glassware and silverware and is stated at cost (see Note 6). Deferred Expenses Deferred expenses consist of the following:
December 31, 1996 1995 ------ ------ Deferred loan costs $1,550 $ 361 Leasing costs 1,684 1,000 Franchise fees 429 429 Organization costs 150 150 ------ ------ 3,813 1,940 Less: accumulated amortization (750) (88) ------ ------ $3,063 $1,852 ====== ======
Loan costs related to the Line of Credit are amortized to interest expense on a straight-line basis over the three-year term of the loan. Leasing costs are amortized to participating lease revenue over the lives of the leases. Franchise costs are amortized using the straight-line method over the terms of the related franchise agreements. Amortization of organization costs is computed using the straight-line method over five years. F-9 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of prepaid insurance, property taxes and deposits and pre-acquisition costs associated with hotels under purchase consideration. At December 31, 1996, other assets include a $10,000 escrow deposit related to the acquisition of Resorts Limited Partnership and Carefree Resorts Corporation and their assets (see Note 14). Additionally, other assets include a note receivable from California Jockey Club in the amount of $2,900 which relates to the Agreement and Plan of Merger with California Jockey Club and Bay Meadows Operating Company (see Note 14). Revenue Recognition The Realty Partnership leases its hotel properties to the Lessees pursuant to separate Participating Leases. Lease income is recognized when earned from the Lessees under the Participating Leases. Stock Split On January 30, 1997, the Board of Directors declared a 2-for-1 stock split on Patriot's common stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. All references in the consolidated financial statements to the number of shares, per share amounts, and market prices of Patriot's common stock and options to purchase common stock have been restated to reflect the impact of the stock split. The number of OP Units currently outstanding will remain unchanged after the 2-for-1 stock split. However, the OP Unit conversion factor will be changed as a result of the stock split such that each OP Unit subject to redemption will now be redeemed for cash equal to the value of two shares of Patriot's common stock (or, at Patriot's election, Patriot may purchase each OP Unit offered for redemption for two shares of common stock). Earnings per Share Earnings per share is computed based upon the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period presented. The per share computations include options to purchase common stock which were outstanding during the period. The number of shares outstanding related to the options has been calculated by application of the "treasury stock" method. Dividends Patriot intends to pay regular quarterly dividends in order to maintain its REIT status under the Internal Revenue Code. Payment of such dividends is dependent upon receipt of distributions from the Realty Partnership. Stock Compensation Patriot accounts for its stock compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and intends to continue to do so. See Note 10 for a discussion of Patriot's stock compensation arrangements and pro forma disclosure of the effect on income from operations and earnings per share of such arrangements pursuant to the requirements of Financial Accounting Standards Board Statement 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Income Taxes Patriot intends to continue to qualify to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. Under the Internal Revenue Code, if certain requirements are met in a tax year, a corporation that is treated as a REIT will generally not be subject to federal income tax with respect to income which it distributes to its F-10 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) shareholders. Patriot has declared dividends in excess of its taxable income for 1996 and 1995. Accordingly, no provision for income taxes has been reflected in the statement of operations. For federal income tax purposes, 1996 dividends amounted to $0.98 per share, none of which is considered return of capital and 1995 dividends amounted to $0.24 per share, of which 26% was considered a return of capital. Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported for financial reporting purposes due to differences for federal tax purposes in the estimated useful lives used to compute depreciation and the carrying value (basis) of the investment in hotel properties. Additionally, certain costs associated with the Initial Offering are treated differently for federal tax purposes than for financial reporting purposes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentrations Patriot currently invests exclusively in hotel properties. The hotel industry is highly competitive and Patriot's hotel investments are subject to competition from other hotels for guests. Each of Patriot's hotels competes for guests primarily with other similar hotels in its immediate vicinity and other similar hotels in its geographic market. Patriot believes that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting its hotel investments. In 1996 and 1995, Patriot earned rents under the Participating Leases of $75,893 and $10,582, respectively (net of leasing cost amortization of $116 and $23, respectively), of which $54,186 and $10,432 was earned from the Participating Leases with CHC Lease Partners in 1996 and 1995, respectively. In addition, 55% of future minimum rent amounts due under leases outstanding at December 31, 1996 relate to the Participating Leases with CHC Lease Partners. Patriot must rely on the Lessees to generate sufficient cash flow from operation of the hotels to enable the Lessees to meet rent obligations under the Participating Leases. Seasonality The hotel industry is seasonal in nature. Revenues at certain 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 revenues at Patriot's hotels may cause quarterly fluctuations in Patriot's lease revenues. Reclassification Certain prior year balances have been reclassified to conform to the current year presentation. F-11 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 3. INVESTMENT IN HOTEL PROPERTIES: On October 2, 1995, Patriot, through the Realty Partnership, used approximately $263,600 of the net proceeds of the Initial Offering and $47,685 in OP Units (including $38,322 in OP Units paid to affiliates) to acquire the 20 initial hotels (including certain working capital assets) from various entities (the "Selling Entities") and repay existing mortgage and other indebtedness of these hotels. In connection with the assumption and repayment of mortgage indebtedness on certain of these properties, Patriot assumed $680 in unamortized deferred financing costs which were written off upon repayment of the debt, and paid $174 in mortgage prepayment penalties. These amounts have been reported as an extraordinary item in the accompanying financial statements. At December 31, 1996 and 1995 Patriot had aggregate receivables of $559 and $1,765, respectively, from the Selling Entities which represents amounts due to Patriot relating to the final proration of current assets acquired in connection with the acquisition of the 20 initial hotels. On November 15, 1995, Patriot, through the Realty Partnership, completed the acquisition of the Embassy Suites Hotel in Hunt Valley, Maryland for cash (including closing costs) of approximately $15,951. The purchase was paid for with a portion of the remaining net proceeds from the Initial Offering. During the first quarter of 1996, Patriot acquired three hotels located in Massachusetts, Georgia and California with an aggregate of 830 guest rooms. The aggregate purchase price of the properties (including acquisition-related expenses) was approximately $38,587 plus 167,012 OP Units (valued at approximately $4,000 based upon the market price of Patriot's common stock on the contract settlement date). One of the hotels is subject to a 73-year ground lease. The cash portion of the purchase was financed primarily with funds drawn on the Line of Credit. During the second quarter of 1996, Patriot acquired eight hotels located in Washington, California, Kentucky and Colorado with an aggregate of 1,784 guest rooms. The aggregate purchase price of the properties (including acquisition- related expenses) was approximately $102,470 plus 331,577 OP Units, valued at approximately $8,800 at the closing of the acquisition. The cash portion of the purchase was financed primarily with funds drawn on the Line of Credit. The payment of a portion of the purchase price related to the acquisition of six of the hotels, in the amount of $2,000, is payable in April 1998. This amount is included in accounts payable and accrued expenses at December 31, 1996. During the third quarter of 1996, Patriot acquired five hotels located in Texas, Georgia, Florida, Oregon and Missouri with an aggregate of 1,596 guest rooms. The aggregate purchase price of the properties (including acquisition- related expenses and approximately $3,456 relating to the assumption of operating liabilities and acquisition costs) was approximately $108,761 plus 17,036 OP Units valued at approximately $500 at the time of the acquisition. The cash portion of the purchase was financed primarily with funds drawn on the Line of Credit. In addition, Patriot may be obligated to pay up to $3,000 of additional consideration upon acheivement of certain future operating results of two of the hotels, which management considers unlikely. Patriot, through certain of its consolidated partnerships (see Note 9), acquired a 244-room hotel in Tallahassee, Florida for approximately $11,186; a 242-room hotel in Des Plaines, Illinios for approximately $8,539; and a 264-room hotel in Miami, Florida for approximately $12,513. The acquisitions of the hotels were financed through a combination of cash and funds drawn on the Line of Credit. During the fourth quarter of 1996, Patriot, through certain of its consolidated partnerships (see Note 9), acquired the 341-room Doubletree Hotel at Allen Center in Houston, Texas for approximately $28,700 and the 417-room Doubletree Hotel in Tulsa, Oklahoma for approximately $22,400. The acquisitions of the hotels were financed through a combination of cash and funds drawn on the Line of Credit. In addition, Patriot, through the Realty Partnership, acquired two additional hotels located in Alabama and California with an aggregate of 336 guest rooms. The aggregate purchase price of the properties (including acquisition-related expenses) was approximately $22,600 plus 85,078 OP Units valued at approximately $3,091 at the time of the acquisition. The cash portion of the purchase was financed primarily with funds drawn on the Line of Credit. F-12 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) As of December 31, 1996, Patriot, through the Realty Partnership and certain other consolidated and unconsolidated subsidiaries, owns interests in 46 hotel properties aggregating 11,340 guest rooms in 18 states. (As of December 31, 1995, Patriot owned 22 hotel properties aggregating 4,924 guest rooms.) One hotel is located in Alabama (147 rooms), four hotels are in California (1,036 rooms), one in Colorado (180 rooms), five properties are located in Florida (1,261 rooms), four in Georgia (1,233 rooms), one in Illinois (242 rooms), one in Kentucky (365 rooms), two in Louisiana (970 rooms), one in Maryland (223 rooms), one in Massachusetts (288 rooms), two in Michigan (506 rooms), one in Missouri (184 rooms), two in New York (475 rooms), three in Ohio (412 rooms), one in Oklahoma (417 rooms), one in Oregon (257 rooms), eleven in Texas (2,507 rooms), and four in Washington (637 rooms). Investment in hotel properties consists of the following:
December 31, 1996 1995 -------- -------- Land............................... $ 56,739 $ 23,893 Building and improvements.......... 540,755 218,239 Furniture, fixtures and equipment.. 64,146 26,156 -------- -------- 661,640 268,288 Less: accumulated depreciation..... (19,815) (2,529) -------- -------- $641,825 $265,759 ======== ========
4. INVESTMENT IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED SUBSIDIARIES: In December 1995, Patriot, through the Realty Partnership, acquired an approximate 99% non-voting ownership interest in PAH Ravinia, a Virginia corporation, for $4,458. PAH Ravinia acquired the 495-room Crowne Plaza Ravinia Hotel in Atlanta, Georgia. As part of the financing for the acquisition of the Crowne Plaza Ravinia Hotel, Patriot, through the Realty Partnership, advanced $40,500 to PAH Ravinia, which is evidenced by two mortgage notes consisting of a $36,000 first mortgage note and a $4,500 second mortgage note. The principal amount of both notes is due on November 28, 1998. Interest at an annual rate equal to 10.25% and 12.5% on the first and second mortgage notes, respectively, is payable monthly. All amounts owing under the mortgage notes will become due upon a sale of the hotel to a third party purchaser. The mortgage notes are collateralized by deeds of trust on the Crowne Plaza Ravinia Hotel. The Crowne Plaza Ravinia Hotel is not operated by a lessee. The hotel is being managed by Holiday Inns, Inc. for a period of ten years expiring in 2005 (with two renewal terms of five years each) pursuant to a management agreement between PAH Ravinia and Holiday Inns, Inc. Under the terms of the management agreement, Holiday Inns, Inc. receives base management fees equal to 4% of gross room revenue, a portion of which is subordinated to the payment of a return on PAH Ravinia's invested capital, as defined, of 10.5% per annum. The management agreement also provides for payment of an incentive management fee to Holiday Inns, Inc., subject to PAH Ravinia's receipt of an aggregate 12.5% per annum return on invested capital. Under the terms of the management agreement, PAH Ravinia is required to maintain capital improvement reserves equal to 4.0% of total revenues. F-13 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following summarizes certain financial information for PAH Ravinia.
As of December 31, 1996 1995 ---- ---- Financial Position: Total assets $ 48,273 $ 46,739 ======== ======== Total liabilities $ 43,111 $ 42,424 ======== ======== Total equity $ 5,162 $ 4,315 ======== ======== December 1, 1995 (inception) Year Ended through December 31, December 31, 1996 1995 ------ ------ Summary Operations: Total revenues $ 24,377 $ 1,737 ======== ======= Gross profit $ 14,389 $ 829 ======== ======= Net income/(loss) (a) $ 847 $ (194) ======== ======= Cash flow from operations $ 4,061 $ 315 ======== =======
- --------------- (a) For the year ended December 31, 1996, Patriot reported net income from this unconsolidated subsidiary of $5,118 after elimination of $4,280 of interest expense related to the mortgage notes payable to Patriot. For the period December 1, 1995 (inception) through December 31, 1995, Patriot reported net income from this unconsolidated subsidiary of $156 after elimination of $351 of interest expense related to the mortgage notes payable to Patriot. In September 1996, Patriot, through the Realty Partnership, acquired an approximate 99% non-voting ownership interest in PAH Windwatch, a Delaware limited liability corporation. Patriot's investment in PAH Windwatch of approximately $6,217 is evidenced by a promissory note. PAH Windwatch acquired the 362-room Marriott WindWatch Hotel in Hauppauge (Long Island), New York for approximately $31,102. As part of the financing for the acquisition of the Marriott WindWatch Hotel, Patriot, through the Realty Parnership, advanced PAH Windwatch $31,400, which is evidenced by a first lien mortgage note. The principal amount of the note is due on August 31, 1999. Interest at an annual rate equal to 9% is payable monthly. All amounts owed under the mortgage note will become due upon the sale of the hotel to a third party purchaser. The mortgage note is collateralized by a deed of trust on the Marriott WindWatch Hotel. The Marriott WindWatch Hotel is not operated by a lessee but is managed by Marriott International, Inc. ("Marriott"). Pursuant to the Purchase and Sale agreement dated March 15, 1996, the existing management agreement has been terminated and Patriot is currently negotiating the terms of a new agreement. Until such time a new agreement is reached, Marriot will continue to manage the Marriott WindWatch Hotel under the terms of the prior agreement. Pursuant to this agreement, Marriott receives an annual base management fee equal to 5% of gross receipts. In addition, in any year the hotel generates a profit, as defined in the agreement, Marriott will receive an amount equal to the excess of 15% of the profit over the base management fee. 5. LINE OF CREDIT AND MORTGAGE NOTE: In connection with the Initial Offering, Patriot, through the Realty Partnership, obtained the Line of Credit, a revolving credit facility of up to $165,000 to fund the acquisition of additional hotels, renovations and capital improvements to hotels and for general working capital purposes. In May 1996, the maximum amount available under the Line of Credit was increased to $250,000 and certain other modifications were made, thereby increasing Patriot's F-14 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS,, EXCEPT PER SHARE DATA) ability to borrow under the Line of Credit. The Line of Credit is collateralized by a first mortgage lien on certain of the hotels. As of December 31, 1996, Patriot had $192,339 outstanding on its Line of Credit. The Line of Credit, which expires October 1, 1998, bears interest on the outstanding balance at a rate per annum equal to the 30-day LIBOR rate, plus 1.90%. LIBOR was 5.56% at December 31, 1996 and 5.69% at December 31, 1995. The weighted average interest rate incurred by Patriot during 1996 and 1995 under this borrowing was 7.38% and 7.71%, respectively. No prepayment penalties are required under the Line of Credit. In connection with the acquisition of the Wyndham Greenspoint Hotel during the third quarter of 1996, Patriot has agreed to maintain at least $22,000 of debt on this property until 1999. PaineWebber Real Estate has extended a single asset mortgage loan of $22,000 on this hotel (the "Greenspoint Loan") on economic terms substantially similar to the Line of Credit. While the Greenspoint Loan is outstanding, the maximum amount Patriot may draw on the Line of Credit has been reduced to $228,000. The Line of Credit and the Greenspoint Loan are cross defaulted. No prepayment penalties are required under the Greeenspoint Loan. The Line of Credit requires Patriot to maintain certain financial ratios with respect to liquidity, loan to value and net worth and imposes certain limitations on acquisitions. Patriot is in compliance with such covenants at December 31, 1996. The unused commitment under the Line of Credit at December 31, 1996, is $35,661, subject to certain restrictions and provisions of the Line of Credit Agreement (see Note 14). 6. PARTICIPATING LEASES: The Realty Partnership has leased the hotels under the Participating Leases to the Lessees through 2008. Minimum future rental income under these noncancelable operating leases for the next five years and thereafter is as follows:
YEAR RENT AMOUNT - ---- ----------- 1997................. $ 81,409 1998................. 82,405 1999................. 82,787 2000................. 83,167 2001................. 83,542 2002 and thereafter.. 422,814 -------- $836,124 ========
The Participating Leases obligate Patriot to establish a reserve for capital improvements for the replacement and refurbishment of furniture, fixtures and equipment and other capital expenditures. Patriot and the Lessees agree on the use of funds in these reserves, and Patriot has the right to approve the Lessees' annual and long-term capital expenditures budgets. The amount of such reserves are to average 4.0% of total revenues for the hotels. At December 31, 1996 and 1995, $2,458 and $1,091, respectively, of cash is reserved for capital improvements, net of capital improvements made to date. Patriot is responsible for payment of (i) real estate and personal property taxes on its hotel investments (except to the extent that personal property associated with the hotels is owned by the Lessees), (ii) casualty insurance on the hotels and (iii) business interruption insurance on the hotels. The Lessees are required to pay for all liability insurance on Patriot's hotels, with extended coverage, including comprehensive general public liability, workers' compensation and other insurance appropriate and customary for properties similar to Patriot's hotels with Patriot as an additional named insured. Upon acquisition of the Initial Hotels, Patriot acquired the hotel inventories with an estimated fair value of $2,035, which were transferred to CHC Lease Partners for its use in the operation of the hotels. Under the Participating Lease Agreements, CHC Lease Partners is obligated to return an equivalent inventory to Patriot at the end of the F-15 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) respective lease terms, less $1,000. The $1,000 is considered a lease inducement and has been recorded as a reduction in inventory and an increase in deferred expenses and is being amortized to Participating Lease revenue on a straight- line basis over the lives of the leases. In connection with the acquisition of a resort property in 1996, Patriot recorded an additional lease inducement of $685 which is being amortized to Participating Lease revenue on a straight-line basis over the 12 year lease term. 7. COMMITMENTS AND CONTINGENCIES: Office Lease Patriot has entered into an agreement with an affiliate to provide Patriot with office space and limited support personnel for Patriot's headquarters for an annual fee of approximately $141 through February 1998 and $144 thereafter. The term of the agreement is through February 1999. Employment Agreements In connection with the Initial Offering, Patriot entered into employment agreements with each of Messrs. Nussbaum, Lattin and Stewart, three of the Executive Officers of Patriot, for a term of three years expiring in 1998. The agreements provide for annual base compensation with any increases approved by the Compensation Committee of the Board of Directors. Upon termination of employment other than for cause, the employment agreements provide for severance benefits in an amount to be determined by the Compensation Committee. Business Combination On October 31, 1996, Patriot, California Jockey Club, a Delaware corporation ("Cal Jockey") and Bay Meadows Operating Company, a Delaware corporation ("Bay Meadows") entered into a binding acquisition agreement (the "October 31, 1996 Agreement") pursuant to which the parties agreed, subject to stockholder approval and other conditions, to engage in a business combination transaction. Cal Jockey operates as a REIT under the Internal Revenue Code and is the owner of approximately 175 acres of land in San Mateo, California on which the Bay Meadows Racecourse is situated. Cal Jockey leases the racecourse facility to Bay Meadows. Bay Meadows is a gaming and entertainment company engaged primarily in the business of conducting and offering pari-mutuel wagering (meaning that individuals wager against each other and not against the operator of the facility) on Thoroughbred horse racing at the racecourse. In addition, Bay Meadows generates revenues from commissions on simulcast and off-track pari- mutuel wagering, admissions, parking, program sales and food and beverage concessions at the racecourse. Since 1983, Cal Jockey's shares of common stock have been paired and trade together with the shares of common stock of Bay Meadows as a single unit on the American Stock Exchange pursuant to a stock pairing arrangement (referred to herein as a "paired share" ownership structure). See Note 14. Contingencies Patriot currently is not subject to any material legal proceedings or claims nor, to management's knowledge, are any material legal proceedings or claims currently threatened. 8. RELATED PARTY TRANSACTIONS: As described in Note 4, Patriot, through the Realty Partnership, loaned $40,500 in the form of mortgage notes to PAH Ravinia as part of the financing for PAH Ravinia's acquisition of the Crowne Plaza Ravinia Hotel. Patriot recognized $43 and $3 of interest income in 1996 and 1995, respectively, related to such mortgage notes (excluding $4,280 and $351 of such interest eliminated for financial reporting purposes in 1996 and 1995, respectively). In addition, Patriot has a receivable of $40,866 due from PAH Ravinia as of December 31, 1996. F-16 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Patriot, through the Realty Partnership, also loaned $31,400 in the form of mortgage notes to PAH Windwatch (see Note 4), as part of the financing for PAH Windwatch's acquisition of the Marriott WindWatch Hotel. Patriot recognized $8 of interest income in 1996 related to such mortgage notes (excluding $754 of such interest eliminated for financial reporting purposes). In addition, Patriot has a receivable of $31,343 due from PAH Windwatch as of December 31, 1996. In December 1996, Patriot funded advances to one of the executive officers totaling $123 which have been included in prepaid expenses and other assets in the accompanying financial statements. The advances were repaid in March 1997. 9. MINORITY INTERESTS Minority Interest in Realty Partnership The Realty Partnership has 2,517,808 OP Units and 662,391 Preferred OP Units outstanding as of December 31, 1996 (excluding OP Units held by Patriot). Pursuant to the Realty Partnership's limited partnership agreement, the limited partners of the Realty Partnership, including certain affiliates of Patriot, received rights (the "Redemption Rights") that enable them to cause the Realty Partnership to redeem each OP Unit in exchange for cash equal to the value of a share of common stock (or, at Patriot's election, Patriot may purchase each OP Unit offered for redemption for one share of common stock). The Redemption Rights generally may be exercised at any time after one year following the issuance of the OP Units. However, certain holders of OP Units, including directors and officers of Patriot, are restricted from exercising their Redemption Rights for 18 to 24 months from the closing of the Initial Offering. The number of shares of common stock issuable upon exercise of the Redemption Rights will be adjusted for share splits, mergers, consolidations or similar pro rata transactions, which would have the effect of diluting the ownership interests of the limited partners of the Realty Partnership or the shareholders of Patriot. Coincident with the stock split in March 1997, the conversion factor is now 2-for-1 (see Note 14). During the fourth quarter of 1996, certain partners elected to redeem a total of 407,207 OP Units for a total of $16,584 in cash (based upon the current market price of Patriot's common stock on the effective date of the redemptions) in accordance with their Redemption Rights, including 395,746 OP Units redeemed by a principal of Patriot American Group for a total price of $16,196. Patriot recognized an adjustment to shareholders' equity in the amount of $8,841 in connection with the transaction, which represents the excess of the redemption price paid over the recorded book value of the OP Units redeemed. Minority Interest in Other Partnerships During September 1996, Patriot entered into three partnership agreements in which the Realty Partnership owns a 90% general partnership interest and DTR PAH Holding, Inc. ("DTR"), an affiliate of Doubletree Hotels Corporation, owns a 10% limited partnership interest. The three partnerships, formed for the purpose of acquiring certain hotel properties, are PAH-DT Tallahassee Partners, L.P., PAH-DT Chicago O'Hare Partners, L.P. and PAH-DT Miami Airport Partners, L.P. During the fourth quarter of 1996, Patriot entered into two additional partnership agreements in which the Realty Partnership owns an 85% general partnership interest and DTR owns a 15% limited partnership interest. The two partnerships, formed for the purpose of acquiring certain hotel properties, are PAH-DT Allen Partners, L.P. and PAH-DT Tulsa Partners, L.P. Each partnership is a Delaware limited partnership. The financial position and results of operations of each partnership is included in the consolidated financial statements of Patriot. DTR's interest in the partnerships is reflected as minority interest in other partnerships in the accompanying consolidated financial statements. F-17 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 10. SHAREHOLDERS' EQUITY: Capital Stock Patriot's Board of Directors has authorized the issuance of up to 20,000,000 shares of preferred stock in one or more series. The number of shares in each series and the designation, powers, preferences and rights of each such series and the qualifications, limitations or restrictions thereof have not been established. As of December 31, 1996, no preferred stock was issued. Patriot was initially capitalized through the issuance of 2,850 shares of no par value common stock to three of Patriot's executive officers for which the executive officers paid nominal consideration. In connection with the Initial Offering, Patriot declared an approximate 41-to-1 stock split of its outstanding common shares, resulting in the issuance of an additional 115,900 shares of common stock to such executive officers. The aggregate value of $1,425 (based upon the initial public offering price of $12.00 per share), less cash received of $3, has been recorded as unearned stock compensation and was initially being amortized over the five-year vesting period. In response to an independent consultant review of executive compensation, the Board of Directors elected to accelerate the vesting period for the shares of common stock described above which were recorded as unearned stock compensation. During the first quarter of 1996, the vesting period was reduced from five years to three years and the amortization period of the unearned stock compensation was revised accordingly. On October 2, 1995, Patriot completed the Initial Offering of 29,210,000 shares of its common stock (including 3,810,000 shares of common stock issued upon exercise of the underwriters' over-allotment option). The offering price of all shares sold was $12.00 per share, resulting in net proceeds (less the underwriters' discount and Initial Offering expenses) of approximately $313,170. During the third quarter of 1996, Patriot completed a second public offering (the "Follow-on Offering") of 12,293,400 shares of its common stock (including 1,293,400 shares of common stock issued upon exercise of the underwriters' over- allotment option). The offering price of all shares sold in the Follow-on Offering was $14.125 per share, resulting in net proceeds (less the underwriters' discount and offering expenses) of approximately $160,222, of which approximately $151,963 was used to reduce amounts outstanding under the Line of Credit. Patriot's Board of Directors declared quarterly distributions of $0.24 per common share for the fourth quarter of 1995 (Patriot's first quarter of operations) and for each of the first, second and third quarters of 1996. On October 25, 1996, Patriot's Board of Directors declared a quarterly distribution of $0.26 per common share for the fourth quarter of 1996 which was paid on January 30, 1997 to shareholders of record on December 30, 1996. For dividends related to 1996 and 1995, concurrent with each of the distribution declarations, the Realty Partnership authorized distributions in the same amount. Stock Incentive Plans Patriot adopted the 1995 Incentive Plan (the "1995 Plan") and the Non- Employee Directors' Incentive Plan (the "Directors' Plan") for the purpose of (i) attracting and retaining employees, directors and others, (ii) providing incentives to those deemed important to the success of Patriot, and (iii) associating the interests of these individuals with the interests of Patriot and its shareholders through opportunities for increased stock ownership. The 1995 Plan. Under the 1995 Plan, employees of Patriot are eligible to receive stock options, stock awards or performance shares, subject to certain restrictions. All awards under the 1995 Plan are determined by the Compensation Committee of the Board of Directors and a maximum of 2,000,000 shares of common stock may be issued under the 1995 Plan. Subject to shareholder approval, the maximum limit has been increased to 5,000,000 shares of common stock. F-18 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Directors' Plan. The Directors' Plan provides for the award of stock options and stock awards to each eligible non-employee director of Patriot. Each eligible director will receive nonqualified options to purchase 15,000 shares of common stock upon their election to the Board. On the date of each annual meeting of Patriot's shareholders, each non-employee director then in office receives an additional grant of nonqualified options to purchase 5,000 shares of common stock, with the maximum aggregate number of shares subject to options to be granted to each non-employee director being 35,000. The exercise price of options will be 100% of the fair market value of the common stock on the date of grant. The exercise price may be paid in cash, cash equivalents acceptable to the Compensation Committee, common stock or a combination thereof. Options granted under the Directors' Plan are exercisable for ten years from the date of grant. The Directors' Plan also provides for the annual award of common stock to each eligible director in payment of one-half of the annual retainer of $13 payable to each such director. The number of shares awarded will be determined based upon the fair market value of the stock at the date of the grant. Such shares vest immediately upon grant and are nonforfeitable. Stock Grant Awards During 1996, pursuant to Patriot's Directors' Plan and the 1995 Plan, Patriot awarded 48,000 shares of common stock to its non-employee directors and 314,800 shares of common stock to certain of its officers and employees. Patriot has recorded $5,144 (the aggregate value of Patriot's common stock based on the market price at the date of the award) as unearned stock compensation which is being amortized over the vesting period of four years. For 1996 and 1995, $1,068 and $71, respectively, of amortization of stock compensation related to stock grants awarded to Patriot's directors, officers and certain employees is included in general and administrative expense in the accompanying consolidated financial statements. In 1996, the directors were granted 2,640 common shares with an aggregate value of $37 in payment of one-half of the annual retainer payable to each director. In 1995, the directors were granted 3,120 common shares with an aggregate value of $37 in payment of one-half the annual retainer payable to each director. Stock Option Awards During 1996, pursuant to Patriot's Directors' Plan and the 1995 Plan, the Board of Directors granted stock options to purchase 30,000 shares of common stock to Patriot's directors and stock options to purchase 355,600 shares of common stock to Patriot's officers and certain employees. The exercise price of the options granted to the directors is $14.188 (the market price of Patriot's common stock on the date of the grant, May 23, 1996). For the officers and employees employed as of the grant date of April 19, 1996, the exercise price of the options is $13.438 (the market price of Patriot's common stock on the date of grant). For officers and employees hired subsequent to April 19, 1996, the exercise price is equal to the market price of Patriot's common stock on the employee's hire date. The options to purchase common stock vest annually over a period of seven years. Upon completion of the Initial Offering, 1,000,000 options were granted to the executive officers to purchase shares of common stock of Patriot. Each option is exercisable at an amount equal to the initial public offering price of $12.00 per share. Of the options granted, 55,560 vested immediately, while the remaining options become exercisable at various dates through January 1, 2005. In addition, each eligible director who was a member of the Board as of September 27, 1995, was awarded nonqualified options to purchase 15,000 shares of common stock on that date (each such director, a "Founding Director"). The options granted to Founding Directors have an exercise price equal to the initial public offering price of $12.00 per share and vested immediately. As of December 31, 1996, no options had been exercised. Patriot has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement 123 requires use of F-19 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Patriot's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Patriot's Directors' Plan and the 1995 Plan have authorized the grant of options to management personnel for up to 1,475,600 shares of Patriot's common stock. All options granted have ten year terms and either vest immediately or vest over a period of three to ten years and become fully exercisable at the end of the specified period of continued employment. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if Patriot has accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.09% and 5.97%; dividend yields of 6%; volatility factors of the expected market price of Patriot's common stock of 0.173, and a weighted average expected life of the options of 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Patriot's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options that have vesting periods and are non-transferable. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Patriot's pro forma information is as follows: 1996 1995 ---- ---- Pro forma net income................ $ 37,607 $ 5,193 Pro forma earnings per share: Primary........................... $ 1.05 $ 0.18 A summary of Patriot's stock option activity, and related information for the years ended December 31 is as follows:
1996 1995 ------------------------- -------------------------- Options Weighted Average Options Weighted Average (000's) Exercise Price (000's) Exercise Price ------- ---------------- ------- ---------------- Outstanding, beginning of year........................................... 1,090 $12.00 -- $ -- Granted.................................................................. 386 13.51 1,090 12.00 Exercised................................................................ -- -- -- -- Forfeited................................................................ -- -- -- -- ------- ------ -------- ------------ Outstanding, end of year................................................. 1,476 $12.39 1,090 $12.00 ======= ====== ======= ============ Exercisable at end of year............................................... 401 $12.00 145 $12.00 Weighted average fair value of options granted during year............................................ $ 1.27 $1.19
Exercise prices for options outstanding as of December 31, 1996 ranged from $12.00 to $15.125. The weighted-average remaining contractual life of those options is 9 years. F-20 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Private Placement In May 1996, Patriot sold an aggregate of approximately $40,000 of equity securities to an institutional investor that purchased the securities on behalf of two owners (the "Private Placement"). The securities consisted of 1,622,786 shares of common stock sold at $13.475 per share and 662,391 Preferred OP Units (the "Preferred OP Units") sold at $27.375 per unit. The common stock is of the same class as Patriot's existing common stock and is entitled to the same voting and dividend rights as all outstanding common stock, subject to certain restrictions on the resale of the stock. The Preferred OP Units are entitled to quarterly distributions equal to 103% of the quarterly dividends paid on the common stock. Generally, three years following issuance, the Preferred OP Units may be converted into shares of common stock on a two-for-one basis, subject to certain limitations. After 10 years, Patriot will have the right to exchange all outstanding Preferred OP Units for shares of common stock on a two-for-one basis. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107 requires disclosure about the fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Management estimates that the fair value of (i) accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) the notes receivable approximate carrying value based upon effective borrowing rates for issuance of debt with similar terms and remaining maturities; and (iii) the borrowings under the Line of Credit approximate carrying value as the Line of Credit accrues interest at floating interest rates based on market. 12. NONCASH INVESTING AND FINANCING ACTIVITIES: In connection with the acquisition of hotel properties in 1996, the following assets and liabilities were assumed: Receivables from selling entities........................... $ 537 Inventory................................................... 613 Prepaid expenses and other assets........................... 510 Deferred expenses........................................... 685 Accounts payable and accrued liabilities.................... 4,195 Issuance of OP Units in connection with the acquisition of hotel properties in 1996.................................. $16,391
In connection with Patriot's investment in an unconsolidated subsidiary, Patriot issued a promissory note payable to the unconsolidated subsidiary in the amount of $6,217 which has been included in due to unconsolidated subsidiaries in the accompanying financial statements. In connection with the Initial Offering and acquisition of the Initial Hotels in 1995, the following assets and liabilities were assumed: Deferred expenses, net of write-off of deferred financing costs of $679................................................... $ 127 Prepaid expenses and other assets................................ 313 Accrued real estate and personal property taxes.................. (1,102)
F-21 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) In connection with Patriot's investment in an unconsolidated subsidiary in 1995:
Accrued stock subscription.................................... $ (220) Accrued receivables from unconsolidated subsidiary, net of payables of $43.............................................. 354 In connection with the Initial Offering and acquisition of the Initial Hotels in 1995: Predecessor basis of interests acquired from affiliates....... $ 1,840 Issuance of OP units to non-affiliates........................ 9,363 Distribution of note receivable as consideration.............. (479) Minority interest at closing of the Initial Offering.......... (41,670) Accrued Initial Offering costs................................ (843) Other noncash investing and financing activities: 1996 1995 ------- -------- Dividends and distributions declared and payable........ $13,129 $ 8,154 Issuance of shares to directors......................... 37 37 Accrued acquisition and other costs..................... 844 28
F-22 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 13. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): The unaudited pro forma condensed consolidated statements of operations of Patriot are presented as if the (i) the Initial Offering and the acquisition of the 20 Initial Hotels, (ii) the subsequent investment in 26 additional hotel properties, and (iii) the Private Placement and Follow-on Offering had occurred on January 1, 1995, and the hotels (except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel) had been leased to the Lessees pursuant to the Participating Leases. These unaudited pro forma condensed consolidated statements of operations are not necessarily indicative of what actual results of operations of Patriot would have been assuming such transactions had been completed as of January 1, 1995, nor do they purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Participating lease revenue............ $102,980 $95,017 Interest and other income.............. 621 580 -------- ------- Total revenue........................ 103,601 95,597 -------- ------- Expenses: Real estate and personal property taxes and casualty insurance.......... 10,977 10,109 Ground lease expense................... 1,390 1,368 General and administrative............. 5,192 4,435 Interest expense....................... 16,416 17,467 Depreciation and amortization.......... 25,870 24,096 -------- ------- Total expenses....................... 59,845 57,475 -------- ------- Income before equity in earnings of unconsolidated subsidiaries and minority interests................. 43,756 38,122 Equity in earnings of unconsolidated subsidiaries.......................... 7,217 4,676 -------- ------- Income before minority interests........ 50,973 42,798 Minority interest in Realty Partnership........................... (6,384) (5,363) Minority interest in other partnerships (705) (566) -------- ------- Net income applicable to common shareholders........................... $ 43,884 $36,869 ======== ======= Net income per common share (1)......... $1.01 $0.84 ======== ======= Weighted average number of common shares and common share equivalents outstanding (1)............ 43,614 43,614 ======== =======
- --------------- (1) After restatement to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997 F-23 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 14. SUBSEQUENT EVENTS: Merger Agreement On February 24, 1997, Patriot, Cal Jockey and Bay Meadows entered into an Agreement and Plan of Merger (the "Merger Agreement"), which by its terms supersedes the October 31, 1996 Agreement and more fully details the transactions to be consummated by the parties (see Note 7). Pursuant to the Merger Agreement, Patriot will merge with and into Cal Jockey (the "Merger"), with Cal Jockey being the surviving company. Immediately following the Merger, Cal Jockey's name will be changed to Patriot American Hospitality, Inc. ("New Patriot REIT") and Bay Meadows name will be changed to Patriot American Hospitality Operating Company ("New Patriot Operating Company"). Pursuant to the Merger Agreement, Patriot shareholders will be entitled to receive for each share of common stock, no par value per share, of Patriot held by them at the effective time of the Merger 0.5189 shares of common stock, par value $0.01 per share, of New Patriot REIT and 0.5189 shares of common stock, par value $0.01 per share, of New Patriot Operating Company, which shares will be paired and transferable only as a single unit. Upon completion of the Merger and the related transactions, it is anticipated that New Patriot REIT and New Patriot Operating Company will continue the operations of Patriot, Cal Jockey and Bay Meadows within the paired share ownership structure. Hotel Properties Acquired On January 16, and January 17, 1997, Patriot acquired Resorts Limited Partnership ("RLP"), Carefree Resorts Corporation ("Carefree") and their assets (the "Carefree Acquisition"). The assets of these entities include a 100% fee interest in The Boulders near Scottsdale, Arizona and The Lodge at Ventana Canyon in Tucson, Arizona, and a 50% partnership interest in the entities that own The Peaks Resort and Spa at Telluride, Colorado and Carmel Valley Ranch in Carmel, California. The four resort properties are collectively referred to as the Carefree Resorts. Additionally, on January 17, 1997, Patriot acquired from The Morgan Stanley Real Estate Fund, L.P. and certain of its affiliates the remaining 50% partnership interest in the entities that own The Peaks Resort and Spa and Carmel Valley Ranch (the "Morgan Stanley Acquisition"). The aggregate purchase price of the Carefree Acquisition and the Morgan Stanley Acquisition was approximately $263,600 and consisted of 1,295,077 OP Units valued at approximately $58,662, the assumption of approximately $28,489 of debt related to The Lodge at Ventana Canyon, the assumption of a net working capital liability of approximately $5,900 and approximately $170,549 in cash (including closing costs and loan commitment fees). The cash portion of the purchase price was financed primarily with funds drawn on the Line of Credit. Patriot has leased the Carefree Resorts to PAH RSI, L.L.C. (the "PAH RSI Lessee") for a period of one year pursuant to separate Participating Lease agreements. PAH RSI Lessee is owned and controlled by certain executive officers of Patriot. In connection with the Carefree Acquisition, the Realty Partnership and certain of its subsidiaries acquired certain assets relating to the Carefree Resorts and then sold these assets to PAH RSI Lessee in exchange for promissory notes in an aggregate amount of approximately $2,000. The principal amount of the notes is due in January 1998. Interest at an annual rate of 13% is payable semi-annually commencing July 1, 1997. In addition, PAH RSI Lessee acquired from the Realty Partnership and certain of its subsidiaries certain trade names and the right to receive royalty fees through the issuance of a promissory note for $9,000. The principal amount of the note is due January 17, 2002. Interest at an annual rate of 13% is payable semi-annually commencing July 1, 1997. In addition, certain Carefree employees were retained to provide consulting services for the Carefree Resorts. As consideration for entering into consulting agreements with Patriot, on January 17, 1997, certain Carefree employees F-24 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) were granted nonqualified options to purchase an aggregate of 780,000 shares of Patriot common stock at an exercise price of $19.125 (based on the market price of Patriot's common stock on the date the purchase contract with Carefree Resorts was executed after giving effect to the 2-for-1 stock split). The options to purchase common stock vest annually over a period of seven years. Additionally, in connection with the Carefree Acquisition, certain assets associated with the Carefree Resorts were transferred to PAH Boulders, Inc., a corporation owned by certain executive officers of Patriot (who hold voting common stock representing a 1% economic interest) and the Realty Partnership (who holds non-voting common stock representing a 99% economic interest). PAH Boulders, Inc. acquired the right to receive certain royalty fees through the issuance of a promissory note to the Realty Partnership. On January 14, 1997, Patriot, through the Realty Partnership, acquired the 190-room Radisson Hotel in Overland Park, Kansas for approximately $7,700, which was financed primarily with funds drawn on the Line of Credit. The hotel is leased for a period of ten years to CHC Lease Partners pursuant to a Participating Lease agreement. On January 29, 1997, Patriot, through the Realty Partnership, acquired the 313-room Radisson Hotel in Northbrook, Illinois for approximately $15,600, which was financed primarily with funds drawn on the Line of Credit. The hotel is leased to PAH RSI Lessee for a period of one year pursuant to a Participating Lease agreement. In March 1997, Patriot, through the Realty Partnership, acquired the 112- room Redmont Hotel in Birmingham, Alabama for approximately $2,625. In addition, a separate partnership in which the Realty Partnership holds a 90% general partnership interest and DTR holds a 10% limited partnership interest acquired the 230-room Luxeford Suites Hotel in Minneapolis, Minnesota for approximately $18,500. The acquisition of the hotels was financed primarily with funds drawn on the Line of Credit. The Redmont Hotel is leased to the Grand Heritage Lessee and the Luxeford Suites Hotel is leased to the PAH RSI Lessee for one-year periods pursuant to separate Participating Lease agreements. Line of Credit and Mortgage Note On January 17, 1997, Patriot, through the Realty Partnership, obtained financing from the First National Bank of Commerce, New Orleans, Louisiana in the amount of $13,500. The net proceeds from the financing of approximately $13,388 were used to repay the Line of Credit and release the Bourbon Orleans Hotel from the borrowing base of the Line of Credit. The principal amount of the note along with accrued interest is due January 1, 2004. Interest at a rate of LIBOR plus 2% is payable monthly commencing February 1, 1997 through January 1, 1999. Thereafter, monthly payments of principal and interest are due through maturity. Initial interest is at a rate of 7.469% per annum. The note is collateralized by a first mortgage lien on the Bourbon Orleans Hotel. In January 1997, the maximum amount available under the Line of Credit with PaineWebber Real Estate was increased from $250,000 to $475,000, along with certain other modifications provided, however, the maximum amount that Patriot may draw on the Line of Credit will be reduced by $48,000 as a result of the single asset loans related to the the Wyndham Greenspoint Hotel and the debt assumed in connection with the Carefree Acquisition. Stock Split On January 30, 1997, the Board of Directors declared a 2-for-1 stock split on Patriot's common stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. All references in the consolidated financial statements to the number of shares, per share amounts, and market prices of Patriot's common stock and options to purchase common stock have been restated to reflect the impact of the stock split. Coincident with the 2-for-1 stock split, the OP Unit conversion factor has been changed such that each OP Unit subject to redemption will now be redeemed for cash equal to the value of two shares of Patriot's common stock (or, at Patriot's election, Patriot may purchase each OP Unit offered for redemption for two shares of common stock). F-25 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Potential Acquisitions Patriot has entered into an agreement to acquire Grand Heritage Hotels, a hotel management and marketing company, and other Grand Heritage subsidiaries (including the Grand Heritage Lessee); to purchase the 220-room Ambassador West Hotel in Chicago, Illinois; and to make an investment in the 262-room Broadview Hotel in Wichita, Kansas. The total purchase price of approximately $40,800 is expected to be financed by a combination of common stock, OP Units and/or funds drawn on the Line of Credit. In addition, Patriot has entered into contracts or letters of intent to acquire 14 hotels with an aggregate 4,378 guest rooms for approximately $378,200. Stock Grant Award On March 18, 1997, pursuant to Patriot's 1995 Plan, the Board of Directors awarded 280,000 shares of common stock to one of its executive officers. Patriot will record compensation expense based on the market price at the date of the award. F-26 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS Investment in hotel properties, net of accumulated depreciation of $28,275 in 1997 and $19,815 in 1996.................................... $ 947,722 $641,825 Cash and cash equivalents, including capital improvement reserves of $2,394 in 1997 and $2,458 in 1996...................................... 6,271 6,604 Lease revenue receivable................................................. 14,769 5,351 Receivables from selling entities........................................ 879 847 Investments in unconsolidated subsidiaries............................... 12,140 11,291 Mortgage notes and other receivables from unconsolidated subsidiaries.... 73,622 72,209 Promissory notes and other receivables from Lessees...................... 10,189 631 Inventory................................................................ 1,821 1,648 Deferred expenses, net of accumulated amortization of $1,144 in 1997 and $750 in 1996....................................................... 4,297 3,063 Prepaid expenses and other assets........................................ 10,188 17,462 ---------- -------- Total assets........................................................ $1,081,898 $760,931 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under line of credit and mortgage notes....................... $ 466,712 $214,339 Dividends and distributions payable...................................... 13,938 13,129 Accounts payable and accrued expenses.................................... 10,843 10,117 Due to unconsolidated subsidiaries....................................... 6,098 6,034 Due to PAH RSI, LLC...................................................... 2,655 -- Minority interest in Realty Partnership.................................. 127,262 68,562 Minority interest in other partnerships.................................. 13,774 11,711 Commitments and contingencies............................................ -- -- Shareholders' equity: Preferred stock, no par value, 20,000,000 shares authorized, no shares issued and outstanding.................................... -- -- Common stock, no par value, 200,000,000 shares authorized, shares issued and outstanding were 44,093,496 in 1997 and 43,613,496 in 1996 (1).......................................... -- -- Paid-in capital........................................................ 457,178 442,540 Unearned stock compensation, net of accumulated amortization of $1,760 in 1997 and $1,139 in 1996................................ (16,261) (5,427) Retained earnings (distributions in excess of retained earnings)....... (301) (74) ---------- -------- Total shareholders' equity............................................. 440,616 437,039 ---------- -------- Total liabilities and shareholders' equity.......................... $1,081,898 $760,931 ========== ========
- --------------------- (1) After restatement to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. See accompanying notes. F-27 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------- 1997 1996 --------- --------- Revenue: Participating lease revenue...................................... $35,013 $12,371 Interest and other income........................................ 375 92 ------- ------- Total revenue................................................. 35,388 12,463 ------- ------- Expenses: Real estate and personal property taxes and casualty insurance... 3,201 1,082 Ground lease expense............................................. 345 77 General and administrative....................................... 2,782 941 Interest expense................................................. 7,805 601 Depreciation and amortization.................................... 8,496 2,838 ------- ------- Total expenses................................................ 22,629 5,539 ------- ------- Income before equity in earnings of unconsolidated subsidiaries and minority interest............................................ 12,759 6,924 Equity in earnings of unconsolidated subsidiaries................ 1,021 1,362 ------- ------- Income before minority interest.................................... 13,780 8,286 Minority interest in Realty Partnership.......................... (2,232) (1,158) Minority interest in other partnerships.......................... (200) -- ------- ------- Net income applicable to common shareholders....................... $11,348 $ 7,128 ======= ======= Net income per common share (1).................................... $0.25 $0.24 ======= ======= Weighted average number of common shares and common share equivalents outstanding (1)...................................... 44,552 29,468 ======= =======
- ------------------------- (1) Amounts for 1996 have been restated to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. See accompanying notes. F-28 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------------- 1997 1996 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................... $ 11,348 $ 7,128 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation...................................................... 8,467 2,808 Amortization of unearned stock compensation....................... 621 166 Amortization of deferred loan costs............................... 330 43 Amortization of lease inducement costs............................ 36 23 Other amortization................................................ 29 30 Payment of interest on notes receivable from unconsolidated subsidiaries..................................... 349 1,064 Equity in earnings of unconsolidated subsidiaries................. (1,021) (1,362) Minority interest in income of Realty Partnership................. 2,232 1,158 Minority interest in income of other partnerships................. 200 -- Changes in assets and liabilities: Lease revenue receivable.......................................... (9,418) (19) Receivables from selling entities................................. (23) -- Receivables from Lessees.......................................... (58) -- Prepaid expenses and other assets................................. (1,751) (361) Accounts payable and other accrued expenses....................... 566 (1,664) Due to unconsolidated subsidiaries................................ 64 (12) Due to PAH RSI, LLC............................................... (482) -- --------- -------- Net cash provided by operating activities.................... 11,489 9,002 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of hotel properties and related working capital assets... (191,462) (38,550) Improvements and additions to hotel properties....................... (17,634) (1,198) Collection of receivables from selling entities...................... 10 354 Prepaid acquisition costs............................................ (2,369) (503) Investment in unconsolidated subsidiaries............................ (1,574) -- Investment in promissory notes receivable from Lessees............... (9,500) -- Advances from unconsolidated subsidiaries............................ -- 2,009 Principal payment received on other note receivable.................. -- 50 --------- -------- Net cash used in investing activities........................ (222,529) (37,838) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit and mortgage note.................... 237,272 40,750 Repay borrowings under line of credit................................ (13,388) -- Payment of deferred loan costs....................................... (1,627) (68) Payment of other prepaid expenses.................................... -- (58) Payment of offering costs............................................ (84) (305) Contribution received from minority interest in other partnerships... 1,863 -- Redemption of OP Units............................................... (201) -- Dividends and distributions paid..................................... (13,128) (8,154) --------- -------- Net cash provided by financing activities.................... 210,707 32,165 --------- -------- Net (decrease) increase in cash and cash equivalents................... (333) 3,329 Cash and cash equivalents at beginning of period....................... 6,604 4,769 --------- -------- Cash and cash equivalents at end of period............................. $ 6,271 $ 8,098 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest............................. $ 7,421 $ 620 ========= ========
See accompanying notes. F-29 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. ORGANIZATION AND BASIS OF PRESENTATION: Patriot American Hospitality, Inc. (collectively with its subsidiaries, "Patriot"), a Virginia corporation, was formed April 17, 1995 as a self- administered real estate investment trust ("REIT") for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Patriot completed an initial public offering (the "Initial Offering") of 29,210,000 shares of its common stock and commenced operations. Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole general partner and the holder of a 1.0% general partnership interest in Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). In addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an approximate 82.1% limited partnership interest in the Realty Partnership as of March 31, 1997. At March 31, 1997, Patriot, through the Realty Partnership and other subsidiaries, owned interests in 54 hotels in 21 states with an aggregate of 12,671 guest rooms. Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel, which are separately owned through special purpose corporations, to lessees who are responsible for operating the hotels (the "Lessees"). Patriot leases 25 of its hotel investments to CHC Lease Partners for staggered terms of ten to twelve years pursuant to separate participating leases providing for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Leases"). Nine of the hotels are leased to NorthCoast Hotels, L.L.C. ("NorthCoast Lessee") under similar Participating Lease agreements. Six of the hotels are leased to PAH RSI, L.L.C. ("PAH RSI Lessee") under similar Participating Lease agreements. DTR North Canton, Inc. (the "Doubletree Lessee") leases six hotels; Crow Hotel Lessee, Inc. (the "Wyndham Lessee") leases two hotels; Metro Hotels Leasing Corporation ("Metro Lease Partners") leases one hotel and Grand Heritage Leasing, L.L.C. (the "Grand Heritage Lessee") leases three hotels under similar Participating Lease agreements. The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. The Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel acquisitions were structured without lessees and are managed directly by Holiday Inns, Inc. and Marriott International, Inc., respectively. These unaudited consolidated financial statements include the accounts of Patriot, its wholly-owned subsidiaries and the partnerships in which Patriot owns at least 50% controlling interest. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in Patriot's Annual Report on Form 10-K for the year ended December 31, 1996. Certain prior year amounts have been reclassified to conform to current period presentation. On January 30, 1997, the Board of Directors declared a 2-for-1 stock split on Patriot's common stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. All references in the consolidated financial statements to the number of shares, per share amounts, and market prices of Patriot's common stock and options to purchase common stock related to periods prior to the stock split have been restated to reflect the impact of the stock split. The number of units of limited partnership interest in the Realty Partnership ("OP Units") outstanding did not change after the 2-for-1 stock split. However, the OP Unit conversion factor has changed such that each OP Units subject to redemption will now be redeemed for cash equal to the value of two shares of Patriot's common stock (or, at Patriot's election, Patriot may purchase each OP Unit offered for redemption for two shares of common stock). F-30 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("Statement 128"). Statement 128 specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on Patriot's earnings per share. 2. ACQUISITION OF HOTEL PROPERTIES: On January 16, and January 17, 1997, Patriot acquired Resorts Limited Partnership, Carefree Resorts Corporation and their assets (the "Carefree Acquisition"). The assets of these entities include a 100% fee interest in The Boulders near Scottsdale, Arizona and The Lodge at Ventana Canyon in Tucson, Arizona, and a 50% partnership interest in the entities that own The Peaks Resort and Spa at Telluride, Colorado and Carmel Valley Ranch in Carmel, California. The four resort properties are collectively referred to as the "Carefree Resorts." Additionally, on January 17, 1997, Patriot acquired from The Morgan Stanley Real Estate Fund, L.P. and certain of its affiliates the remaining 50% partnership interest in the entities that own The Peaks Resort and Spa and Carmel Valley Ranch (the "Morgan Stanley Acquisition"). The aggregate purchase price of the Carefree Acquisition and the Morgan Stanley Acquisition was approximately $263,600 and consisted of 1,295,077 OP Units valued at approximately $58,662, the assumption of approximately $28,489 of debt related to The Lodge at Ventana Canyon, the assumption of a net working capital liability of approximately $5,900 and approximately $170,549 in cash (including closing costs and loan commitment fees). The cash portion of the purchase price was financed primarily with funds drawn on the Line of Credit. Patriot has leased the Carefree Resorts to PAH RSI Lessee for a period of one year pursuant to separate Participating Lease agreements. PAH RSI Lessee is owned and controlled by certain executive officers of Patriot. On January 14, 1997, Patriot, through the Realty Partnership, acquired the 190-room Radisson Hotel in Overland Park, Kansas for approximately $7,700, which was financed primarily with funds drawn on the Line of Credit. The hotel is leased for a period of ten years to CHC Lease Partners pursuant to a Participating Lease agreement. On January 29, 1997, Patriot, through the Realty Partnership, acquired the 313-room Radisson Hotel in Northbrook, Illinois for approximately $15,600, which was financed primarily with funds drawn on the Line of Credit. The hotel is leased to PAH RSI Lessee for a period of one year pursuant to a Participating Lease agreement. On March 6, 1997, Patriot, through the Realty Partnership, acquired the 112-room Holiday Inn Redmont Hotel in Birmingham, Alabama for approximately $2,700. The acquisition was financed primarily with funds drawn on the Line of Credit. The hotel is leased to Grand Heritage Lessee for a period of one year pursuant to a Participating Lease agreement. In addition, Patriot, through a consolidated partnership (see Note 6), acquired the 230-room Luxeford Suites Hotel in Minneapolis, Minnesota for approximately $18,600. The hotel is leased to PAH RSI Lessee for a one-year period pursuant to a Participating Lease agreement. The acquisition of the hotel was financed through a combination of cash and funds drawn on the Line of Credit. In March 1997, Patriot paid $475 to NorthCoast Lessee which represents acquisition fees and reimbursement of expenses related to the acquisition of certain hotel properties. 3. INVESTMENTS IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED SUBSIDIARIES: In connection with the Carefree Acquisition, Patriot, through the Realty Partnership, contributed certain assets associated with the Carefree Resorts (including the right to receive certain royalty fees) valued at $1,574 in exchange F-31 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) for an approximate 99% non-voting ownership interest in PAH Boulders, Inc., a Virginia corporation. The controlling 1% voting ownership interest in PAH Boulders, Inc. is held by certain executive officers of Patriot. 4. PROMISSORY NOTES AND OTHER RECEIVABLES FROM LESSEES: PAH RSI Lessee In connection with the Carefree Acquisition, the Realty Partnership and certain of its subsidiaries acquired certain assets relating to the Carefree Resorts and then sold these assets to PAH RSI Lessee for approximately $2,000. In addition, PAH RSI Lessee acquired from the Realty Partnership and certain of its subsidiaries certain trade names and the right to receive royalty fees through the issuance of a promissory note for $9,000. The principal amount of the note is due January 17, 2002. Interest at an annual rate of 13% is payable semi-annually commencing July 1, 1997. NorthCoast Lessee In March 1997, the Realty Partnership advanced $500 to the NorthCoast Lessee for construction of laundry facilities at the Hyatt Regency in Lexington, Kentucky. Interest accrues on the outstanding note balance at a rate of 9.6% per annum. Monthly payments of principal and interest are required in an amount sufficient to pay accrued interest and amortize the principal balance over the three year loan term. The note may be prepaid without penalty. 5. LINE OF CREDIT AND MORTGAGE NOTES: Borrowings under the Line of Credit and Mortgage Notes consist of the following:
March 31, December 31, 1997 1996 --------- ------------ Line of credit..................................... $424,723 $214,339 Mortgage note payable to First National Bank of Commerce....................................... 13,500 -- Senior note payable to FINOVA Capital Corporation.. 18,758 -- Junior note payable to FINOVA Capital Corporation.. 8,830 -- Interest payable to FINOVA Capital Corporation..... 901 -- -------- -------- $466,712 $214,339 ======== ========
Line of Credit In January 1997, the maximum amount available under Patriot's revolving credit facility (the "Line of Credit") with PaineWebber Real Estate Securities, Inc. was increased from $250,000 to $475,000, along with certain other modifications provided, however, the maximum amount that Patriot may draw on the Line of Credit will be reduced by $22,000 as a result of the single asset loan related to the Wyndham Greenspoint Hotel. The Line of Credit bears interest on the outstanding balance at a rate per annum equal to 30-day LIBOR plus 1.90%. LIBOR was 5.44% at March 31, 1997 and 5.56% at December 31, 1996. The weighted average interest rate incurred by Patriot under this borrowing during the first quarter of 1997 and 1996 was 7.40% and 7.56%, respectively. The Line of Credit requires Patriot to maintain certain financial ratios with respect to liquidity, loan to value and net worth and imposes certain limitations on acquisitions. Patriot is in compliance with such covenants at March 31, 1997. The unused commitment under the Line of Credit at March 31, 1997, is approximately $24,300, subject to certain restrictions and provisions of the Line of Credit Agreement. F-32 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Mortgage Notes On January 17, 1997, Patriot, through the Realty Partnership, obtained financing from the First National Bank of Commerce, New Orleans, Louisiana in the amount of $13,500. The net proceeds from the financing of approximately $13,388 were used to repay the Line of Credit and release the Bourbon Orleans Hotel from the borrowing base of the Line of Credit. The principal amount of the note along with accrued interest is due January 1, 2004. Interest at a rate of LIBOR plus 2% is payable monthly commencing February 1, 1997 through January 1, 1999. Thereafter, monthly payments of principal and interest are due through maturity. The weighted average interest rate incurred by Patriot under this borrowing during the first quarter of 1997 was 7.49%. The note is collateralized by a first mortgage lien on the Bourbon Orleans Hotel. In connection with the Carefree Acquisition, Patriot assumed certain mortgage debt in the amount of $28,489 which is collateralized by the property and equipment at The Lodge at Ventana Canyon. The senior and junior notes payable to FINOVA Capital Corporation ("FINOVA") provide for annual interest to accrue at a rate of 6.5% (computed based on stated interest payment amounts); however, through March 1, 1998, actual interest paid is dependent on the attainment of certain levels of annual cash flows, as defined, of The Lodge at Ventana Canyon. Any interest which accrues on the notes which is unpaid during this period is added to the senior note balance. If The Lodge at Ventana Canyon is sold after March 1, 2000 and distributions of the net sales proceeds, as defined, are made to FINOVA in accordance with the terms specified in the related purchase agreement, any remaining unpaid balance on the junior note may be deemed discharged. Except as noted above, all unpaid principal and interest is due upon maturity on March 1, 2005. Patriot also has a construction loan available from FINOVA which was assumed in connection with the acquisition of The Lodge at Ventana Canyon. Under the terms of the construction loan agreement, FINOVA is required to loan to Patriot a maximum of $4,500 (approximately 60% of the budgeted construction cost) for the planned expansion of The Lodge at Ventana Canyon. No funds have been drawn under this agreement by Patriot as of March 31, 1997. 6. MINORITY INTERESTS: Minority Interest in Realty Partnership During the first quarter of 1997, the Realty Partnership issued an additional 10,188 OP Units valued at approximately $370 in connection with The Tutwiler Hotel acquisition, and 1,295,077 OP Units valued at approximately $58,662 in connection with the Carefree Resorts acquisition. In accordance with their redemption rights, in January 1997 certain partners elected to redeem a total of 4,255 OP Units for a total of $201 in cash (based upon the market price of Patriot's common stock on the effective dates of the redemptions). The Realty Partnership has 3,818,818 OP Units and 662,391 Preferred OP Units outstanding as of March 31, 1997 (excluding OP Units held by Patriot). Minority Interest in Other Partnerships In February 1997, Patriot entered into a partnership agreement in which the Realty Partnership owns a 90% general partnership interest and DTR PAH Holding, Inc. ("DTR"), an affiliate of Doubletree Hotels Corporation, owns a 10% limited partnership interest. The partnership, PAH-DT Minneapolis Partnership, L.P. ("PAH-DT Minneapolis"), was formed for the purpose of acquiring certain hotel properties. F-33 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) On March 3, 1997, PAH-DT Minneapolis acquired the 230-room Luxeford Suites Hotel in Minneapolis, Minnesota for approximately $18,600. The acquisition was financed through cash contributions to the partnership of approximately $16,737 by Realty Partnership and $1,863 by DTR. Realty Partnership's contribution was financed primarily with funds drawn on the Line of Credit. 7. SHAREHOLDERS' EQUITY: Capital Stock On January 30, 1997, Patriot declared a 2-for-1 stock split effected in the form of a stock dividend which was distributed on March 18, 1997 to shareholders of record on March 7, 1997. On March 24, 1997, Patriot declared a $0.2625 per common share dividend to holders of record on March 31, 1997. Concurrent with the dividend declaration, the Realty Partnership authorized distributions in the same amount. The dividend and distributions were paid on April 30, 1997. Patriot paid dividends of $0.24 per common share for the first quarter of 1996. Stock Grant Awards On March 18, 1997, pursuant to Patriot's 1995 Incentive Plan, the Board of Directors awarded 480,000 shares of common stock to two of its executive officers. Patriot has recorded $11,455 (the aggregate value of Patriot's common stock based on the market price at the date of the award) as unearned stock compensation which is being amortized over the vesting period of three to four years. For the first quarters of 1997 and 1996, $621 and $166, respectively, of amortization of stock compensation related to stock grants awarded to Patriot's directors, officers and certain employees is included in general and administrative expense in the accompanying consolidated financial statements. Stock Option Awards In connection with the Carefree Acquisition, on January 17, 1997, certain Carefree owners who are also Carefree employees were granted nonqualified options to purchase an aggregate of 780,000 shares of Patriot common stock at an exercise price of $19.125 (based on the market price of Patriot's common stock on the date the purchase contract with Carefree Resorts was executed after giving effect to the 2-for-1 stock split) as additional consideration for entering into the purchase and sale agreement for the Carefree Resorts. The estimated fair value of the options issued, in the aggregate amount of $3,266, was recorded as additional purchase consideration for the acquisition of the Carefree Resorts. The options to purchase common stock vest annually over a period of four years. F-34 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 8. NONCASH INVESTING AND FINANCING ACTIVITIES: In connection with the acquisition of hotel properties, the following assets and liabilities were assumed:
1997 1996 -------- -------- Receivables from selling entities................................ $ (19) $ (78) Inventory........................................................ (156) - Prepaid expenses and other assets................................ (23) (151) Mortgage debt.................................................... 28,489 - Accounts payable and accrued liabilities......................... (270) 267 Due to PAH RSI Lessee for working capital liabilities assumed.... 3,712 - Reclassification of prepaid acquisition costs to property costs.. $11,392 $ - Capital lease obligation acquired................................ $ 430 $ - Issuance of options in connection with the acquisition of hotel properties............................................ $ 3,266 $ - Issuance of OP Units in connection with the acquisition of hotel properties............................................... $59,032 $4,000
9. COMMITMENTS AND CONTINGENCIES: Business Combination Patriot has entered into an Agreement and Plan of Merger (the "Merger Agreement") with California Jockey Club ("Cal Jockey") and Bay Meadows Operating Company ("Bay Meadows") pursuant to which, subject to stockholder approval and other conditions, Patriot will merge with and into Cal Jockey (the "Merger"), with Cal Jockey being the surviving company. Cal Jockey's shares of common stock are paired and trade together with the shares of common stock of Bay Meadows as a single unit pursuant to a stock pairing arrangement (referred to herein as a "paired share" ownership structure). Immediately following the Merger, Cal Jockey's name will be changed to Patriot American Hospitality, Inc. ("New Patriot REIT") and Bay Meadows name will be changed to Patriot American Hospitality Operating Company ("New Patriot Operating Company"). Pursuant to the Merger Agreement, Patriot shareholders will be entitled to receive for each share of common stock, no par value per share, of Patriot held by them at the effective time of the Merger 0.51895 shares of common stock, par value $0.01 per share, of New Patriot REIT and 0.51895 shares of common stock, par value $0.01 per share, of New Patriot Operating Company, which shares will be paired and transferable only as a single unit. Upon completion of the Merger and the related transactions, it is anticipated that New Patriot REIT and New Patriot Operating Company will continue the operations of Patriot, Cal Jockey and Bay Meadows within the paired share ownership structure. Development Fees The Carefree Resorts which are leased to PAH RSI Lessee are managed by Resorts Services, Inc., an Arizona corporation. In connection with the acquisition of the Carefree Resorts, Patriot agreed to pay certain executive officers and employees a development fee equal to 3% of the total development cost, as defined, of certain new resort construction. F-35 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Contingencies Except as described in Note 11, Patriot currently is not subject to any material legal proceedings or claims nor, to management's knowledge, are any material legal proceedings or claims currently threatened. 10. PRO FORMA FINANCIAL INFORMATION: The following unaudited pro forma condensed consolidated statements of operations of Patriot are presented as if (i) the acquisition of the 54 hotels owned by Patriot as of March 31, 1997, and (ii) the private placement of equity securities and public offering of Patriot's common stock which occurred during 1996 had occurred on January 1, 1996, and the hotels (except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel) had been leased to the Lessees pursuant to the Participating Leases. These unaudited pro forma condensed consolidated statements of operations are not necessarily indicative of what actual results of operations of Patriot would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods.
THREE MONTHS ENDED MARCH 31, --------------------------------------- 1997 1996 ------------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Participating lease revenue..................................... $36,551 $35,336 Interest and other income....................................... 430 392 ------- ------- Total revenue............................................... 36,981 35,728 ------- ------- Expenses: Real estate and personal property taxes and casualty insurance.. 3,380 3,365 Ground lease expense............................................ 345 335 General and administrative...................................... 3,461 2,158 Interest expense................................................ 8,840 9,011 Depreciation and amortization................................... 9,064 8,900 ------- ------- Total expenses.............................................. 25,090 23,769 ------- ------- Income before equity in earnings of unconsolidated subsidiaries and minority interest........................................... 11,891 11,959 Equity in earnings of unconsolidated subsidiaries.............. 1,021 1,185 ------- ------- Income before minority interests................................... 12,912 13,144 Minority interest in Realty Partnership......................... (2,145) (2,184) Minority interest in other partnerships......................... (219) (216) ------- ------- Net income applicable to common shareholders....................... $10,548 $10,744 ======= ======= Net income per common share (1).................................... $0.23 $0.24 ======= ======= Weighted average number of common shares and common share equivalents outstanding (1)........................ 44,919 44,919 ======= =======
- ---------------------- (1) The 1996 amounts have been restated to reflect the impact of the 2-for-1 stock split effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. F-36 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 11. SUBSEQUENT EVENTS: Acquisition of Hotel Properties On April 14, 1997, a separate partnership in which the Realty Partnership holds a 90% general partnership interest and DTR holds a 10% limited partnership interest acquired the 298-room Sheraton Park Place Hotel in Minneapolis, Minnesota for a purchase price of approximately $17,000 in cash. The hotel has been leased to PAH RSI Lessee for a period of one year pursuant to a Participating Lease agreement. Potential Acquisitions On April 14, 1997, Patriot entered into a merger agreement and a related stock purchase agreement (collectively, the "Wyndham Merger Agreement") pursuant to which Wyndham Hotel Corporation ("Wyndham") will merge with and into New Patriot REIT with New Patriot REIT being the surviving company (the "Wyndham Merger"). As a result of the Wyndham Merger, New Patriot REIT will acquire all of the assets and liabilities of Wyndham, including Wyndham's portfolio of 23 owned and leased hotels, with an aggregate of 4,877 rooms, as well as Wyndham's 79 managed and franchised properties and the Wyndham, Wyndham Garden and Wyndham Hotels & Resorts proprietary brand names. Pursuant to the Wyndham Merger Agreement, upon consummation of the Wyndham Merger, each outstanding share of common stock of Wyndham ("Wyndham Common Stock") will be converted into the right to receive 0.712 paired shares of New Patriot REIT common stock and New Patriot Operating Company common stock (the "Wyndham Exchange Ratio"), subject to certain adjustments. In lieu of receiving paired shares, Wyndham stockholders have the right to elect to receive cash (in an amount per share based upon the Wyndham Exchange Ratio, as it may be adjusted, and the average closing price of the paired shares over the five trading days immediately preceding the closing date of the Wyndham Merger) up to a maximum aggregate amount of $100,000. If stockholders holding shares of Wyndham Common Stock with a value in excess of $100,000 elect to receive cash, such cash will be allocated on a pro rata basis among such stockholders. In connection with the execution of the Wyndham Merger Agreement, Patriot also entered into agreements with partnerships affiliated with members of the Trammell Crow family providing for the acquisition by New Patriot REIT of 11 full-service Wyndham-branded hotels with 3,072 rooms for approximately $331,664 in cash, plus approximately $14,000 in additional consideration if two hotels meet certain operations targets (the "Crow Acquisition" and, collectively with the Wyndham Merger, the "Proposed Wyndham Transactions"). The Wyndham Merger and the Crow Acquisition, which will be consummated concurrently, are subject to various conditions including, without limitation, the consummation of the Merger and approval of the Proposed Wyndham Transactions by the stockholders of New Patriot REIT, New Patriot Operating Company and Wyndham. It is currently anticipated that the stockholder meetings to approve the Proposed Wyndham Transactions will occur in the fourth quarter of 1997. In addition, Patriot has entered into contracts or letters of intent to purchase 14 hotels with an aggregate of 3,506 rooms for a combined purchase price (excluding closing costs and other acquisition-related expenses) of approximately $268,500. In addition, Patriot has entered into an agreement to acquire Grand Heritage Hotels, a hotel management and marketing company, and other Grand Heritage subsidiaries, including an investment in one hotel property, for a total acquisition price estimated to be approximately $25,250. These acquisitions are subject to a number of conditions including completion of Patriot's due diligence. Line of Credit Patriot is currently in negotiations with certain lenders regarding expanding and replacing the Line of Credit with a new credit facility with availability of up to approximately $1,400,000 (the "New Credit Facility"). This credit facility will consist of a $600,000 revolving line of credit and two term loans (each for $300,000). It is anticipated that these three portions of the New Credit Facility will be secured by substantially all of the assets and properties of Patriot (following the Merger, the assets and properties of New Patriot REIT and New Patriot Operating Company). Additionally, the New Credit Facility will include an additional $200,000 term loan which can be drawn upon in F-37 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) connection with the Proposed Wyndham Transactions and the acquisition of certain other properties and may either be secured by specific assets, subordinate to the rest of the New Credit Facility, or unsecured. While negotiations concerning the New Credit Facility are ongoing, there can be no assurance that such a credit facility will be obtained, or if obtained, when it will become effective or available or what the specific terms of such credit facility will be. Legal Proceedings On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et. al., was filed in the Delaware Court of Chancery in and for New Castle County, purportedly as a class action on behalf of Wyndham stockholders, against Wyndham, Patriot and the members of the Board of Directors of Wyndham. The complaint alleges that the Wyndham Board of Directors breached its fiduciary duties owed to Wyndham's public stockholders in connection with the Board of Directors' approval of the Wyndham Merger. In particular, the complaint alleges that the Wyndham Merger was negotiated at the expense of Wyndham's public stockholders, and that the Wyndham Board of Directors permitted Patriot to negotiate on more favorable terms the Crow Acquisition with members of the Trammell Crow family. Patriot is alleged to have knowingly aided and abetted the alleged breach of fiduciary duties. The complaint seeks to enjoin, preliminarily and permanently, consummation of the Wyndham Merger under the terms presently proposed and also seeks unspecified damages. Patriot denies the allegations in the complaint and expects to defend the action vigorously. F-38 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Partners of CHC Lease Partners: In our opinion, the accompanying balance sheets and the related statements of operations, partners' capital and of cash flows present fairly, in all material respects, the financial position of CHC Lease Partners at December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996 and the period inception (October 2, 1995) to December 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP Miami, Florida February 13, 1997, except as to note 4, which is as of March 18, 1997 F-39 CHC LEASE PARTNERS BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents..................... $ 11,096 $ 9,385 Accounts receivable, net of allowance for doubtful accounts of $159 and $142 at December 31, 1996 and 1995, respectively........................ 6,895 5,833 Due from affiliates........................... 341 46 Inventories................................... 2,588 2,136 Prepaid expenses.............................. 1,189 441 -------- -------- Total current assets................... 22,109 17,841 Investments...................................... 5,100 5,100 Deposits......................................... 272 71 -------- -------- Total assets........................... $ 27,481 $ 23,012 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Current Liabilities: Accounts payable.............................. $ 4,656 $ 2,202 Accrued lease payments due to Patriot American Hospitality Partnership, L.P. ........................ 3,829 2,260 Due to affiliates............................. 57 184 Accrued payroll............................... 2,922 2,219 Taxes payable................................. 1,452 1,556 Guest deposits................................ 2,412 958 Accrued expenses and other liabilities.................................. 2,611 2,012 -------- -------- Total current liabilities.............. 17,939 11,391 Due to Patriot American Hospitality Partnership, L.P................................ 809 1,035 Lease inducement................................. 1,546 977 -------- -------- Total liabilities...................... 20,294 13,403 Commitments and contingencies (Note 2)........... -- -- Partners' capital................................ 7,187 9,609 -------- -------- Total liabilities and partners' capital..................... $ 27,481 $ 23,012 ======== ========
The accompanying notes are an integral part of these financial statements. F-40 CHC LEASE PARTNERS STATEMENTS OF OPERATIONS (IN THOUSANDS)
TWELVE INCEPTION MONTHS (OCTOBER 2, ENDED 1995) TO DECEMBER 31, DECEMBER 31, 1996 1995 ---------- ---------- Revenue: Rooms....................................... $ 109,537 $ 21,092 Food and beverage........................... 36,225 8,524 Conference center........................... 2,354 576 Telephone and other......................... 10,175 1,703 ---------- ---------- Total revenue........................... 158,291 31,895 ---------- ---------- Expenses: Departmental costs and expenses............. 58,153 11,949 Participating lease payments................ 54,186 10,432 General and administrative.................. 13,779 2,655 Repairs and maintenance..................... 7,213 1,436 Utilities................................... 7,215 1,290 Marketing................................... 14,880 2,865 Insurance................................... 893 191 ---------- ---------- Total expenses.......................... 156,319 30,818 ---------- ---------- Income before lessee income (expense)...... 1,972 1,077 ---------- ---------- Limited partnership distributions, interest and miscellaneous income ........... 1,401 198 Management fees............................... (2,542) (536) Lessee general and administrative expenses.... (1,163) (230) ---------- ---------- Total lessee income (expense).......... (2,304) (568) ---------- ---------- Net income (loss)...................... $ (332) $ 509 ========== ==========
The accompanying notes are an integral part of these financial statements. F-41 CHC LEASE PARTNERS STATEMENTS OF PARTNERS' CAPITAL FOR THE PERIOD INCEPTION (OCTOBER 2, 1995) TO DECEMBER 31, 1995 AND THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (IN THOUSANDS) Capitalization at inception.......................... $ 9,100 Net income........................................... 509 ------- Balance, December 31, 1995...................... 9,609 Net loss............................................. (332) Distributions........................................ (2,090) ------- Balance, December 31, 1996...................... $ 7,187 =======
The accompanying notes are an integral part of these financial statements. F-42 CHC LEASE PARTNERS STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TWELVE INCEPTION MONTHS (OCTOBER 2, ENDED 1995) TO DECEMBER 31, DECEMBER 31, 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................. $ (332) $ 509 Adjustments to reconcile net income (loss) to net cash (used in)/provided by operating activities: Recognition of lease inducement........... (116) (23) Provision for losses on accounts receivable.............................. 17 142 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable....................... 678 (3,282) Due from affiliates....................... (295) (46) Inventories............................... 247 (101) Prepaid expenses and other assets......... (949) (178) Increase (decrease) in: Accounts payable.......................... (1,918) 1,306 Accrued lease payments due to Patriot American Hospitality Partnership, L.P... 1,569 2,260 Due to affiliates......................... (127) 184 Accrued payroll........................... 703 1,219 Taxes payable............................. (104) 1,265 Guest deposits............................ 41 (182) Accrued expenses and other liabilities.... 452 1,517 ----------- ----------- Net cash (used in)/provided by operating activities...................................... (134) 4,590 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired at inception................ -- 795 Acquired cash from new operating leases... 3,935 -- ----------- ----------- Net cash provided by investing activities........ 3,935 795 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Initial capitalization........................ -- 4,000 Partnership distributions..................... (2,090) -- ----------- ----------- Net cash (used in)/provided by financing activities...................................... (2,090) 4,000 ----------- ----------- Net increase in cash and cash equivalents........ 1,711 9,385 Cash and cash equivalents at beginning of period....................................... 9,385 -- ----------- ----------- Cash and cash equivalents at end of period....... $ 11,096 $ 9,385 =========== ===========
The accompanying notes are an integral part of these financial statements. F-43 CHC LEASE PARTNERS STATEMENTS OF CASH FLOWS - CONTINUED (IN THOUSANDS)
TWELVE INCEPTION MONTHS (OCTOBER 2, ENDED 1995) TO DECEMBER 31, DECEMBER 31, 1996 1995 ----------- ----------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capitalization in units of limited partnership interest........................ $ -- $ 5,100 =========== =========== Assumption of assets and liabilities upon consummation of participating lease agreements with Patriot American Hospitality Partnership, L.P.: Acquired cash................................. $ 3,935 $ 795 Inventories................................... 699 2,035 Accounts receivable........................... 1,757 2,693 Prepaid expenses and other assets............. -- 334 Lease inducement.............................. (685) (1,000) Due to Patriot American Hospitality Partnership, L.P............................. 79 (1,035) Accounts payable.............................. (4,372) (896) Accrued payroll............................... -- (1,000) Taxes payable................................. -- (291) Accrued expenses and other liabilities........ -- (495) Guest deposits................................ (1,413) (1,140) ----------- ----------- Net assets.................................. $ -- $ -- =========== ============
The accompanying notes are an integral part of these financial statements. F-44 CHC LEASE PARTNERS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION CHC Lease Partners was formed as the initial lessee to lease and operate certain hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). At December 31, 1996, Patriot American Hospitality, Inc. ("Patriot"), through its subsidiaries, owns approximately 87.3% of the Realty Partnership. CHC Lease Partners, a general partnership, is owned jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC International, Inc. ("CHC") and by Gencom Lessee, L.P., an affiliate of a principal of the Gencom group of companies. CHC Lease Partners began operating the twenty initial hotels on October 2, 1995. During 1996, CHC Lease Partners and the Realty Partnership entered into additional operating leases for four hotels acquired by the Realty Partnership. The leases are substantially similar to the other lease agreements between CHC Lease Partners and the Realty Partnership. At December 31, 1996, CHC Lease Partners leases twenty-four hotels. The hotels are leased by the Realty Partnership to CHC Lease Partners under separate participating operating lease agreements which contain cross- default provisions. These leases, which require CHC Lease Partners to maintain minimum levels of net worth and working capital, have an average term of eleven years and require payment of the greater of (1) minimum base rent or (2) participating rent based upon certain percentages of room revenue, food and beverage revenue, conference center revenue and telephone and other revenues of each of the hotels. The hotels leased by CHC Lease Partners consist of eighteen full service hotels, four limited service hotels, one executive conference center and one resort. Twenty of the twenty-four hotels are operated under franchise licenses with nationally recognized hotel companies. The cost of obtaining the franchise licenses is paid by the Realty Partnership while continuing franchise fees are paid by CHC Lease Partners. Franchise and related fees generally range from 3.5% to 8.0% of room revenues for the hotels under franchise licenses. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with generally accepted accounting principles. Significant accounting policies are summarized below. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year CHC Lease Partners' fiscal year ends on November 30, however, these financial statements have been prepared as of and for the twelve months ended December 31, 1996 and as of December 31, 1995 and for the period inception (October 2, 1995) to December 31, 1995. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. Inventories Inventories, consisting of food, beverages, china, linens, silverware and glassware, are stated at the lower of cost (first-in, first-out) or market. F-45 CHC LEASE PARTNERS NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) Investments Investments consist of 250,001 units of limited partnership interest in the Realty Partnership ("OP Units"). The OP Units are subject to redemption rights which became exercisable, subject to certain restrictions, on October 2, 1996. The redemption rights require the Realty Partnership to redeem each OP Unit for cash equal to the value of two shares of Patriot common stock or, at Patriot's election, for two shares of Patriot common stock. The OP Units are also subject to restrictions as to transfer until October 2, 1997. Under the participating lease agreements CHC Lease Partners has collaterally assigned 166,668 OP Units to the Realty Partnership. The OP Units are stated at cost which is based upon the fair market value of Patriot common stock at the date of issue with an appropriate discount for restrictions imposed on the OP Units. Revenue Recognition Revenue is recognized upon performance of hotel-related services and delivery of food and beverages. Credit evaluations are performed and an allowance for doubtful accounts is provided against accounts receivable which are estimated to be uncollectible. Income Taxes Under the provisions of the Internal Revenue Code and applicable state income tax law, CHC Lease Partners is not subject to taxation on income. The federal and state income tax consequences of CHC Lease Partners' profits and losses accrue to the partners. Concentration of Credit Risk Financial instruments which potentially subject CHC Lease Partners to concentrations of credit risk consist principally of cash balances with banks in excess of Federal Deposit Insurance Corporation ("FDIC") insured limits, accounts receivable from hotel customers and investments in OP Units. CHC Lease Partners places its cash with high quality financial institutions, however, at December 31, 1996 CHC Lease Partners has cash balances with banks in excess of FDIC insured limits. Management believes the credit risk related to these deposits is minimal. Concentrations of credit risk with respect to accounts receivable from hotel customers are limited due to the large number of customers and their dispersion across many hotels and geographies. Management believes the credit risk related to the OP Units is minimal. Fair Value of Financial Instruments The following notes summarize the major methods and assumptions used in estimating fair values of financial instruments: Cash and Cash Equivalents. The carrying amount approximates fair value due to the relatively short period to maturity of these instruments. Accounts Receivable. The carrying amount approximates fair value. Investments. The fair value of the OP Units is estimated based upon the quoted market price of Patriot common stock less an appropriate discount for the restrictions imposed on the OP Units. The carrying amount of the OP Units at December 31, 1995 approximates fair value. The estimated fair value of the OP Units at December 31, 1996 is $9,970. F-46 CHC LEASE PARTNERS NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) 2. COMMITMENTS AND RELATED PARTY TRANSACTIONS: CHC Lease Partners at December 31, 1996 has future lease commitments to the Realty Partnership under the participating lease agreements through the year 2008. Minimum future rental payments under these noncancellable operating leases are as follows: Year Ending December 31, Amount ------------------------ -------- 1997.................... $ 44,437 1998.................... 44,771 1999.................... 45,106 2000.................... 45,445 2001.................... 45,786 Thereafter.............. 237,100 -------- $462,645 ======== Under the participating lease agreements for the twenty initial hotels, CHC Lease Partners is obligated to return the inventory to the Realty Partnership at the end of each lease term less a total of $1,000, which is accounted for as a lease inducement. Additionally, a lease inducement of $685 was received in 1996 related to leasing one resort property. These lease inducements are recorded as reductions on a straight-line basis to participating lease payments over the lives of the participating lease agreements. Exclusive of the lease inducements, CHC Lease Partners incurred base rents of $35,470 and $6,801 and participating rents of $18,832 and $3,654 for the twelve months ending December 31, 1996 and for the period inception (October 2, 1995) to December 31, 1995, respectively. CHC Lease Partners owed the Realty Partnership $3,829 and $2,260 at December 31, 1996 and 1995, respectively, for rents due under the terms of the participating leases. Lease inducements were $1,546 and $977 and inventory due to the Realty Partnership was $809 and $1,035 at December 31, 1996 and 1995, respectively. CHC Lease Partners entered into management agreements with hotel management subsidiaries of CHC and GAH-II, L.P. ("GAH"), an affiliate of CHC and the Gencom group of companies, to perform all management functions necessary to operate 23 of the 24 hotels leased by CHC Lease Partners. The terms of these agreements range from ten to twelve years with management fees due based upon a percentage of gross revenue of each of the hotels. The fees under these management agreements are subordinate to CHC Lease Partners' obligations to the Realty Partnership under the participating lease agreements. If, after payment of management fees at the contract rate, CHC Lease Partners would incur an operating loss under any of the participating lease agreements in any year, CHC and GAH would be required to refund and forego management fees for each of the hotels which are deficient in participating lease payments up to the amount of the operating loss. If after the management fees are refunded and foregone, CHC Lease Partners would still incur an operating loss under any of the participating lease agreements, CHC and GAH would be required to pay CHC Lease Partners up to 50% of the management fees earned by CHC and GAH, respectively. Management fees incurred under these management agreements were $2,274 and $460 for the twelve months ended December 31, 1996, and the period inception (October 2, 1995) to December 31, 1995, respectively. These management fees are net of management fees refunded and foregone by CHC and GAH of $1,784 and $274 for the twelve months ended December 31, 1996 and the period inception (October 2, 1995) to December 31, 1995, respectively. Included in due to (from) affiliates were amounts for management fees under these management agreements due (from) CHC of $(300) and $(46) and due to (from) GAH of $(41) and $43 at December 31, 1996 and 1995, respectively. CHC Lease Partners fully reimburses CHC for office space it occupies within the corporate offices of CHC and for payroll and related costs CHC and GAH incur on behalf of CHC Lease Partners. These costs amounted to $615 and $141 for the twelve months ended December 31, 1996 and for the period inception (October 2, 1995) to December 31, 1995, respectively. At December 31, 1996 and 1995, CHC Lease Partners owed CHC and GAH in the aggregate $57 and $141, respectively, which is included in due to affiliates. F-47 CHC LEASE PARTNERS NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) 3. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): The unaudited pro forma statements of operations are presented as if the leases and the operation of the twenty-four hotels had commenced on January 1, 1995. The unaudited pro forma statements of operations are not necessarily indicative of what the actual results of operations of CHC Lease Partners would have been assuming such operations had commenced as of January 1, 1995, nor do they purport to represent the results of operations for future periods. Pro forma lessee expenses represent management fees and estimated lessee overhead expenses and exclude pro forma distribution income on 250,001 OP Units and interest income associated with working capital balances.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- (IN THOUSANDS) Revenue: Rooms......................................... $ 118,652 $ 113,022 Food and beverage............................. 41,835 43,185 Conference center............................. 2,354 2,434 Telephone and other........................... 12,361 12,016 ---------- ---------- Total revenue............................. 175,202 170,657 ---------- ---------- Expenses: Departmental costs and expenses............... 66,606 66,888 Participating lease payments.................. 57,381 52,760 General and administrative.................... 15,944 14,614 Repairs and maintenance....................... 8,285 8,695 Utilities..................................... 8,174 7,737 Marketing..................................... 16,668 16,405 Insurance..................................... 1,015 1,325 ---------- ---------- Total expenses............................ 174,073 168,424 ---------- ---------- Income before lessee expenses.................... 1,129 2,233 Lessee expenses.................................. (2,234) (2,278) ---------- ---------- Net loss...................................... $ (1,105) $ (45) ========== ==========
4. SUBSEQUENT EVENTS: In January 1997, CHC Lease Partners and the Realty Partnership entered into an operating lease for a hotel acquired by the Realty Partnership. The lease is substantially similar to the other participating lease agreements between CHC Lease Partners and the Realty Partnership except the lease may be terminated due to the sale of the hotel with the Realty Partnership not being obligated to CHC Lease Partners to replace the operating lease. The base rent for the hotel is anticipated to be approximately $1,350 for the twelve months ended December 31, 1997, subject to completion of planned renovations and other activities. On January 30, 1997, the Board of Directors of Patriot declared a 2-for-1 stock split on Patriot's common stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. Coincident with the 2-for-1 stock split, the OP Unit conversion factor has changed such that each OP Unit subject to redemption will now be redeemed for cash equal to the value of two shares of Patriot's common stock (or, at Patriot's election, Patriot may purchase each OP Unit offered for redemption for two shares of Patriot's common stock). All references in the financial statements to the OP Unit conversion factor have been restated to reflect the impact of Patriot's stock split. F-48 CHC LEASE PARTNERS BALANCE SHEETS (IN THOUSANDS)
MARCH 31, 1997 DECEMBER 31, 1996 --------------- ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................... $10,368 $11,096 Accounts receivable, net of allowance for doubtful accounts of $138 and $159 at March 31, 1997 and December 31, 1996, respectively............................ 11,092 6,895 Due from affiliates.......................................... 537 341 Inventories.................................................. 2,666 2,588 Prepaid expenses............................................. 1,801 1,189 ------- ------- Total current assets.................................... 26,464 22,109 Investments....................................................... 5,100 5,100 Deposits.......................................................... 321 272 ------- ------- Total assets............................................... $31,885 $27,481 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable............................................. $ 5,207 $ 4,656 Accrued lease payments due to Patriot American Hospitality Partnership, L.P............................... 5,841 3,829 Due to affiliates............................................ 126 57 Accrued payroll.............................................. 3,305 2,922 Taxes payable................................................ 1,974 1,452 Guest deposits............................................... 2,218 2,412 Accrued expenses and other liabilities....................... 3,363 2,611 ------- ------- Total current liabilities............................... 22,034 17,939 Due to Patriot American Hospitality Partnership, L.P.............. 799 809 Lease inducement.................................................. 1,509 1,546 ------- ------- Total liabilities....................................... 24,342 20,294 Commitments and contingencies (Note 2)............................ -- -- Partners' capital................................................. 7,543 7,187 ------- ------- Total liabilities and partners' capital................. $31,885 $27,481 ======= =======
The accompanying notes are an integral part of these financial statements. F-49 CHC LEASE PARTNERS STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------- 1997 1996 --------- --------- Revenue: Rooms............................................. $32,216 $24,260 Food and beverage................................. 11,665 7,998 Conference center................................. 748 645 Telephone and other............................... 3,122 2,295 ------- ------- Total revenue................................... 47,751 35,198 ------- ------- Expenses: Departmental costs and expenses................... 17,417 12,765 Participating lease payments...................... 15,514 11,918 General and administrative........................ 4,167 2,883 Repairs and maintenance........................... 2,160 1,544 Utilities......................................... 1,997 1,496 Marketing......................................... 4,544 3,174 Insurance......................................... 254 220 ------- ------- Total expenses.................................. 46,053 34,000 ------- ------- Income before lessee income (expense)........... 1,698 1,198 ------- ------- Limited partnership distributions, interest and income miscellaneous........................... 345 210 Management fees................................... (520) (597) Lessee general and administrative expenses........ (167) (178) ------- ------- Total lessee expense........................... (342) (565) ------- ------- Net income..................................... $ 1,356 $ 633 ======= =======
The accompanying notes are an integral part of these financial statements. F-50 CHC LEASE PARTNERS STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------ 1997 1996 ------- ------- Cash flows from operating activities: Net income........................................................... $ 1,356 $ 633 Adjustments to reconcile net income to net cash provided by operating activities: Recognition of lease inducement.................................. (37) (23) Provision for losses on accounts receivable...................... 17 46 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable.............................................. (4,208) (897) Due from affiliates.............................................. (196) -- Inventories...................................................... (15) 255 Prepaid expenses................................................. (648) (500) Deposits......................................................... -- (44) Increase (decrease) in: Accounts payable................................................. 551 51 Accrued lease payments due to Patriot American Hospitality Partnership, L.P.................................. 2,012 19 Due to affiliates................................................ 69 373 Accrued payroll.................................................. 383 52 Taxes payable.................................................... 522 239 Guest deposits................................................... (205) 871 Accrued expenses and other liabilities........................... 664 (674) ------- ------- Net cash provided by operating activities............................... 265 401 ------- ------- Cash flows from investing activities: Acquired cash from new operating leases............................... 7 736 ------- ------- Net cash provided by investing activities............................... 7 736 ------- ------- Cash flows from financing activities: Partnership distribution.............................................. (1,000) (340) ------- ------- Net cash used by financing activities................................... (1,000) (340) ------- ------- Net (decrease) increase in cash and cash equivalents.................... (728) 797 Cash and cash equivalents at beginning of period........................ 11,096 9,385 ------- ------- Cash and cash equivalents at end of period.............................. $10,368 $10,182 ======= ======= Supplemental Schedule of Non-Cash Investing and Financing Activities: Assumption of assets and liabilities upon consummation of participating lease agreements with Patriot American Hospitality Partnership, L.P.: Acquired cash...................................................... $ 7 $ 736 Accounts receivable................................................ 5 -- Inventories........................................................ 63 336 Prepaid expenses................................................... 13 68 Due to Patriot American Hospitality Partnership, L.P............... (63) (320) Guest deposits..................................................... (11) (820) Accrued expenses and other liabilities............................. (14) -- ------- ------- Net assets......................................................... $ -- $ -- ======= =======
The accompanying notes are an integral part of these financial statements. F-51 CHC LEASE PARTNERS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CHC Lease Partners was formed as the initial lessee to lease and operate certain hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). CHC Lease Partners, a general partnership, is owned jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC International, Inc. ("CHC") and by Gencom Lessee, L.P., an affiliate of a principal of the Gencom group of companies. CHC Lease Partners began operating the twenty initial hotels on October 2, 1995. During 1996 and 1997, CHC Lease Partners and the Realty Partnership entered into additional operating leases for five hotels acquired by the Realty Partnership. The leases are substantially similar to the other lease agreements between CHC Lease Partners and the Realty Partnership. At March 31, 1997, CHC Lease Partners leases twenty-five hotels. The hotels are leased by the Realty Partnership to CHC Lease Partners under separate participating operating lease agreements which contain cross- default provisions. These leases, which require CHC Lease Partners to maintain minimum levels of net worth and working capital, have terms ranging from ten to twelve years and require payment of the greater of (1) minimum base rent or (2) participating rent based upon certain percentages of room revenue, food and beverage revenue, conference center revenue and telephone and other revenues of each of the hotels. The hotels leased by CHC Lease Partners consist of nineteen full service hotels, four limited service hotels, one executive conference center and one resort. Twenty-one of the twenty-five hotels are operated under franchise licenses with nationally recognized hotel companies. The cost of obtaining the franchise licenses is paid by the Realty Partnership while continuing franchise fees are paid by CHC Lease Partners. Franchise and related fees generally range from 3.5% to 8.0% of room revenues for hotels under franchise licenses. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month periods ended March 31, 1997 and 1996 are not necessarily indicative of the results that may be expected for the years ended December 31, 1997 and 1996, respectively. For further information, refer to the CHC Lease Partners financial statements and footnotes thereto included in the Annual Report on Form 10-K of Patriot American Hospitality, Inc. for the year ended December 31, 1996. 2. COMMITMENTS AND RELATED PARTY TRANSACTIONS: Under the participating lease agreements for the twenty intial hotels, CHC Lease Partners is obligated to return the inventory to the Realty Partnership at the end of each lease term less a total of $1,000, which is accounted for as a lease inducement. Additionally, a lease inducement of $685 was received in 1996 related to leasing one resort property. These lease inducements are recorded as reductions on a straight-line basis to participating lease payments over the lives of the participating lease agreements. Exclusive of the lease inducements, CHC Lease Partners incurred base rents of $9,515 and $7,321 and participating rents of $6,036 and $4,620 for the three months ended March 31, 1997 and 1996, respectively. CHC Lease Partners owed the Realty Partnership $5,841 and $3,829 at March 31, 1997 and December 31, 1996, respectively, for lease payments due under the terms of the participating leases. Lease inducements were $1,509 and $1,546 and inventory due to the Realty Partnership was $799 and $809 at March 31, 1997 and December 31, 1996, respectively. CHC Lease Partners entered into management agreements with hotel management subsidiaries of CHC and GAH-II, L.P. ("GAH"), an affiliate of CHC and the Gencom group of companies, to perform all management functions necessary to operate 24 of the 25 hotels leased by CHC Lease Partners. The terms of these agreements range from ten to twelve years with management fees due based upon a percentage of gross revenue of each of the hotels. The fees under these management agreements are subordinate to CHC Lease Partners' obligations to the Realty Partnership under the participating lease agreements. If, after payment of management fees at the contract rate, CHC Lease Partners would incur an operating loss under any of the participating lease agreements in any year, CHC and GAH would be required to refund and forego management fees for each of the hotels which are deficient in participating lease payments up to the amount of the operating loss. If after the management fees are refunded and foregone, CHC Lease Partners would still incur an operating loss under any of the participating lease agreements, CHC and GAH would be required to pay CHC Lease Partners up to 50% of the management fees earned by CHC and GAH, respectively. Management fees incurred under these management agreements were $441 and $516 for the three months ended March 31, 1997 and 1996, respectively. These management fees are net of management fees refunded and foregone by CHC and GAH of $782 and $297 for the three months ended March 31, 1997 and 1996, respectively. Included in due to (from) affiliates F-52 CHC LEASE PARTNERS NOTES TO FINANCIAL STATEMENTS - (continued) (UNAUDITED) (DOLLARS IN THOUSANDS) were amounts for management fees under these management agreements due from CHC of $305 and $300 and due from GAH of $232 and $41 at March 31, 1997 and December 31, 1996, respectively. CHC Lease Partners fully reimburses CHC for office space it occupies within the corporate offices of CHC and for the payroll and related costs CHC and GAH incur on behalf of CHC Lease Partners. These costs amounted to $239 and $149 for the three months ended March 31, 1997 and 1996, respectively. At March 31, 1997 and December 31, 1996, CHC Lease Partners owed CHC and GAH in the aggregate $126 and $57, respectively, which is included in due to affiliates. During the three months ended March 31, 1997 and 1996, CHC Lease Partners made distributions to its partners of $1,000 and $340, respectively. 3. PRO FORMA FINANCIAL INFORMATION: The unaudited pro forma statements of operations are presented as if the leases and the operation of the twenty-five hotels had commenced on January 1, 1996. The unaudited pro forma statements of operations are not necessarily indicative of what the actual results of operations of CHC Lease Partners would have been assuming such operations had commenced as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Pro forma lessee expenses include management fees, estimated lessee overhead expenses, distribution income on 250,001 units of limited partnership interest in the Realty Partnership and interest income associated with working capital balances. No pro forma interest income associated with working capital balances has been included.
THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1996 ------------- ------------- (IN THOUSANDS) Revenue: Rooms............................ $32,318 $31,528 Food and beverage................ 11,704 11,457 Conference center................ 748 645 Telephone and other.............. 3,126 3,658 ------- ------- Total revenue................... 47,896 47,288 ------- ------- Expenses: Departmental costs and expenses.. 17,480 17,783 Participating lease payments..... 15,596 15,409 General and administrative....... 4,181 4,021 Repairs and maintenance.......... 2,167 2,118 Utilities........................ 2,006 2,025 Marketing........................ 4,557 4,240 Insurance........................ 255 317 ------- ------- Total expenses.................. 46,242 45,913 ------- ------- Income before lessee expenses..... 1,654 1,375 Lessee expenses................... 305 624 ------- ------- Net income....................... $ 1,349 $ 751 ======= =======
F-53 REPORT OF INDEPENDENT AUDITORS To the Members of NorthCoast Hotels, L.L.C.: We have audited the accompanying balance sheet of NorthCoast Hotels, L.L.C. as of December 31, 1996, and the related statements of operations, members' equity, and cash flows for the period April 2, 1996 (inception of operations) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NorthCoast Hotels, L.L.C. as of December 31, 1996, and the results of its operations and its cash flows for the period April 2, 1996 (inception of operations) through December 31 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Seattle, Washington March 5, 1997 F-54 NORTHCOAST HOTELS, L.L.C. BALANCE SHEET (IN THOUSANDS)
December 31, 1996 ----------- ASSETS Current assets: Cash and cash equivalents.......................... $ 1,756 Accounts receivable, net of allowance for doubtful accounts of $43...................... 4,224 Receivable from Patriot American Hospitality Partnership, L.P...................... 245 Inventories........................................ 320 Prepaid expenses................................... 387 Other assets....................................... 792 ----------- Total current assets................................ 7,724 Deferred assets, net of accumulated amortization of $33............................... 500 Investments........................................ 825 ----------- Total assets...................................... $ 9,049 =========== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable................................... $ 2,064 Accrued rent due to Patriot American Hospitality Partnership, L.P...................... 943 Due to affiliates.................................. 113 Accrued payroll and benefits....................... 2,088 Guest deposits..................................... 155 Accrued expenses and other liabilities............. 986 FF&E reserve due to Patriot American Hospitality Partnership, L.P...................... 415 ----------- Total current liabilities........................... 6,764 ----------- Due to Patriot American Hospitality Partnership, L.P................................... 242 ----------- Total liabilities................................. 7,006 Commitments and contingencies....................... -- Members' equity..................................... 2,043 ----------- Total liabilities and members' equity............... $9,049 ===========
See accompanying notes. F-55 NORTHCOAST HOTELS, L.L.C. STATEMENT OF OPERATIONS (IN THOUSANDS)
April 2, 1996 (inception of operations) through December 31, 1996 ------------- Revenue: Rooms.................................................... $ 27,402 Food and beverage........................................ 12,900 Telephone and other...................................... 2,518 ------------- Total revenue.......................................... 42,820 ------------- Expenses: Departmental costs and other expenses.................... 17,547 Participating rent....................................... 12,553 General and administrative............................... 3,734 Ground lease expense..................................... 818 Repairs and maintenance.................................. 2,319 Utilities................................................ 1,516 Marketing................................................ 3,078 ------------- Total expenses......................................... 41,565 ------------- Income before lessee income (expense).................. 1,255 ------------- Dividend and interest income............................. 132 Management fees.......................................... (1,103) Depreciation and amortization............................ (33) Lessee general and administrative expenses............... (343) ------------- Total lessee expenses.................................. (1,347) ------------- Net loss............................................... (92) =============
See accompanying notes. F-56 NORTHCOAST HOTELS, L.L.C. STATEMENT OF MEMBERS' EQUITY FOR THE PERIOD FROM APRIL 2, 1996 (INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996 (IN THOUSANDS)
Notes Retained Capital Receivable Earnings Total --------- ---------- -------- -------- Contributions on April 2, 1996.... $ 3,300 $ (1,050) $ -- $ 2,250 Distributions to members.......... (165) -- -- (165) Payments on notes receivable...... -- 50 -- 50 Net loss.......................... -- -- (92) (92) --------- --------- -------- -------- Balance at December 31, 1996...... $ 3,135 $ (1,000) $ (92) $ 2,043 ========= ========= ======== ========
See accompanying notes. F-57 NORTHCOAST HOTELS, L.L.C. STATEMENT OF CASH FLOWS (IN THOUSANDS)
April 2, 1996 (inception of operations) through December 31, 1996 ------------- Cash flows from operating activities: Net loss............................................... $ (92) Adjustments to reconcile net loss to net cash provided by operating activities: Provision for losses on accounts receivable......... 43 Depreciation and amortization....................... 33 Increase in assets and liabilities: Accounts receivable................................. (4,268) Receivable from Patriot American Hospitality Partnership, L.P....................... (44) Inventories......................................... (78) Prepaid expenses and other assets................... (387) Accounts payable.................................... 1,968 Accrued rent due to Patriot American Hospitality Partnership, L.P....................... 943 Due to affiliates................................... 113 Accrued payroll and benefits........................ 1,187 Guest deposits...................................... 155 Accrued expenses and other liabilities.............. 903 FF&E reserve due to Patriot American Hospitality Partnership, L.P....................... 415 ------------- Net cash provided by operating activities.................. 891 ------------- Cash flows from investing activities: Purchase of equipment................................... (7) Payments for capital improvements on behalf of owner........................................ (104) Payment of organization costs and capitalized lease costs................................ (533) Payment for deferred purchase consideration............. (785) ------------- Net cash used in investing activities...................... (1,429) ------------- Cash flows from financing activities: Cash received from assumption of operating liabilities.................................. 901 Proceeds from repayment of member note.................. 50 Capital contributions................................... 1,425 Distributions........................................... (82) ------------- Net cash provided by financing activities.................. 2,294 ------------- Net increase in cash and cash equivalents.................. 1,756 ------------- Cash and cash equivalents at end of period................. $ 1,756 ============= Supplemental Disclosure of Non-Cash Investing and Financing Activities: Contribution of Patriot Partnership Units............... $ 825 ============= Inventory received in exchange for a liability to Patriot American Hospitality Partnership, L.P....................................... $ 242 ============= Operating liabilities assumed in exchange for receivables from Patriot American Hospitality Partnership, L.P........................... $ 96 ============= Distributions declared and unpaid....................... $ 83 =============
See accompanying notes. F-58 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION NorthCoast Hotels, L.L.C. ("NorthCoast Lessee"), a Washington limited liability company, was formed January 10, 1996 to lease and operate certain hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). At December 31, 1996, Patriot American Hospitality, Inc. ("Patriot"), through its subsidiaries, owns approximately 87.3% of the Realty Partnership. NorthCoast Lessee will continue for a term of fifty years unless terminated earlier pursuant to the terms of the limited liability company agreement. In general, members are not individually liable for any debts or losses of NorthCoast Lessee that exceed their respective capital contribution, except as discussed in Note 2, and losses are generally allocated to the members in proportion to their capital contributions. NorthCoast Lessee began leasing five hotels on April 2, 1996. On April 5, 1996, May 22, 1996, August 29,1996, and November 26, 1996, NorthCoast Lessee and the Realty Partnership entered into four additional operating leases for four hotels which were acquired by the Realty Partnership. At December 31, 1996, NorthCoast leased nine hotels as follows:
Property Name Location Guest Rooms ------------------------------------- ------------------------- ----------- Hyatt Regency Lexington Lexington, Kentucky 365 rooms Hyatt Newporter Newport Beach, California 410 rooms Plaza Park Suites Seattle, Washington 193 rooms The Pickwick San Francisco, California 192 rooms The Roosevelt Hotel Seattle, Washington 151 rooms Valley River Inn Eugene, Oregon 257 rooms WestCoast Gateway Hotel Seattle, Washington 145 rooms WestCoast Long Beach Hotel and Marina Long Beach, California 192 rooms WestCoast Wenatchee Center Hotel Wenatchee, Washington 147 rooms
Each hotel is leased by the Realty Partnership to NorthCoast Lessee under separate participating operating lease agreements. Eight of the nine hotel leases contain cross-default provisions. These leases, which have an average term of eleven years, require NorthCoast Lessee to maintain a minimum net worth, a minimum level of cash, and adequate working capital, (as those terms are defined) and require payment of the greater of (1) minimum base rent or (2) participating rent based upon certain percentages of room revenue, food and beverage revenue, and telephone and other revenues of each of the hotels, plus certain additional charges, as applicable. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. Inventories Inventories, consisting of food, beverages, china, linens, silverware and glassware, are stated at the lower of cost (generally first-in, first-out) or market. Deferred Assets Deferred assets consist of organization costs and capitalized lease costs. Amortization of organization costs is computed using the straight-line method over five years. Capitalized lease costs are amortized over the average lease term of eleven years. F-59 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) Investments Investments consist of 31,074 restricted units of limited partnership interest in the Realty Partnership ("OP Units") and are stated at cost. The OP Units may be redeemed, subject to certain restrictions, at NorthCoast's election after April 2, 1997, for cash equal to the market value (as defined) of two shares of Patriot common stock or, at Patriot's election, two shares of Patriot common stock. Under the participating lease agreements, NorthCoast has assigned certain of the OP Units to the Realty Partnership as collateral for certain deferred rents. Such deferred rents were paid by NorthCoast Lessee in January 1997, and the assignment was released. Dividends are included in dividend and interest income. Other Assets Other assets consist primarily of additional purchase consideration due from the Realty Partnership related to two of the hotels. Receipt of the additional purchase consideration is dependent upon the respective hotels achieving certain operating performance goals in 1997. Management believes this additional purchase consideration will be collected. Revenue Recognition Revenue is recognized upon performance of hotel-related services and delivery of food and beverages. Credit evaluations are performed and an allowance for doubtful accounts is provided against accounts receivable which are estimated to be uncollectible. Income Taxes Under the provisions of the Internal Revenue Code and applicable state income tax law, NorthCoast Lessee has elected to be taxed as a partnership for federal and state purposes. Therefore, federal and state income tax consequences of NorthCoast Lessee's profits and losses pass through to the limited liability company members. Concentration of Credit Risk Financial instruments which potentially subject NorthCoast Lessee to concentrations of credit risk consist principally of cash balances with banks in excess of Federal Deposit Insurance Corporation ("FDIC") insured limits, accounts receivable from hotel customers. NorthCoast Lessee places its cash with high quality financial institutions, however, at December 31, 1996, NorthCoast Lessee has cash balances with banks in excess of FDIC insured limits. Management believes the credit risk related to these deposits is minimal. Concentrations of credit risk with respect to accounts receivable from hotel customers are limited due to the large number of customers and their dispersion across many hotels and geographies. 2. MEMBERS' EQUITY: Initial Capitalization Each of the four members is required to contribute $825 to NorthCoast Lessee. Contributions can be in the form of cash or other property. At December 31, 1996, cash contributions of $1,475 and OP Units of $825 have been received. Two members contributed notes receivable totaling $1,050, which bear interest at 7% per annum. One note, which is unsecured, is due in two installments with $50 paid July 31, 1996 and the balance due March 31, 1997. The other note is due October 31, 1998, and can be paid with either cash or OP Units. This note is secured by an approximate 12.6% interest in LeParc Investment Group, LLC (the "LeParc Entity"). These notes receivable from members have been offset against members' equity in the accompanying financial statements. At December 31, 1996, NorthCoast Lessee had $83 accrued for distributions which were declared and unpaid. Minimum Net Worth Under the terms of the participating lease agreements, NorthCoast Lessee is required to maintain minimum net worth, as defined, equal to 20% of the projected annual lease payments for all hotels leased. The minimum net worth must be composed of certain components in specified minimum amounts, including at least 15% in cash or certain cash equivalents. No more than 25% of the minimum net worth can be composed of a promissory note secured by an interest in the LeParc Entity. NorthCoast Lessee is also required to maintain ownership of shares of common stock of Patriot or OP Units. NorthCoast Lessee was in compliance with these covenants as of December 31, 1996. F-60 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) 3. COMMITMENTS AND RELATED PARTY TRANSACTIONS: Participating Lease Commitments At December 31, 1996, NorthCoast Lessee has future lease commitments to the Realty Partnership under the participating lease agreements through the year 2008. Minimum future rental payments under these noncancellable operating leases are as follows:
Year Ending December 31, Amount ------------------------ ------- 1997............................... $ 17,597 1998............................... 18,247 1999............................... 18,280 2000............................... 18,307 2001............................... 18,328 Thereafter......................... 93,221 -------- $183,980 ========
NorthCoast Lessee incurred rents of $12,553 during the period April 2, 1996 through December 31, 1996, consisting of $10,453 in base rents, $1,171 in participating rents, and $929 in additional rent. At December 31, 1996, NorthCoast Lessee owed the Realty Partnership $943 for rents under the terms of the participating leases. Under the participating lease agreements, NorthCoast Lessee is obligated to return to the Realty Partnership the inventory at each of the hotels at the end of the related lease term. As of December 31, 1996, the balance of the inventory due to the Realty Partnership was $242. In addition, two of the hotels are managed by Hyatt Corporation ("Hyatt"). Under the terms of the hotel management agreements, Hyatt funds a percentage of the hotel gross revenues to a reserve account for furniture, fixtures and equipment (the "FF&E Reserve"), which is payable to the Realty Partnership to make improvements to the hotels. At December 31, 1996, the FF&E Reserve payable to the Realty Partnership was $415. Management and Franchise Agreements Seven of the nine hotels leased by NorthCoast Lessee are managed by WestCoast Hotels, Inc. ("WestCoast Hotels"), an affiliate of a member, and are marketed under a franchise agreement with WestCoast Marketing, Inc., an affiliate of WestCoast Hotels. WestCoast Hotels receives a hotel management fee per hotel of $2 per month for four of the seven hotels and 1% of gross room revenue, as defined, for the WestCoast Long Beach Hotel and Marina, the Valley River Inn and The Pickwick. All management fees payable to WestCoast Hotels greater than 1% of hotel revenues are subordinate to NorthCoast Lessee's obligations to the Realty Partnership under the terms of the participating lease agreements. WestCoast Marketing, Inc. receives a franchise fee of 2.5% of gross room revenues, as well as certain reservation fees in connection with the use of the WestCoast brand. Two of the nine hotels are managed by Hyatt and include an asset management agreement with WestCoast Hotels. WestCoast Hotels received an asset management fee in 1996 on the Hyatt Regency Lexington of $6 per month and on the Hyatt Newporter of $2 per month. In 1997, the asset management fees will be $6 per month and $5 per month on the Hyatt Regency Lexington and Hyatt Newporter, respectively. The asset management fees are subject to escalation based on increases in the Consumer Price Index beginning in 1998. Hyatt receives management fees ranging from 3.5% to 5% of gross revenues plus incentive fees if certain operating results based on cash flow and profits (as defined) are achieved by the hotels. In addition, the management agreement with Hyatt provides for the allocation of certain advertising, marketing and reservation related expenses incurred by Hyatt to all hotels in the Hyatt chain based upon the number of total rooms available during the year. Management Contract for Convention Center The WestCoast Wenatchee Center Hotel has entered into an agreement with the City of Wenatchee (the "City") to provide management services for the Wenatchee Center, including marketing and space rental for meetings, conferences and banquets. The agreement, which commenced in October 1980, provides for an initial term of seven years and the option to extend the agreement for three consecutive periods of seven years each. The WestCoast Wenatchee Center Hotel pays the City fees based on the greater of $50 annually, adjusted for the increase in the Consumer Price Index, or a percentage of gross revenues from operation of the hotel. F-61 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) Ground Lease NorthCoast Lessee has commitments under two ground lease agreements. The term of the lease for the Hyatt Newporter is through December 31, 2048 and the lease is subject to an escalation clause for each five-year period based on the Consumer Price Index, not to exceed 8% per year compounded annually for the five years then ending. In addition, the lease requires the hotel to pay a percentage of its annual sales, as defined, as additional rent. During 1996, NorthCoast Lessee paid $569 in base rent and $187 in additional rent. Minimum annual lease payments of $831 are due under the lease through 2001, at which time the base rent will be adjusted. The term of the lease for the WestCoast Long Beach Hotel and Marina is through March 31, 2052. Annual minimum rent payments are approximately $173 through September 30, 1999, at which time the rent will be negotiated for the next five-year period. Half of the minimum rent payments through March 1998 are deferred and accrue interest at 7% per annum. Percentage rent is payable, if in excess of the minimum rent, based upon certain percentages of room revenue, food and beverage revenue, and telephone and other revenues of the hotel. Employment and Other Agreements NorthCoast Lessee has entered into an agreement with an individual affiliated with one of the members. Pursuant to that agreement, this individual serves as President of NorthCoast Lessee for a term of five years. NorthCoast Lessee pays WestCoast Hotels for office space it occupies within the corporate offices of WestCoast Hotels and for the payroll and related costs WestCoast Hotels administers on behalf of NorthCoast Lessee. The amount paid to WestCoast Hotels for these costs was $18 during the period from April 2, 1996 through December 31, 1996. F-62 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (DOLLARS IN THOUSANDS) 4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): The following unaudited pro forma statements of operations are presented as if the leases and the operation of the nine hotels leased by NorthCoast Lessee had commenced on January 1, 1995. The unaudited pro forma statements of operations are not necessarily indicative of what the actual results of operations of NorthCoast Lessee would have been assuming such operations had commenced as of January 1, 1995, nor do they purport to represent the results of operations for future periods. Pro forma lessee expenses represent management fees and estimated lessee overhead expenses and exclude pro forma dividend income on 31,074 OP Units and interest income associated with working capital balances.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- (IN THOUSANDS) Revenue: Rooms....................................... $ 42,797 $ 40,750 Food and beverage........................... 19,575 19,525 Telephone and other......................... 3,878 3,705 ---------- ---------- Total revenue........................... 66,250 63,980 ---------- ---------- Expenses: Departmental costs and expenses............. 27,818 27,067 Participating rent.......................... 20,293 18,996 General and administrative.................. 5,752 5,461 Ground lease expense........................ 1,114 1,147 Repairs and maintenance..................... 3,673 3,570 Utilities................................... 2,473 2,387 Marketing................................... 4,898 4,863 Insurance................................... 501 306 ---------- ---------- Total expenses.......................... 66,522 63,797 ---------- ---------- Income before lessee expenses.................. (272) 183 Lessee expenses................................ 1,918 2,088 ---------- ---------- Net loss.................................... $(2,190) $ (1,905) ========== ==========
5. SUBSEQUENT EVENT: On January 30, 1997, the Board of Directors of Patriot declared a 2-for-1 stock split on Patriot's common stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. Coincident with the 2-for-1 stock split, the OP Unit conversion factor has been changed such that each OP Unit subject to redemption will now be redeemed for cash equal to the value of two shares of Patriot's common stock (or, at Patriot's election, Patriot may purchase each OP Unit offered for redemption for two shares of Patriot's common stock). All references in the financial statements to the OP Unit conversion factor have been restated to reflect the impact of Patriot's stock split. F-63 NORTHCOAST HOTELS, L.L.C. BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................................................. $1,817 $1,756 Accounts receivable, net of allowance for doubtful accounts of $38 and $43 at March 31, 1997 and December 31, 1996, respectively......................... 3,967 4,224 Receivable from Patriot American Hospitality Partnership, L.P......................... 182 245 Inventories........................................................................... 309 320 Prepaid expenses...................................................................... 460 387 Other assets.......................................................................... 812 792 ------ ------ Total current assets........................................................... 7,547 7,724 Deferred assets, net of accumulated amortization of $47 and $33 at March 31, 1997 and December 31, 1996, respectively................................ 518 500 Investments.............................................................................. 825 825 Cash held in trust....................................................................... 172 -- Construction in progress................................................................. 330 -- ------ ------ Total assets................................................................... $9,392 $9,049 ====== ====== LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable...................................................................... $2,269 $2,064 Accrued rent due to Patriot American Hospitality Partnership, L.P..................... 1,622 943 Due to affiliates..................................................................... 199 113 Accrued payroll and benefits.......................................................... 1,683 2,088 Guest deposits........................................................................ 203 155 Accrued expenses and other liabilities................................................ 1,030 986 FF&E reserve due to Patriot American Hospitality Partnership, L.P..................... 13 415 ------ ------ Total current liabilities...................................................... 7,019 6,764 Note payable to Patriot American Hospitality Partnership, L.P............................ 500 -- Due to Patriot American Hospitality Partnership, L.P..................................... 242 242 ------ ------ Total liabilities.............................................................. 7,761 7,006 Commitments and contingencies............................................................ -- -- Members' equity.......................................................................... 1,631 2,043 ------ ------ Total liabilities and members' equity.......................................... $9,392 $9,049 ====== ======
See accompanying notes. F-64 NORTHCOAST HOTELS, L.L.C. STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1997 ---------- Revenue: Rooms.......................................... $ 9,912 Food and beverage.............................. 4,792 Telephone and other............................ 944 ------- Total revenue.............................. 15,648 ------- Expenses: Departmental costs and other expenses.......... 6,806 Participating lease payments................... 4,683 General and administrative..................... 1,408 Ground lease expense........................... 320 Repairs and maintenance........................ 911 Utilities...................................... 586 Marketing...................................... 1,248 ------- Total expenses............................. 15,962 ------- Loss before lessee income (expense)........ (314) ------- Dividend and interest income................... 56 Service fee income............................. 422 Management fees................................ (471) Depreciation and amortization.................. (14) Lessee general and administrative expenses..... (91) ------- Total lessee income (expense).............. (98) ------- Net loss................................... $ (412) =======
See accompanying notes. F-65 NORTHCOAST HOTELS, L.L.C. STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1997 ------------- Cash flows from operating activities: Net loss................................................................................ $ (412) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization....................................................... 14 Changes in assets and liabilities: Accounts receivable................................................................. 257 Inventories......................................................................... 11 Prepaid expenses and other assets................................................... (74) Accounts payable.................................................................... 300 Accrued rent due to Patriot American Hospitality Partnership, L.P................... 679 Due to affiliates................................................................... 86 Accrued payroll and benefits........................................................ (405) Guest deposits...................................................................... 48 Accrued expenses and other liabilities.............................................. 127 FF&E Reserve due to Patriot American Hospitality Partnership, L.P................... (402) ------ Net cash provided by operating activities.................................................. 229 ------ Cash flows from investing activities: Purchases of equipment and leasehold improvements....................................... (334) Cash held in trust...................................................................... (172) Payment for capital improvements on behalf of owner..................................... (31) Payment of organization costs and capitalized lease costs............................... (32) Payment for deferred purchase consideration............................................. (16) ------ Net cash used in investing activities...................................................... (585) ------ Cash flows from financing activities: Proceeds from issuance of note.......................................................... 500 Distributions........................................................................... (83) ------ Net cash provided by financing activities.................................................. 417 ------ Net increase in cash and cash equivalents.................................................. 61 Cash and cash equivalents at beginning of period........................................... 1,756 ------ Cash and cash equivalents at end of period................................................. $1,817 ======
See accompanying notes. F-66 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NorthCoast Hotels, L.L.C. ("NorthCoast Lessee"), a Washington limited liability company, was formed January 10, 1996 to lease and operate certain hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). NorthCoast Lessee will continue for a term of fifty years unless terminated earlier pursuant to the terms of the limited liability company agreement. In general, members are not individually liable for any debts or losses of NorthCoast Lessee that exceed their respective capital contribution, and losses are generally allocated to the members in proportion to their capital contributions. NorthCoast Lessee began leasing five hotels on April 2, 1996. During 1996, NorthCoast Lessee and the Realty Partnership entered into additional operating leases for four hotels which were acquired by the Realty Partnership. At March 31, 1997, NorthCoast Lessee leased nine hotels. Each hotel is leased by the Realty Partnership to NorthCoast Lessee under separate participating operating lease agreements. Eight of the nine hotel leases contain cross-default provisions. These leases, which have an average term of eleven years, require NorthCoast Lessee to maintain a minimum net worth, a minimum level of cash, and adequate working capital, (as those terms are defined) and require payment of the greater of (1) minimum base rent or (2) participating rent based upon certain percentages of room revenue, food and beverage revenue, and telephone and other revenues of each of the hotels, plus certain additional charges, as applicable. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the NorthCoast Hotels, L.L.C. financial statements and footnotes thereto included in the Annual Report on Form 10-K of Patriot American Hospitality, Inc. for the year ended December 31, 1996. 2. MEMBERS' EQUITY: Initial Capitalization Each of the four members is required to contribute $825 to NorthCoast Lessee. Contributions can be in the form of cash or other property. At March 31, 1997, cash contributions of $1,475 and OP Units of $825 have been received. Two members contributed notes receivable totaling $1,050 which bear interest at 7% per annum. One note, which is unsecured, is due in two installments, with $50 paid July 31, 1996 and the balance due May 31, 1997. The other note is due October 31, 1998, and can be paid with either cash or OP Units. This note is secured by an approximate 12.6% interest in LeParc Investment Group, LLC. These notes receivable from members have been offset against members' equity in the accompanying financial statements. Minimum Net Worth Under the terms of the participating lease agreements, NorthCoast Lessee is required to maintain minimum net worth, as defined, equal to 20% of the projected annual lease payments for all hotels leased, subject to certain agreed upon adjustments. The minimum net worth must be composed of certain components in specified minimum amounts, including at least 15% in cash or certain cash equivalents. No more than 25% of the minimum net worth can be composed of a promissory note secured by an interest in LeParc Investment Group, LLC. NorthCoast Lessee is also required to maintain ownership of shares of common stock of Patriot or units of limited partnership interest of the Realty Partnership. 3. COMMITMENTS AND RELATED PARTY TRANSACTIONS: NorthCoast Lessee incurred rents of $4,683 during the three months ended March 31, 1997, consisting of $3,902 in base rents, $490 in participating rents, and $291 in additional rent. At March 31, 1997 and December 31, 1996, NorthCoast Lessee owed the Realty Partnership $1,622 and $943, respectively, for rents under the terms of the participating leases. F-67 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS -(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) Under the participating lease agreements, NorthCoast Lessee is obligated to return to the Realty Partnership the inventory at each of the hotels at the end of the related lease term. As of March 31, 1997, the balance of the inventory due to the Realty Partnership was $242. In addition, two of the hotels are managed by Hyatt Corporation ("Hyatt"). Under the terms of the hotel management agreements, Hyatt funds a percentage of the hotel gross revenues to a reserve account for furniture, fixtures and equipment (the "FF&E Reserve"), which is payable to the Realty Partnership to make improvements to the hotels. At March 31, 1997 and December 31, 1996, the FF&E Reserve payable to the Realty Partnership was $13 and $415, respectively. NorthCoast Lessee pays WestCoast Hotels for office space it occupies within the corporate offices of WestCoast Hotels and for the payroll and related costs WestCoast Hotels administers on behalf of NorthCoast Lessee. The amount paid to WestCoast Hotels for these costs was $6 for the three months ended March 31, 1997. NorthCoast Lessee borrowed $500 from the Realty Partnership on March 13, 1997 (the "Note") for the construction of a laundry facility at the Hyatt Regency Lexington. The Note bears interest at 9.6% per annum, requires monthly payments of principal and interest commencing June 1, 1997 and is due March 13, 1999. Construction in progress consists of direct costs and capitalized interest and are recorded at cost. As of March 31, 1997, NorthCoast Lessee had capitalized $330 related to this project and held $172 in cash restricted to expenditures related to the project. Service fee income consists of fees received for acquisition, project development and renovation services provided to the Realty Partnership net of reimbursed expenses of $53. NorthCoast Lessee received $475 for such services during the three months ended March 31, 1997. F-68 NORTHCOAST HOTELS, L.L.C. NOTES TO FINANCIAL STATEMENTS -(CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) 4. PRO FORMA FINANCIAL INFORMATION: The following unaudited pro forma statement of operations for the three months ended March 31, 1996 is presented as if the leases and the operation of the nine hotels leased by NorthCoast Lessee had commenced on January 1, 1996. The unaudited pro forma statement of operations is not necessarily indicative of what the actual results of operations of NorthCoast Lessee would have been assuming such operations had commenced as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Pro forma lessee expenses represent management fees and estimated lessee overhead expenses and exclude pro forma dividend income on 31,074 units of limited partnership interest of the Realty Partnership and pro forma interest income associated with working capital balances.
THREE MONTHS ENDED MARCH 31, 1996 -------------- (IN THOUSANDS) Revenue: Rooms............................ $ 9,390 Food and beverage................ 4,374 Telephone and other.............. 900 ------- Total revenue................ 14,664 ------- Expenses: Departmental costs and expenses.. 6,505 Participating lease payments..... 4,232 General and administrative....... 1,552 Ground lease expense............. 289 Repairs and maintenance.......... 898 Utilities........................ 597 Marketing........................ 1,196 Insurance........................ 93 ------- Total expenses............... 15,362 ------- Loss before lessee expenses......... (698) Lessee expenses..................... 417 ------- Net loss......................... $(1,115) =======
F-69 PAH RSI, L.L.C. CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS)
MARCH 31, 1997 --------- (Restated) ASSETS Current assets: Cash and cash equivalents................................................... $16,637 Accounts receivable, net of allowance for doubtful accounts of $1........... 3,485 Due from Patriot American Hospitality Partnership, L.P and affiliates....... 2,655 Due from Resorts Services, Inc.............................................. 382 Inventories................................................................. 1,833 Prepaid expenses and other assets........................................... 1,770 ------- Total current assets...................................................... 26,762 Organizational costs, net of accumulated amortization of $1................... 34 Tradenames, net of accumulated amortization of $62............................ 8,937 Deposits...................................................................... 332 ------- Total assets.............................................................. $36,065 ======= LIABILITIES AND MEMBERS' EQUITY Current Liabilities: Accounts payable............................................................ $ 1,213 Accrued rent due to Patriot American Hospitality Partnership, L.P........... 5,879 Accrued expenses and other liabilities...................................... 6,163 Accrued interest............................................................ 237 Guest and other deposits.................................................... 6,498 ------- Total current liabilities................................................. 19,990 Due to selling entities....................................................... 5,276 Note payable to Patriot American Hospitality Partnership, L.P................. 9,000 ------- Total liabilities......................................................... 34,266 Commitments and contingencies................................................. -- Members' equity............................................................... 1,799 ------- Total liabilities and members' equity..................................... $36,065 =======
See accompanying notes. F-70 PAH RSI, L.L.C. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
JANUARY 16, 1997 (INCEPTION OF OPERATIONS) THROUGH MARCH 31, 1997 ----------------- (Restated) Revenue: Rooms................................................. $11,129 Food and beverage..................................... 4,981 Telephone and other revenue........................... 3,175 Club, club membership and spa revenue................. 8,013 Shopping center revenue............................... 363 Royalty revenues...................................... 382 ------- Total revenue..................................... 28,043 ------- Expenses: Departmental costs and other expenses................. 11,199 Participating lease payments.......................... 8,015 General and administrative............................ 1,611 Repairs and maintenance............................... 1,812 Utilities............................................. 706 Marketing............................................. 1,055 Interest expense...................................... 237 Insurance............................................. 104 ------- Total expenses.................................... 24,739 ------- Income before lessee expenses..................... 3,304 ------- Management fees....................................... (1,342) Amortization.......................................... (63) Lessee general and administrative expenses............ (100) ------- Total lessee expenses............................. (1,505) ------- Net income........................................ $ 1,799 =======
See accompanying notes. F-71 PAH RSI, L.L.C. CONSOLIDATED STATEMENT OF MEMBERS' EQUITY (UNAUDITED) (IN THOUSANDS)
JANUARY 16, 1997 (INCEPTION OF OPERATIONS) THROUGH MARCH 31, 1997 --------------- (Restated) Initial capitalization at inception.. $ 4,110 Notes receivable from members........ (4,110) Net income........................... 1,799 ------- Balance, March 31, 1997.............. $ 1,799 =======
See accompanying notes. F-72 PAH RSI, L.L.C. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
JANUARY 16, 1997 (INCEPTION OF OPERATIONS) THROUGH MARCH 31, 1997 ----------------- (Restated) Cash flows from operating activities: Net income................................................................................... $ 1,799 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on accounts receivable.............................................. 1 Amortization............................................................................. 63 Increase in assets and liabilities: Accounts receivable...................................................................... (2,733) Due from Patriot American Hospitality Partnership, L.P................................... 1,058 Due from Resorts Services, Inc........................................................... (382) Inventories.............................................................................. (76) Prepaid expenses and other assets........................................................ 19 Other assets............................................................................. (332) Accounts payable......................................................................... 1,112 Accrued lease payments due to Patriot American Hospitality Partnership, L.P.............. 5,879 Accrued expenses and other liabilities................................................... (573) Accrued interest......................................................................... 237 Guest and other deposits................................................................. 988 Due to selling entities.................................................................. 5,276 ------- Net cash provided by operating activities 12,336 ------- Cash flows from investing activities: Payment for organizational costs............................................................. (35) Cash acquired at inception................................................................... 4,336 ------- Net cash provided by investing activities....................................................... 4,301 ------- Net increase in cash and cash equivalents....................................................... 16,637 ------- Cash and cash equivalents at end of period...................................................... $16,637 ======= Supplemental Disclosure of Non-Cash Investing and Financing Activities: Contribution of member notes receivable...................................................... $ 4,110 ======= Issuance of note payable to Patriot American Hospitality Partnership, L.P. for purchase of tradenames.......................................................... $ 9,000 ======= Operating liabilities assumed in exchange for receivables from Patriot American Hospitality Partnership, L.P............................................................. $ 3,712 =======
See accompanying notes. F-73 PAH RSI, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION PAH RSI, L.L.C. (the "PAH RSI Lessee"), a Delaware limited liability company, was formed on January 16, 1997 to lease and operate certain hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). At March 31, 1997, Patriot American Hospitality, Inc. ("Patriot"), through its subsidiaries, owns approximately 83.1% of the Realty Partnership. PAH RSI Lessee, is owned jointly by Messrs. Thomas W. Lattin, Rex E. Stewart and Michael Murphy, each of whom is an executive officer of Patriot. PAH RSI Lessee will continue for a term of 49 years unless terminated earlier pursuant to the terms of the limited liability company agreement. In general, members are not personally liable for any debts or losses of PAH RSI Lessee that exceed their respective capital contribution, except as discussed in Note 5, and losses are generally allocated to the members in proportion to their capital contributions. PAH RSI Lessee commenced operations and began leasing two resort properties from the Realty Partnership on January 16, 1997. On January 17, 1997, January 29, 1997 and March 14, 1997, PAH RSI Lessee and the Realty Partnership entered into four additional operating leases for two additional resort properties and two hotels which were acquired by the Realty Partnership. At March 31, 1997, PAH RSI Lessee leased six hotels as follows:
Property Name Location Guest Rooms - ----------------------------------- ---------------------- ----------- Resorts: Carmel Valley Ranch Carmel, California 100 The Boulders Scottsdale, Arizona 160 The Lodge at Ventana Canyon Tucson, Arizona 49 The Peaks Resort and Spa Telluride, Colorado 177 Full-service hotels: Radisson Hotel Northbrook, Illinois 313 Luxeford Suites Hotel Minneapolis, Minnesota 230
Each hotel is leased by the Realty Partnership to PAH RSI Lessee for one-year terms under separate participating operating lease agreements. These leases, which require PAH RSI Lessee to maintain a minimum net worth and adequate working capital, require payment of the greater of (1) minimum base rent or (2) participating rent based upon certain percentages of room revenue, food and beverage revenue, and telephone and other revenues of each of the hotels, plus certain additional charges, as applicable. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period January 16, 1997 (inception of operations) through March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. Significant accounting policies are summarized below. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of PAH RSI Lessee and its wholly-owned subsidiaries, Boulders Carefree Sewer Corporation, BJV Realty, Inc., and The Peaks Real Estate Services, Inc. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. F-74 PAH RSI, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (UNAUDITED) (in thousands, except per share data) Inventories Inventories, consisting of food, beverages, china, linens, silverware, glassware, and gift and golf shop merchandise, are principally stated at the lower of cost (generally first-in, first-out) or market. Tradenames Tradenames are stated at cost and are amortized using the straight-line method over a 40-year estimated useful life. Organization costs Organization costs are being amortized using the straight-line method over five years. Revenue Recognition Revenue is recognized upon performance of hotel-related services and delivery of food and beverages. Credit evaluations are performed and an allowance for doubtful accounts is provided against accounts receivable which are estimated to be uncollectible. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the actual results will not differ materially from the estimates used in preparing the financial statements. Income Taxes Under the provisions of the Internal Revenue Code and applicable state income tax law, PAH RSI Lessee is taxed as a limited liability company, an entity which is taxed in the same manner as a partnership and, therefore, is not subject to taxation on income. The federal and state income tax consequences of PAH RSI Lessee's profits and losses accrue to the limited liability company members. Basis of Restatement The accompanying financial statements have been restated to reflect the correction of an error in departmental costs and other expenses and inventory from amounts previously reported. 2. TRADENAMES: PAH RSI Lessee acquired certain tradenames or licensing rights to certain tradenames, including the Carefree(R) and Boulders(R) trademarks, simultaneously with the Realty Partnership's acquisition of the four Carefree Resort properties. The acquisition of the tradenames and licensing rights was financed by a promissory note in the amount of $9,000 payable to a subsidiary of the Realty Partnership (see Note 3). PAH RSI Lessee has assigned certain of these licensing rights to Resorts Services, Inc. ("RSI"), an Arizona corporation. Substantially all of the economic interests in RSI are owned individually by the members of PAH RSI Lessee (see Note 4). 3. NOTES PAYABLE: In connection with the acquisition of certain tradenames and licensing rights, on January 17, 1997, PAH RSI Lessee issued a promissory note in the amount of $9,000 payable to a subsidiary of the Realty Partnership. The principal amount of the note is due January 17, 2002. Interest at an annual rate of 13% is payable semi-annually commencing July 1, 1997. 4. COMMITMENTS AND RELATED PARTY TRANSACTIONS: Participating Lease Commitments At March 31, 1997, PAH RSI Lessee has future lease commitments to the Realty Partnership under the participating lease agreements through March 1998. Minimum future rental payments under these operating leases for the remainder of the lease terms aggregate approximately $12,241. PAH RSI Lessee incurred base rents of $2,840 and participating rents of $5,175 for the period January 16, 1997 through March 31, 1997. At March 31, 1997, PAH RSI Lessee owed the Realty Partnership $5,879 for rents under the terms of the participating leases. F-75 PAH RSI, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (UNAUDITED) (in thousands, except per share data) The Realty Partnership has the right to terminate all participating lease agreements with PAH RSI Lessee. In the event such termination occurs, Patriot will be obligated to pay PAH RSI Lessee the fair market value of the leasehold interests. In addition, in the event of such termination, Patriot intends to acquire the assets, including inventory, tradenames and right to receive certain royalty fees, of PAH RSI Lessee. Management and Franchise Agreements The four resort properties leased by PAH RSI Lessee are managed by RSI. RSI receives management fees per resort ranging from 2% to 3% of gross room revenue, as defined. In addition, certain executive officers and employees of RSI are entitled to receive an annual incentive fee equal to 10% of the excess recurring cash flow of the resorts, as defined. All management fees payable to RSI are subordinate to PAH RSI Lessee's obligations to the Realty Partnership under the terms of the participating lease agreements. The Luxeford Suites Hotel is managed by Doubletree Hotels Corporation which receives a management fee of 3% of gross revenues, plus incentive fees if certain operating results based on cash flow and profits (as defined) are achieved by the hotel. The Radisson Hotel in Northbrook, Illinois is managed by a hotel management entity affiliated with CHC International, Inc. and the Gencom group of companies which receives a management fee of 1.5% of gross revenues, as defined. RSI is subject to an exclusive license agreement with PAH RSI Lessee for the use of certain tradenames. Certain royalties may be paid to PAH RSI Lessee by RSI if adjusted gross receipts, as defined, of RSI exceed certain thresholds. Royalties earned in conjuction with this agreement were approximately $382 for the three months ended March 31, 1997. Stock Purchase Option Pursuant to a stock option agreement dated January 17, 1997, PAH RSI Lessee's members were granted an exclusive option to purchase all of the outstanding voting common stock (an aggregate 625 shares of common stock, no par value per share) of RSI for $1.00 per share. The option expires January 17, 2007. Expense Reimbursements PAH RSI Lessee fully reimburses the Realty Partnership for office space it occupies within the corporate offices of Patriot and for payroll and related costs the Realty Partnership incurs on behalf of PAH RSI Lessee. These costs amounted to $100 for the period ended March 31, 1997. At March 31, 1997, PAH RSI Lessee owed the Realty Partnership $100 for such reimbursements. Payables to Selling Entities At March 31, 1997, PAH RSI Lessee has aggregate payables of $5,276 due to certain of the former owners of the four resort properties leased from the Realty Partnership. These payables to selling entities are related to the final proration of net current assets of the resort properties and are to be repaid from the collection of such net assets. 5. MEMBERS' EQUITY: Initial Capitalization Each of the three members has executed a non-interest bearing demand note in the principal amount of $1,370 in consideration of their required capital contributions. These notes receivable from members have been offset against members' equity in the accompanying financial statements. Minimum Net Worth Under the terms of the participating lease agreements, PAH RSI Lessee is required to maintain minimum net worth, as defined, equal to 20% of the projected annual lease payments for all resorts or hotels leased. The minimum net worth must be composed of certain components which generally exclude F-76 PAH RSI, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (UNAUDITED) (in thousands, except per share data) intangible assets as defined by generally accepting accounting principles. In addition, PAH RSI Lessee is required to maintain at all times during the participating lease term a debt to members' equity ratio of no more than four to one. 6. LEASES: The El Pedregal Shopping Center leases have remaining terms that range from 1 to 4 years. The leases generally provide for minimum annual rental amounts that may be subject to cost of living increases, and for reimbursement by tenants for common area environmental costs. Minimum future rental income under these noncancelable operating leases for the next four years is as follows:
Year Rent Amount ---- ----------- 1997............... $1,087 1998............... 666 1999............... 448 2000............... 165 ------ $2,366 ======
F-77 PAH RSI, L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (UNAUDITED) (in thousands, except per share data) 7. PRO FORMA FINANCIAL INFORMATION: The following unaudited pro forma statements of operations are presented as if the leases and the operation of the six hotels leased by PAH RSI Lessee had commenced on January 1, 1996. The unaudited pro forma statements of operations are not necessarily indicative of what the actual results of operations of PAH RSI Lessee would have been assuming such operations had commenced as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Pro forma lessee expenses represent management fees and estimated lessee overhead expenses and exclude pro forma interest income associated with working capital balances.
THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1996 ------------- ------------- (IN THOUSANDS) Revenue: Rooms.................................. $13,177 $12,152 Food and beverage...................... 5,891 5,958 Telephone and other revenue............ 3,770 3,067 Club, club membership and spa revenue.. 9,054 8,729 Shopping center revenue................ 474 437 Royalty revenue........................ 458 377 ------- ------- Total revenue......................... 32,824 30,720 ------- ------- Expenses: Departmental costs and expenses........ 13,827 12,897 Participating lease payments........... 9,428 8,863 General and administrative............. 1,927 1,916 Repairs and maintenance................ 2,247 2,148 Utilities.............................. 949 950 Marketing.............................. 1,405 1,442 Interest expense....................... 293 293 Insurance.............................. 130 157 ------- ------- Total expenses........................ 30,206 28,666 ------- ------- Income before lessee expenses........... 2,618 2,054 Lessee expenses......................... 1,602 1,450 ------- ------- Net income............................. $ 1,016 $ 604 ======= =======
8. SUBSEQUENT EVENTS: On April 14, 1997. PAH RSI Lessee and the Realty Partnership entered into an operating lease for a hotel acquired by the Realty Partnership. The lease is substantially similar to the other participating lease agreements between PAH RSI Lessee and the Realty Partnership. The base rent for the hotel is anticipated to be approximately $1,864 for the year ended December 31, 1997. F-78 NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) On October 31, 1996, Patriot American Hospitality, Inc., a Virginia corporation ("Patriot"), Patriot American Hospitality Partnership, L.P., a Virginia limited partnership (the "Realty Partnership"), California Jockey Club, a Delaware corporation ("Cal Jockey") and Bay Meadows Operating Company, a Delaware corporation ("Bay Meadows") entered into an agreement pursuant to which the parties agreed to engage in a business combination. Cal Jockey and Bay Meadows are collectively referred to herein as "CJC/BMOC". On July 1, 1997, pursuant to an Agreement and Plan of Merger, dated as of February 24, 1997, as amended and restated as of May 28, 1997 (the "Merger Agreement") by and among, Patriot, Realty Partnership, Cal Jockey and Bay Meadows, Patriot was merged with the into Cal Jockey (the "Merger") with Cal Jockey as the surviving corporation in the Merger. The Merger and the Merger Agreement were approved by the stockholders of Patriot, Cal Jockey and Bay Meadows at their respective Special Meetings of Stockholders held on July 1, 1997. In connection with the Merger, Cal Jockey's name was changed to "Patriot American Hospitality, Inc." (hereinafter, "New Patriot REIT") and Bay Meadows' name was changed to "Patriot American Hospitality Operating Company" (hereinafter, "New Patriot Operating Company"). Pursuant to the Merger Agreement, each issued and outstanding share of common stock, no par value, of Patriot (the "Patriot Common Stock"), was converted, at the effective time, into 0.51895 shares of common stock, $.01 par value, of New Patriot REIT (the "New Patriot REIT Common Stock") and 0.51895 shares of common stock, $.01 par value, of New Patriot Operating Company (the "New Patriot Operating Company Common Stock"), which shares are paired and transferable only as a single unit (as so paired, the "Paired Shares"). In lieu of issuing fractional Paired Shares, the Merger Agreement provided that a holder of Patriot Common Stock otherwise entitled to such fractional Paired Shares became entitled to receive an amount in cash (without interest), rounded to the nearest cent. As a result of the exchange, Patriot stockholders received approximately 22,964,173 Paired Shares in connection with the Merger. The following unaudited Pro Forma Financial Statements have been adjusted for the purchase method of accounting whereby the Bay Meadows Racecourse facility and related leasehold improvements owned by CJC/BMOC are adjusted to estimated fair market value. Although CJC/BMOC issued their Paired Shares to Patriot stockholders and are the surviving legal entities following the Merger, CJC/BMOC are considered the acquired companies for accounting purposes as the current Patriot stockholders hold the majority of the combined paired shares of New Patriot REIT Common Stock and New Patriot Operating Company Common Stock subsequent to the Merger. The fair market values of the assets and liabilities of CJC/BMOC have been determined based upon preliminary estimates and are subject to change as additional information is obtained. Management of Patriot does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market value of the assets and liabilities of CJC/BMOC will materially change; however, the allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the date of the Merger. Therefore, the allocations reflected in the following unaudited Pro Forma Financial Statements may differ from the amounts ultimately determined. In the first quarter of 1997, Patriot acquired ownership interests in four hotel properties (the "Recent Acquisitions") which include the Radisson Overland Park Hotel in Overland Park, Kansas, the Radisson Hotel in Northbrook, Illinois, the Luxeford Suites Hotel in Minneapolis, Minnesota and the Holiday Inn Redmont Hotel in Birmingham, Alabama. Additionally, in April 1997, Patriot acquired the Sheraton Park Place Hotel in Minneapolis, Minnesota and in May 1997, Patriot acquired the Myrtle Beach Hilton Oceanfront Golf Resort. The acquisitions were financed primarily with funds drawn on Patriot's Line of Credit. In January 1997, Patriot acquired the Carefree Resorts for a total purchase price of approximately $264 million. This acquisition was primarily financed with funds drawn on Patriot's Line of Credit and the issuance of 1,295,077 units of limited partnership interest of the Realty Partnership ("OP Units"). Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel (which are separately owned through two special purpose non-controlled entities), to lesses who are responsible for operating the hotels (the "Lessees"). Patriot's investments in these two special purpose entities are accounted for using the equity method of accounting and Patriot's share of their net income is reflected in Equity in Earnings of Unconsolidated Subsidiaries in the accompanying unaudited Pro Forma Financial Statements. The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. Following the Merger, New Patriot REIT expects to terminate its leases with PAH RSI, L.L.C., a limited liability company owned by certain executive officers of Patriot ("PAH RSI Lessee") F-79 relating to the Carefree Resorts, the Radisson Northbrook Hotel, the Luxeford Suites Hotel, the Sheraton Park Place Hotel and the Myrtle Beach Hilton Oceanfront Golf Resort and re-lease such hotel properties to New Patriot Operating Company. In addition, it is anticipated that New Patriot Operating Company will offer to acquire certain assets of PAH RSI Lessee including inventories, trade names and the right to receive certain royalty fees subsequent to the Merger and the Related Transactions. As of March 31, 1997 Patriot owned interests in 54 hotels and resorts and had an approximate 83.1% interest in the Realty Partnership. This ownership interest in the Realty Partnership is also reflected for unaudited Pro Forma Financial Statement presentation purposes. Patriot and PaineWebber Incorporated ("PaineWebber") have entered into an agreement pursuant to which following the close of the Merger an affiliate of PaineWebber will purchase substantially all of the land of Cal Jockey excluding the land subject to a certain lease (the "Borders Lease"), for a purchase price of $78.05 million (the "PaineWebber Land Sale"). New Patriot REIT will retain ownership of the improvements located on the land. Simultaneously with the consummation of such purchase, the PaineWebber affiliate and New Patriot REIT have entered into a ground lease covering that portion of the land on which the Bay Meadows Racecourse (sometimes referred to herein as the "Racecourse") is situated. New Patriot REIT has subleased the Racecourse land and related improvements to New Patriot Operating Company. In addition, Patriot has agreed in principle to loan an aggregate of $103 million to partnerships affiliated with the members of CHC Lease Partners to enable such partnerships to refinance existing indebtedness relating to four hotels, the Sheraton Grand Hotel in Tampa, the Sheraton Gateway Hotel in Miami (also known as the River House Hotel), the Grand Bay Hotel in Miami, and the Doubletree Hotel in Glenview, Illinois. The loans would mature in two years, bear interest at a rate per annum equal to 30-day LIBOR plus 2.75%, and would be secured by first priority liens on the assets of the respective partnerships, including first mortgages on the hotels. The following unaudited Pro Forma Condensed Combined Statements of Operations assume the following transactions have occurred at the beginning of the periods presented: (i) the Merger and the related transactions have been consummated on terms set forth in the Merger Agreement; (ii) the PaineWebber Land Sale has been consummated, the PaineWebber affiliate has leased that portion of the land upon which the Racecourse is situated to New Patriot REIT, and New Patriot REIT has subleased this land to New Patriot Operating Company; (iii) New Patriot REIT has leased certain land to Borders, Inc. ("Borders"); (iv) Patriot has acquired the Recent Acquisitions and the Carefree Resorts and (v) the mortgage notes to affiliates of CHC Lease Partners have been funded. In addition, the unaudited Pro Forma Combined Balance Sheet data is presented as if the transactions discussed above had occurred on March 31, 1997. The following unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 and the three months ended March 31, 1997 of New Patriot REIT and New Patriot Operating Company are derived from the individual unaudited Pro Forma Condensed Consolidated Statements of Operations of New Patriot REIT and New Patriot Operating Company included in this report on pages F-88 through F-93. These Pro Forma Condensed Combined Statements of Operations are also derived from the unaudited Pro Forma Condensed Consolidated Statements of Operations of Patriot (Pre-Merger) which have been included in this report on pages F-99 through F-102. Such pro forma information is based in part upon the Separate and Combined Statements of Income of CJC/BMOC filed with CJC/BMOC's Annual Report on Form 10-K for the year ended December 31, 1996 and Quarterly Report on Form 10-Q for the three months ended March 31, 1997, as amended; the Consolidated Statements of Operations of Patriot filed with Patriot's Annual Report on Form 10-K for the year ended December 31, 1996 and Quarterly Report on Form 10-Q for the three months ended March 31, 1997; the historical financial statements of certain hotels acquired by Patriot filed in Patriot's Current Reports on Form 8-K dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as amended; and the Pro Forma Condensed Combined Statements of Operations of the Lessees which have been included in this report on pages F-95 and F-96. In management's opinion, all material adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Condensed Combined Statements of Operations do not include the results of operations of the Sheraton Park Place Hotel acquired by Patriot in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort acquired by Patriot in May 1997. The following unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of New Patriot REIT and New Patriot Operating Company would have been assuming such transactions had been completed as of the beginning of the period presented, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended March 31, 1997 is not necessarily indicative of the results of operations for the full year. F-80 NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
NEW PATRIOT NEW PATRIOT OPERATING REIT COMPANY PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL ----------- ----------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease rev- enue................... $130,570 $ -- $(25,967)(A) $104,603 Hotel revenue........... -- 58,685(B) -- 58,685 Club and spa revenue.... -- 24,710 -- 24,710 Racecourse facility rev- enue................... 6,682 51,946 (6,348)(C) 52,280 Club membership reve- nue.................... -- 4,277 -- 4,277 Shopping center reve- nue.................... -- 1,730 -- 1,730 Interest and other in- come................... 10,765 12,274 (1,204)(D) 21,835 -------- -------- -------- -------- Total revenue........... 148,017 153,622 (33,519) 268,120 -------- -------- -------- -------- Expenses: Departmental costs--ho- tel operations......... -- 47,280 -- 47,280 Racing facility opera- tions.................. -- 47,180 (6,348)(C) 40,832 Ground lease expense.... 5,354 -- -- 5,354 General and administra- tive................... 5,992 10,181 (34)(D) 16,139 Repair and maintenance.. -- 8,045 -- 8,045 Utilities............... -- 4,082 -- 4,082 Interest expense........ 45,201 1,300 (1,170)(D) 45,331 (E) Real estate and personal property taxes and ca- sualty insurance....... 13,372 398 -- 13,770 Marketing............... -- 7,767 -- 7,767 Management fees......... -- 3,194 -- 3,194 Depreciation and amorti- zation................. 38,335 1,072 -- 39,407 Participating lease pay- ments.................. -- 25,967 (25,967)(A) -- General liability insur- ance................... -- 656 -- 656 -------- -------- -------- -------- Total expenses.......... 108,254 157,122 (33,519) 231,857 -------- -------- -------- -------- Income (loss) before eq- uity in earnings of un- consolidated subsidiar- ies, income tax provi- sion and minority inter- ests.................... 39,763 (3,500) -- 36,263 Equity in earnings of unconsolidated subsidi- aries.................. 7,560 -- -- 7,560 -------- -------- -------- -------- Income (loss) before in- come tax provision and minority interests...... 47,323 (3,500) -- 43,823 Income tax provision.... -- (62) -- (62) -------- -------- -------- -------- Income (loss) before mi- nority interests........ 47,323 (3,562) -- 43,761 Minority interest in the Realty Partnerships.... (6,548) 499 -- (6,049) Minority interest in other partnerships..... (553) -- -- (553) -------- -------- -------- -------- Net income (loss) appli- cable to common share- holders................. $ 40,222 $ (3,063) $ -- $ 37,159 (E) ======== ======== ======== ======== Net income (loss) per common paired share(F).. $ 1.40 $ (0.11) $ 1.29 (E) ======== ======== ======== Weighted average number of common paired shares and common paired share equivalents outstanding............. 28,793 28,793 28,793 (E) ======== ======== ========
- -------- (A) Represents elimination of participating lease revenue and expense related to the six hotel properties leased by New Patriot REIT to New Patriot Operating Company. (B) Hotel revenue includes revenue from rooms of $38,940 and food and beverage sales of $19,745. (C) Represents elimination of rental income and expense related to the Racecourse facility and land leased by New Patriot REIT to New Patriot Operating Company. (D) Represents the elimination of $1,170 of interest income and expense related to a note receivable issued to Patriot in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by New Patriot Operating Company, and the elimination of other intercompany income and expense items. (E) The pro forma amounts presented assume an average interest rate of 7.2502% per annum (representing LIBOR plus 1.7%) on the outstanding debt obligations with a term of three years. An increase of 0.25% in the interest rate would increase pro forma interest expense to $46,652, decrease net income applicable to common shareholders to $36,244 and decrease net income per common share to $1.26. F-81 Patriot has entered into a commitment letter with PaineWebber Real Estate and The Chase Manhattan Bank ("Chase") which will modify and extend the Line of Credit up to $700,000 and provide for a term loan of $500,000 (the "New Credit Facility"). The additional availability under this New Credit Facility will be primarily used to finance future acquisitions. In the event Patriot is successful in obtaining the New Credit Facility, deferred loan costs totaling approximately $16,325, including fees, legal Credit Facility (of which approximately $10,150 relates to the modification and extension of the Line of Credit and has been reflected in the pro forma financial information). (F) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 Earnings Per Share ("Statement 128"). Statement 128 specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of New Patriot REIT and New Patriot Operating Company. F-82 NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
NEW PATRIOT NEW PATRIOT OPERATING REIT COMPANY PRO FORMA PRO FORMA PRO FORMA ELIMINATIONS TOTAL ----------- ----------- ------------ ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease rev- enue................... $36,551 $ -- $ (9,428)(A) $27,123 Hotel revenue........... -- 19,068(B) -- 19,068 Club and spa revenue.... -- 8,706 -- 8,706 Racecourse facility rev- enue................... 1,760 20,269 (1,677)(C) 20,352 Club membership reve- nue.................... -- 348 -- 348 Shopping center reve- nue.................... -- 474 -- 474 Interest and other in- come................... 2,669 4,459 (317)(D) 6,811 ------- ------- -------- ------- Total revenue........... 40,980 53,324 (11,422) 82,882 ------- ------- -------- ------- Expenses: Departmental costs--ho- tel operations......... -- 13,828 -- 13,828 Racing facility opera- tions.................. -- 16,949 (1,677)(C) 15,272 Ground lease expense.... 1,336 -- -- 1,336 General and administra- tive................... 3,502 2,591 -- 6,093 Repair and maintenance.. -- 2,247 -- 2,247 Utilities............... -- 949 -- 949 Interest expense........ 11,709 319 (317)(D) 11,711(E) Real estate and personal property taxes and ca- sualty insurance....... 3,404 129 -- 3,533 Marketing............... -- 1,870 -- 1,870 Management fees......... -- 1,482 -- 1,482 Depreciation and amorti- zation................. 9,862 268 -- 10,130 Participating lease pay- ments.................. -- 9,428 (9,428)(A) -- General liability insur- ance................... -- 252 -- 252 ------- ------- -------- ------- Total expenses.......... 29,813 50,312 (11,422) 68,703 ------- ------- -------- ------- Income (loss) before eq- uity in earnings of un- consolidated subsidiar- ies, income tax provi- sion and minority inter- ests.................... 11,167 3,012 -- 14,179 Equity in earnings of unconsolidated subsidi- aries.................. 1,021 -- -- 1,021 ------- ------- -------- ------- Income (loss) before in- come tax provision and minority interests...... 12,188 3,012 -- 15,200 Income tax provision.... -- (1,205) -- (1,205) ------- ------- -------- ------- Income (loss) before mi- nority interests........ 12,188 1,807 -- 13,995 Minority interest in the Realty Partnerships.... (1,676) (253) -- (1,929) Minority interest in other partnerships..... (219) -- -- (219) ------- ------- -------- ------- Net income (loss) appli- cable to common share- holders................. $10,293 $ 1,554 $ -- $11,847 (E) ======= ======= ======== ======= Net income (loss) per common paired share(F).. $ 0.35 $ 0.05 $ 0.40 (E) ======= ======= ======= Weighted average number of common paired shares and common paired share equivalents outstanding............. 29,074 29,074 29,074 (E) ======= ======= =======
- -------- (A) Represents elimination of participating lease revenue and expense related to the six hotel properties leased by New Patriot REIT to New Patriot Operating Company. (B) Hotel revenue includes revenue from rooms of $13,177 and food and beverage sales of $5,891. (C) Represents elimination of rental income and expense related to the Racecourse facility and land leased by New Patriot REIT to New Patriot Operating Company. (D) Represents the elimination of $293 of interest income and expense related to a note receivable issued to Patriot in connection with the sale of certain assets to PAH RSI Lessee, which assets are assumed to be acquired by New Patriot Operating Company, and the elimination of other intercompany income and expense items. (E) The pro forma amounts presented assume an average interest rate of 7.2012% per annum (representing LIBOR plus 1.7%) on the outstanding debt obligations with a term of three years. An increase of 0.25% in the interest rate would increase pro forma interest expense to $12,073 and decrease net income applicable to common shareholders to $11,590. Net income per common share would be unchanged. F-83 Patriot has entered into a Commitment Letter with PaineWebber Real Estate and Chase which will modify and extend the Line of Credit up to $700,000 and provide for a term loan of $500,000. The additional availability under this New Credit Facility will be primarily used to finance future acquisitions. In the event Patriot is successful in obtaining the New Credit Facility, deferred loan costs totaling approximately $16,325, including fees, legal and other expenses are expected to be incurred in connection with the New Credit Facility (of which approximately $10,150 relates to the modification and extension of the Line of Credit and has been reflected in the pro forma financial information). (F) In February 1997, the Financial Accounting Standards Board issued Statement No. 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of New Patriot REIT and New Patriot Operating Company. F-84 NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED BALANCE SHEET The following unaudited Pro Forma Condensed Combined Balance Sheet is presented as if the Merger and the related transactions, as well as (i) the sale of substantially all of the Cal Jockey land to an affiliate of PaineWebber, (ii) the subsequent leaseback of certain land by New Patriot REIT on which the Racecourse is situated, (iii) the sub-lease of the Racecourse land and related improvements from New Patriot REIT to New Patriot Operating Company, and (iv) the lease of certain land of New Patriot REIT to Borders, had occurred as of March 31, 1997. The following unaudited Pro Forma Condensed Combined Balance Sheet is also derived from Patriot's Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997 included elsewhere in this Report on Form 8-K which is presented as if the funding of the mortgage notes to affiliates of CHC Lease Partners had occurred as of March 31, 1997. Such pro forma information is based in part upon CJC/BMOC's Combined Balance Sheet as of March 31, 1997 and Patriot's Consolidated Balance Sheet as of March 31, 1997 and should be read in conjunction with the financial statements filed with CJC/BMOC's and Patriot's respective Quarterly Reports on Form 10-Q for the three months ended March 31, 1997. In management's opinion, all material adjustments necessary to reflect the effect of these transactions have been made. The following unaudited Pro Forma Condensed Combined Balance Sheet does not include the Sheraton Park Place Hotel acquired by Patriot in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort acquired by Patriot in May 1997. Although Cal Jockey and Bay Meadows issued their Paired Shares to Patriot stockholders and are the surviving legal entities following the Merger, CJC/BMOC are considered the acquired companies for accounting purposes as the current Patriot stockholders hold the majority of paired shares of the combined companies subsequent to the Merger. Accordingly, the accompanying Pro Forma Condensed Combined Balance Sheet reflects adjustments to record the net assets of CJC/BMOC at their estimated fair market values and the elimination of CJC/BMOC's historical shareholders' equity. The fair market values of the assets and liabilities of CJC/BMOC have been determined based upon preliminary estimates and are subject to change as additional information is obtained. Management of Patriot does not anticipate that the preliminary allocation of purchase costs based upon the estimated fair market value of the assets and liabilities of CJC/BMOC will materially change; however, the allocations of purchase costs are subject to final determination based upon estimates and other evaluations of fair market value as of the date of the Merger. Therefore, the allocations reflected in the following unaudited Pro Forma Condensed Combined Balance Sheet may differ from the amounts ultimately determined. The following unaudited Pro Forma Condensed Combined Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming such transactions had been completed as of March 31, 1997, nor does it purport to represent the future financial position of New Patriot REIT and New Patriot Operating Company. F-85 NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT FOR SHARE DATA)
CJC/ PATRIOT BMOC PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS TOTAL ---------- ---------- ----------- ---------- ASSETS Net investment in hotel and resort properties and land held for sale.............. $ 947,722 $ -- $ -- $ 947,722 Net investment in Racecourse facility and related im- provements................. -- 18,800 5,465 (A) 24,265 Mortgage notes and other re- ceivables from unconsoli- dated subsidiaries......... 73,622 -- -- 73,622 Notes receivable............ 113,189 -- (9,237)(B) 103,952 Investment in unconsolidated subsidiaries............... 12,140 -- -- 12,140 Cash and equivalents........ 6,271 7,708 -- 13,979 Restricted cash............. -- -- 78,050 (C) 78,050 Securities available for sale....................... -- 5,609 -- 5,609 Accounts receivable......... 15,648 1,269 -- 16,917 Goodwill.................... -- -- 97,216 (D) 97,216 Deferred expenses, net...... 14,447 -- -- 14,447 Prepaid expenses and other assets..................... 12,009 733 6,337 (B) 19,079 Deferred income taxes....... -- 227 -- 227 ---------- ------- -------- ---------- Total assets............... $1,195,048 $34,346 $177,831 $1,407,225 ========== ======= ======== ========== LIABILITIES AND SHAREHOLD- ERS' EQUITY Borrowings under a line of credit and mortgage notes.. $ 579,862 $ -- $ -- (G) $ 579,862 Dividends and distributions payable.................... 13,938 -- -- 13,938 Accounts payable and accrued expenses................... 13,498 7,738 14,252 (E) 35,488 Note payable................ -- 2,900 (2,900)(B) -- Due to unconsolidated sub- sidiaries.................. 6,098 -- -- 6,098 Minority interest in the Realty Partnership......... 127,262 -- -- 127,262 Minority interest in other partnerships............... 13,774 -- -- 13,774 Shareholders' equity: Preferred stock............ -- -- -- -- Common stock............... -- 116 457 (F) 573 Paid-in capital............ 457,178 18,385 171,229 (G) 646,792 Unearned stock compensa- tion, net................. (16,261) -- -- (16,261) Unrealized gain on securi- ties available for sale... -- 1,323 (1,323)(G) -- Retained earnings.......... (301) 3,884 (3,884)(G) (301) ---------- ------- -------- ---------- Total shareholders' equi- ty........................ 440,616 23,708 166,479 630,803 ---------- ------- -------- ---------- Total liabilities and shareholders' equity...... $1,195,048 $34,346 $177,831 $1,407,225 ========== ======= ======== ==========
- -------- (A) Represents adjustment for the purchase method of accounting whereby the Racecourse facility and related leasehold improvements owned by CJC/BMOC are adjusted to estimated fair market value after the sale of substantially all of the Cal Jockey land to an affiliate of PaineWebber for $78,050. (B) Represents the elimination of $9,237 notes receivable and accrued interest between New Patriot REIT and PAH RSI Lessee which relate to certain assets, trade names and the right to receive certain royalty fees which are to be acquired by New Patriot Operating Company. In addition, the $2,900 note payable between CJC/BMOC and Patriot issued in connection with the Merger has been eliminated. (C) Represents the cash proceeds from the sale of substantially all of the Cal Jockey land to an affiliate of PaineWebber. It is assumed that the sale of the land will be structured as a tax-deferred exchange. In order to qualify as a tax-deferred exchange, suitable properties must be located and exchanged and the exchange must be effectuated within a relatively short time period allowed by applicable IRS regulations. Until such time that suitable properties are located, the proceeds from the sale of land will be maintained in a restricted trust account. (D) Represents the purchase consideration in excess of the fair market value of the net assets of CJC/BMOC. Patriot primarily attributes this amount to the paired share structure that, subsequent to the Merger, will enable New Patriot REIT and New Patriot Operating Company to be a fully integrated owner and operator of hotels. The paired share tax treatment is no longer available under the Code; however, CJC/BMOC is one of only four publicly- held companies in existence for which this structure has been "grandfathered." (E) Represents adjustment for accrued Merger costs including, legal and accounting fees, printing and various other professional fees anticipated in connection with the Merger and the related transactions. F-86 (F) Represents the exchange of shares of Patriot Common Stock for paired shares of New Patriot REIT Common Stock and New Patriot Operating Company Common Stock. Pursuant to the Merger Agreement, Patriot stockholders received, for each share of Patriot Common Stock held by them at the time the Merger became effective, 0.51895 shares of New Patriot REIT Common Stock and 0.51895 shares of New Patriot Operating Company Common Stock, which shares are paired and transferable only as a single unit. At March 31, 1997, Patriot had 44,093,496 shares of Patriot Common Stock outstanding which were exchanged for approximately 22,882,320 paired shares of New Patriot REIT Common Stock and New Patriot Operating Company Common Stock, resulting in an increase in common stock of approximately $457, which has been offset by a corresponding adjustment to Paid-in Capital. (G) Pursuant to the Merger Agreement, Patriot stockholders received 0.51895 shares of New Patriot REIT Common Stock and 0.51895 shares of New Patriot Operating Company Common Stock for each Patriot share. The estimated value of the CJC/BMOC shares, based on the closing price of Patriot shares on October 30, 1996, of $17.125 (adjusted for the 2-for-1 stock split), is $33.00 per paired share. Based on 5,763,257 CJC/BMOC Paired Shares outstanding, the total purchase consideration is approximately $190,187. The adjustments to shareholders' equity eliminate CJC/BMOC historical equity accounts totaling $23,708 and record equity based on the number of Paired Shares held by CJC/BMOC that remain outstanding after the Merger at $33.00 per Paired Share. F-87 NEW PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PATRIOT CAL JOCKEY PRO FORMA HISTORICAL MERGER PRO FORMA (A) (B) ADJUSTMENTS TOTAL --------- ----------- ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease revenue..... $130,570 $ -- $ -- $130,570 Rental of Racecourse facility and land....................... -- 4,918 1,764 (C) 6,682 Interest and other income....... 10,271 494 -- 10,765 -------- ------- ------ -------- Total revenue................... 140,841 5,412 1,764 148,017 -------- ------- ------ -------- Expenses: Ground lease expense............ 1,390 -- 3,964 (D) 5,354 General and administrative...... 5,342 5,696 (5,046)(E) 5,992 Interest expense................ 45,201 -- -- 45,201 Real estate and personal prop- erty taxes and casualty insur- ance........................... 13,372 -- -- 13,372 Depreciation and amortization... 35,123 932 2,280 (F) 38,335 -------- ------- ------ -------- Total expenses.................. 100,428 6,628 1,198 108,254 -------- ------- ------ -------- Income (loss) before equity in earnings of unconsolidated sub- sidiaries and minority inter- ests............................ 40,413 (1,216) 566 39,763 Equity in earnings of unconsoli- dated subsidiaries............. 7,560 -- -- 7,560 -------- ------- ------ -------- Income (loss) before minority in- terests......................... 47,973 (1,216) 566 47,323 Minority interest in the Patriot Partnership.................... (8,014) -- 1,466 (G) (6,548) Minority interest in other part- nerships....................... (553) -- -- (553) -------- ------- ------ -------- Net income (loss) applicable to common shareholders............. $ 39,406 $(1,216) $2,032 $ 40,222 ======== ======= ====== ======== Net income (loss) per common share(H)........................ $ 0.89 $ (0.21) $ 1.40 ======== ======= ======== Weighted average number of common shares and common share equiva- lents outstanding............... 44,378 5,763 28,793 ======== ======= ========
- -------- (A) Represents Patriot's pro forma results of operations for the year ended December 31, 1996. See page F-99. (B) Represents the historical results of operations of Cal Jockey for the year ended December 31, 1996. (C) Represents adjustments to Racecourse facility rental revenue as a result of (i) the lease agreement between New Patriot REIT and New Patriot Operating Company subsequent to the Merger and the related transactions and the PaineWebber Land Sale and (ii) rental income related to the Borders Lease. (D) Represents ground lease payments to be made with respect to the ground lease with an affiliate of PaineWebber. (E) Represents adjustment for certain administrative salaries and other expenses not expected to be incurred by New Patriot REIT of $568 and approximately $1,194 of non-recurring legal fees and Merger related costs of $3,284. (F) Represents adjustment to reduce depreciation related to the Racecourse facility by $93, offset by amortization of goodwill of $2,373 which results from the adjustment for purchase method of accounting whereby the Racecourse facility and retained leasehold improvements owned by CJC/BMOC are adjusted to estimated fair market value. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 20 years for the Racecourse facility and 5 to 7 years for F, F & E. These estimated useful lives are based on management's knowledge of the properties and the industry in general. Amortization of goodwill is computed using the straight-line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, Patriot believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. (G) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Merger of approximately 14.0%. (H) In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of New Patriot REIT. F-88 NEW PATRIOT REIT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
PATRIOT CAL JOCKEY PRO FORMA HISTORICAL MERGER PRO FORMA (A) (B) ADJUSTMENTS TOTAL --------- ----------- ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Participating lease revenue...... $36,551 $ -- $ -- $36,551 Rental of Racecourse facility and land............................ -- 1,660 100 (C) 1,760 Interest and other income........ 2,555 114 -- 2,669 ------- ------ ----- ------- Total revenue.................... 39,106 1,774 100 40,980 ------- ------ ----- ------- Expenses: Ground lease expense............. 345 -- 991 (D) 1,336 General and administrative....... 3,461 456 (415)(E) 3,502 Interest expense................. 11,709 36 (36)(F) 11,709 Real estate and personal property taxes and casualty insurance.... 3,380 24 -- 3,404 Depreciation and amortization.... 9,064 239 559 (G) 9,862 ------- ------ ----- ------- Total expenses................... 27,959 755 1,099 29,813 ------- ------ ----- ------- Income (loss) before equity in earnings of unconsolidated sub- sidiaries and minority inter- ests............................. 11,147 l,019 (999) 11,167 Equity in earnings of unconsoli- dated subsidiaries.............. 1,021 -- -- 1,021 ------- ------ ----- ------- Income (loss) before minority in- terests.......................... 12,168 1,019 (999) 12,188 Minority interest in the Patriot Partnership..................... (2,019) -- 343 (H) (1,676) Minority interest in other part- nerships........................ (219) -- -- (219) ------- ------ ----- ------- Net income (loss) applicable to common shareholders.............. $ 9,930 $1,019 $(656) $10,293 ======= ====== ===== ======= Net income (loss) per common share(I)......................... $ 0.22 $ 0.18 $ 0.35 ======= ====== ======= Weighted average number of common shares and common share equiva- lents outstanding................ 44,919 5,763 29,074 ======= ====== =======
- -------- (A) Represents Patriot's pro forma results of operations for the three months ended March 31, 1997. See page F-101. (B) Represents the historical results of operations of Cal Jockey for the three months ended March 31, 1997. (C) Represents adjustments to Racecourse facility rental revenue as a result of (i) the lease agreement between New Patriot REIT and New Patriot Operating Company subsequent to the Merger and the related transactions and the PaineWebber Land Sale and (ii) rental income related to the Borders Lease. (D) Represents ground lease payments to be made with respect to the ground lease with an affiliate of PaineWebber. (E) Represents adjustment for non-recurring legal fees and Merger-related costs not expected to be incurred by New Patriot REIT. (F) Represents elimination of $36 of interest expense related to the $2,900 note payable between CJC/BMOC and Patriot. (G) Represents adjustment to reduce depreciation related to the Racecourse facility by $30, offset by amortization of goodwill of $589 which results from the adjustment for purchase method of accounting whereby the Racecourse facility and retained leasehold improvements owned by CJC/BMOC are adjusted to estimated fair market value. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 20 years for the Racecourse facility and 5 to 7 years for F, F & E. These estimated useful lives are based on management's knowledge of the properties and the industry in general. Amortization of goodwill is computed using the straight-line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, Patriot believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. (H) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Merger of approximately 14.0%. (I) In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of New Patriot REIT. F-89 NEW PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PRO FORMA ADJUSTMENTS --------------------------------------- BAY MEADOWS CAREFREE RECENT HISTORICAL RESORTS ACQUISITIONS PRO FORMA (A) (B) (C) ADJUSTMENTS TOTAL ---------- -------- ------------ ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Room revenue........... $ -- $29,251 $ 9,689 $ -- $ 38,940 Food and beverage...... -- 17,356 2,389 -- 19,745 Club and spa revenue... -- 24,710 -- -- 24,710 Pari-mutuel revenue.... 41,476 -- -- -- 41,476 Other racing income.... 10,470 -- -- -- 10,470 Club membership reve- nue................... -- 4,277 -- -- 4,277 Shopping center reve- nue................... -- 1,730 -- -- 1,730 Telephone and other ho- tel revenue........... -- 9,569 769 -- 10,338 Interest and other in- come.................. 1,526 410 -- -- 1,936 ------- ------- ------- ----- -------- Total revenue.......... 53,472 87,303 12,847 -- 153,622 ------- ------- ------- ----- -------- Expenses: Departmental costs-- hotel, club and spa operations............ -- 42,175 5,105 -- 47,280 Direct operating costs of racing facility.... 20,950 -- -- -- 20,950 Purses and incentive awards................ 17,054 -- -- -- 17,054 Commissions, concession costs and Racecourse facility rental....... 8,483 -- -- 693 (D) 9,176 General and administra- tive.................. 3,552 6,229 961 (561)(E) 10,181 Repair and mainte- nance................. -- 7,386 659 -- 8,045 Utilities.............. -- 3,480 602 -- 4,082 Marketing.............. 1,436 5,589 742 -- 7,767 Management fees........ -- 2,971 223 -- 3,194 Depreciation and amor- tization.............. 754 -- -- 318 (F) 1,072 Participating lease payments.............. -- 21,464 (G) 4,503 (G) -- 25,967 Interest expense....... 130 1,170 (H) -- -- 1,300 Real estate and per- sonal property taxes and insurance......... 398 -- -- -- 398 General liability insurance............. -- 492 164 -- 656 ------- ------- ------- ----- -------- Total expenses......... 52,757 90,956 12,959 450 157,122 ------- ------- ------- ----- -------- Income (loss) before income tax provision and minority interest.. 715 (3,653) (112) (450) (3,500) Income tax (provision) benefit............... (260) -- -- 198 (I) (62) ------- ------- ------- ----- -------- Income (loss) before minority interest...... 455 (3,653) (112) (252) (3,562) Minority interest in the Patriot Operating Partnership........... -- 511 (J) 16 (J) (28) (J) 499 ------- ------- ------- ----- -------- Net income (loss) applicable to common shareholders........... $ 455 $(3,142) $ (96) $(280) $ (3,063) ======= ======= ======= ===== ======== Net income (loss) per common share(K)........ $ 0.08 $ (0.11) ======= ======== Weighted average number of common shares and common share equivalents outstanding............ 5,763 28,793 ======= ========
- -------- (A) Represents the historical results of operations of Bay Meadows for the year ended December 31, 1996. (B) Represents adjustments to New Patriot Operating Company's results of operations assuming the Carefree Resort properties had been leased to New Patriot Operating Company at the beginning of the period presented. (C) Represents adjustments to New Patriot Operating Company's results of operations assuming the Radisson Northbrook Hotel and the Luxeford Suites Hotel had been leased to New Patriot Operating Company at the beginning of the period presented. (D) Represents adjustment to Racecourse facility rental expense as a result of (i) the lease agreement between New Patriot REIT and New Patriot Operating Company subsequent to the Merger and the related transactions and (ii) the PaineWebber Land Sale. F-90 (E) Represents adjustment for estimated incremental general and administrative expenses of approximately $300 and certain expenses not expected to be incurred by New Patriot Operating Company of $861, including approximately $472 of non-recurring legal fees and approximately $389 of Merger-related costs. (F) Represents an increase in depreciation of furniture and equipment of $245, and amortization of goodwill of $73 which results from the adjustment for purchase method of accounting whereby the furniture and equipment owned by Bay Meadows is adjusted to estimated fair market value. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 5 to 7 years for F, F & E. Amortization of goodwill is computed using the straight-line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, Patriot believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. (G) Represents lease payments from New Patriot Operating Company to New Patriot REIT calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (H) Represents interest expense incurred on promissory notes issued to the Realty Partnership by PAH RSI Lessee in connection with the acquisition of certain assets, which assets are assumed to be acquired by New Patriot Operating Company. (I) Represents an adjustment to the estimated federal and state tax liability as a result of the pro forma operating loss of the Carefree Resorts and the pro forma adjustments to Bay Meadows for the year ended December 31, 1996. (J) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Merger of approximately 14.0%. (K) In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of New Patriot Operating Company. F-91 NEW PATRIOT OPERATING COMPANY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
PRO FORMA ADJUSTMENTS -------------------------------------- BAY MEADOWS CAREFREE RECENT HISTORICAL RESORTS ACQUISITIONS PRO FORMA (A) (B) (C) ADJUSTMENTS TOTAL ---------- -------- ------------ ----------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Room revenue........... $ -- $11,059 $2,118 $ -- $13,177 Food and beverage...... -- 5,440 451 -- 5,891 Club and spa revenue... -- 8,706 -- -- 8,706 Pari-mutuel revenue.... 17,099 -- -- -- 17,099 Other racing income.... 3,170 -- -- -- 3,170 Club membership reve- nue................... -- 348 -- -- 348 Shopping center reve- nue................... -- 474 -- -- 474 Telephone and other ho- tel revenue........... -- 3,588 181 -- 3,769 Interest and other in- come.................. 232 458 -- -- 690 ------- ------- ------ ----- ------- Total revenue.......... 20,501 30,073 2,750 -- 53,324 ------- ------- ------ ----- ------- Expenses: Departmental costs-- hotel, club and spa operations............ -- 12,670 1,158 -- 13,828 Direct operating costs of racing facility.... 6,608 -- -- -- 6,608 Purses and incentive awards................ 7,240 -- -- -- 7,240 Commissions, concession costs and Racecourse facility rental....... 3,084 -- -- 17 (D) 3,101 General and administra- tive.................. 783 1,809 248 (249)(E) 2,591 Repair and mainte- nance................. -- 2,105 142 -- 2,247 Utilities.............. -- 759 190 -- 949 Marketing.............. 465 1,185 220 -- 1,870 Management fees........ -- 1,425 57 -- 1,482 Depreciation and amor- tization.............. 181 -- -- 87 (F) 268 Participating lease payments.............. -- 8,292 (G) 1,136 (G) -- 9,428 Interest expense....... 26 293 (H) -- -- 319 Real estate and per- sonal property taxes and insurance......... 129 -- -- -- 129 General liability insurance............. 122 108 22 -- 252 ------- ------- ------ ----- ------- Total expenses......... 18,638 28,646 3,173 (145) 50,312 ------- ------- ------ ----- ------- Income (loss) before income tax provision and minority interest.. 1,863 1,427 (423) 145 3,012 Income tax (provision) benefit............... (748) -- -- (457)(I) (1,205) ------- ------- ------ ----- ------- Income (loss) before minority interest...... 1,115 1,427 (423) (312) 1,807 Minority interest in the Patriot Operating Partnership........... -- (200)(J) 59 (J) (112)(J) (253) ------- ------- ------ ----- ------- Net income (loss) applicable to common shareholders........... $ 1,115 $ 1,227 $ (364) $(424) $ 1,554 ======= ======= ====== ===== ======= Net income (loss) per common share(K)........ $ 0.19 $ 0.05 ======= ======= Weighted average number of common shares and common share equivalents outstanding............ 5,763 29,074 ======= =======
- -------- (A) Represents the historical results of operations of Bay Meadows for the three months ended March 31, 1997. (B) Represents adjustments to New Patriot Operating Company's results of operations assuming the Carefree Resort properties had been leased to New Patriot Operating Company at the beginning of the period presented. (C) Represents adjustments to New Patriot Operating Company's results of operations assuming the Radisson Northbrook Hotel and the Luxeford Suites Hotel had been leased to New Patriot Operating Company at the beginning of the period presented. (D) Represents adjustment to Racecourse facility rental expense as a result of (i) the lease agreement between New Patriot REIT and New Patriot Operating Company subsequent to the Merger and the related transactions and (ii) the PaineWebber Land Sale. (E) Represents adjustment for estimated incremental general and administrative expenses of approximately $75 and certain expenses not expected to be incurred by New Patriot Operating Company of $324, including approximately $257 of non-recurring legal fees and approximately $67 of Merger related costs. F-92 (F) Represents an increase in depreciation of furniture and equipment of $69, and amortization of goodwill of $18 which results from the adjustment for purchase method of accounting whereby the furniture and equipment owned by Bay Meadows is adjusted to estimated fair market value. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 5 to 7 years for F, F & E. Amortization of goodwill is computed using the straight-line method over a 40 year estimated useful life. Because the paired share structure is "grandfathered" under the Code, Patriot believes the life of the paired share structure is perpetual. Under generally accepted accounting principles, however, the maximum amortization period is 40 years for intangible assets. (G) Represents lease payments from New Patriot Operating Company to New Patriot REIT calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (H) Represents interest expense incurred on promissory notes issued to the Realty Partnership by PAH RSI Lessee in connection with the acquisition of certain assets, which assets are assumed to be acquired by New Patriot Operating Company. (I) Represents an adjustment to the estimated federal and state tax liability as a result of the pro forma operating income of the Carefree Resorts and the pro forma adjustments to Bay Meadows for the three months ended March 31, 1997. (J) Represents the adjustments to minority interest to reflect the estimated minority interest percentage subsequent to the Merger of approximately 14.0%. (K) In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of New Patriot Operating Company. F-93 COMBINED LESSEES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel, which are separately owned through two special purpose non-controlled entities, to Lessees. The Combined Lessees subsequent to the Merger and the related transactions consist of CHC Lease Partners which leases 25 hotels, NorthCoast Hotel, L.L.C. ("NorthCoast Lessee"), which leases 9 hotels, DTR North Canton, Inc. (the "Doubletree Lessee") which leases 6 hotels, Crow Hotel Lessee, Inc. (the "Wyndham Lessee") which leases 2 hotels, Metro Hotels Leasing Corporation ("Metro Lease Partners") which leases 1 hotel and Grand Heritage Leasing L.L.C. (the "Grand Heritage Lessee") which leases 3 hotels. With respect to the hotels leased to PAH RSI Lessee, New Patriot REIT expects to terminate its leases with PAH RSI Lessee and release such hotels to New Patriot Operating Company. PAH RSI Lessee leased six hotels from Patriot as of March 31, 1997 which have been eliminated in the following unaudited Pro Forma Condensed Combined Statements of Operations. Patriot acquired the Sheraton Park Place Hotel in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort in May 1997 and then leased these hotels to PAH RSI Lessee. The operations of the Sheraton Park Place Hotel and the Myrtle Beach Hilton Oceanfront Golf Resort have not been included in the following pro forma financial data. The Participating Leases provide for staggered terms of ten to twelve years and the payment of the greater of base or participating rent, plus certain additional charges, as applicable. The Combined Lessees' unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1996 and the three months ended March 31, 1997 are presented as if 46 of the hotels that Patriot currently leases to the Combined Lessees pursuant to Participating Leases had been leased as of January 1, 1996. Six of the hotels leased to PAH RSI Lessee (excluding the Sheraton Park Place Hotel, which was acquired by Patriot in April 1997, and the Myrtle Beach Hilton Oceanfront Golf Resort, which was acquired by Patriot in May 1997) are assumed to have been leased to New Patriot Operating Company and, therefore, have been eliminated from the Pro Forma Condensed Combined Statements of Operations for the Combined Lessees. The pro forma information is based in part upon the Statements of Operations of CHC Lease Partners, and the Statement of Operations of NorthCoast Lessee filed with Patriot's Annual Report on Form 10-K for the year ended December 31, 1996 and the Statements of Operations of CHC Lease Partners, the Statement of Operations of NorthCoast Lessee and the Statement of Operations of PAH RSI Lessee filed with Patriot's Quarterly Report on Form 10-Q for the three months ended March 31, 1997. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The unaudited Pro Forma Condensed Combined Statements of Operations are not necessarily indicative of what the actual results of operations of the Combined Lessees would have been assuming such transactions had been completed as of the beginning of the periods presented, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Combined Statement of Operations for the interim period ended March 31, 1997 is not necessarily indicative of the results of operations for the full year. F-94 COMBINED LESSEES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
LESSEES COMBINED PRE-MERGER MERGER LESSEES PRO FORMA ADJUSTMENTS PRO FORMA (A) (G) TOTAL ----------- ------------ --------- (IN THOUSANDS) Revenue: Room................................... $260,991 $(38,940) $222,051 Food and beverage...................... 105,234 (19,745) 85,489 Conference center...................... 2,354 -- 2,354 Club and spa revenue................... 24,710 (24,710) -- Club membership revenue................ 4,277 (4,277) -- Shopping center revenue................ 1,730 (1,730) -- Telephone and other.................... 32,667 (10,748) 21,919 --------- -------- -------- Total revenue....................... 431,963 (100,150) 331,813 --------- -------- -------- Expenses: Departmental costs and expenses........ 177,861 (47,280) 130,581 General and administrative............. 38,371 (6,822) 31,549 Ground lease expense................... 2,064 -- 2,064 Repair and maintenance................. 24,460 (8,045) 16,415 Utilities.............................. 19,793 (4,082) 15,711 Marketing.............................. 35,646 (6,331) 29,315 Interest expense....................... 1,173 (B) (1,170) 3 Insurance.............................. 2,881 (656) 2,225 Participating lease payments........... 130,570 (C) (25,967) 104,603 --------- -------- -------- Total expenses...................... 432,819 (100,353) 332,466 --------- -------- -------- Income (loss) before lessee income (ex- pense)................................. (856) 203 (653) --------- -------- -------- Dividend and interest income............ 1,543 (D) -- 1,543 Management fees......................... (10,265)(E) 3,195 (7,070) Lessee general and administrative....... (2,043)(F) 367 (1,676) --------- -------- -------- (10,765) 3,562 (7,203) --------- -------- -------- Net loss................................ $ (11,621) $ 3,765 $ (7,856) ========= ======== ========
- -------- (A) The Lessees pre-Merger pro forma results of operations represent the combined pro forma operating results of the Lessees. These Lessees' pro forma results of operations include (i) the combined historical results of operations of CHC Lease Partners and Metro Lease Partners for the year ended December 31, 1996 and NorthCoast Lessee, Doubletree Lessee, Wyndham Lessee and Grand Heritage Lessee for the period from their respective inception of operations through December 31, 1996 and (ii) adjustments to the Lessees' combined results of operations assuming the 52 hotels currently leased by Patriot to the Lessees (including six of the hotel properties leased to PAH RSI Lessee as of March 31, 1997 and excluding the Sheraton Park Place Hotel acquired in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort acquired in May 1997) had been leased at the beginning of the period presented. (B) Represents pro forma interest expense on promissory notes issued in connection with the acquisition of certain assets by PAH RSI Lessee, assuming the notes were outstanding at the beginning of the period presented. (C) Represents lease payments calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels. (D) Includes dividend income on OP Units in the Realty Partnership which form a portion of the required capitalization of CHC Lease Partners and NorthCoast Lessee, respectively. Pro forma amounts exclude additional dividend income earned on OP Units held by certain Lessees, and pro forma interest income earned on invested cash balances. (E) Represents pro forma management fees paid to the Operators under the terms of their respective management agreements with the Lessees. (F) Represents pro forma overhead expenses, which include an estimate of the Lessees' salaries and benefits, professional fees, insurance costs and administrative expenses. (G) Represents the elimination of the pro forma results of operations for the four Carefree Resorts, the Radisson Northbrook Hotel and the Luxeford Suites Hotel which are expected to be leased to New Patriot Operating Company following the Merger. F-95 COMBINED LESSEES PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
LESSEES COMBINED PRE-MERGER MERGER LESSEES PRO FORMA ADJUSTMENTS PRO FORMA (A) (G) TOTAL ----------- ------------ --------- (IN THOUSANDS) Revenue: Room................................... $ 69,862 $(13,177) $56,685 Food and beverage...................... 27,891 (5,891) 22,000 Conference center...................... 748 -- 748 Club and spa revenue................... 8,706 (8,706) -- Club membership revenue................ 348 (348) -- Shopping center........................ 474 (474) -- Telephone and other.................... 9,658 (4,227) 5,431 -------- -------- ------- Total revenue....................... 117,687 (32,823) 84,864 -------- -------- ------- Expenses: Departmental costs..................... 46,332 (13,828) 32,504 General and administrative............. 9,610 (1,927) 7,683 Ground lease........................... 320 -- 320 Repairs and maintenance................ 6,322 (2,247) 4,075 Utilities.............................. 4,622 (949) 3,673 Marketing.............................. 9,081 (1,405) 7,676 Interest............................... 293 (B) (293) -- Insurance.............................. 631 (130) 501 Participating lease payments........... 36,551 (C) (9,428) 27,123 -------- -------- ------- 113,762 (30,207) 83,555 -------- -------- ------- Income (loss) before lessee income (expense).............................. 3,925 (2,616) 1,309 -------- -------- ------- Dividend and interest income............ 945 (D) -- 945 Management fees......................... (3,117)(E) 1,482 (1,635) Lessee general and administrative....... (575)(F) 120 (455) -------- -------- ------- (2,747) 1,602 (1,145) -------- -------- ------- Net income (loss)....................... $ 1,178 $ (1,014) $ 164 ======== ======== =======
- -------- (A) The Lessees pre-Merger pro forma results of operations represent the combined pro forma operating results of the Lessees. These Lessees' pro forma results of operations include (i) the combined historical results of operations of CHC Lease Partners, Metro Lease Partners, NorthCoast Lessee, Doubletree Lessee, Wyndham Lessee and Grand Heritage Lessee for the three months ended March 31, 1997 and, for PAH RSI Lessee, for the period from inception of operations through March 31, 1997 and (ii) adjustments to the Lessees' combined results of operations assuming the 52 hotels currently leased by Patriot to the Lessees (including six of the hotel properties currently leased to PAH RSI Lessee as of March 31, 1997 and excluding the Sheraton Park Place Hotel acquired in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort acquired in May 1997) had been leased at the beginning of the period presented. (B) Represents pro forma interest expense on promissory notes issued in connection with the acquisition of certain assets by PAH RSI Lessee, assuming the notes were outstanding at the beginning of the period presented. (C) Represents lease payments calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels. (D) Includes dividend income on OP Units in the Realty Partnership which form a portion of the required capitalization of CHC Lease Partners and NorthCoast Lessee, respectively. Pro forma amounts exclude additional dividend income earned on OP Units held by certain Lessees, and pro forma interest income earned on invested cash balances. (E) Represents pro forma management fees paid to the Operators under the terms of their respective management agreements with the Lessees. (F) Represents pro forma overhead expenses, which include an estimate of the Lessees' salaries and benefits, professional fees, insurance costs and administrative expenses. (G) Represents the elimination of the pro forma results of operations for the four Carefree Resorts, the Radisson Northbrook Hotel and the Luxeford Suites Hotel which are expected to be leased to New Patriot Operating Company following the Merger. F-96 PATRIOT (PRE MERGER) PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Patriot completed the Initial Offering on October 2, 1995 and commenced operations. Upon completion of the Initial Offering, Patriot, through its wholly-owned subsidiary, PAH LP, contributed substantially all of the net proceeds of the Initial Offering to the Realty Partnership in exchange for an approximate 85.3% limited partnership interest in the Realty Partnership. Patriot, through its wholly-owned subsidiary, PAH GP, is the sole general partner and the holder of a 1.0% general partnership interest in the Realty Partnership. The Realty Partnership used approximately $263,600 of the net proceeds of the Initial Offering to acquire ownership interests in 20 hotels (the "Initial Hotels") from various entities (the "Selling Entities") and to repay existing mortgage and other indebtness of the Initial Hotels. In consideration for the sale of the Initial Hotels, certain owners in the Selling Entities, including affiliates of Patriot, elected to receive OP Units in the Realty Partnership. The 2,324,312 OP Units received by such owners represented an approximate 13.7% equity interest in the Realty Partnership as Patriot commenced operations. The balance of the proceeds from the Initial Offering, together with proceeds from the Line of Credit, were used to finance acquisitions of two additional hotel investments, to provide for renovations to existing hotels and for general working capital during 1995. During 1996, Patriot acquired 24 additional hotel properties, utilizing cash drawn on its Line of Credit and issuing 600,703 OP Units of the Realty Partnership in connection with the purchases. In May 1996, Patriot sold an aggregate of approximately $40,000 of equity securities in the Private Placement. The proceeds of the Private Placement were used primarily to reduce amounts outstanding under the Line of Credit. During the third quarter of 1996, Patriot completed the Follow-On Offering. The offering price of all shares sold in the Follow-On Offering was $14.125 per share, resulting in net proceeds (less the underwriters' discount and offering expenses) of approximately $160,222, of which approximately $151,963 was used to reduce amounts outstanding under the Line of Credit. As a result, at December 31, 1996, the Realty Partnership owned interests in 46 hotels in 18 states with an aggregate 11,340 guest rooms and Patriot owned an approximate 87.3% interest in the Realty Partnership. In the first quarter of 1997, Patriot acquired ownership interests in the Recent Acquisitions. Subsequent to March 31, 1997, Patriot acquired the Sheraton Park Place Hotel in Minneapolis, Minnesota and the Myrtle Beach Hilton Oceanfront Golf Resort. These acquisitions were financed primarily with funds drawn on the Line of Credit. In addition, in January 1997, Patriot acquired the Carefree Resorts for a total purchase price of approximately $264 million. The acquisition of the Carefree Resorts was primarily financed with funds drawn on the Line of Credit and the issuance of 1,295,077 OP Units of the Realty Partnership. As of March 31, 1997, Patriot owned interests in 54 hotels and resorts in 21 states with an aggregate of 12,671 guest rooms and had an approximate 83.1% interest in the Realty Partnership. The following unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1996 and the three months ended March 31, 1997 of Patriot are presented as if (i) the Private Placement and the Follow-On Offering, (ii) the acquisition of 24 additional hotel properties in 1996 including a hotel owned through a special-purpose, non-controlled subsidiary, (iii) the acquisition of the Carefree Resorts and the Recent Acquisitions (excluding the Sheraton Park Place Hotel acquired by Patriot in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort acquired by Patriot in May 1997 and leased to PAH RSI Lessee) and (iv) the funding of the mortgage notes to affiliates of CHC Lease Partners had occurred on January 1, 1996. Such pro forma information is based in part upon the Consolidated Statements of Operations of Patriot filed with Patriot's Annual Report on Form 10-K for the year ended December 31, 1996 and the Quarterly Report on Form 10-Q for the three months ended March 31, 1997; the historical financial statements of certain hotels acquired by Patriot F-97 filed in Patriot's Current Reports on Form 8-K dated April 2, 1996, as amended, December 5, 1996 and January 16, 1997, as amended; and the Pro Forma Condensed Combined Statements of Operations of the Lessees. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The following unaudited Pro Forma Financial Statements do not reflect the Merger and the related transactions. The following unaudited Pro Forma Condensed Consolidated Statements of Operations are not necessarily indicative of what actual results of operations of Patriot would have been assuming such transactions had been completed as of January 1, 1996, nor do they purport to represent the results of operations for future periods. Further, the unaudited Pro Forma Condensed Consolidated Statement of Operations for the interim period ended March 31, 1997 is not necessarily indicative of the results of operations for the full year. F-98 PATRIOT (PRE MERGER) PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
PRO FORMA ADJUSTMENTS ------------------------------------ PATRIOT RECENT CAREFREE HISTORICAL ADJUSTMENTS ACQUISITIONS RESORTS PRO FORMA (A) (B) (C) (D) TOTAL ---------- ----------- ------------ -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Participating lease revenue............... $75,893 $27,111 (E) $6,102 (E) $21,464 (E) $130,570 Interest and other in- come.................. 600 8,501 (F) -- 1,170 (F) 10,271 ------- ------- ------ ------- -------- Total revenue.......... 76,493 35,612 6,102 22,634 140,841 ------- ------- ------ ------- -------- Expenses: Ground lease expense... 1,075 315 (G) -- -- 1,390 General and administra- tive.................. 4,500 742 (H) -- 100 (H) 5,342 Interest expense....... 7,380 20,502 (I) 3,240 (I) 14,079 (I) 45,201 Real estate and per- sonal property taxes and casualty insurance............. 7,150 3,703 (J) 1,076 (J) 1,443 (J) 13,372 Depreciation and amor- tization.............. 17,420 8,451 (K) 1,843 (K) 7,409 (K) 35,123 ------- ------- ------ ------- -------- Total expenses......... 37,525 33,713 6,159 23,031 100,428 ------- ------- ------ ------- -------- Income (loss) before equity in earnings of unconsolidated subsidiaries and minority interests..... 38,968 1,899 (57) (397) 40,413 Equity in earnings of unconsolidated subsidiaries.......... 5,845 1,372 (L) -- 343 (M) 7,560 ------- ------- ------ ------- -------- Income (loss) before minority interests..... 44,813 3,271 (57) (54) 47,973 Minority interest in the Patriot Partnership........... (6,767) (1,247) -- -- (8,014)(N) Minority interest in other partnerships.... (55) (650)(O) 152 (O) -- (553) ------- ------- ------ ------- -------- Net income (loss) applicable to common shareholders........... $37,991 $ 1,374 $ 95 $ (54) $ 39,406 ======= ======= ====== ======= ======== Net income per common share (P)(Q)........... $ 1.06 $ 0.89 ======= ======== Weighted average number of common shares and common share equivalents outstanding (P) ................... 35,938 44,378 ======= ========
- -------- (A) Represents Patriot's historical results of operations for the year ended December 31, 1996. (B) Represents adjustments to Patriot's results of operations assuming the Private Placement, the Follow-On Offering and the acquisition of the 24 hotels in 1996 had occurred as of the beginning of the period presented. (C) Represents adjustments to Patriot's results of operations assuming the acquisition of the four Recent Acquisitions: the Luxeford Suites Hotel, the Holiday Inn Redmont Hotel, the Radisson Overland Park Hotel and the Radisson Northbrook Hotel, had occurred at the beginning of the period presented. (D) Represents adjustments to Patriot's results of operations assuming the acquisition of the Carefree Resort properties had occurred at the beginning of the period presented. Sales and cost of sales related to the residential real estate which was owned, developed and sold by the Carefree Resorts are excluded because Patriot anticipates selling the residential real estate to an affiliate at fair market value. Therefore, no gain or loss on the sale of the residential real estate is expected. (E) Represents lease payments from the Lessees to the Realty Partnership calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (F) Pro forma interest and other income consists of historical interest and other income of approximately $600 related to the 46 hotels owned as of December 31, 1996, an adjustment for pro forma interest income of $21 earned on notes receivable issued to the Realty Partnership by certain special-purpose, non-controlled subsidiaries, and pro forma interest income of $1,170 earned on notes receivable issued to the Realty Partnership by PAH RSI Lessee in connection with the sale of certain assets and the right to receive certain royalty fees (assuming such notes were outstanding at the beginning of the period presented), resulting in pro forma interest and other income of $1,791. In addition, pro forma interest and other income has been adjusted to include $8,480 of interest income earned on $103,000 of mortgage notes receivable from certain affiliates of CHC Lease Partners which bear interest at an annual rate equal to LIBOR plus 2.75%. (G) Represents ground lease payments to be made with respect to certain of the hotels. (H) Represents increased salaries, insurance, travel, audit, legal and other expenses associated with operating as a public company and the continued growth of Patriot. Also includes annual amortization of unearned stock compensation computed on a straight-line basis over the three to four year vesting periods. F-99 (I) Pro forma interest expense consists of historical interest expense and amortization of deferred loan costs of $7,380, pro forma interest expense of approximately $8,966 related to the 46 hotels owned as of December 31, 1996, pro forma interest expense of approximately $3,240 related to the Recent Acquisitions, and pro forma interest expense of approximately $14,079 related to the acquisition of Carefree Resorts. Pro forma interest expense also includes an adjustment to reflect interest expense of approximately $7,391 incurred on net borrowings under the Line of Credit which will be used to fund $103,000 in mortgage notes receivable from certain affiliates of CHC Lease Partners. In addition, pro forma interest expense includes adjustments to reflect additional interest expense of approximately $762 related to borrowings under the Line of Credit used to fund deferred loan costs of approximately $10,150 associated with the modification and extension of the Line of Credit and amortization of such deferred loan costs of approximately $3,383. Deferred loan costs are amortized over the term of the related loan. Additionally, a 0.25% increase in the interest rate on the Line of Credit would increase interest expense to $46,522, decrease net income to $38,308 and decrease net income per common share to $0.86 per share. Patriot has entered into a commitment letter with PaineWebber Real Estate and Chase which will modify and extend the Line of Credit up to $700,000 and provide for a term loan of $500,000. The additional availability under this New Credit Facility will be primarily used to finance future acquisitions. In the event Patriot is successful in obtaining the New Credit Facility, deferred loan costs totaling approximately $16,325, including fees, legal and other expenses are expected to be incurred in connection with New Credit Facility (of which approximately $10,150 relate to the modification and extension of the Line of Credit and have been reflected in the pro forma financial information). (J) Represents real estate and personal property taxes, and casualty insurance to be paid by the Realty Partnership. (K) Represents adjustments to depreciation on the Patriot hotels owned as of December 31, 1996 of $8,441 and amortization of $10. The adjustments related to the Recent Acquisitions and the Carefree Resorts acquisition represent depreciation. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements and 5 to 7 years for F, F & E. These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. Amortization of franchise fees is computed using the straight-line method over the terms of the related franchise agreement. (L) Represents equity in income of the unconsolidated subsidiaries which own the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel. (M) Represents equity in income of PAH Boulders, Inc. (N) Represents the adjustments to minority interest assuming the acquisition of the 24 hotels by Patriot in 1996, including the hotels owned through the special-purpose non-controlled subsidiaries, the Private Placement and the Follow-On Offering of Patriot's common stock, the acquisition of the Recent Acquisitions, and the acquisition of the Carefree Resorts had occurred at the beginning of the period presented. Prior to the acquisition of the Recent Acquisitions and the Carefree Resorts, the minority interest percentage was approximately 12.7%. Subsequent to the acquisition of the Carefree Resorts, the minority interest percentage was approximately 16.9%. (O) Represents the minority interest related to the partnerships with DTR PAH Holding, Inc., assuming such entities had been formed and the six hotels owned by such partnerships had been acquired at the beginning of the period presented. (P) The net income per common share and the weighted average number of common shares and common share equivalents have been adjusted for the 2-for-1 stock split effected in the form of a stock dividend. (Q) In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of Patriot. F-100 PATRIOT (PRE MERGER) PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
PRO FORMA ADJUSTMENTS ------------------------------------- PATRIOT RECENT CAREFREE HISTORICAL ACQUISITIONS RESORTS PRO FORMA (A) ADJUSTMENTS (B) (C) TOTAL ---------- ----------- ------------ -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Participating lease revenue............... $35,013 $ -- $ 618 (D) $ 920 (D) $36,551 Interest and other income................ 375 2,125 (E) -- 55 (E) 2,555 ------- ------- ----- ----- ------- Total revenue.......... 35,388 2,125 618 975 39,106 ------- ------- ----- ----- ------- Expenses: Ground lease expense... 345 -- -- -- 345 General and administrative........ 2,782 679 (F) -- -- 3,461 Interest expense....... 7,805 2,870 (G) 365 (G) 669 (G) 11,709 Real estate and per- sonal property taxes and casualty insurance............. 3,201 -- 120 (H) 59 (H) 3,380 Depreciation and amortization.......... 8,496 -- 229 (I) 339 (I) 9,064 ------- ------- ----- ----- ------- Total expenses......... 22,629 3,549 714 1,067 27,959 ------- ------- ----- ----- ------- Income (loss) before equity in earnings of unconsolidated subsidiaries and minority interests..... 12,759 (1,424) (96) (92) 11,147 Equity in earnings of unconsolidated subsidiaries.......... 1,021 -- -- -- 1,021 ------- ------- ----- ----- ------- Income (loss) before minority interests..... 13,780 (1,424) (96) (92) 12,168 Minority interest in the Realty Partnership........... (2,232) 213 (J) -- -- (2,019)(J) Minority interest in other partnerships.... (200) -- (19) (K) -- (219) ------- ------- ----- ----- ------- Net income (loss) applicable to common shareholders........... $11,348 $(1,211) $(115) $ (92) $ 9,930 ======= ======= ===== ===== ======= Net income per common share (L)(M)........... $ 0.25 $ 0.22 ======= ======= Weighted average number of common shares and common share equivalents outstanding (L) ................... 44,552 44,919 ======= =======
- -------- (A) Represents Patriot's historical results of operations for the three months ended March 31, 1997. (B) Represents adjustments to Patriot's results of operations assuming the acquisition of the four Recent Acquisitions: the Luxeford Suites Hotel, the Holiday Inn Redmont Hotel, the Radisson Overland Park Hotel and the Radisson Northbrook Hotel, had occurred at the beginning of the period presented. (C) Represents adjustments to Patriot's results of operations assuming the acquisition of the Carefree Resort properties had occurred at the beginning of the period presented. Sales and cost of sales related to the residential real estate which was owned, developed and sold by the Carefree Resorts are excluded because Patriot anticipates selling the residential real estate to an affiliate at fair market value. Therefore, no gain or loss on the sale of the residential real estate is expected. (D) Represents lease payments from the Lessees to the Realty Partnership calculated on a pro forma basis by applying the provisions of the Participating Leases to the historical revenue of the hotels for the period presented. (E) Pro forma interest and other income consists of historical interest and other income of $375 related to the 54 hotels owned as of March 31, 1997 and pro forma interest income of $55 earned on notes receivable issued to the Realty Partnership by PAH RSI Lessee in connection with the sale of certain assets and the right to receive certain royalty fees (assuming such notes were outstanding at the beginning of the period presented), resulting in pro forma interest and other income of $430. In addition, pro forma interest and other income has been adjusted to include $2,125 of interest income earned on $103,000 of mortgage notes receivable from certain affiliates of CHC Lease Partners which bear interest at an annual rate equal to LIBOR plus 2.75%, assuming such notes were outstanding at the beginning of the period presented. (F) Represents amortization of unearned stock compensation computed on a straight-line basis over the three to four year vesting periods. (G) Pro forma interest expense consists of historical interest expense and amortization of deferred loan costs of $7,805, pro forma interest expense of approximately $365 incurred on the net borrowings under the Line of Credit related to the Recent Acquisitions and pro forma interest expense of approximately $669 incurred on the Carefree Resorts, resulting in pro forma interest expense of $8,839. Pro forma interest expense also includes an adjustment to reflect interest expense of approximately $1,835 incurred on net borrowings under the Line of Credit which will be used to fund $103,000 in mortgage notes receivable from certain affiliates of CHC Lease Partners. In F-101 addition, pro forma interest expense includes adjustments to reflect additional interest expense of approximately $189 related to borrowings under the Line of Credit used to fund deferred loan costs of approximately $10,150 associated with the expansion and modification of the Line of Credit and the amortization of such deferred loan costs of approximately $846. Deferred loan costs are amortized over the term of the related loan. Additionally, a 0.25% increase in the interest rate on the Line of Credit would increase interest expense to $12,071, decrease net income to $9,628 and decrease net income per common share to $0.21 per share. Patriot has entered into a commitment letter with PaineWebber Real Estate and Chase which will modify and extend the Line of Credit up to $700,000 and provide for a term loan of $500,000. The additional availability under this New Credit Facility will be primarily used to finance future acquisitions. In the event Patriot is successful in obtaining the New Credit Facility, deferred loan costs totaling approximately $16,325, including fees, legal and other expenses are expected to be incurred in connection with the New Credit Facility (of which approximately $10,150 relate to the modification and extension of the Line of Credit and have been reflected in the pro forma financial information). (H) Represents real estate and personal property taxes, and casualty insurance to be paid by the Realty Partnership. (I) Represents adjustments to depreciation on the Recent Acquisitions and the Carefree Resorts. Depreciation is computed using the straight-line method and is based upon the estimated useful lives of 35 years for hotel buildings and improvements and 5 to 7 years for F, F & E. These estimated useful lives are based on management's knowledge of the properties and the hotel industry in general. (J) Represents the adjustments to minority interest assuming the acquisition of the Recent Acquisitions and the acquisition of the Carefree Resorts had occurred at the beginning of the period presented. Prior to the acquisition of the Recent Acquisitions and the Carefree Resorts, the minority interest percentage was approximately 12.7%. Subsequent to the acquisition of the Carefree Resorts, the minority interest percentage was approximately 16.9%. (K) Represents the minority interest related to the partnerships with DTR PAH Holding, Inc., assuming such entities had been formed and the six hotels owned by such partnerships had been acquired at the beginning of the period presented. (L) The net income per common share and the weighted average number of common shares and common share equivalents have been adjusted for the 2-for-1 stock split effected in the form of a stock dividend. (M) In February 1997, the Financial Accounting Standards Board issued Statement 128 which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of Statement 128 will not have a material effect on the earnings per share of Patriot. F-102 PATRIOT (PRE MERGER) PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 (UNAUDITED) The following unaudited Pro Forma Condensed Consolidated Balance Sheet is presented as if the funding of the mortgage notes to certain affiliates of CHC Lease Partners had occurred on March 31, 1997. Such pro forma information is based in part upon Patriot's Consolidated Balance Sheet as of March 31, 1997 and should be read in conjunction with the financial statements filed with Patriot's Quarterly Report on Form 10-Q for the period ended March 31, 1997. In management's opinion, all adjustments necessary to reflect the effect of this transaction have been made. The following unaudited Pro Forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been assuming the above described transaction had been completed as of March 31, 1997, nor does it purport to represent the future financial position of Patriot.
PATRIOT PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS TOTAL ---------- ----------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Net investment in hotel and resort prop- erties and land held for sale.......... $947,722 $ -- $ 947,722 Mortgage notes and other receivables from unconsolidated subsidiaries....... 73,622 -- 73,622 Notes receivable........................ 10,189 103,000(A) 113,189 Investment in unconsolidated subsidiar- ies.................................... 12,140 -- 12,140 Cash and cash equivalents............... 6,271 -- 6,271 Accounts receivable..................... 15,648 -- 15,648 Deferred expenses, net.................. 4,297 10,150(B) 14,447 Prepaid expenses and other assets....... 12,009 -- 12,009 ---------- -------- ---------- Total assets........................... $1,081,898 $113,150 $1,195,048 ========== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under line of credit and mortgage notes......................... $466,712 $113,150(C) $ 579,862 Dividends and distributions payable..... 13,938 -- 13,938 Accounts payable and accrued expenses... 13,498 -- 13,498 Due to unconsolidated subsidiaries...... 6,098 -- 6,098 Minority interest in the Realty Part- nership................................ 127,262 -- 127,262 Minority interest in other partner- ships.................................. 13,774 -- 13,774 Shareholders' equity: Preferred stock........................ -- -- -- Common stock........................... -- -- -- Paid-in capital........................ 457,178 -- 457,178 Unearned stock compensation, net....... (16,261) -- (16,261) Retained earnings...................... (301) -- (301) ---------- -------- ---------- Total shareholders' equity............. 440,616 -- 440,616 ---------- -------- ---------- Total liabilities and shareholders' eq- uity.................................. $1,081,898 $113,150 $1,195,048 ========== ======== ==========
- -------- (A) Represents mortgage notes issued to the Realty Partnership by certain affiliates of CHC Lease Partners. (B) Represents deferred loan costs to be incurred in connection with modification and extension of the Line of Credit. (C) Represents draws on the Line of Credit related to the funding of mortgage notes receivable from certain affiliates of CHC Lease Partners. Patriot has entered into a commitment letter with PaineWebber Real Estate and Chase which will modify and extend the Line of Credit up to $700,000 and provide for a term loan of $500,000. The additional availability under this New Credit Facility will be primarily used to finance future acquisitions. In the event Patriot is successful in obtaining the New Credit Facility, deferred loan costs totaling approximately $16,325, including fees, legal and other expenses are expected to be incurred in connection with the New Credit Facility (of which approximately $10,150 relate to the modification and extension of the Line of Credit and have been reflected in the pro forma financial information). F-103 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger, dated as of February 24, 1997, as amended as restated as of May 28, 1997, by and among Patriot American Hospitality, Inc., Patriot American Hospitality Partnership, L.P., California Jockey Club and Bay Meadows Operating Company (the "Merger Agreement"), attached as annex A to the Joint Proxy Statement/Prospectus contained in the Registration Statement on Form S-4 (No. 333-28085) dated May 30, 1997 filed by California Jockey Club and Bay Meadows Operating Company and incorporated herein by reference. 4.1* Amended and Restated Certificate of Incorporation of Patriot American Hospitality, Inc. 4.2* Amended and Restated Bylaws of Patriot American Hospitality, Inc. 4.3* Amended and Restated Certificate of Incorporation of Patriot American Hospitality Operating Company 4.4* Amended and Restated Bylaws of Patriot American Hospitality Operating Company 99.1* Press release announcing the consummation of the merger of Patriot American Hospitality, Inc. and California Jockey Club. 99.2 The material contained under the captions "SUMMARY--Interests of Certain Officers and Directors," "RISK FACTORS--Benefits to Certain Directors and Officers of Cal Jockey and Bay Meadows," "THE MERGER AND SUBSCRIPTION--Interests of Certain Officers and Directors," and "THE MERGER AGREEMENT--Indemnification," incorporated herein by reference to Cal Jockey's and Bay Meadow's Registration Statement on Form S-4 (File No. 333-28085) dated May 30, 1997. __________________ *Filed herewith. EX-4.1 2 AMENDED AND RESTATED CERTIFICATE OF INC. EXHIBIT 4.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PATRIOT AMERICAN HOSPITALITY, INC. California Jockey Club, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is California Jockey Club. The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was January 27, 1983 (the "Original Certificate of Incorporation"). The name under which the Corporation filed the Original Certificate of Incorporation was Bay Meadows Realty Enterprises, Inc. The name of the Corporation was changed to California Jockey Club on March 31, 1983, by way of amendment to the Original Certificate of Incorporation. Pursuant to this Amended and Restated Certificate of Incorporation, the name of the Corporation is hereby changed to Patriot American Hospitality, Inc. 2. This Amended and Restated Certificate of Incorporation (the "Certificate") amends, restates and integrates the provisions of the Original Certificate of Incorporation, was duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law, as amended from time to time (the "DGCL"), and was duly adopted by the stockholders of the Corporation in accordance with the applicable provisions of Sections 242 and 245 of the DGCL. 3. The text of the Original Certificate of Incorporation, as amended to date, is hereby amended and restated in its entirety to provide as herein set forth in full. I. NAME The name of the corporation is Patriot American Hospitality, Inc. II. PURPOSES The nature of business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act for which corporations may be organized under the DGCL. III. REGISTERED OFFICE The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. IV. CAPITAL STOCK The Corporation shall have the authority to issue 650,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), 750,000,000 shares of excess stock, par value $.01 per share (the "Excess Stock"), and 100,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The rights, preferences, voting powers and the qualifications, limitations and restrictions of the authorized stock shall be as follows: 1 A. Common Stock. 1. Voting Rights. Each share of Common Stock shall be entitled to one vote on all matters submitted to a vote at any meeting of stockholders. 2. Dividend Rights. Subject to the rights of holders of Preferred Stock and subject to any other provisions of this Certificate or any amendment hereto, holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors from time to time. 3. Action Without a Meeting. Any action required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders of the Corporation may be taken in lieu of such a meeting only by an unanimous written consent of the stockholders signed by each stockholder entitled to vote on the matter. B. Preferred Stock. 1. The Preferred Stock may be issued from time to time in one or more series, with such distinctive designations, rights and preferences as shall be stated and expressed herein or in the resolution or resolutions providing for the issue of shares of a particular series, and in such resolution or resolutions providing for the issue of shares of such series, the Board of Directors is expressly authorized to fix or establish the basis for determining: a. The annual or other periodic dividend rate for such series, the dividend payment dates, the date from which dividends on all shares of such series issued shall be cumulative, and the extent of participation rights, if any; b. The redemption price or prices, if any, for such series and other terms and conditions on which such series may be retired and redeemed; c. The obligation, if any, of the Corporation to purchase and retire or redeem shares of such series as a sinking fund or otherwise, and the terms and conditions of any such redemption; d. The designation and maximum number of shares of such series issuable; e. The right to vote, if any, with holders of shares of any other class or series, either generally or as a condition to specified corporate action; f. The amount payable upon shares in the event of involuntary liquidation; g. The amount payable upon shares in the event of voluntary liquidation; h. The rights, if any, of the holders of shares of such series to convert such shares into other classes of stock of the Corporation, or to exchange such shares for other securities or assets, and the terms and conditions of any such conversion or exchange; and i. Such other rights as may be specified by the Board of Directors and not prohibited by law. All shares of Preferred Stock of any one series shall be identical with each other in all respects except, if so determined by the Board of Directors, as to the dates from which dividends thereon shall be cumulative; and all shares of Preferred Stock shall be of equal rank with each other, regardless of series, and shall be identical with each other in all respects except as provided herein or in the resolution or resolutions providing for the issue of a particular series. In case dividends on all shares of Preferred Stock for any regular dividend period are not paid in full, all such shares shall participate ratably in any partial payment of dividends for such period in proportion to the full amounts of dividends for such period to which they are respectively entitled. 2 C. Restrictions on Ownership and Transfer of Equity Stock. 1. Definitions. For purposes of this Article IV, the following terms shall have the meanings set forth below: "Beneficial Ownership" shall mean, with respect to any Person, ownership of shares of Equity Stock equal to the sum of (i) the shares of Equity Stock directly or indirectly owned by such Person, (ii) the number of shares of Equity Stock treated as owned directly or indirectly by such Person through the application of the constructive ownership rules of Section 544 of the Internal Revenue Code of 1986, as amended (the "Code"), as modified by Section 856(h)(l)(B) of the Code, and (iii) the number of shares of Equity Stock which such person is deemed to beneficially own pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have correlative meanings. "Beneficiary" shall mean, with respect to any Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by the Corporation as the beneficiary or beneficiaries of such Trust, in accordance with the provisions of Section (D)(4) of this Article IV. "Constructive Ownership" shall mean ownership of shares of Equity Stock by a Person who is or would be treated as a direct or indirect owner of such shares of Equity Stock through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have correlative meanings. "Equity Stock" shall mean Common Stock and Preferred Stock of the Corporation. "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Equity Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Equity Stock are listed or admitted to trading or, if the shares of Equity Stock are not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the Nasdaq Stock Market, Inc. or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if the shares of Equity Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker selected by the Board of Directors making a market in the shares of Equity Stock. In the case of Equity Stock that is paired, "Market Price" shall mean the "Market Price" for paired shares multiplied by a fraction (expressed as a percentage) determined by dividing the value for such Equity Stock most recently determined under Section 2(c) of the Pairing Agreement by the value of a paired share most recently determined under Section 2(c) of the Pairing Agreement (the "Valuation Percentage"). "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, including, but not limited to, (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of shares of Equity Stock or (ii) the sale, transfer, assignment or other disposition of interests in any Person or of any securities or rights convertible into or exchangeable for shares of Equity Stock that results in changes in Beneficial Ownership or Constructive Ownership of shares of Equity Stock. "Ownership Limit" shall mean, with respect to any class or series of Equity Stock, 9.8% of the number of outstanding shares of such class or series of Equity Stock. For purposes of computing the percentage of shares of any class or series of Equity Stock of the Corporation that is Beneficially Owned by any Person, any shares of Equity Stock of the Corporation which are deemed to be Beneficially Owned by such Person pursuant to Rule 13d-3 of the Exchange Act but which are not outstanding shall be deemed to be outstanding. 3 "Pairing Agreement" shall mean the Pairing Agreement, dated as of February 17, 1983, by and between Bay Meadows Realty Enterprises, Inc. (the predecessor of California Jockey Club) and Bay Meadows Operating Company, as amended from time to time in accordance with the provisions thereof. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section (D)(8) of this Article IV. "Person" shall mean (a) an individual or any corporation, partnership, estate, trust, association, private foundation, joint stock company or any other entity and (b) a "group" as that term is defined for purposes of Rule 13d-5 of the Exchange Act. "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who is prevented from being or becoming the owner of record title to shares of Equity Stock by the provisions of Section (D)(1) of this Article IV. "Restriction Termination Date" shall mean the first day on which the Board of Directors determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify under the Code as a real estate investment trust (a "REIT"). "Trading Day" shall mean a day on which the principal national securities exchange on which shares of Equity Stock are listed or admitted to trading is open for the transaction of business or, if shares of Equity Stock are not listed or admitted to trading on any national securities exchange, any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Transfer" (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of shares of Equity Stock, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. "Transfer" (as a verb) shall have the correlative meaning. "Trust" shall mean any separate trust created and administered in accordance with the terms of Section (D) of this Article IV, for the exclusive benefit of any Beneficiary. "Trustee" shall mean any Person or entity unaffiliated with both the Corporation and any Prohibited Owner designated by the Corporation to act as trustee of any Trust, or any successor trustee thereof. The Trustee shall be designated by the Corporation and Patriot American Hospitality Operating Company (the "Operating Company") in accordance with the Pairing Agreement. 2. Restriction on Ownership and Transfer. a. Except as provided in Section (C)(4) of this Article IV, until the Restriction Termination Date, (i) no Person shall Beneficially Own or Constructively Own outstanding shares of Equity Stock in excess of the Ownership Limit and (ii) any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) that, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Equity Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit and the intended transferee shall acquire no rights in such shares of Equity Stock. b. Until the Restriction Termination Date, any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) of shares of Equity Stock that, if effective, would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of shares of Equity Stock that would cause the Corporation to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. c. Until the Restriction Termination Date, any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) of shares of Equity Stock that, if effective, would cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the real property of the Corporation or any direct or indirect subsidiary (whether a corporation, partnership, limited liability company or other entity) of the Corporation (a "Subsidiary"), within the meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that number of shares of Equity Stock that would cause the Corporation to Constructively Own 10% 4 or more of the ownership interests in a tenant of the real property of the Corporation or a Subsidiary within the meaning of Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. d. Until the Restriction Termination Date, any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) that, if effective, would result in the shares of capital stock of the Corporation being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code shall be void ab initio and the intended transferee shall acquire no rights in such shares of Equity Stock. 3. Owners Required to Provide Information. Until the Restriction Termination Date: a. Every Beneficial Owner or Constructive Owner of more than 5%, or such lower percentages as required pursuant to regulations under the Code, of the outstanding shares of any class or series of Equity Stock of the Corporation shall, within 30 days after January 1 of each year, provide to the Corporation a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of shares of Equity Stock Beneficially Owned or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Corporation such additional information as the Corporation may request to ensure compliance with the restrictions in this Section C of this Article IV. b. Each Person who is a Beneficial Owner or Constructive Owner of shares of Equity Stock and each Person (including the stockholder of record) who is holding shares of Equity Stock for a Beneficial Owner or Constructive Owner shall provide to the Corporation a written statement or affidavit stating such information as the Corporation may request in order to determine the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. 4. Exception. The Board of Directors, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel in each case to the effect that the restrictions contained in Sections (C)(2)(b) through (d) of this Article IV would not be violated, may exempt a Person from the Ownership Limit, provided that (A) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no Person's Beneficial Ownership or Constructive Ownership of shares of Equity Stock will (i) result in the capital stock of the Corporation being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code or (iii) cause the Corporation to Constructively Own 10% or more of the ownership interests in the real property of a tenant of the Corporation or a Subsidiary within the meaning of Section 856(d)(2)(B) of the Code and (B) such Person agrees in writing that any violation or attempted violation of the Ownership Limit will result in the conversion of such shares into shares of Excess Stock pursuant to Section (D)(1) of this Article IV. 5. New York Stock Exchange Transactions. Notwithstanding any provision contained herein to the contrary, nothing in this Certificate shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. D. Excess Stock. 1. Conversion into Excess Stock. a. If, notwithstanding the other provisions contained in this Article IV, prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, then, (i) except as otherwise provided in Section (C)(4) of this Article IV, the purported transferee shall be deemed to be a Prohibited Owner and shall acquire no right or interest (or, in the case of a Non-Transfer Event, the Person holding record title to the shares of Equity Stock Beneficially 5 Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of shares of Equity Stock which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, (ii) such number of shares of Equity Stock in excess of the Ownership Limit (rounded up to the nearest whole share) shall be automatically converted into an equal number of shares of Excess Stock and transferred to a Trust in accordance with Section (D)(4) of this Article IV and (iii) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee of the Trust. Such conversion into Excess Stock and transfer to a Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer or Non-Transfer Event, as the case may be. b. If, notwithstanding the other provisions contained in this Article IV, prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the capital stock of the Corporation being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code or (iii) cause the Corporation to Constructively Own 10% or more of the ownership interest in a tenant of the Corporation's or a Subsidiary's real property within the meaning of Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall be deemed to be a Prohibited Owner and shall acquire no right or interest (or, in the case of a Non-Transfer Event, the Person holding record title of the shares of Equity Stock with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of shares of Equity Stock, the ownership of which by such purported transferee or record holder would (A) result in the shares of capital stock of the Corporation being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, (B) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code or (C) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's or a Subsidiary's real property within the meaning of Section 856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up to the nearest whole share) shall be automatically converted into an equal number of shares of Excess Stock and transferred to a Trust in accordance with Section (D)(4) of this Article IV and (z) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee of the Trust. Such conversion into Excess Stock and transfer to a Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer or Non-Transfer Event, as the case may be. c. Upon the occurrence of such a conversion of shares of any class or series of Equity Stock into an equal number of shares of Excess Stock, such shares of Equity Stock shall be automatically retired and canceled, without any action required by the Board of Directors of the Corporation, and shall thereupon be restored to the status of authorized but unissued shares of the particular class or series of Equity Stock from which such Excess Stock was converted and may be reissued by the Corporation as that particular class or series of Equity Stock. 2. Remedies for Breach. If the Corporation, or its designees, shall at any time determine in good faith that a Transfer has taken place in violation of Section (C)(2) of this Article IV or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in violation of Section (C)(2) of this Article IV, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect to such Transfer on the stock transfer books of the Corporation or instituting proceedings to enjoin such Transfer or acquisition. 3. Notice of Restricted Transfer. Any Person who acquires or attempts to acquire shares of Equity Stock in violation of Section (C)(2) of this Article IV, or any Person who owns shares of Equity Stock that were converted into shares of Excess Stock and transferred to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article IV, shall immediately give written notice to the Corporation of such event and shall provide 6 to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Corporation's status as a REIT. 4. Ownership in Trust. Upon any Transfer or Non-Transfer Event that results in Excess Stock pursuant to Section (D)(1) of this Article IV, such Excess Stock shall be automatically transferred to a Trust to be held for the exclusive benefit of the Beneficiary. The Corporation and the Operating Company shall name a Beneficiary for each Trust pursuant to the terms of the Pairing Agreement. Any conversion of shares of Equity Stock into shares of Excess Stock and transfer to a Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer or Non- Transfer Event that results in the conversion. Shares of Excess Stock so held in trust shall remain issued and outstanding shares of stock of the Corporation. 5. Dividend Rights. Each share of Excess Stock shall be entitled to the same dividends and distributions (as to both timing and amount) as may be declared by the Board of Directors as shares of the class or series of Equity Stock from which such Excess Stock was converted. The Trustee, as record holder of the shares of Excess Stock, shall be entitled to receive all dividends and distributions and shall hold all such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to such shares of Excess Stock shall repay to the Trust the amount of any dividends or distributions received by it (i) that are attributable to any shares of Equity Stock that have been converted into shares of Excess Stock and (ii) the record date of which was on or after the date that such shares were converted into shares of Excess Stock. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Equity Stock Beneficially Owned or Constructively Owned by the Person who, but for the provisions of this Article IV, would Constructively Own or Beneficially Own the shares of Equity Stock that were converted into shares of Excess Stock; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. 6. Rights upon Liquidation. In the event of any voluntary or involuntary liquidation of, or winding up of, or any distribution of the assets of, the Corporation, each holder of shares of Excess Stock shall be entitled to receive, ratably with each other holder of shares of Equity Stock of the same class or series from which the Equity Stock was converted, that portion of the assets of the Corporation that is available for distribution to the holders of such class or series of Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; provided, however, that the Prohibited Owner shall not be entitled to receive amounts in excess of, in the case of a purported Transfer in which the Prohibited Owner gave value for shares of Equity Stock and which Transfer resulted in the conversion of the shares into shares of Excess Stock, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock (which, in the case of Equity Stock that is paired, shall equal the price per paired share multiplied by the most recent Valuation Percentage) and, in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the conversion of the shares into shares of Excess Stock, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be distributed to the Beneficiary. 7. Voting Rights. Each share of Excess Stock shall entitle the holder to the number of votes the holder would have, if such share of Excess Stock was a share of Equity Stock of the same class or series from which such Excess Stock was converted, on all matters submitted to a vote at any meeting of stockholders. The holders of shares of Excess Stock converted from the same class or series of Equity Stock shall vote together with the holders of such Equity Stock as a single class on all such matters. The Trustee, as record holder of the Excess Stock, shall be entitled to vote all shares of Excess Stock. Any vote by a Prohibited Owner as a purported holder of shares of Equity Stock prior to the discovery by the Corporation that the shares of Equity Stock have been converted into shares of Excess Stock shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such shares of Excess Stock, and the Prohibited Owner 7 shall be deemed to have given, as of the close of trading on the Trading Day prior to the date of the purported Transfer or Non-Transfer Event that results in the conversion of the shares of Equity Stock into shares of Excess Stock and the transfer of such shares to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article IV, an irrevocable proxy to the Trustee to vote the shares of Excess Stock in the manner in which the Trustee, in its sole and absolute discretion, desires. 8. Designation of Permitted Transferee. a. The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any and all shares of Excess Stock if the Company fails to exercise its option with respect to such shares pursuant to Section (D)(10) hereof within the time period set forth therein. As soon as practicable, but in an orderly fashion so as not to materially adversely affect the Market Price of the shares of Excess Stock, the Trustee shall designate any Person as a Permitted Transferee; provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the shares of Excess Stock (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) and (ii) the Permitted Transferee so designated may acquire such shares of Excess Stock without violating any of the restrictions set forth in Section (C)(2) of this Article IV and without such acquisition resulting in the conversion of the shares of Equity Stock so acquired into shares of Excess Stock and the transfer of such shares to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article IV. b. Upon the designation by the Trustee of a Permitted Transferee in accordance with the provisions of this Section (D)(8), the Trustee shall cause to be transferred to the Permitted Transferee that number of shares of Excess Stock acquired by the Permitted Transferee. Upon such transfer of the shares of Excess Stock to the Permitted Transferee, such shares of Excess Stock shall be automatically converted into an equal number of shares of Equity Stock of the same class and series from which such Excess Stock was converted. Upon the occurrence of such a conversion of shares of Excess Stock into an equal number of shares of Equity Stock, such shares of Excess Stock shall be automatically retired and canceled, without any action required by the Board of Directors of the Corporation, and shall thereupon be restored to the status of authorized but unissued shares of Excess Stock and may be reissued by the Corporation as Excess Stock. c. The Trustee shall (i) cause to be recorded on the stock transfer books of the Corporation that the Permitted Transferee is the holder of record of such number of shares of Equity Stock, and (ii) distribute to the Beneficiary any and all amounts held with respect to the shares of Excess Stock after making payment to the Prohibited Owner pursuant to Section (D)(9) of this Article IV. d. If the Transfer of shares of Excess Stock to a purported Permitted Transferee shall violate any of the transfer restrictions set forth in Section (C)(2) of this Article IV, such Transfer shall be void ab initio as to that number of shares of Excess Stock that cause the violation of any such restriction when such shares are converted into shares of Equity Stock (as described in clause (b) above) and the purported Permitted Transferee shall be deemed to be a Prohibited Owner and shall acquire no rights in such shares of Excess Stock or Equity Stock. Such shares of Equity Stock shall be automatically re-converted into Excess Stock and transferred to the Trust from which they were originally Transferred. Such conversion and transfer to the Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer to the purported Permitted Transferee and the provisions of this Article IV shall apply to such shares, including, without limitation, the provisions of Sections D(8) through (D)(10) with respect to any future Transfer of such shares by the Trust. 9. Compensation to Record Holder of Shares of Equity Stock that are Converted into Shares of Excess Stock. Any Prohibited Owner shall be entitled (following discovery of the shares of Excess Stock and subsequent designation of the Permitted Transferee in accordance with Section (D)(8) of this Article IV or following the acceptance of the offer to purchase such shares in accordance with Section (D)(10) of this Article IV) to receive from the Trustee following the sale or other disposition of such shares of Excess Stock the lesser of (i) (a) in the case of a purported Transfer in which the Prohibited Owner gave value for shares of Equity Stock and which Transfer resulted in the conversion of such shares into shares of Excess Stock, 8 the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) and (b) in the case of a Non- Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the conversion of such shares into shares of Excess Stock, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer or (ii) the price per share (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) received by the Trustee from the sale or other disposition of such shares of Excess Stock in accordance with this Section (D)(9) or Section (D)(10) of this Article IV. Any amounts received by the Trustee in respect of such shares of Excess Stock and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section (D)(9) shall be distributed to the Beneficiary in accordance with the provisions of Section (D)(8) of this Article IV. Each Beneficiary and Prohibited Owner shall waive any and all claims that it may have against the Trustee and the Trust arising out of the disposition of shares of Excess Stock, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section (D) of this Article IV by, such Trustee or the Corporation. 10. Purchase Right in Excess Stock. Shares of Excess Stock shall be deemed to have been offered for sale to the Corporation or its designee, at a price per share equal to the lesser of (i) the price per share (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) in the transaction that created such shares of Excess Stock (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-Transfer Event) or (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period of 90 days following the later of (a) the date of the Non-Transfer Event or purported Transfer which results in such shares of Excess Stock or (b) the date on which the Corporation determines in good faith that a Transfer or Non-Transfer Event resulting in shares of Excess Stock has previously occurred, if the Corporation does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section (D)(3) of this Article IV. E. Preemptive Rights. No holder of shares of any class or series of capital stock shall as such holder have any preemptive or preferential right to purchase or subscribe to (i) any shares of any class or series of capital stock of the Corporation, whether now or hereafter authorized, (ii) any warrants, rights or options to purchase any such capital stock or (iii) any obligations convertible into any such capital stock or into warrants, rights or options to purchase any such capital stock. F. Remedies Not Limited. Nothing contained in this Article IV shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders by preservation of the Corporation's status as a REIT and to ensure compliance with the requirements of the Pairing Agreement and with the restrictions set forth in Section C of this Article IV. G. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article IV, including any definition contained in Section (C)(1) of this Article IV, the Board of Directors shall have the power to determine the application of the provisions of this Article IV with respect to any situation based on the facts known to it. H. Legend. Each certificate for shares of Equity Stock shall bear the following legend: "The shares of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company represented by this combined certificate are subject to restrictions in the respective Amended and Restated Certificate of Incorporation of each company which prohibit (a) any Person from Beneficially Owning or Constructively Owning (as these terms are defined in the respective Amended and Restated Certificate of Incorporation of each company) in excess of 9.8% of the number of outstanding shares of any class or series of Equity Stock (as that term is defined in the respective Amended and Restated Certificate of Incorporation of each company), (b) any Person (as that term is defined in the respective Amended and Restated Certificate of Incorporation of each company), from acquiring or maintaining any ownership interest in the stock of either company that is inconsistent with (i) the requirements of the Internal Revenue Code of 1986, as amended, pertaining to real estate investment trusts or (ii) Article IV of the respective Amended and Restated Certificate of Incorporation of each company and (c) any transfer of shares of any 9 class or series of Equity Stock of either company that are paired pursuant to the Pairing Agreement, dated as of February 17, 1983, by and between the two companies, as amended from time to time in accordance with the provisions thereof (the "Pairing Agreement"), except in combination with an equal number of shares of the other company in accordance with the respective Amended and Restated Bylaws of each company and the Pairing Agreement, copies of which are on file with the transfer agent, and the holder of this certificate by his acceptance hereof consents to be bound by such restrictions. Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company will furnish without charge to each stockholder who so requests a copy of the relevant provisions of the respective Amended and Restated Certificate of Incorporation and the respective Amended and Restated Bylaws of each company, a copy of the Pairing Agreement and a copy of the provisions setting forth the designations, preferences, privileges and rights of each class of stock or series thereof that each company is authorized to issue and the qualifications, limitations and restrictions of such preferences and/or rights. Any such request may be addressed to the Secretary of either company or to the transfer agent named on the face hereof." I. Severability. Each provision of this Article IV shall be severable and an adverse determination as to any such provision shall be in no way affect the validity of any other provision. V. DIRECTORS A. General Powers. The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors and, except as otherwise expressly provided by law, the Bylaws or this Certificate, all of the powers of the Corporation shall be vested in such Board. B. Number of Directors. The number of directors shall be fixed by resolution duly adopted from time to time by the Board of Directors. A director need not be a stockholder of the Corporation. C. Terms of Directors. The directors shall be classified, with respect to the term for which they severally hold office, into three classes, as nearly equal in number as possible. The initial Class I Directors of the Corporation shall be Paul A. Nussbaum, Arch K. Jacobson and Leonard Boxer; the initial Class II Directors of the Corporation shall be Thomas S. Foley and Gregory R. Dillon; and the initial Class III Directors of the Corporation shall be John H. Daniels and John C. Deterding. The initial Class I Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1997; the initial Class II Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1998; and the initial Class III Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1999. At each annual meeting of stockholders, the successor or successors of the class of directors whose term expires at that meeting shall be elected by a plurality of the votes of the shares present in person or represented by proxy at such meeting and entitled to vote on the election of directors, and shall hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. The directors elected to each class shall hold office until their successors are duly elected and qualified or until their earlier resignation or removal. Notwithstanding the foregoing, whenever, pursuant to the provisions of Article IV of this Certificate, the holders of any one or more series of Preferred Stock shall have the right, voting separately as a series or together with holders of other such series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate and any certificates of designation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section C of this Article V. During any period when the holders of any series of Preferred Stock have the right to elect additional directors as provided for or fixed pursuant to the provisions of Article IV of this Certificate, then upon commencement and for the duration of the period during which such right continues: (a) the then otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions and (b) each such additional director shall serve until such director's 10 successor shall have been duly elected and qualified, or until such director's right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to such director's earlier death, disqualification, resignation or removal. Except as otherwise provided by the Board in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate and the total and authorized number of directors of the Corporation shall be reduced accordingly. D. Removal of Directors. Subject to the rights, if any, of any series of Preferred Stock to elect directors and to remove any director whom the holders of any such stock have the right to elect, any director (including persons elected by directors to fill vacancies in the Board of Directors) may be removed from office (a) only with cause and (b) only by the affirmative vote of the holders of at least 75% of the shares then entitled to vote at an election of directors. At least 30 days prior to any meeting of stockholders at which it is proposed that any director be removed from office, written notice of such proposed removal shall be sent to the director whose removal will be considered at the meeting. For purposes of this Certificate, "cause," with respect to the removal of any director shall mean only (i) conviction of a felony, (ii) declaration of unsound mind by order of a court, (iii) gross dereliction of duty, (iv) commission of any act involving moral turpitude or (v) commission of an act that constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit to such director and a material injury to the Corporation. E. Vacancies. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect directors and to fill vacancies in the Board of Directors relating thereto, any and all vacancies in the Board of Directors, however occurring, including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a director, shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum of the Board of Directors. Any director appointed in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been duly elected and qualified or until such director's earlier resignation or removal. Subject to the rights, if any, of the holders of any series of Preferred Stock, when the number of directors is increased or decreased, the Board of Directors shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided, however, that no decrease in the number of directors shall shorten the term of any incumbent director. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until such vacancy is filled. VI. LIMITATION OF LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL or (d) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended after the effective date of this Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of this Article VI by either (i) the stockholders of the Corporation or (ii) an amendment to the DGCL shall not adversely affect any right or protection existing at the time of such repeal or modification with respect to any acts or omissions occurring before such repeal or modification of a person serving as a director at the time of such repeal or modification. 11 VII. MAINTENANCE OF REIT STATUS For so long as the Board of Directors deems the maintenance of REIT status to be in the best interests of the Corporation, it shall be the duty of the Board of Directors to ensure that the Corporation satisfies the requirements for qualification as a REIT under the Code, including, but not limited to, the ownership of its outstanding stock, the nature of its assets, the sources of its income, and the amount and timing of its distributions to its stockholders. VIII. RELATED PERSON TRANSACTION The affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of capital stock of this corporation, which shall include the affirmative vote of at least 50% of the outstanding shares of capital stock held by shareholders other than a "Related Person" (as hereinafter defined), shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of this corporation with any Related Person; provided, however, that such 66 2/3% voting requirement shall not be applicable if the Business Combination was approved by the Board of Directors of the corporation prior to the acquisition by such Related Person of the beneficial ownership of 5% or more of the outstanding shares of the capital stock of the corporation. For purposes of this Article VIII: 1. The term "Business Combination" shall mean (a) any merger, reorganization or consolidation of this corporation with or into a Related Person, (b) any sale, lease, exchange, transfer or other disposition, including, without limitation, a mortgage or any other security device, of all or any substantial part of the assets of this corporation (including, without limitation, any voting securities of a subsidiary) or of a subsidiary, to a Related Person, (c) any merger or consolidation of a Related Person with or into this corporation or a subsidiary of this corporation and (d) any sale, lease, exchange, transfer or other disposition of all or any substantial part of the assets of a Related Person to this corporation or a subsidiary of this corporation. 2. The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "affiliates" and "associates" (defined below), beneficially (as defined in Rule 13d-3 of the Securities Exchange Act of 1934), owns in the aggregate five percent (5%) or more of the outstanding shares of the capital stock of this corporation, and any "affiliate" or "associate" (as those terms are defined in Rule 12b-2 of the Exchange Act) of any such individual, corporation, partnership or other person or entity; provided, however, that the term "Related Person" shall not include either Patriot American Hospitality Operating Company or any subsidiary of this corporation. 3. The term "substantial part of the assets" shall mean assets having a fair market value or book value, whichever is greater, equal to 25% or more of such value of the total assets as reflected on the most recent quarterly balance sheet of the corporation as of a date no earlier than forty-five (45) days prior to any acquisition of such assets. 4. Without limitation, any share of capital stock of this corporation which any Related Person has the right to acquire pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise shall be deemed beneficially owned by such Related Person. The provisions set forth in this Article VIII may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of capital stock of this corporation; provided, however, that if there is a Related Person (as defined herein), such 66 2/3% vote must include the affirmative vote of at least 50% of the outstanding shares of capital stock held by shareholders other than the Related Person. 12 IX. AMENDMENT OF CERTIFICATE OF INCORPORATION Subject to Article VIII of this Certificate, the Corporation reserves the right to amend or repeal this Certificate in the manner now or hereafter prescribed by statute and this Certificate, and all rights conferred upon stockholders herein are granted subject to this reservation. 13 EX-4.2 3 AMENDED AND RESTATED BYLAWS EXHIBIT 4.2 AMENDED AND RESTATED BYLAWS OF PATRIOT AMERICAN HOSPITALITY, INC. ARTICLE I. DEFINITIONS For purposes of these Bylaws, the following words shall have the meanings set forth below: (a) "Affiliate" of a Person shall mean (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such other Person, (ii) any Person that owns, beneficially, directly or indirectly, 5% or more of the outstanding capital stock, shares or equity interests of such other Person or (iii) any officer, director, employee, partner or trustee of such other Person or any Person controlling, controlled by or under common control with such Person (excluding directors and Persons serving in similar capacities who are not otherwise Affiliates of such Person). For the purposes of this definition, the term "Person" shall mean, and includes, any natural person, corporation, partnership, association, trust, limited liability company or any other legal entity. For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. (b) "Certificate" shall mean the Amended and Restated Certificate of Incorporation of the Corporation, as amended from time to time. (c) "Corporation" shall mean Patriot American Hospitality, Inc. (d) "DGCL" shall mean the Delaware General Corporation Law, as amended from time to time. (e) "Equity Stock" shall mean the common stock, par value $.01 per share, and the preferred stock, par value $.01 per share of the Corporation and the Operating Company. (f) "Independent Director" shall mean a director of the Corporation who is not (i) an officer or employee of the Corporation, (ii) a director or officer of Operating Company or (iii) an Affiliate of (a) any lessee of any property of the Corporation, (b) a subsidiary of the Corporation or (c) any partnership that is an affiliate of the Corporation. (g) "Operating Company" shall mean Patriot American Hospitality Operating Company. (h) "Public Announcement" shall mean: (i) disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, (ii) a report or other document filed publicly with the Securities and Exchange Commission (including, without limitation, a Form 8-K) or (iii) a letter or report sent to stockholders of record of the Corporation at the time of the mailing of such letter or report. ARTICLE II. MEETINGS OF STOCKHOLDERS 2.1 Places of Meetings. All meetings of the stockholders shall be held at such place, either within or without the State of Delaware, as from time to time may be fixed by the Board of Directors. 1 2.2 Annual Meetings. The annual meeting of the stockholders, for the election of directors and transaction of such other business as may come properly before the meeting, shall be held at such date and time as shall be determined by the Board of Directors. 2.3 Special Meetings. A special meeting of the stockholders for any purpose or purposes may be called at any time only by the Chairman of the Board or by a majority of the Board of Directors. At a special meeting no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting. 2.4 Notice of Meetings; Adjournments. A written notice of each annual meeting stating the hour, date and place of such annual meeting shall be given by the Secretary or an Assistant Secretary of the Corporation (or other person authorized by these Bylaws or by law) not less than 10 days nor more than 60 days before the annual meeting, to each stockholder entitled to vote thereat and to each stockholder who, by law or under the Certificate or under these Bylaws, is entitled to such notice, by delivering such notice to him or her or by mailing it, postage prepaid, addressed to such stockholder at the address of such stockholder as it appears on the stock transfer books of the Corporation. Such notice shall be deemed to be delivered when hand delivered to such address or deposited in the mail so addressed, with postage prepaid. Notice of all special meetings of stockholders shall be given in the same manner as provided for annual meetings, except that the written notice of all special meetings shall state the purpose or purposes for which the meeting has been called. Notice of an annual meeting or special meeting of stockholders need not be given to a stockholder if a written waiver of notice is signed before or after such meeting by such stockholder or if such stockholder attends such meeting, unless such attendance was for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual meeting or special meeting of stockholders need be specified in any written waiver of notice. The Board of Directors may postpone and reschedule any previously scheduled annual meeting or special meeting of stockholders and any record date with respect thereto, regardless of whether any notice or public disclosure with respect to any such meeting has been sent or made pursuant to this Section 2.4 or otherwise. In no event shall the Public Announcement of an adjournment, postponement or rescheduling of any previously scheduled meeting of stockholders commence a new time period for the giving of a stockholder's notice under Section 2.9 of these Bylaws. When any meeting is convened, the presiding officer of the meeting may adjourn the meeting if (a) no quorum is present for the transaction of business, (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information that the Board of Directors determines has not been made sufficiently or timely available to stockholders or (c) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation. When any annual meeting or special meeting of stockholders is adjourned to another hour, date or place, notice need not be given of the adjourned meeting, other than an announcement at the meeting at which the adjournment is taken, of the hour, date and place to which the meeting is adjourned; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat and each stockholder who, by law or under the Certificate or under these Bylaws, is entitled to such notice. 2.5 Quorum. Except as otherwise required by the Certificate, any number of stockholders together holding at least a majority of the outstanding shares of capital stock entitled to vote with respect to the business to be transacted, who shall be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of business. If less than a quorum shall be in attendance at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the stockholders present or represented by proxy. 2 2.6 Voting and Proxies. Stockholders shall have one vote for each share of stock entitled to vote owned by them of record according to the stock transfer books of the Corporation, unless otherwise provided by law or by the Certificate. Stockholders may vote either in person or by written proxy, but no proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Proxies shall be filed with the secretary of the meeting before being voted. Except as otherwise limited therein or as otherwise provided by law, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid, and the burden of proving invalidity shall rest on the challenger. 2.7 Action at Meeting. When a quorum is present, any matter before any meeting of stockholders shall be decided by the affirmative vote of the majority of shares present in person or represented by proxy at such meeting and entitled to vote on such matter, except where a larger vote is required by law, by the Certificate or by these Bylaws. Any election by stockholders shall be determined by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors, except where a larger vote is required by law, by the Certificate or by these Bylaws. The Corporation shall not directly or indirectly vote any shares of its own stock; provided, however, that the Corporation may vote shares which it holds in a fiduciary capacity to the extent permitted by law. 2.8 Stockholder List. The officer or agent having charge of the stock transfer books of the Corporation shall make, at least 10 days before every annual meeting or special meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting or any adjournment thereof, in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the hour, date and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.9 Stockholder Proposals. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder of record (both as of the time notice of such proposal is given by the stockholder as set forth below and as of the record date for the annual meeting in question) of any shares of capital stock entitled to vote at such annual meeting, such stockholder shall: (i) give timely written notice as required by this Section 2.9 to the Secretary of the Corporation and (ii) be present at such meeting, either in person or by a representative. For the first annual meeting following the end of the fiscal year ended December 31, 1996, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which the Public Announcement of the date of such annual meeting is first made by the Corporation. For all subsequent annual meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than 90 days prior to the anniversary date of the immediately preceding annual meeting (the "Anniversary Date"); provided, however, that in the event the annual meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (1) the 90th day prior to the scheduled date of such annual meeting or (2) the 15th day following the day on which Public Announcement of the date of such annual meeting is first made by the Corporation. A stockholder's notice to the Secretary of the Corporation shall set forth as to each matter proposed to be brought before an annual meeting: (i) a brief description of the business the stockholder desires to bring before such annual meeting and the reasons for conducting such business at such annual meeting, (ii) the name and address, as they appear on the stock transfer books of the Corporation, of the stockholder proposing such 3 business, (iii) the class and number of shares of the capital stock of the Corporation beneficially owned by the stockholder proposing such business, (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Corporation registered in such stockholder's name on such books, and the class and number of shares of the capital stock of the Corporation beneficially owned by such beneficial owners, (v) the names and addresses of other stockholders known by the stockholder proposing such business to support such proposal, and the class and number of shares of the capital stock of the Corporation beneficially owned by such other stockholders and (vi) any material interest of the stockholder proposing to bring such business before such meeting (or any other stockholders known to be supporting such proposal) in such proposal. If the Board of Directors or a designated committee thereof determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2.9 or that the information provided in a stockholder's notice does not satisfy the information requirements of this Section 2.9 in any material respect, such proposal shall not be presented for action at the annual meeting in question. If neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal in the manner set forth above, the presiding officer of the annual meeting shall determine whether the stockholder proposal was made in accordance with the terms of this Section 2.9. If the presiding officer determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2.9 or that the information provided in a stockholder's notice does not satisfy the information requirements of this Section 2.9 in any material respect, such proposal shall not be presented for action at the annual meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a stockholder proposal was made in accordance with the requirements of this Section 2.9, the presiding officer shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such proposal. Notwithstanding the foregoing provisions of this Section 2.9, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder with respect to the matters set forth in this Section 2.9, and nothing in this Section 2.9 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2.10 Inspectors of Elections. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the presiding officer shall appoint one or more inspectors to act at the meeting. Any inspector may, but need not, be an officer, employee or agent of the Corporation. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall perform such duties as are required by the DGCL, including the counting of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. The presiding officer may review all determinations made by the inspectors, and in so doing the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the inspectors. All determinations by the inspectors and, if applicable, the presiding officer, shall be subject to further review by any court of competent jurisdiction. 2.11 Presiding Officer. The Chairman of the Board, if one is elected, or if not elected or in his or her absence, the President, shall preside at all annual meetings or special meetings of stockholders and shall have the power, among other things, to adjourn such meeting at any time and from time to time, subject to Sections 2.4 and 2.5 of this Article II. The order of business and all other matters of procedure at any meeting of the stockholders shall be determined by the presiding officer. 4 ARTICLE III. DIRECTORS 3.1 General Powers. The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors and, except as otherwise expressly provided by law, the Certificate or these Bylaws, all of the powers of the Corporation shall be vested in such Board. 3.2 Number of Directors. The number of directors shall be fixed by resolution duly adopted from time to time by the Board of Directors. 3.3 Election and Removal of Directors; Quorum. (a) Directors shall be elected and removed in the manner provided for in Article V of the Certificate. (b) Vacancies in the Board of Directors shall be filled in the manner provided for in Article V of the Certificate. (c) At any meeting of the Board of Directors, a majority of the number of directors then in office shall constitute a quorum for the transaction of business. However, if less than a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except that when any meeting of the Board of Directors, either regular of special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of the original meeting. 3.4 Meetings of Directors. Meetings of the Board of Directors shall be held at places within or without the State of Delaware and at times fixed by resolution of the Board of Directors, or upon call of the Chairman of the Board, and the Secretary of the Corporation or officer performing the Secretary's duties shall give not less than 24 hours' notice by letter, facsimile, telegraph or telephone (or in person) of all meetings of the Board of Directors, provided that notice need not be given of the annual meeting or of regular meetings held at times and places fixed by resolution of the Board of Directors. Meetings may be held at any time without notice if all of the directors are present, or if those not present waive notice in writing either before or after the meeting; provided, however, that attendance at a meeting for the express purpose of objecting at the beginning of a meeting to the transaction of any business because the meeting is not lawfully convened shall not be considered a waiver of notice. 3.5 Nominations. Nominations of candidates for election as directors of the Corporation at any annual meeting may be made only (a) by, or at the direction of, a majority of the Board of Directors or (b) by any holder of record (both as of the time notice of such nomination is given by the stockholder as set forth below and as of the record date for the annual meeting in question) of any shares of the capital stock of the Corporation entitled to vote at such annual meeting who complies with the timing, informational and other requirements set forth in this Section 3.5. Any stockholder who has complied with the timing, informational and other requirements set forth in this Section 3.5 and who seeks to make such a nomination must be, or his, her or its representative must be, present in person at the annual meeting. Only persons nominated in accordance with the procedures set forth in this Section 3.5 shall be eligible for election as directors at an annual meeting. Nominations, other than those made by, or at the direction of, the Board of Directors shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 3.5. For the first annual meeting following the end of the fiscal year ended December 31, 1996, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which the Public Announcement of the date of such annual meeting is first made by the Corporation. For all subsequent annual meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 90 days prior to the Anniversary Date; provided, however, that in the event the annual meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary 5 Date, a stockholder's notice shall be timely if delivered to, or mailed and received by, the Corporation at its principal executive office not later than the close of business on the later of (x) the 90th day prior to the scheduled date of such annual meeting or (y) the 15th day following the day on which Public Announcement of the date of such annual meeting is first made by the Corporation. A stockholder's notice to the Secretary of the Corporation shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a director: (1) the name, age, business address and residence address of such person; (2) the principal occupation or employment of such person; (3) the class and number of shares of the capital stock of the Corporation which are beneficially owned by such person on the date of such stockholder notice; and (4) the consent of each nominee to serve as a director if elected. A stockholder's notice to the Secretary of the Corporation shall further set forth as to the stockholder giving such notice: (a) the name and address, as they appear on the stock transfer books of the Corporation, of such stockholder and of the beneficial owners (if any) of the capital stock of the Corporation registered in such stockholder's name and the name and address of other stockholders known by such stockholder to be supporting such nominee(s); (b) the class and number of shares of the capital stock of the Corporation which are held of record, beneficially owned or represented by proxy by such stockholder and by any other stockholders known by such stockholder to be supporting such nominee(s) on the record date for the annual meeting in question (if such date shall then have been made publicly available) and on the date of such stockholder's notice; and (c) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder. If the Board of Directors or a designated committee thereof determines that any stockholder nomination was not made in accordance with the terms of this Section 3.5 or that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3.5 in any material respect, then such nomination shall not be considered at the annual meeting in question. If neither the Board of Directors nor such committee makes a determination as to whether a nomination was made in accordance with the provisions of this Section 3.5, the presiding officer of the annual meeting shall determine whether a nomination was made in accordance with such provisions. If the presiding officer determines that any stockholder nomination was not made in accordance with the terms of this Section 3.5 or that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3.5 in any material respect, then such nomination shall not be considered at the annual meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a nomination was made in accordance with the terms of this Section 3.5, the presiding officer shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such nominee. Notwithstanding anything to the contrary in the second paragraph of this Section 3.5, in the event that the number of directors to be elected to the Board of Directors is increased and there is no Public Announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 90 days prior to the Anniversary Date, a stockholder's notice required by this Section 3.5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if such notice shall be delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which such Public Announcement is first made by the Corporation. No person shall be elected by the stockholders as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.5. Election of directors at an annual meeting need not be by written ballot, unless otherwise provided by the Board of Directors or presiding officer at such annual meeting. If written ballots are to be used, ballots bearing the names of all the persons who have been nominated for election as directors at the annual meeting in accordance with the procedures set forth in this Section 3.5 shall be provided for use at the annual meeting. 6 3.6 Voting. (a) Except as provided in subsection (c) of this Section 3.6, the action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless a larger vote is required for such action by the Certificate, these Bylaws or by law. (b) Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing. Such written consent shall be filed with the records of the meetings of the Board of Directors and shall be treated for all purposes as a vote at a meeting of the Board of Directors. (c) Notwithstanding anything in these Bylaws to the contrary, (i) any action pertaining to a sale or other disposition of any of the following hotels: (1) Radisson New Orleans; (2) Bourbon Orleans; (3) North Dallas Holiday Inn; and (4) San Angelo Holiday Inn and (ii) any other action pertaining to any transaction involving the Corporation, including the purchase, sale, lease, or mortgage of any real estate asset, entering into joint venture investments or any other transaction, in which an advisor, director or officer of the Corporation, or any Affiliate of any of the foregoing persons, has any direct or indirect interest other than solely as a result of their status as a director, officer, or stockholder of the Corporation, must be approved by a majority of the directors, including a majority of the Independent Directors, even if the Independent Directors constitute less than a quorum. 3.7 Manner of Participation. Directors may participate in meetings of the Board of Directors by means of conference telephone or similar communications equipment by means of which all directors participating in the meeting can hear each other, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for purposes of these Bylaws. 3.8 Compensation. By resolution of the Board of Directors, directors may be allowed a fee and expenses for attendance at all meetings, but nothing herein shall preclude directors from serving the Corporation in other capacities and receiving compensation for such other services. ARTICLE IV. COMMITTEES 4.1 Executive Committee. The Board of Directors, by resolution duly adopted, may elect an Executive Committee which shall consist of not less than two directors, including the Chairman of the Board. The members of the Executive Committee shall serve until their successors are designated by the Board of Directors, until removed, or until the Executive Committee is dissolved by the Board of Directors. All vacancies that may occur in the Executive Committee shall be filled by the Board of Directors. When the Board of Directors is not in session, the Executive Committee shall have all power vested in the Board of Directors by law, by the Certificate, or by these Bylaws, except as otherwise provided in the DGCL. The Executive Committee shall report at the next regular or special meeting of the Board of Directors all action that the Executive Committee may have taken on behalf of the Board of Directors since the last regular or special meeting of the Board of Directors. Meetings of the Executive Committee shall be held at such places and at such times fixed by resolution of the Executive Committee, or upon call of the Chairman of the Board. Not less than 12 hours' notice shall be given by letter, facsimile, telegraph or telephone (or in person) of all meetings of the Executive Committee; provided, however, that notice need not be given of regular meetings held at times and places fixed by resolution of the Executive Committee and that meetings may be held at any time without notice if all of the members of the Executive Committee are present or if those not present waive notice in writing either before or after the meeting; provided, further, that attendance at a meeting for the express purpose of objecting at the beginning of a meeting to the transaction of any business because the meeting is not lawfully convened shall not be considered a waiver of notice. A majority of the members of the Executive Committee then serving shall constitute a quorum for the transaction of business at any meeting of the Executive Committee. 7 4.2 Compensation Committee. The Board of Directors, at its regular annual meeting, shall designate a Compensation Committee which shall consist of two or more non-employee directors. In addition, the Board of Directors at any time may designate one or more alternate members of the Compensation Committee, who shall be non-employee directors, who may act in place of any absent regular member upon invitation by the chairman or secretary of the Compensation Committee. With respect to bonuses, the Compensation Committee shall have and may exercise the powers to determine the amounts annually available for bonuses pursuant to any bonus plan or formula approved by the Board of Directors, to determine bonus awards to executive officers and to exercise such further powers with respect to bonuses as may from time to time be conferred by the Board of Directors. With respect to salaries, the Compensation Committee shall have and may exercise the power to fix and determine from time to time all salaries of the executive officers of the Corporation, and such further powers with respect to salaries as may from time to time be conferred by the Board of Directors. The Compensation Committee shall administer the Corporation's stock incentive plans and from time to time may grant, consistent with the plans, stock options and other awards permissible under such plans. Vacancies in the Compensation Committee shall be filled by the Board of Directors, and members of the Compensation Committee shall be subject to removal by the Board of Directors at any time. The Compensation Committee shall fix its own rules of procedure. A majority of the number of regular members then serving on the Compensation Committee shall constitute a quorum; and regular and alternate members present shall be counted to determine whether there is a quorum. The Compensation Committee shall keep minutes of its meetings, and all action taken by it shall be reported to the Board of Directors. 4.3 Audit Committee. The Board of Directors, at its regular annual meeting, shall designate an Audit Committee which shall consist of two or more directors whose membership on the Audit Committee shall meet the requirements set forth in the rules of the New York Stock Exchange, as amended from time to time. Vacancies in the Audit Committee shall be filled by the Board of Directors with directors meeting the requirements set forth above, giving consideration to continuity of the Audit Committee, and members shall be subject to removal by the Board of Directors at any time. The Audit Committee shall fix its own rules of procedure and a majority of the members serving shall constitute a quorum. The Audit Committee shall meet at least twice per year with both the internal and the Corporation's outside auditors present at each meeting and shall keep minutes of its meetings and all action taken shall be reported to the Board of Directors. The Audit Committee shall review the reports and minutes of any audit committees of the Corporation's subsidiaries. The Audit Committee shall review the Corporation's financial reporting process, including accounting policies and procedures. The Audit Committee shall examine the report of the Corporation's outside auditors, consult with them with respect to their report and the standards and procedures employed by them in their audit, report to the Board of Directors the results of its study and recommend the selection of auditors for each fiscal year. 4.4 Nominating Committee. The Board of Directors, by resolution duly adopted, shall designate a Nominating Committee which shall consist of three or more directors. The Nominating Committee shall make recommendations to the Board of Directors regarding nominees for election as directors by the stockholders at each annual meeting of stockholders and make such other recommendations regarding tenure, classification and compensation of directors as the Nominating Committee may deem advisable from time to time. The Nominating Committee shall fix its own rules of procedure and a majority of the members then serving shall constitute a quorum. 4.5 Other Committees. The Board of Directors, by resolution adopted, may establish such other standing or special committees of the Board of Directors as it may deem advisable, and the members, terms and authority of such committees shall be as set forth in the resolutions establishing the same. 8 ARTICLE V. OFFICERS 5.1 Election of Officers; Terms. The officers of the Corporation shall be elected by the Board of Directors and shall include a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer or Chief Financial Officer. Other officers, including Executive Vice Presidents and Senior Vice Presidents, may be specified by the Board of Directors, and assistant and subordinate officers, may from time to time be elected by the Board of Directors. All officers shall hold office until the next annual meeting of the Board of Directors and until their successors are duly elected and qualified. The Chairman of the Board shall be chosen from among the directors. Any two officers may be combined in the same person as the Board of Directors may determine. 5.2 Removal of Officers; Vacancies. Any officer of the Corporation may be removed with or without cause, at any time, by the Board of Directors. Vacancies shall be filled by the Board of Directors. 5.3 Duties. The officers of the Corporation shall have such duties as generally pertain to their offices, respectively, as well as such powers and duties as are prescribed by law or are hereinafter provided or as from time to time shall be conferred by the Board of Directors. The Board of Directors may require any officer to give such bond for the faithful performance of his or her other duties as the Board of Directors may see fit. 5.4 Duties of the Chairman of the Board. The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall be responsible for the execution of the policies of the Board of Directors, shall serve as the Chairman of the Executive Committee and shall have direct supervision over the business of the Corporation and its several officers, subject to the ultimate authority of the Board of Directors. He or she shall be a director, and, except as otherwise provided in these Bylaws or in the resolutions establishing such committees, he or she shall be ex officio a member of all committees of the Board of Directors. He or she shall preside at all meetings of stockholders, the Board of Directors and the Executive Committee. He or she may sign and execute in the name of the Corporation share certificates, deeds, mortgages, bonds, contracts or other instruments except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed. In addition, he or she shall perform all duties incident to the office of the Chairman of the Board and Chief Executive Officer and such other duties as from time to time may be assigned to him or her by the Board of Directors. 5.5 Duties of the President. Unless the Board of Directors, by resolution duly adopted, designates some other person to serve as the Chief Operating Officer of the Corporation, the President shall serve as Chief Operating Officer and shall have direct supervision over the business of the Corporation and its several officers, subject to the authority of the Board of Directors and the Chairman of the Board, and shall consult with and report to the aforementioned officer. The President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments, except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed. In addition, he or she shall perform all duties incident to the office of the President and such other duties as from time to time may be assigned to him or her by the Board of Directors or the Chairman of the Board. 5.6 Duties of the Vice Presidents. Each Vice President, if any, shall have such powers and duties as may from time to time be assigned to him or her by the Chairman of the Board or the Board of Directors. When there shall be more than one Vice President of the Corporation, the Board of Directors may from time to time designate one of them to perform the duties of the President in the absence of the President. Any Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors, except where the signing and execution of such documents shall be expressly delegated by the Board of Directors or the Chairman of the Board to some other officer or agent of the Corporation or shall be required by law or otherwise to be signed or executed. 9 5.7 Duties of the Treasurer or Chief Financial Officer. The Treasurer or Chief Financial Officer shall have charge and custody of and be responsible for all funds and securities of the Corporation, and shall cause all such funds and securities to be deposited in such banks and depositories as shall be designated by the Board of Directors. He or she shall be responsible (i) for maintaining adequate financial accounts and records in accordance with generally accepted accounting practices, (ii) for the preparation of appropriate operating budgets and financial statements, (iii) for the preparation and filing of all tax returns required by law and (iv) for the performance of all duties incident to the office of Treasurer or Chief Financial Officer and such other duties as from time to time may be assigned to him or her by the Board of Directors, the Audit Committee or the Chairman of the Board. The Treasurer or Chief Financial Officer may sign and execute in the name of the Corporation share certificates, deeds, mortgages, bonds, contracts or other instruments, except where the signing and execution of such documents shall be expressly delegated by the Board of Directors or the Chairman of the Board to some other officer or agent of the Corporation or shall be required by law or otherwise to be signed or executed. 5.8 Duties of the Secretary. The Secretary shall act as secretary of all meetings of the Board of Directors, all committees of the Board of Directors and stockholders of the Corporation. He or she shall (i) keep and preserve the minutes of all such meetings in permanent books, (ii) ensure that all notices required to be given by the Corporation are duly given and served, (iii) have custody of the seal of the Corporation and shall affix the seal or cause it to be affixed to all share certificates of the Corporation and to all documents the execution of which on behalf of the Corporation under its corporate seal is duly authorized in accordance with law or the provisions of these Bylaws, (iv) have custody of all deeds, leases, contracts and other important corporate documents, (v) have charge of the books, records and papers of the Corporation relating to its organization and management as a Corporation, (vi) see that all reports, statements and other documents required by law (except tax returns) are properly filed and (vii) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Board of Directors or the Chairman of the Board. ARTICLE VI. CAPITAL STOCK 6.1 Certificates. Each stockholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the Chairman of the Board, the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. The Corporation seal and the signatures by the Corporation's officers, the transfer agent or the registrar may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the time of its issue. Every certificate for shares of stock which are subject to a restriction on transfer (as provided in Article IV of the Certificate) and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend (as provided in Article IV of the Certificate) with respect thereto as is required by law. 6.2 Pairing. Until the limitation on transfer provided for in the Pairing Agreement, dated as of February 17, 1983, by and between Bay Meadows Realty Enterprises, Inc. (the predecessor of California Jockey Club) and Bay Meadows Operating Company (the "Pairing Agreement"), as amended from time to time in accordance with the provisions thereof, shall be terminated: (a) The shares of Equity Stock of the Corporation that are paired pursuant to the Pairing Agreement shall not be transferable, and shall not be transferred on the stock transfer books of the Corporation, unless (i) a simultaneous transfer is made by the same transferor to the same transferee or (ii) arrangements have been made with the Operating Company for the acquisition by the transferee, of a like number of shares of the same class or series of Equity Stock of the Operating Company and such shares are paired with one another. 10 (b) Each certificate evidencing ownership of shares of Equity Stock of the Corporation that are paired pursuant to the Pairing Agreement and issued and not canceled prior to the Effective Time of the Restriction shall be deemed to evidence a like number of shares of the same class or series of Equity Stock of the Operating Company. (c) A legend shall be placed on the face of each certificate evidencing ownership of shares of Equity Stock of the Corporation that are paired pursuant to the Pairing Agreement referring to the restrictions on transfer set forth herein. (d) Notwithstanding the foregoing, the Corporation may issue or transfer shares of its Equity Stock to the Operating Company without regard to the restrictions of this Section 6.2. (e) To the extent that a paired share of Equity Stock of the Corporation is converted into a share of excess stock, par value $.01 per share (the "Excess Stock"), of the Corporation in accordance with the provisions of Article IV of the Certificate, such share of Excess Stock of the Corporation, together with the corresponding share of Excess Stock of the Operating Company, which has been converted from a share of Equity Stock of the Operating Company in accordance with Article IV of the Certificate and the Pairing Agreement, shall be automatically transferred to a trust established by the Corporation and the Operating Company for such purpose in accordance with Article IV of the Certificate. 6.3 Lost, Destroyed and Mutilated Certificates. Holders of the shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board of Directors may in its discretion cause one or more new certificates for the same number of shares in the aggregate to be issued to such stockholder upon the surrender of the mutilated certificate or upon satisfactory proof of such loss or destruction, and the deposit of a bond in such form and amount and with such surety as the Board of Directors may require. 6.4 Transfer of Stock. Subject to the restrictions on transfer of stock described in Section 6.2 of these Bylaws and Article IV of the Certificate, the stock of the Corporation shall be transferable or assignable only on the stock transfer books of the Corporation by the holder in person or by attorney on surrender of the certificate for such shares duly endorsed and, if sought to be transferred by attorney, accompanied by a written power of attorney to have the same transferred on the stock transfer books of the Corporation. The Corporation will recognize, however, the exclusive right of the person registered on its stock transfer books as the owner of shares to receive dividends and to vote as such owner. 6.5 Fixing Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not less than 10 nor more than 60 days prior to the date on which the particular action requiring such determination of stockholders, is to be taken. If no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notices of the meeting are mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to notice of or to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. ARTICLE VII. INDEMNIFICATION 7.1 Definitions. For purposes of this Article VII: (a) "Corporate Status" describes the status of a person who (i) in the case of a Director, is or was a director of the Corporation and is or was acting in such capacity, (ii) in the case of an Officer, is or was an 11 officer, employee or agent of the Corporation or is or was a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such Officer is or was serving at the request of the Corporation and (iii) in the case of a Non-Officer Employee, is or was an employee of the Corporation or is or was a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such Non-Officer Employee is or was serving at the request of the Corporation; (b) "Director" means any person who serves or has served the Corporation as a director on the Board of Directors; (c) "Disinterested Director" means, with respect to each Proceeding in respect of which indemnification is sought hereunder, a Director of the Corporation who is not and was not a party to such Proceeding; (d) "Expenses" means all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of expert witnesses, private investigators and professional advisors (including, without limitation, accountants and investment bankers), travel expenses, duplicating costs, printing and binding costs, costs of preparation of demonstrative evidence and other courtroom presentation aids and devices, costs incurred in connection with document review, organization, imaging and computerization, telephone charges, postage, delivery service fees, and all other disbursements, costs or expenses of the type customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, settling or otherwise participating in, a Proceeding; (e) "Non-Officer Employee" means any person who serves or has served as an employee of the Corporation, but who is not or was not a Director or Officer; (f) "Officer" means any person who serves or has served the Corporation as an officer appointed by the Board of Directors; and (g) "Proceeding" means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, inquiry, investigation, administrative hearing or other proceeding, whether civil, criminal, administrative, arbitrative or investigative. 7.2 Indemnification of Directors and Officers. Subject to the operation of Section 7.4 of these Bylaws, each Director and Officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment) against any and all Expenses, judgments, penalties, fines and amounts reasonably paid in settlement that are incurred by such Director or Officer or on such Director's or Officer's behalf in connection with any threatened, pending or completed Proceeding or any claim, issue or matter therein, which such Director or Officer is, or is threatened to be made, a party to or participant in by reason of such Director's or Officer's Corporate Status, if such Director or Officer acted in good faith and in a manner such Director or Officer reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 7.2 shall exist as to a Director or Officer after he or she has ceased to be a Director or Officer and shall inure to the benefit of his or her heirs, executors, administrators and personal representatives. Notwithstanding the foregoing, the Corporation shall indemnify any Director or Officer seeking indemnification in connection with a Proceeding initiated by such Director or Officer only if such Proceeding was authorized by the Board of Directors. 7.3 Indemnification of Non-Officer Employees. Subject to the operation of Section 7.4 of these Bylaws, each Non-Officer Employee may, in the discretion of the Board of Directors, be indemnified by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against any 12 and all Expenses, judgments, penalties, fines and amounts reasonably paid in settlement that are incurred by such Non-Officer Employee or on such Non- Officer Employee's behalf in connection with any threatened, pending or completed Proceeding, or any claim, issue or matter therein, which such Non- Officer Employee is, or is threatened to be made, a party to or participant in by reason of such Non-Officer Employee's Corporate Status, if such Non-Officer Employee acted in good faith and in a manner such Non-Officer Employee reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 7.3 shall exist as to a Non-Officer Employee after he or she has ceased to be a Non-Officer Employee and shall inure to the benefit of his or her heirs, personal representatives, executors and administrators. Notwithstanding the foregoing, the Corporation may indemnify any Non-Officer Employee seeking indemnification in connection with a Proceeding initiated by such Non-Officer Employee only if such Proceeding was authorized by the Board of Directors. 7.4 Good Faith. Unless ordered by a court, no indemnification shall be provided pursuant to this Article VII to a Director, to an Officer or to a Non-Officer Employee unless a determination shall have been made that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal Proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. Such determination shall be made by (a) a majority vote of the Disinterested Directors, even though less than a quorum of the Board of Directors, (b) if there are no such Disinterested Directors, or if a majority of Disinterested Directors so direct, by independent legal counsel in a written opinion or (c) by the stockholders of the Corporation. 7.5 Advancement of Expenses to Directors Prior to Final Disposition. The Corporation shall advance all Expenses incurred by or on behalf of any Director in connection with any Proceeding in which such Director is involved by reason of such Director's Corporate Status within 10 days after the receipt by the Corporation of a written statement from such Director requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Director and shall be preceded or accompanied by an undertaking by or on behalf of such Director to repay any Expenses so advanced if it shall ultimately be determined that such Director is not entitled to be indemnified against such Expenses. 7.6 Advancement of Expenses to Officers and Non-Officer Employees Prior to Final Disposition. The Corporation may, in the discretion of the Board of Directors, advance any or all Expenses incurred by or on behalf of any Officer or Non-Officer Employee in connection with any Proceeding in which such Officer or Non-Officer Employee is involved by reason of such Officer or Non- Officer Employee's Corporate Status upon the receipt by the Corporation of a statement or statements from such Officer or Non-Officer Employee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Officer or Non-Officer Employee and shall be preceded or accompanied by an undertaking by or on behalf of such Officer or Non-Officer Employee to repay any Expenses so advanced if it shall ultimately be determined that such Officer or Non-Officer Employee is not entitled to be indemnified against such Expenses. 7.7 Contractual Nature of Rights. The foregoing provisions of this Article VII shall be deemed to be a contract between the Corporation and each Director and Officer entitled to the benefits hereof at any time while this Article VII is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any Proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. If a claim for indemnification or advancement of Expenses hereunder by a Director or Officer is not paid in full by the Corporation within (a) 60 days after the receipt by the Corporation of a written claim for indemnification or (b) in the case of a Director, 10 days after the receipt by the Corporation of documentation of Expenses and the required undertaking, such Director or Officer may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, such Director or Officer shall also be entitled to be paid the expenses of prosecuting such claim. The failure of the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) to make a determination concerning the permissibility of 13 such indemnification or, in the case of a Director, advancement of Expenses, under this Article VII shall not be a defense to the action and shall not create a presumption that such indemnification or advancement is not permissible. 7.8 Non-Exclusivity of Rights. The rights to indemnification and advancement of Expenses set forth in this Article VII shall not be exclusive of any other right which any Director, Officer or Non-Officer Employee may have or hereafter acquire under any statute, provision of the Certificate or these Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise. 7.9 Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer or Non-Officer Employee against any liability of any character asserted against or incurred by the Corporation or any such Director, Officer or Non-Officer Employee, or arising out of any such person's Corporate Status, whether or not the Corporation would have the power to indemnify such person against such liability under the DGCL or the provisions of this Article VII. ARTICLE VIII. MISCELLANEOUS PROVISIONS 8.1 Seal. The seal of the Corporation shall consist of a flat-faced circular die, of which there may be any number of counterparts, on which there shall be engraved the word "Seal" and the name of the Corporation. 8.2 Fiscal Year. The fiscal year of the Corporation shall end on such date and shall consist of such accounting periods as may be fixed by the Board of Directors. 8.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the Board of Directors from time to time may authorize. When the Board of Directors so authorizes, however, the signature of any such person may be a facsimile. 8.4 Amendment of Bylaws. (a) Amendment by Directors. Except as provided otherwise by law, these Bylaws may be amended or repealed by the Board of Directors by the affirmative vote of a majority of the directors then in office. (b) Amendment by Stockholders. These Bylaws may be amended or repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the shares present in person or represented by proxy at such meeting and entitled to vote on such amendment or repeal, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of a majority of the shares present in person or represented by proxy at such meeting and entitled to vote on such amendment or repeal, voting together as a single class. 8.5 Voting of Stock Held. Unless otherwise provided by resolution of the Board of Directors or of the Executive Committee, if any, the Chairman of the Board may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the vote that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or to consent in writing to any action by any such other corporation; and the Chairman of the Board shall instruct the person or persons so appointed as to the manner of casting such votes or giving such consent and may execute or cause to be executed on behalf of the Corporation, and under its corporate seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the premises. In lieu of such appointment, the Chairman of the Board may himself or herself attend any meetings of the holders of shares or other securities of any such other corporation and there vote or exercise any or all power of the Corporation as the holder of such shares or other securities of such other corporation. 14 EX-4.3 4 AMENDED AND RESTATED CERTIFICATE OF INC. EXHIBIT 4.3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY Bay Meadows Operating Company, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is Bay Meadows Operating Company. The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was January 27, 1983 (the "Original Certificate of Incorporation"). The name under which the Corporation filed the Original Certificate of Incorporation was Bay Meadows Operating Company. Pursuant to this Amended and Restated Certificate of Incorporation, the name of the Corporation is hereby changed to Patriot American Hospitality Operating Company. 2. This Amended and Restated Certificate of Incorporation (the "Certificate") amends, restates and integrates the provisions of the Original Certificate of Incorporation, was duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law, as amended from time to time (the "DGCL"), and was duly adopted by the stockholders of the Corporation in accordance with the applicable provisions of Sections 242 and 245 of the DGCL. 3. The text of the Original Certificate of Incorporation, as amended to date, is hereby amended and restated in its entirety to provide as herein set forth in full. I. NAME The name of the corporation is Patriot American Hospitality Operating Company. II. PURPOSES The nature of business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act for which corporations may be organized under the DGCL. III. REGISTERED OFFICE The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. IV. CAPITAL STOCK The Corporation shall have the authority to issue 650,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), 750,000,000 shares of excess stock, par value $.01 per share (the "Excess 1 Stock"), and 100,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The rights, preferences, voting powers and the qualifications, limitations and restrictions of the authorized stock shall be as follows: A. Common Stock. 1. Voting Rights. Each share of Common Stock shall be entitled to one vote on all matters submitted to a vote at any meeting of stockholders. 2. Dividend Rights. Subject to the rights of holders of Preferred Stock and subject to any other provisions of this Certificate or any amendment hereto, holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors from time to time. 3. Action Without a Meeting. Any action required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders of the Corporation may be taken in lieu of such a meeting only by an unanimous written consent of the stockholders signed by each stockholder entitled to vote on the matter. B. Preferred Stock. 1. The Preferred Stock may be issued from time to time in one or more series, with such distinctive designations, rights and preferences as shall be stated and expressed herein or in the resolution or resolutions providing for the issue of shares of a particular series, and in such resolution or resolutions providing for the issue of shares of such series, the Board of Directors is expressly authorized to fix or establish the basis for determining: a. The annual or other periodic dividend rate for such series, the dividend payment dates, the date from which dividends on all shares of such series issued shall be cumulative, and the extent of participation rights, if any; b. The redemption price or prices, if any, for such series and other terms and conditions on which such series may be retired and redeemed; c. The obligation, if any, of the Corporation to purchase and retire or redeem shares of such series as a sinking fund or otherwise, and the terms and conditions of any such redemption; d. The designation and maximum number of shares of such series issuable; e. The right to vote, if any, with holders of shares of any other class or series, either generally or as a condition to specified corporate action; f. The amount payable upon shares in the event of involuntary liquidation; g. The amount payable upon shares in the event of voluntary liquidation; h. The rights, if any, of the holders of shares of such series to convert such shares into other classes of stock of the Corporation, or to exchange such shares for other securities or assets, and the terms and conditions of any such conversion or exchange; and i. Such other rights as may be specified by the Board of Directors and not prohibited by law. All shares of Preferred Stock of any one series shall be identical with each other in all respects except, if so determined by the Board of Directors, as to the dates from which dividends thereon shall be cumulative; and all shares of Preferred Stock shall be of equal rank with each other, regardless of series, and shall be identical with each other in all respects except as provided herein or in the resolution or resolutions providing for the issue of a particular series. In case dividends on all shares of Preferred Stock for any regular dividend period are not paid in full, all such shares shall participate ratably in any partial payment of dividends for such period in proportion to the full amounts of dividends for such period to which they are respectively entitled. 2 C. Restrictions on Ownership and Transfer of Equity Stock. 1. Definitions. For purposes of this Article IV, the following terms shall have the meanings set forth below: "Beneficial Ownership" shall mean, with respect to any Person, ownership of shares of Equity Stock equal to the sum of (i) the shares of Equity Stock directly or indirectly owned by such Person, (ii) the number of shares of Equity Stock treated as owned directly or indirectly by such Person through the application of the constructive ownership rules of Section 544 of the Internal Revenue Code of 1986, as amended (the "Code"), as modified by Section 856(h)(1)(B) of the Code, and (iii) the number of shares of Equity Stock which such Person is deemed to beneficially own pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have correlative meanings. "Beneficiary" shall mean, with respect to any Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by the Corporation as the beneficiary or beneficiaries of such Trust, in accordance with the provisions of Section (D)(4) of this Article IV. "Constructive Ownership" shall mean ownership of shares of Equity Stock by a Person who is or would be treated as a direct or indirect owner of such shares of Equity Stock through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have correlative meanings. "Equity Stock" shall mean Common Stock and Preferred Stock of the Corporation. "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. The "Closing Price" on any date shall mean the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Equity Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Equity Stock are listed or admitted to trading or, if the shares of Equity Stock are not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the Nasdaq Stock Market, Inc. or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if the shares of Equity Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker selected by the Board of Directors making a market in the shares of Equity Stock. In the case of Equity Stock that is paired, "Market Price" shall mean the "Market Price" for paired shares multiplied by a fraction (expressed as a percentage) determined by dividing the value for such Equity Stock most recently determined under Section 2(c) of the Pairing Agreement by the value of a paired share most recently determined under Section 2(c) of the Pairing Agreement (the "Valuation Percentage"). "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, including, but not limited to, (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of shares of Equity Stock or (ii) the sale, transfer, assignment or other disposition of interests in any Person or of any securities or rights convertible into or exchangeable for shares of Equity Stock that results in changes in Beneficial Ownership or Constructive Ownership of shares of Equity Stock. "Ownership Limit" shall mean, with respect to any class or series of Equity Stock, 9.8% of the number of outstanding shares of such class or series of Equity Stock. For purposes of computing the percentage of shares of any class or series of Equity Stock of the Corporation that is Beneficially Owned by 3 any Person, any shares of Equity Stock of the Corporation which are deemed to be Beneficially Owned by such Person pursuant to Rule 13d-3 of the Exchange Act but which are not outstanding shall be deemed to be outstanding. "Pairing Agreement" shall mean the Pairing Agreement, dated as of February 17, 1983, by and between Bay Meadows Realty Enterprises, Inc. (the predecessor of California Jockey Club) and Bay Meadows Operating Company, as amended from time to time in accordance with the provisions thereof. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section (D)(8) of this Article IV. "Person" shall mean (a) an individual or any corporation, partnership, estate, trust, association, private foundation, joint stock company or any other entity and (b) a "group" as that term is defined for purposes of Rule 13d-5 of the Exchange Act. "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who is prevented from being or becoming the owner of record title to shares of Equity Stock by the provisions of Section (D)(1) of this Article IV. "Restriction Termination Date" shall mean the first day on which the Corporation is no longer a party to the Pairing Agreement, the Pairing Agreement terminates or the Corporation is no longer required by the Pairing Agreement to maintain the restrictions set forth in this Section C of this Article IV. "Trading Day" shall mean a day on which the principal national securities exchange on which shares of Equity Stock are listed or admitted to trading is open for the transaction of business or, if shares of Equity Stock are not listed or admitted to trading on any national securities exchange, any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Transfer" (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of shares of Equity Stock, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. "Transfer" (as a verb) shall have the correlative meaning. "Trust" shall mean any separate trust created and administered in accordance with the terms of Section (D) of this Article IV, for the exclusive benefit of any Beneficiary. "Trustee" shall mean any Person or entity unaffiliated with both the Corporation and any Prohibited Owner designated by the Corporation to act as trustee of any Trust, or any successor trustee thereof. The Trustee shall be designated by the Corporation and Patriot American Hospitality, Inc. ("Patriot REIT") in accordance with the Pairing Agreement. 2. Restriction on Ownership and Transfer. a. Except as provided in Section (C)(4) of this Article IV, until the Restriction Termination Date, (i) no Person shall Beneficially Own or Constructively Own outstanding shares of Equity Stock in excess of the Ownership Limit and (ii) any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) that, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Equity Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit and the intended transferee shall acquire no rights in such shares of Equity Stock. b. Until the Restriction Termination Date, any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) of shares of Equity Stock that are paired pursuant to the Pairing Agreement that, if effective, would result in Patriot REIT being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of shares of Equity Stock that are paired pursuant to the Pairing Agreement that would cause Patriot REIT to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. 4 c. Until the Restriction Termination Date, any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) of shares of Equity Stock that, if effective, would cause Patriot REIT to Constructively Own 10% or more of the ownership interests in a tenant of the real property of Patriot REIT or any direct or indirect subsidiary (whether a corporation, partnership, limited liability company or other entity) of Patriot REIT (a "Subsidiary"), within the meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that number of shares of Equity Stock that would cause Patriot REIT to Constructively Own 10% or more of the ownership interests in a tenant of the real property of Patriot REIT or a Subsidiary within the meaning of Section 856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. d. Until the Restriction Termination Date, any Transfer (whether or not the result of a transaction entered into through the facilities of the New York Stock Exchange) of Equity Stock that is paired pursuant to the Pairing Agreement that, if effective, would result in the capital stock of Patriot REIT being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code shall be void ab initio and the intended transferee shall acquire no rights in such shares of Equity Stock. 3. Owners Required To Provide Information. Until the Restriction Termination Date: a. Every Beneficial Owner or Constructive Owner of more than 5%, or such lower percentages as required pursuant to regulations under the Code, of the outstanding shares of any class or series of Equity Stock of the Corporation shall, within 30 days after January 1 of each year, provide to the Corporation a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of shares of Equity Stock Beneficially Owned or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Corporation such additional information as the Corporation may request to ensure compliance with the restrictions in this Section C of this Article IV. b. Each Person who is a Beneficial Owner or Constructive Owner of shares of Equity Stock and each Person (including the stockholder of record) who is holding shares of Equity Stock for a Beneficial Owner or Constructive Owner shall provide to the Corporation a written statement or affidavit stating such information as the Corporation may request to ensure compliance with the restrictions set forth in this Section C of this Article IV. 4. Exception. The Board of Directors may exempt a Person from the Ownership Limit, provided that (A) such exemption is permitted by and made in accordance with the Pairing Agreement and (B) such Person agrees in writing that any violation or attempted violation of the Ownership Limit will result in the conversion of such shares into shares of Excess Stock pursuant to Section (D)(1) of this Article IV and provides such other representations and undertakings as the Board of Directors may reasonably require. 5. New York Stock Exchange Transactions. Notwithstanding any provision contained herein to the contrary, nothing in this Certificate shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. D. Excess Stock. 1. Conversion into Excess Stock. a. If, notwithstanding the other provisions contained in this Article IV, prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, then, (i) except as otherwise provided in Section (C)(4) of this Article IV, the purported transferee shall be deemed to be a Prohibited Owner and shall acquire no right or interest (or, in the case of a Non-Transfer Event, the Person holding record title to the shares of Equity Stock Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of shares of Equity Stock which would cause such Beneficial 5 Owner or Constructive Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, (ii) such number of shares of Equity Stock in excess of the Ownership Limit (rounded up to the nearest whole share) shall be automatically converted into an equal number of shares of Excess Stock and transferred to a Trust in accordance with Section (D)(4) of this Article IV and (iii) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee of the Trust. Such conversion into Excess Stock and transfer to a Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer or Non-Transfer Event, as the case may be. b. If, notwithstanding the other provisions contained in this Article IV, prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the capital stock of Patriot REIT being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, (ii) result in Patriot REIT being "closely held" within the meaning of Section 856(h) of the Code or (iii) cause Patriot REIT to Constructively Own 10% or more of the ownership interest in a tenant of Patriot REIT's or a Subsidiary's real property within the meaning of Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall be deemed to be a Prohibited Owner and shall acquire no right or interest (or, in the case of a Non-Transfer Event, the Person holding record title of the shares of Equity Stock with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of shares of Equity Stock, the ownership of which by such purported transferee or record holder would (A) result in the capital stock of Patriot REIT being beneficially owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, (B) result in Patriot REIT being "closely held" within the meaning of Section 856(h) of the Code or (C) cause Patriot REIT to Constructively Own 10% or more of the ownership interests in a tenant of Patriot REIT's or a Subsidiary's real property within the meaning of Section 856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up to the nearest whole share) shall be automatically converted into an equal number of shares of Excess Stock and transferred to a Trust in accordance with Section (D)(4) of this Article IV and (z) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee of the Trust. Such conversion into Excess Stock and transfer to a Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer or Non-Transfer Event, as the case may be. c. Upon the occurrence of such a conversion of shares of any class or series of Equity Stock into an equal number of shares of Excess Stock, such shares of Equity Stock shall be automatically retired and canceled, without any action required by the Board of Directors of the Corporation, and shall thereupon be restored to the status of authorized but unissued shares of the particular class or series of Equity Stock from which such Excess Stock was converted and may be reissued by the Corporation as that particular class or series of Equity Stock. 2. Remedies for Breach. If the Corporation, or its designees, shall at any time determine in good faith that a Transfer has taken place in violation of Section (C)(2) of this Article IV or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in violation of Section (C)(2) of this Article IV, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect to such Transfer on the stock transfer books of the Corporation or instituting proceedings to enjoin such Transfer or acquisition. 3. Notice of Restricted Transfer. Any Person who acquires or attempts to acquire shares of Equity Stock in violation of Section (C)(2) of this Article IV, or any Person who owns shares of Equity Stock that were converted into shares of Excess Stock and transferred to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article IV, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, 6 if any, of such Transfer or Non-Transfer Event, as the case may be, on the Corporation's compliance with the terms of the Pairing Agreement, including the effect on Patriot REIT's status as a real estate investment trust. 4. Ownership in Trust. Upon any Transfer or Non-Transfer Event that results in Excess Stock pursuant to Section (D)(1) of this Article IV, such Excess Stock shall be automatically transferred to a Trust to be held for the exclusive benefit of the Beneficiary. The Corporation and Patriot REIT shall name a Beneficiary for each Trust pursuant to the terms of the Pairing Agreement. Any conversion of shares of Equity Stock into shares of Excess Stock and transfer to a Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer or Non- Transfer Event that results in the conversion. Shares of Excess Stock so held in trust shall remain issued and outstanding shares of stock of the Corporation. 5. Dividend Rights. Each share of Excess Stock shall be entitled to the same dividends and distributions (as to both timing and amount) as may be declared by the Board of Directors as shares of the class or series of Equity Stock from which such Excess Stock was converted. The Trustee, as record holder of the shares of Excess Stock, shall be entitled to receive all dividends and distributions and shall hold all such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to such shares of Excess Stock shall repay to the Trust the amount of any dividends or distributions received by it (i) that are attributable to any shares of Equity Stock that have been converted into shares of Excess Stock and (ii) the record date of which was on or after the date that such shares were converted into shares of Excess Stock. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Equity Stock Beneficially Owned or Constructively Owned by the Person who, but for the provisions of this Article IV, would Constructively Own or Beneficially Own the shares of Equity Stock that were converted into shares of Excess Stock; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. 6. Rights upon Liquidation. In the event of any voluntary or involuntary liquidation of, or winding up of, or any distribution of the assets of, the Corporation, each holder of shares of Excess Stock shall be entitled to receive, ratably with each other holder of shares of Equity Stock of the same class or series from which the Equity Stock was converted, that portion of the assets of the Corporation that is available for distribution to the holders of such class or series of Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; provided, however, that the Prohibited Owner shall not be entitled to receive amounts in excess of, in the case of a purported Transfer in which the Prohibited Owner gave value for shares of Equity Stock and which Transfer resulted in the conversion of the shares into shares of Excess Stock, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock (which, in the case of Equity Stock that is paired, shall equal the price per paired share multiplied by the most recent Valuation Percentage) and, in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the conversion of the shares into shares of Excess Stock, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be distributed to the Beneficiary. 7. Voting Rights. Each share of Excess Stock shall entitle the holder to the number of votes the holder would have, if such share of Excess Stock was a share of Equity Stock of the same class or series from which such Excess Stock was converted, on all matters submitted to a vote at any meeting of stockholders. The holders of shares of Excess Stock converted from the same class or series of Equity Stock shall vote together with the holders of such Equity Stock as a single class on all such matters. The Trustee, as record holder of the Excess Stock, shall be entitled to vote all shares of Excess Stock. Any vote by a Prohibited 7 Owner as a purported holder of shares of Equity Stock prior to the discovery by the Corporation that the shares of Equity Stock have been converted into shares of Excess Stock shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such shares of Excess Stock, and the Prohibited Owner shall be deemed to have given, as of the close of trading on the Trading Day prior to the date of the purported Transfer or Non-Transfer Event that results in the conversion of the shares of Equity Stock into shares of Excess Stock and the transfer of such shares to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article IV, an irrevocable proxy to the Trustee to vote the shares of Excess Stock in the manner in which the Trustee, in its sole and absolute discretion, desires. 8. Designation of Permitted Transferee. a. The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any and all shares of Excess Stock if the Company fails to exercise its option with respect to such shares pursuant to Section (D)(10) hereof within the time period set forth therein. As soon as practicable, but in an orderly fashion so as not to materially adversely affect the Market Price of the shares of Excess Stock, the Trustee shall designate any Person as a Permitted Transferee; provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the shares of Excess Stock (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) and (ii) the Permitted Transferee so designated may acquire such shares of Excess Stock without violating any of the restrictions set forth in Section (C)(2) of this Article IV and without such acquisition resulting in the conversion of the shares of Equity Stock so acquired into shares of Excess Stock and the transfer of such shares to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article IV. b. Upon the designation by the Trustee of a Permitted Transferee in accordance with the provisions of this Section (D)(8), the Trustee shall cause to be transferred to the Permitted Transferee that number of shares of Excess Stock acquired by the Permitted Transferee. Upon such transfer of the shares of Excess Stock to the Permitted Transferee, such shares of Excess Stock shall be automatically converted into an equal number of shares of Equity Stock of the same class and series from which such Excess Stock was converted. Upon the occurrence of such a conversion of shares of Excess Stock into an equal number of shares of Equity Stock, such shares of Excess Stock shall be automatically retired and canceled, without any action required by the Board of Directors of the Corporation, and shall thereupon be restored to the status of authorized but unissued shares of Excess Stock and may be reissued by the Corporation as Excess Stock. c. The Trustee shall (i) cause to be recorded on the stock transfer books of the Corporation that the Permitted Transferee is the holder of record of such number of shares of Equity Stock, and (ii) distribute to the Beneficiary any and all amounts held with respect to the shares of Excess Stock after making payment to the Prohibited Owner pursuant to Section (D)(9) of this Article IV. d. If the Transfer of shares of Excess Stock to a purported Permitted Transferee shall violate any of the transfer restrictions set forth in Section (C)(2) of this Article IV, such Transfer shall be void ab initio as to that number of shares of Excess Stock that cause the violation of any such restriction when such shares are converted into shares of Equity Stock (as described in clause (b) above) and the purported Permitted Transferee shall be deemed to be a Prohibited Owner and shall acquire no rights in such shares of Excess Stock or Equity Stock. Such shares of Equity Stock shall be automatically re-converted into Excess Stock and transferred to the Trust from which they were originally Transferred. Such conversion and transfer to the Trust shall be effective as of the close of trading on the Trading Day prior to the date of the Transfer to the purported Permitted Transferee and the provisions of this Article IV shall apply to such shares, including, without limitation, the provisions of Sections D(8) through (D)(10) with respect to any future Transfer of such shares by the Trust. 9. Compensation to Record Holder of Shares of Equity Stock that are Converted into Shares of Excess Stock. Any Prohibited Owner shall be entitled (following discovery of the shares of Excess Stock and subsequent designation of the Permitted Transferee in accordance with Section (D)(8) of this Article IV or following the acceptance of the offer to purchase such shares in accordance with Section (D)(10) of this 8 Article IV) to receive from the Trustee following the sale or other disposition of such shares of Excess Stock the lesser of (i) (a) in the case of a purported Transfer in which the Prohibited Owner gave value for shares of Equity Stock and which Transfer resulted in the conversion of such shares into shares of Excess Stock, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) and (b) in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the conversion of such shares into shares of Excess Stock, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer or (ii) the price per share (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) received by the Trustee from the sale or other disposition of such shares of Excess Stock in accordance with this Section (D)(9) or Section (D)(10) of this Article IV. Any amounts received by the Trustee in respect of such shares of Excess Stock and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section (D)(9) shall be distributed to the Beneficiary in accordance with the provisions of Section (D)(8) of this Article IV. Each Beneficiary and Prohibited Owner shall waive any and all claims that it may have against the Trustee and the Trust arising out of the disposition of shares of Excess Stock, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section (D) of this Article IV by, such Trustee or the Corporation. 10. Purchase Right in Excess Stock. Shares of Excess Stock shall be deemed to have been offered for sale to the Corporation or its designee, at a price per share equal to the lesser of (i) the price per share (which, in the case of paired Excess Stock, shall be determined based on the Valuation Percentage) in the transaction that created such shares of Excess Stock (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-Transfer Event) or (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period of 90 days following the later of (a) the date of the Non-Transfer Event or purported Transfer which results in such shares of Excess Stock or (b) the date on which the Corporation determines in good faith that a Transfer or Non-Transfer Event resulting in shares of Excess Stock previously has occurred, if the Corporation does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section (D)(3) of this Article IV. E. Preemptive Rights. No holder of shares of any class or series of capital stock shall as such holder have any preemptive or preferential right to purchase or subscribe to (i) any shares of any class or series of capital stock of the Corporation, whether now or hereafter authorized, (ii) any warrants, rights or options to purchase any such capital stock or (iii) any obligations convertible into any such capital stock or into warrants, rights or options to purchase any such capital stock. F. Remedies Not Limited. Nothing contained in this Article IV shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders to ensure compliance with the requirements of the Pairing Agreement and with the restrictions set forth in Section C of this Article IV. G. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article IV, including any definition contained in Section (C)(1) of this Article IV, the Board of Directors shall have the power to determine the application of the provisions of this Article IV with respect to any situation based on the facts known to it. H. Legend. Each certificate for shares of Equity Stock shall bear the following legend: "The shares of Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company represented by this combined certificate are subject to restrictions in the respective Amended and Restated Certificate of Incorporation of each company which prohibit (a) any Person from Beneficially Owning or Constructively Owning (as these terms are defined in the respective Amended and Restated 9 Certificate of Incorporation of each company) in excess of 9.8% of the number of outstanding shares of any class or series of Equity Stock (as that term is defined in the respective Amended and Restated Certificate of Incorporation of each company), (b) any Person (as that term is defined in the respective Amended and Restated Certificate of Incorporation of each company) from acquiring or maintaining any ownership interest in the stock of either company that is inconsistent with (i) the requirements of the Internal Revenue Code of 1986, as amended, pertaining to real estate investment trusts or (ii) Article IV of the respective Amended and Restated Certificate of Incorporation of each company and (c) any transfer of shares of any class or series of Equity Stock of either company that are paired pursuant to the Pairing Agreement, dated as of February 17, 1997 between the two companies, as amended from time to time in accordance with the provisions thereof (the "Pairing Agreement"), except in combination with an equal number of shares of the other company in accordance with the respective Amended and Restated Bylaws of each company and the Pairing Agreement, copies of which are on file with the transfer agent, and the holder of this certificate by his acceptance hereof consents to be bound by such restrictions. Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company will furnish without charge to each stockholder who so requests a copy of the relevant provisions of the respective Amended and Restated Certificates of Incorporation and the respective Amended and Restated Bylaws of each company, a copy of the Pairing Agreement and a copy of the provisions setting forth the designations, preferences, privileges and rights of each class of stock or series thereof that each company is authorized to issue and the qualifications, limitations and restrictions of such preferences and/or rights. Any such request may be addressed to the Secretary of either Company or to the transfer agent named on the face hereof." I. Severability. Each provision of this Article IV shall be severable and an adverse determination as to any such provision shall be in no way affect the validity of any other provision. V. DIRECTORS A. General Powers. The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors and, except as otherwise expressly provided by law, the Bylaws or this Certificate, all of the powers of the Corporation shall be vested in such Board. B. Number of Directors. The number of directors shall be fixed by resolution duly adopted from time to time by the Board of Directors. A director need not be a stockholder of the Corporation. C. Terms of Directors. The directors shall be classified, with respect to the term for which they severally hold office, into three classes, as nearly equal in number as possible. The initial Class I Directors of the Corporation shall be ; the initial Class II Directors of the Corporation shall be ; and the initial Class III Directors of the Corporation shall be . The initial Class I Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1997; the initial Class II Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1998; and the initial Class III Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1999. At each annual meeting of stockholders, the successor or successors of the class of directors whose term expires at that meeting shall be elected by a plurality of the votes of the shares present in person or represented by proxy at such meeting and entitled to vote on the election of directors, and shall hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. The directors elected to each class shall hold office until their successors are duly elected and qualified or until their earlier resignation or removal. Notwithstanding the foregoing, whenever, pursuant to the provisions of Article IV of this Certificate, the holders of any one or more series of Preferred Stock shall have the right, voting separately as a series or together with holders of other such series, to elect directors at an annual or special meeting of stockholders, the election, 10 term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate and any certificates of designation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section C of this Article V. During any period when the holders of any series of Preferred Stock have the right to elect additional directors as provided for or fixed pursuant to the provisions of Article IV of this Certificate, then upon commencement and for the duration of the period during which such right continues: (a) the then otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions and (b) each such additional director shall serve until such director's successor shall have been duly elected and qualified, or until such director's right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to such director's earlier death, disqualification, resignation or removal. Except as otherwise provided by the Board in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate and the total and authorized number of directors of the Corporation shall be reduced accordingly. D. Removal of Directors. Subject to the rights, if any, of any series of Preferred Stock to elect directors and to remove any director whom the holders of any such stock have the right to elect, any director (including persons elected by directors to fill vacancies in the Board of Directors) may be removed from office (a) only with cause and (b) only by the affirmative vote of the holders of at least 75% of the shares then entitled to vote at an election of directors. At least 30 days prior to any meeting of stockholders at which it is proposed that any director be removed from office, written notice of such proposed removal shall be sent to the director whose removal will be considered at the meeting. For purposes of this Certificate, "cause," with respect to the removal of any director shall mean only (i) conviction of a felony, (ii) declaration of unsound mind by order of a court, (iii) gross dereliction of duty, (iv) commission of any act involving moral turpitude or (v) commission of an act that constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit to such director and a material injury to the Corporation. E. Vacancies. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect directors and to fill vacancies in the Board of Directors relating thereto, any and all vacancies in the Board of Directors, however occurring, including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a director, shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum of the Board of Directors. Any director appointed in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been duly elected and qualified or until such director's earlier resignation or removal. Subject to the rights, if any, of the holders of any series of Preferred Stock, when the number of directors is increased or decreased, the Board of Directors shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided, however, that no decrease in the number of directors shall shorten the term of any incumbent director. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until such vacancy is filled. VI. LIMITATION OF LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the 11 director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL or (d) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended after the effective date of this Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of this Article VI by either (i) the stockholders of the Corporation or (ii) an amendment to the DGCL shall not adversely affect any right or protection existing at the time of such repeal or modification with respect to any acts or omissions occurring before such repeal or modification of a person serving as a director at the time of such repeal or modification. VII. RELATED PERSON TRANSACTION The affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of capital stock of this corporation, which shall include the affirmative vote of at least 50% of the outstanding shares of capital stock held by shareholders other than a "Related Person" (as hereinafter defined), shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of this corporation with any Related Person; provided, however, that such 66 2/3% voting requirement shall not be applicable if the Business Combination was approved by the Board of Directors of the corporation prior to the acquisition by such Related Person of the beneficial ownership of 5% or more of the outstanding shares of the capital stock of the corporation. For purposes of this Article VII: 1. The term "Business Combination" shall mean (a) any merger, reorganization or consolidation of this corporation with or into a Related Person, (b) any sale, lease, exchange, transfer or other disposition, including, without limitation, a mortgage or any other security device, of all or any substantial part of the assets of this corporation (including, without limitation, any voting securities of a subsidiary) or of a subsidiary, to a Related Person, (c) any merger or consolidation of a Related Person with or into this corporation or a subsidiary of this corporation and (d) any sale, lease, exchange, transfer or other disposition of all or any substantial part of the assets of a Related Person to this corporation or a subsidiary of this corporation. 2. The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "affiliates" and "associates" (defined below), beneficially (as defined in Rule 13d-3 of the Securities Exchange Act of 1934), owns in the aggregate five percent (5%) or more of the outstanding shares of the capital stock of this corporation, and any "affiliate" or "associate" (as those terms are defined in Rule 12b-2 of the Exchange Act) of any such individual, corporation, partnership or other person or entity; provided, however, that the term "Related Person" shall not include either Patriot REIT or any subsidiary of this corporation. 3. The term "substantial part of the assets" shall mean assets having a fair market value or book value, whichever is greater, equal to 25% or more of such value of the total assets as reflected on the most recent quarterly balance sheet of the corporation as of a date no earlier than forty-five (45) days prior to any acquisition of such assets. 4. Without limitation, any share of capital stock of this corporation which any Related Person has the right to acquire pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise shall be deemed beneficially owned by such Related Person. 12 The provisions set forth in this Article VII may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of capital stock of this corporation; provided, however, that if there is a Related Person (as defined herein), such 66 2/3% vote must include the affirmative vote of at least 50% of the outstanding shares of capital stock held by shareholders other than the Related Person. VIII. AMENDMENT OF CERTIFICATE OF INCORPORATION Subject to Article VII of this Certificate, the Corporation reserves the right to amend or repeal this Certificate in the manner now or hereafter prescribed by statute and this Certificate, and all rights conferred upon stockholders herein are granted subject to this reservation. 13 EX-4.4 5 AMENDED AND RESTATED BYLAWS EXHIBIT 4.4 AMENDED AND RESTATED BYLAWS OF PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY ARTICLE I. DEFINITIONS For purposes of these Bylaws, the following words shall have the meanings set forth below: (a) "Affiliate" of a Person shall mean (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such other Person, (ii) any Person that owns, beneficially, directly or indirectly, 5% or more of the outstanding capital stock, shares or equity interests of such other Person or (iii) any officer, director, employee, partner or trustee of such other Person or any Person controlling, controlled by or under common control with such Person (excluding directors and Persons serving in similar capacities who are not otherwise Affiliates of such Person). For the purposes of this definition, the term "Person" shall mean, and includes, any natural person, corporation, partnership, association, trust, limited liability company or any other legal entity. For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. (b) "Certificate" shall mean the Amended and Restated Certificate of Incorporation of the Corporation, as amended from time to time. (c) "Corporation" shall mean Patriot American Hospitality Operating Company. (d) "DGCL" shall mean the Delaware General Corporation Law, as amended from time to time. (e) "Equity Stock" shall mean the common stock, par value $.01 per share, and the preferred stock, par value $.01 per share of the Corporation and Patriot REIT. (f) "Independent Director" shall mean a director of the Corporation who is not (i) an officer or employee of the Corporation, (ii) a director or officer of Patriot REIT or (iii) an Affiliate of (a) any lessee of any property of the Corporation, (b) a subsidiary of the Corporation or (c) any partnership that is an Affiliate of the Corporation. (g) "Patriot REIT" shall mean Patriot American Hospitality, Inc. (h) "Public Announcement" shall mean: (i) disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, (ii) a report or other document filed publicly with the Securities and Exchange Commission (including, without limitation, a Form 8-K) or (iii) a letter or report sent to stockholders of record of the Corporation at the time of the mailing of such letter or report. ARTICLE II. MEETINGS OF STOCKHOLDERS 2.1 Places of Meetings. All meetings of the stockholders shall be held at such place, either within or without the State of Delaware, as from time to time may be fixed by the Board of Directors. 2.2 Annual Meetings. The annual meeting of the stockholders, for the election of directors and transaction of such other business as may come properly before the meeting, shall be held at such date and time as shall be determined by the Board of Directors. 1 2.3 Special Meetings. A special meeting of the stockholders for any purpose or purposes may be called at any time only by the Chairman of the Board or by a majority of the Board of Directors. At a special meeting no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting. 2.4 Notice of Meetings; Adjournments. A written notice of each annual meeting stating the hour, date and place of such annual meeting shall be given by the Secretary or an Assistant Secretary of the Corporation (or other person authorized by these Bylaws or by law) not less than 10 days nor more than 60 days before the annual meeting, to each stockholder entitled to vote thereat and to each stockholder who, by law or under the Certificate or under these Bylaws, is entitled to such notice, by delivering such notice to him or her or by mailing it, postage prepaid, addressed to such stockholder at the address of such stockholder as it appears on the stock transfer books of the Corporation. Such notice shall be deemed to be delivered when hand delivered to such address or deposited in the mail so addressed, with postage prepaid. Notice of all special meetings of stockholders shall be given in the same manner as provided for annual meetings, except that the written notice of all special meetings shall state the purpose or purposes for which the meeting has been called. Notice of an annual meeting or special meeting of stockholders need not be given to a stockholder if a written waiver of notice is signed before or after such meeting by such stockholder or if such stockholder attends such meeting, unless such attendance was for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual meeting or special meeting of stockholders need be specified in any written waiver of notice. The Board of Directors may postpone and reschedule any previously scheduled annual meeting or special meeting of stockholders and any record date with respect thereto, regardless of whether any notice or public disclosure with respect to any such meeting has been sent or made pursuant to this Section 2.4 or otherwise. In no event shall the Public Announcement of an adjournment, postponement or rescheduling of any previously scheduled meeting of stockholders commence a new time period for the giving of a stockholder's notice under Section 2.9 of these Bylaws. When any meeting is convened, the presiding officer of the meeting may adjourn the meeting if (a) no quorum is present for the transaction of business, (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information that the Board of Directors determines has not been made sufficiently or timely available to stockholders or (c) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation. When any annual meeting or special meeting of stockholders is adjourned to another hour, date or place, notice need not be given of the adjourned meeting, other than an announcement at the meeting at which the adjournment is taken, of the hour, date and place to which the meeting is adjourned; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat and each stockholder who, by law or under the Certificate or under these Bylaws, is entitled to such notice. 2.5 Quorum. Except as otherwise required by the Certificate, any number of stockholders together holding at least a majority of the outstanding shares of capital stock entitled to vote with respect to the business to be transacted, who shall be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of business. If less than a quorum shall be in attendance at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the stockholders present or represented by proxy. 2.6 Voting and Proxies. Stockholders shall have one vote for each share of stock entitled to vote owned by them of record according to the stock transfer books of the Corporation, unless otherwise provided by law or 2 by the Certificate. Stockholders may vote either in person or by written proxy, but no proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Proxies shall be filed with the secretary of the meeting before being voted. Except as otherwise limited therein or as otherwise provided by law, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid, and the burden of proving invalidity shall rest on the challenger. 2.7 Action at Meeting. When a quorum is present, any matter before any meeting of stockholders shall be decided by the affirmative vote of the majority of shares present in person or represented by proxy at such meeting and entitled to vote on such matter, except where a larger vote is required by law, by the Certificate or by these Bylaws. Any election by stockholders shall be determined by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors, except where a larger vote is required by law, by the Certificate or by these Bylaws. The Corporation shall not directly or indirectly vote any shares of its own stock; provided, however, that the Corporation may vote shares which it holds in a fiduciary capacity to the extent permitted by law. 2.8 Stockholder List. The officer or agent having charge of the stock transfer books of the Corporation shall make, at least 10 days before every annual meeting or special meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting or any adjournment thereof, in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the hour, date and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.9 Stockholder Proposals. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder of record (both as of the time notice of such proposal is given by the stockholder as set forth below and as of the record date for the annual meeting in question) of any shares of capital stock entitled to vote at such annual meeting, such stockholder shall: (i) give timely written notice as required by this Section 2.9 to the Secretary of the Corporation and (ii) be present at such meeting, either in person or by a representative. For the first annual meeting following the end of the fiscal year ended December 31, 1996, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which the Public Announcement of the date of such annual meeting is first made by the Corporation. For all subsequent annual meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than 90 days prior to the anniversary date of the immediately preceding annual meeting (the "Anniversary Date"); provided, however, that in the event the annual meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (1) the 90th day prior to the scheduled date of such annual meeting or (2) the 15th day following the day on which Public Announcement of the date of such annual meeting is first made by the Corporation. A stockholder's notice to the Secretary of the Corporation shall set forth as to each matter proposed to be brought before an annual meeting: (i) a brief description of the business the stockholder desires to bring before such annual meeting and the reasons for conducting such business at such annual meeting, (ii) the name and address, as they appear on the stock transfer books of the Corporation, of the stockholder proposing such business, (iii) the class and number of shares of the capital stock of the Corporation beneficially owned by the 3 stockholder proposing such business, (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Corporation registered in such stockholder's name on such books, and the class and number of shares of the capital stock of the Corporation beneficially owned by such beneficial owners, (v) the names and addresses of other stockholders known by the stockholder proposing such business to support such proposal, and the class and number of shares of the capital stock of the Corporation beneficially owned by such other stockholders and (vi) any material interest of the stockholder proposing to bring such business before such meeting (or any other stockholders known to be supporting such proposal) in such proposal. If the Board of Directors or a designated committee thereof determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2.9 or that the information provided in a stockholder's notice does not satisfy the information requirements of this Section 2.9 in any material respect, such proposal shall not be presented for action at the annual meeting in question. If neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal in the manner set forth above, the presiding officer of the annual meeting shall determine whether the stockholder proposal was made in accordance with the terms of this Section 2.9. If the presiding officer determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2.9 or that the information provided in a stockholder's notice does not satisfy the information requirements of this Section 2.9 in any material respect, such proposal shall not be presented for action at the annual meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a stockholder proposal was made in accordance with the requirements of this Section 2.9, the presiding officer shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such proposal. Notwithstanding the foregoing provisions of this Section 2.9, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder with respect to the matters set forth in this Section 2.9, and nothing in this Section 2.9 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2.10 Inspectors of Elections. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the presiding officer shall appoint one or more inspectors to act at the meeting. Any inspector may, but need not, be an officer, employee or agent of the Corporation. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall perform such duties as are required by the DGCL, including the counting of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. The presiding officer may review all determinations made by the inspectors, and in so doing the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the inspectors. All determinations by the inspectors and, if applicable, the presiding officer, shall be subject to further review by any court of competent jurisdiction. 2.11 Presiding Officer. The Chairman of the Board, if one is elected, or if not elected or in his or her absence, the President, shall preside at all annual meetings or special meetings of stockholders and shall have the power, among other things, to adjourn such meeting at any time and from time to time, subject to Sections 2.4 and 2.5 of this Article II. The order of business and all other matters of procedure at any meeting of the stockholders shall be determined by the presiding officer. 4 ARTICLE III. DIRECTORS 3.1 General Powers. The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors and, except as otherwise expressly provided by law, the Certificate or these Bylaws, all of the powers of the Corporation shall be vested in such Board. 3.2 Number of Directors. The number of directors shall be fixed by resolution duly adopted from time to time by the Board of Directors. 3.3 Election and Removal of Directors; Quorum. (a) Directors shall be elected and removed in the manner provided for in Article V of the Certificate. (b) Vacancies in the Board of Directors shall be filled in the manner provided for in Article V of the Certificate. (c) At any meeting of the Board of Directors, a majority of the number of directors then in office shall constitute a quorum for the transaction of business. However, if less than a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except that when any meeting of the Board of Directors, either regular of special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of the original meeting. 3.4 Meetings of Directors. Meetings of the Board of Directors shall be held at places within or without the State of Delaware and at times fixed by resolution of the Board of Directors, or upon call of the Chairman of the Board, and the Secretary of the Corporation or officer performing the Secretary's duties shall give not less than 24 hours' notice by letter, facsimile, telegraph or telephone (or in person) of all meetings of the Board of Directors, provided that notice need not be given of the annual meeting or of regular meetings held at times and places fixed by resolution of the Board of Directors. Meetings may be held at any time without notice if all of the directors are present, or if those not present waive notice in writing either before or after the meeting; provided, however, that attendance at a meeting for the express purpose of objecting at the beginning of a meeting to the transaction of any business because the meeting is not lawfully convened shall not be considered a waiver of notice. 3.5 Nominations. Nominations of candidates for election as directors of the Corporation at any annual meeting may be made only (a) by, or at the direction of, a majority of the Board of Directors or (b) by any holder of record (both as of the time notice of such nomination is given by the stockholder as set forth below and as of the record date for the annual meeting in question) of any shares of the capital stock of the Corporation entitled to vote at such annual meeting who complies with the timing, informational and other requirements set forth in this Section 3.5. Any stockholder who has complied with the timing, informational and other requirements set forth in this Section 3.5 and who seeks to make such a nomination must be, or his, her or its representative must be, present in person at the annual meeting. Only persons nominated in accordance with the procedures set forth in this Section 3.5 shall be eligible for election as directors at an annual meeting. Nominations, other than those made by, or at the direction of, the Board of Directors shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 3.5. For the first annual meeting following the end of the fiscal year ended December 31, 1996, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which the Public Announcement of the date of such annual meeting is first made by the Corporation. For all subsequent annual meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 90 days prior to the Anniversary Date; provided, however, that in the event the annual meeting is scheduled 5 to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed and received by, the Corporation at its principal executive office not later than the close of business on the later of (x) the 90th day prior to the scheduled date of such annual meeting or (y) the 15th day following the day on which Public Announcement of the date of such annual meeting is first made by the Corporation. A stockholder's notice to the Secretary of the Corporation shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a director: (1) the name, age, business address and residence address of such person; (2) the principal occupation or employment of such person; (3) the class and number of shares of the capital stock of the Corporation which are beneficially owned by such person on the date of such stockholder notice; and (4) the consent of each nominee to serve as a director if elected. A stockholder's notice to the Secretary of the Corporation shall further set forth as to the stockholder giving such notice: (a) the name and address, as they appear on the stock transfer books of the Corporation, of such stockholder and of the beneficial owners (if any) of the capital stock of the Corporation registered in such stockholder's name and the name and address of other stockholders known by such stockholder to be supporting such nominee(s); (b) the class and number of shares of the capital stock of the Corporation which are held of record, beneficially owned or represented by proxy by such stockholder and by any other stockholders known by such stockholder to be supporting such nominee(s) on the record date for the annual meeting in question (if such date shall then have been made publicly available) and on the date of such stockholder's notice; and (c) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder. If the Board of Directors or a designated committee thereof determines that any stockholder nomination was not made in accordance with the terms of this Section 3.5 or that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3.5 in any material respect, then such nomination shall not be considered at the annual meeting in question. If neither the Board of Directors nor such committee makes a determination as to whether a nomination was made in accordance with the provisions of this Section 3.5, the presiding officer of the annual meeting shall determine whether a nomination was made in accordance with such provisions. If the presiding officer determines that any stockholder nomination was not made in accordance with the terms of this Section 3.5 or that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3.5 in any material respect, then such nomination shall not be considered at the annual meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a nomination was made in accordance with the terms of this Section 3.5, the presiding officer shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such nominee. Notwithstanding anything to the contrary in the second paragraph of this Section 3.5, in the event that the number of directors to be elected to the Board of Directors is increased and there is no Public Announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 90 days prior to the Anniversary Date, a stockholder's notice required by this Section 3.5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if such notice shall be delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which such Public Announcement is first made by the Corporation. No person shall be elected by the stockholders as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.5. Election of directors at an annual meeting need not be by written ballot, unless otherwise provided by the Board of Directors or presiding officer at such annual meeting. If written ballots are to be used, ballots bearing the names of all the persons who have been nominated for election as directors at the annual meeting in accordance with the procedures set forth in this Section 3.5 shall be provided for use at the annual meeting. 6 3.6 Voting. (a) Except as provided in subsection (c) of this Section 3.6, the action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless a larger vote is required for such action by the Certificate, these Bylaws or by law. (b) Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing. Such written consent shall be filed with the records of the meetings of the Board of Directors and shall be treated for all purposes as a vote at a meeting of the Board of Directors. (c) Notwithstanding anything in these Bylaws to the contrary, any action pertaining to any transaction involving the Corporation, including entering into joint venture investments or any other transaction, in which an advisor, director or officer of the Corporation, or any Affiliate of any of the foregoing persons, has any direct or indirect interest other than solely as a result of their status as a director, officer, or stockholder of the Corporation, must be approved by a majority of the directors, including a majority of the Independent Directors, even if the Independent Directors constitute less than a quorum. 3.7 Manner of Participation. Directors may participate in meetings of the Board of Directors by means of conference telephone or similar communications equipment by means of which all directors participating in the meeting can hear each other, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for purposes of these Bylaws. 3.8 Compensation. By resolution of the Board of Directors, directors may be allowed a fee and expenses for attendance at all meetings, but nothing herein shall preclude directors from serving the Corporation in other capacities and receiving compensation for such other services. ARTICLE IV. COMMITTEES 4.1 Executive Committee. The Board of Directors, by resolution duly adopted, may elect an Executive Committee which shall consist of not less than two directors, including the Chairman of the Board. The members of the Executive Committee shall serve until their successors are designated by the Board of Directors, until removed, or until the Executive Committee is dissolved by the Board of Directors. All vacancies that may occur in the Executive Committee shall be filled by the Board of Directors. When the Board of Directors is not in session, the Executive Committee shall have all power vested in the Board of Directors by law, by the Certificate, or by these Bylaws, except as otherwise provided in the DGCL. The Executive Committee shall report at the next regular or special meeting of the Board of Directors all action that the Executive Committee may have taken on behalf of the Board of Directors since the last regular or special meeting of the Board of Directors. Meetings of the Executive Committee shall be held at such places and at such times fixed by resolution of the Executive Committee, or upon call of the Chairman of the Board. Not less than 12 hours' notice shall be given by letter, facsimile, telegraph or telephone (or in person) of all meetings of the Executive Committee; provided, however, that notice need not be given of regular meetings held at times and places fixed by resolution of the Executive Committee and that meetings may be held at any time without notice if all of the members of the Executive Committee are present or if those not present waive notice in writing either before or after the meeting; provided, further, that attendance at a meeting for the express purpose of objecting at the beginning of a meeting to the transaction of any business because the meeting is not lawfully convened shall not be considered a waiver of notice. A majority of the members of the Executive Committee then serving shall constitute a quorum for the transaction of business at any meeting of the Executive Committee. 7 4.2 Compensation Committee. The Board of Directors, at its regular annual meeting, shall designate a Compensation Committee which shall consist of two or more non-employee directors. In addition, the Board of Directors at any time may designate one or more alternate members of the Compensation Committee, who shall be non-employee directors, who may act in place of any absent regular member upon invitation by the chairman or secretary of the Compensation Committee. With respect to bonuses, the Compensation Committee shall have and may exercise the powers to determine the amounts annually available for bonuses pursuant to any bonus plan or formula approved by the Board of Directors, to determine bonus awards to executive officers and to exercise such further powers with respect to bonuses as may from time to time be conferred by the Board of Directors. With respect to salaries, the Compensation Committee shall have and may exercise the power to fix and determine from time to time all salaries of the executive officers of the Corporation, and such further powers with respect to salaries as may from time to time be conferred by the Board of Directors. The Compensation Committee shall administer the Corporation's stock incentive plans and from time to time may grant, consistent with the plans, stock options and other awards permissible under such plans. Vacancies in the Compensation Committee shall be filled by the Board of Directors, and members of the Compensation Committee shall be subject to removal by the Board of Directors at any time. The Compensation Committee shall fix its own rules of procedure. A majority of the number of regular members then serving on the Compensation Committee shall constitute a quorum; and regular and alternate members present shall be counted to determine whether there is a quorum. The Compensation Committee shall keep minutes of its meetings, and all action taken by it shall be reported to the Board of Directors. 4.3 Audit Committee. The Board of Directors, at its regular annual meeting, shall designate an Audit Committee which shall consist of two or more directors whose membership on the Audit Committee shall meet the requirements set forth in the rules of the New York Stock Exchange, as amended from time to time. Vacancies in the Audit Committee shall be filled by the Board of Directors with directors meeting the requirements set forth above, giving consideration to continuity of the Audit Committee, and members shall be subject to removal by the Board of Directors at any time. The Audit Committee shall fix its own rules of procedure and a majority of the members serving shall constitute a quorum. The Audit Committee shall meet at least twice per year with both the internal and the Corporation's outside auditors present at each meeting and shall keep minutes of its meetings and all action taken shall be reported to the Board of Directors. The Audit Committee shall review the reports and minutes of any audit committees of the Corporation's subsidiaries. The Audit Committee shall review the Corporation's financial reporting process, including accounting policies and procedures. The Audit Committee shall examine the report of the Corporation's outside auditors, consult with them with respect to their report and the standards and procedures employed by them in their audit, report to the Board of Directors the results of its study and recommend the selection of auditors for each fiscal year. 4.4 Nominating Committee. The Board of Directors, by resolution duly adopted, shall designate a Nominating Committee which shall consist of three or more directors. The Nominating Committee shall make recommendations to the Board of Directors regarding nominees for election as directors by the stockholders at each annual meeting of stockholders and make such other recommendations regarding tenure, classification and compensation of directors as the Nominating Committee may deem advisable from time to time. The Nominating Committee shall fix its own rules of procedure and a majority of the members then serving shall constitute a quorum. 4.5 Other Committees. The Board of Directors, by resolution adopted, may establish such other standing or special committees of the Board of Directors as it may deem advisable, and the members, terms and authority of such committees shall be as set forth in the resolutions establishing the same. 8 ARTICLE V. OFFICERS 5.1 Election of Officers; Terms. The officers of the Corporation shall be elected by the Board of Directors and shall include a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer or Chief Financial Officer. Other officers, including Executive Vice Presidents and Senior Vice Presidents, may be specified by the Board of Directors, and assistant and subordinate officers, may from time to time be elected by the Board of Directors. All officers shall hold office until the next annual meeting of the Board of Directors and until their successors are duly elected and qualified. The Chairman of the Board shall be chosen from among the directors. Any two officers may be combined in the same person as the Board of Directors may determine. 5.2 Removal of Officers; Vacancies. Any officer of the Corporation may be removed with or without cause, at any time, by the Board of Directors. Vacancies shall be filled by the Board of Directors. 5.3 Duties. The officers of the Corporation shall have such duties as generally pertain to their offices, respectively, as well as such powers and duties as are prescribed by law or are hereinafter provided or as from time to time shall be conferred by the Board of Directors. The Board of Directors may require any officer to give such bond for the faithful performance of his or her other duties as the Board of Directors may see fit. 5.4 Duties of the Chairman of the Board. The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall be responsible for the execution of the policies of the Board of Directors, shall serve as the Chairman of the Executive Committee and shall have direct supervision over the business of the Corporation and its several officers, subject to the ultimate authority of the Board of Directors. He or she shall be a director, and, except as otherwise provided in these Bylaws or in the resolutions establishing such committees, he or she shall be ex officio a member of all committees of the Board of Directors. He or she shall preside at all meetings of stockholders, the Board of Directors and the Executive Committee. He or she may sign and execute in the name of the Corporation share certificates, deeds, mortgages, bonds, contracts or other instruments except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed. In addition, he or she shall perform all duties incident to the office of the Chairman of the Board and Chief Executive Officer and such other duties as from time to time may be assigned to him or her by the Board of Directors. 5.5 Duties of the President. Unless the Board of Directors, by resolution duly adopted, designates some other person to serve as the Chief Operating Officer of the Corporation, the President shall serve as Chief Operating Officer and shall have direct supervision over the business of the Corporation and its several officers, subject to the authority of the Board of Directors and the Chairman of the Board, and shall consult with and report to the aforementioned officer. The President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments, except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed. In addition, he or she shall perform all duties incident to the office of the President and such other duties as from time to time may be assigned to him or her by the Board of Directors or the Chairman of the Board. 5.6 Duties of the Vice Presidents. Each Vice President, if any, shall have such powers and duties as may from time to time be assigned to him or her by the Chairman of the Board or the Board of Directors. When there shall be more than one Vice President of the Corporation, the Board of Directors may from time to time designate one of them to perform the duties of the President in the absence of the President. Any Vice President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors, except where the signing and execution of such documents shall be expressly delegated by the Board of Directors or the Chairman of the Board to some other officer or agent of the Corporation or shall be required by law or otherwise to be signed or executed. 9 5.7 Duties of the Treasurer or Chief Financial Officer. The Treasurer or Chief Financial Officer shall have charge and custody of and be responsible for all funds and securities of the Corporation, and shall cause all such funds and securities to be deposited in such banks and depositories as shall be designated by the Board of Directors. He or she shall be responsible (i) for maintaining adequate financial accounts and records in accordance with generally accepted accounting practices, (ii) for the preparation of appropriate operating budgets and financial statements, (iii) for the preparation and filing of all tax returns required by law and (iv) for the performance of all duties incident to the office of Treasurer or Chief Financial Officer and such other duties as from time to time may be assigned to him or her by the Board of Directors, the Audit Committee or the Chairman of the Board. The Treasurer or Chief Financial Officer may sign and execute in the name of the Corporation share certificates, deeds, mortgages, bonds, contracts or other instruments, except where the signing and execution of such documents shall be expressly delegated by the Board of Directors or the Chairman of the Board to some other officer or agent of the Corporation or shall be required by law or otherwise to be signed or executed. 5.8 Duties of the Secretary. The Secretary shall act as secretary of all meetings of the Board of Directors, all committees of the Board of Directors and stockholders of the Corporation. He or she shall (i) keep and preserve the minutes of all such meetings in permanent books, (ii) ensure that all notices required to be given by the Corporation are duly given and served, (iii) have custody of the seal of the Corporation and shall affix the seal or cause it to be affixed to all share certificates of the Corporation and to all documents the execution of which on behalf of the Corporation under its corporate seal is duly authorized in accordance with law or the provisions of these Bylaws, (iv) have custody of all deeds, leases, contracts and other important corporate documents, (v) have charge of the books, records and papers of the Corporation relating to its organization and management as a Corporation, (vi) see that all reports, statements and other documents required by law (except tax returns) are properly filed and (vii) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Board of Directors or the Chairman of the Board. ARTICLE VI. CAPITAL STOCK 6.1 Certificates. Each stockholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the Chairman of the Board, the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. The Corporation seal and the signatures by the Corporation's officers, the transfer agent or the registrar may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the time of its issue. Every certificate for shares of stock which are subject to a restriction on transfer (as provided in Article IV of the Certificate) and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend (as provided in Article IV of the Certificate) with respect thereto as is required by law. 6.2 Pairing. Until the limitation on transfer provided for in the Pairing Agreement, dated as of February 17, 1983, by and between Bay Meadows Realty Enterprises, Inc. (the predecessor of California Jockey Club) and Bay Meadows Operating Company (the "Pairing Agreement"), as amended from time to time in accordance with the provisions thereof, shall be terminated: (a) The shares of Equity Stock of the Corporation that are paired pursuant to the Pairing Agreement shall not be transferable, and shall not be transferred on the stock transfer books of the Corporation, unless (i) a simultaneous transfer is made by the same transferor to the same transferee or (ii) arrangements have been made with Patriot REIT for the acquisition by the transferee, of a like number of shares of the same class or series of Equity Stock of Patriot REIT and such shares are paired with one another. 10 (b) Each certificate evidencing ownership of shares of Equity Stock of the Corporation that are paired pursuant to the Pairing Agreement and issued and not canceled prior to the Effective Time of the Restriction shall be deemed to evidence a like number of shares of the same class or series of Equity Stock of Patriot REIT. (c) A legend shall be placed on the face of each certificate evidencing ownership of shares of Equity Stock of the Corporation that are paired pursuant to the Pairing Agreement referring to the restrictions on transfer set forth herein. (d) Notwithstanding the foregoing, the Corporation may issue or transfer shares of its Equity Stock to Patriot REIT without regard to the restrictions of this Section 6.2. (e) To the extent that a paired share of Equity Stock of the Corporation is converted into a share of excess stock, par value $.01 per share (the "Excess Stock"), of the Corporation in accordance with the provisions of Article IV of the Certificate, such share of Excess Stock of the Corporation, together with the corresponding share of Excess Stock of Patriot REIT, which has been converted from a share of Equity Stock of Patriot REIT in accordance with Article IV of the Amended and Restated Certificate of Incorporation of Patriot REIT and the Pairing Agreement, shall be automatically transferred to a trust established by the Corporation and Patriot REIT for such purpose in accordance with Article IV of the Certificate. 6.3 Lost, Destroyed and Mutilated Certificates. Holders of the shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board of Directors may in its discretion cause one or more new certificates for the same number of shares in the aggregate to be issued to such stockholder upon the surrender of the mutilated certificate or upon satisfactory proof of such loss or destruction, and the deposit of a bond in such form and amount and with such surety as the Board of Directors may require. 6.4 Transfer of Stock. Subject to the restrictions on transfer of stock described in Section 6.2 of these Bylaws and Article IV of the Certificate, the stock of the Corporation shall be transferable or assignable only on the stock transfer books of the Corporation by the holder in person or by attorney on surrender of the certificate for such shares duly endorsed and, if sought to be transferred by attorney, accompanied by a written power of attorney to have the same transferred on the stock transfer books of the Corporation. The Corporation will recognize, however, the exclusive right of the person registered on its stock transfer books as the owner of shares to receive dividends and to vote as such owner. 6.5 Fixing Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not less than 10 nor more than 60 days prior to the date on which the particular action requiring such determination of stockholders, is to be taken. If no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notices of the meeting are mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to notice of or to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. 11 ARTICLE VII. INDEMNIFICATION 7.1 Definitions. For purposes of this Article VII: (a) "Corporate Status" describes the status of a person who (i) in the case of a Director, is or was a director of the Corporation and is or was acting in such capacity, (ii) in the case of an Officer, is or was an officer, employee or agent of the Corporation or is or was a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such Officer is or was serving at the request of the Corporation and (iii) in the case of a Non-Officer Employee, is or was an employee of the Corporation or is or was a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such Non-Officer Employee is or was serving at the request of the Corporation; (b) "Director" means any person who serves or has served the Corporation as a director on the Board of Directors; (c) "Disinterested Director" means, with respect to each Proceeding in respect of which indemnification is sought hereunder, a Director of the Corporation who is not and was not a party to such Proceeding; (d) "Expenses" means all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of expert witnesses, private investigators and professional advisors (including, without limitation, accountants and investment bankers), travel expenses, duplicating costs, printing and binding costs, costs of preparation of demonstrative evidence and other courtroom presentation aids and devices, costs incurred in connection with document review, organization, imaging and computerization, telephone charges, postage, delivery service fees, and all other disbursements, costs or expenses of the type customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, settling or otherwise participating in, a Proceeding; (e) "Non-Officer Employee" means any person who serves or has served as an employee of the Corporation, but who is not or was not a Director or Officer; (f) "Officer" means any person who serves or has served the Corporation as an officer appointed by the Board of Directors; and (g) "Proceeding" means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, inquiry, investigation, administrative hearing or other proceeding, whether civil, criminal, administrative, arbitrative or investigative. 7.2 Indemnification of Directors and Officers. Subject to the operation of Section 7.4 of these Bylaws, each Director and Officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment) against any and all Expenses, judgments, penalties, fines and amounts reasonably paid in settlement that are incurred by such Director or Officer or on such Director's or Officer's behalf in connection with any threatened, pending or completed Proceeding or any claim, issue or matter therein, which such Director or Officer is, or is threatened to be made, a party to or participant in by reason of such Director's or Officer's Corporate Status, if such Director or Officer acted in good faith and in a manner such Director or Officer reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 7.2 shall exist as to a Director or Officer after he or she has ceased to be a Director or Officer and shall inure to the benefit of his or her heirs, executors, administrators and personal representatives. Notwithstanding the foregoing, the Corporation 12 shall indemnify any Director or Officer seeking indemnification in connection with a Proceeding initiated by such Director or Officer only if such Proceeding was authorized by the Board of Directors. 7.3 Indemnification of Non-Officer Employees. Subject to the operation of Section 7.4 of these Bylaws, each Non-Officer Employee may, in the discretion of the Board of Directors, be indemnified by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against any and all Expenses, judgments, penalties, fines and amounts reasonably paid in settlement that are incurred by such Non-Officer Employee or on such Non-Officer Employee's behalf in connection with any threatened, pending or completed Proceeding, or any claim, issue or matter therein, which such Non-Officer Employee is, or is threatened to be made, a party to or participant in by reason of such Non-Officer Employee's Corporate Status, if such Non-Officer Employee acted in good faith and in a manner such Non-Officer Employee reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 7.3 shall exist as to a Non-Officer Employee after he or she has ceased to be a Non-Officer Employee and shall inure to the benefit of his or her heirs, personal representatives, executors and administrators. Notwithstanding the foregoing, the Corporation may indemnify any Non-Officer Employee seeking indemnification in connection with a Proceeding initiated by such Non-Officer Employee only if such Proceeding was authorized by the Board of Directors. 7.4 Good Faith. Unless ordered by a court, no indemnification shall be provided pursuant to this Article VII to a Director, to an Officer or to a Non-Officer Employee unless a determination shall have been made that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal Proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. Such determination shall be made by (a) a majority vote of the Disinterested Directors, even though less than a quorum of the Board of Directors, (b) if there are no such Disinterested Directors, or if a majority of Disinterested Directors so direct, by independent legal counsel in a written opinion or (c) by the stockholders of the Corporation. 7.5 Advancement of Expenses to Directors Prior to Final Disposition. The Corporation shall advance all Expenses incurred by or on behalf of any Director in connection with any Proceeding in which such Director is involved by reason of such Director's Corporate Status within 10 days after the receipt by the Corporation of a written statement from such Director requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Director and shall be preceded or accompanied by an undertaking by or on behalf of such Director to repay any Expenses so advanced if it shall ultimately be determined that such Director is not entitled to be indemnified against such Expenses. 7.6 Advancement of Expenses to Officers and Non-Officer Employees Prior to Final Disposition. The Corporation may, in the discretion of the Board of Directors, advance any or all Expenses incurred by or on behalf of any Officer or Non-Officer Employee in connection with any Proceeding in which such Officer or Non-Officer Employee is involved by reason of such Officer or Non- Officer Employee's Corporate Status upon the receipt by the Corporation of a statement or statements from such Officer or Non-Officer Employee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Officer or Non-Officer Employee and shall be preceded or accompanied by an undertaking by or on behalf of such Officer or Non-Officer Employee to repay any Expenses so advanced if it shall ultimately be determined that such Officer or Non-Officer Employee is not entitled to be indemnified against such Expenses. 7.7 Contractual Nature of Rights. The foregoing provisions of this Article VII shall be deemed to be a contract between the Corporation and each Director and Officer entitled to the benefits hereof at any time while 13 this Article VII is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any Proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. If a claim for indemnification or advancement of Expenses hereunder by a Director or Officer is not paid in full by the Corporation within (a) 60 days after the receipt by the Corporation of a written claim for indemnification or (b) in the case of a Director, 10 days after the receipt by the Corporation of documentation of Expenses and the required undertaking, such Director or Officer may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, such Director or Officer shall also be entitled to be paid the expenses of prosecuting such claim. The failure of the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) to make a determination concerning the permissibility of such indemnification or, in the case of a Director, advancement of Expenses, under this Article VII shall not be a defense to the action and shall not create a presumption that such indemnification or advancement is not permissible. 7.8 Non-Exclusivity of Rights. The rights to indemnification and advancement of Expenses set forth in this Article VII shall not be exclusive of any other right which any Director, Officer or Non-Officer Employee may have or hereafter acquire under any statute, provision of the Certificate or these Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise. 7.9 Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer or Non-Officer Employee against any liability of any character asserted against or incurred by the Corporation or any such Director, Officer or Non-Officer Employee, or arising out of any such person's Corporate Status, whether or not the Corporation would have the power to indemnify such person against such liability under the DGCL or the provisions of this Article VII. ARTICLE VIII. MISCELLANEOUS PROVISIONS 8.1 Seal. The seal of the Corporation shall consist of a flat-faced circular die, of which there may be any number of counterparts, on which there shall be engraved the word "Seal" and the name of the Corporation. 8.2 Fiscal Year. The fiscal year of the Corporation shall end on such date and shall consist of such accounting periods as may be fixed by the Board of Directors. 8.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the Board of Directors from time to time may authorize. When the Board of Directors so authorizes, however, the signature of any such person may be a facsimile. 8.4 Amendment of Bylaws. (a) Amendment by Directors. Except as provided otherwise by law, these Bylaws may be amended or repealed by the Board of Directors by the affirmative vote of a majority of the directors then in office. (b) Amendment by Stockholders. These Bylaws may be amended or repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the shares present in person or represented by proxy at such meeting and entitled to vote on such amendment or repeal, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of a majority of the shares present in person or represented by proxy at such meeting and entitled to vote on such amendment or repeal, voting together as a single class. 14 8.5 Voting of Stock Held. Unless otherwise provided by resolution of the Board of Directors or of the Executive Committee, if any, the Chairman of the Board may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the vote that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or to consent in writing to any action by any such other corporation; and the Chairman of the Board shall instruct the person or persons so appointed as to the manner of casting such votes or giving such consent and may execute or cause to be executed on behalf of the Corporation, and under its corporate seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the premises. In lieu of such appointment, the Chairman of the Board may himself or herself attend any meetings of the holders of shares or other securities of any such other corporation and there vote or exercise any or all power of the Corporation as the holder of such shares or other securities of such other corporation. 15 EX-99.1 6 PRESS RELEASE EXHIBIT 99.1 [On Patriot Letterhead] AT THE COMPANY: FRB CHICAGO: Paul Nussbaum, Chairman & CEO Claire Koeneman Bess Gallanis Rex Stewart, CFO Analyst Inquiries Media Inquiries Suzanne Cottraux, Director of Corporate (312) 640-6784 (312) 640-6737 Communications & Investor Relations (972) 888-8041 FOR IMMEDIATE RELEASE TUESDAY, JULY 1, 1997 PATRIOT AMERICAN HOSPITALITY, INC. COMPLETES MERGER WITH CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY TO BECOME ONE OF ONLY TWO PAIRED-SHARE HOTEL REITS COMPANY ALSO ANNOUNCES TWO-FOR-ONE STOCK SPLIT DALLAS, TX., JULY 1, 1997--PATRIOT AMERICAN HOSPITALITY, INC. (NYSE:PAH) today announced that shareholders of Patriot American and California Jockey Club and Bay Meadows Operating Company (AMEX:CJ) voted overwhelmingly in favor of Patriot's merger with and into California Jockey. The merger was consummated immediately following the stockholder meetings and, in connection with the merger, California Jockey Club changed its name to Patriot American Hospitality, Inc. and Bay Meadows Operating Company changed its name to Patriot American Hospitality Operating Company. As part of the merger, each outstanding share of Patriot common stock has been converted into the right to receive 0.51895 shares of both the REIT and the Operating Company. These shares are now paired together and will begin trading as a single unit on July 2, 1997 on the New York Stock Exchange under the symbol "PAH" with the opening price based on California Jockey's closing price of $44 5/8 per share today. Trading of the paired shares of stock of California Jockey Club and Bay Meadows Operating Company on the American Stock Exchange terminated as of the close of business today. According to Paul A. Nussbaum, chairman and chief executive officer of both Patriot American Hospitality, Inc. and Patriot American Hospitality Operating Company, the long-awaited completion of the California Jockey/Bay Meadows merger represents a springboard for the company's strategic growth, and enhances the company's ability to increase shareholder value. "Since we announced our agreement to acquire California Jockey and Bay Meadows last October, we've proceeded with our aggressive acquisition strategy to ensure that we could put the paired structure to use immediately following the closing," he said. "Despite the lengthy amount of time this merger has taken to complete, I'm extremely proud to say that because we have focused on establishing the components of our paired operating structure, we are ready to begin leasing properties to our paired operating company. In addition, we have approximately 11 hotel properties under contract or letter of intent that, when closed, also will be leased to our paired operating company. All totaled, we expect the completion of our merger with California Jockey to amplify our growth potential, particularly as we proceed with our acquisition of Grand Heritage Hotels and our merger with Wyndham Hotel Corporation later this year." Patriot also announced that the board of directors of the REIT and the operating company had approved a two-for-one stock split in the form of a stock dividend. The date of record for the stock split will be July 15, 1997 and the brokers' cutoff date has been set for July 22, 1997, with an anticipated date for mailing certificates of July 25, 1997. Based in Dallas, Texas, Patriot American is currently the nation's second- largest hotel real estate investment trust (REIT) with a portfolio currently comprised of 56 hotels and resorts with 13,354 rooms, and is one of only four paired-share REITs in the country. THE COMPANY HAS ANOTHER 15 HOTELS WITH A TOTAL OF 3,745 ROOMS UNDER CONTRACT OR LETTER OF INTENT. Having already tripled the size of its room portfolio in less than two years since its IPO, Patriot American is continuing to acquire full-service hotel properties throughout North America. The company recently announced an agreement to acquire Wyndham Hotel Corporation (NYSE:WYN) which will become Patriot's paired-operating company upon completion of the transaction, slated for November 1997. Upon completion of the Wyndham acquisition, Patriot American Hospitality, Inc. will be the nation's largest and the only fully integrated paired hotel REIT. 2 -----END PRIVACY-ENHANCED MESSAGE-----