-----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, RhXRWx99h3zdqHyPYsuUzeKmG0gG1wEm0ExWbeAUcxLz92bf/MJF0CX/yC807EYP +E6td782IJVx1vanUrIL6w== 0000930661-99-001055.txt : 19990511 0000930661-99-001055.hdr.sgml : 19990511 ACCESSION NUMBER: 0000930661-99-001055 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY INC/DE CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09319 FILM NUMBER: 99614927 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO DATE OF NAME CHANGE: 19970717 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA JOCKEY CLUB DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYNDHAM INTERNATIONAL INC CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS, ROOMING HOUSE, CAMPS & OTHER LODGING PLACES [7000] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09320 FILM NUMBER: 99614928 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO\DE DATE OF NAME CHANGE: 19970723 FORMER COMPANY: FORMER CONFORMED NAME: BAY MEADOWS OPERATING CO DATE OF NAME CHANGE: 19920703 10-K/A 1 FORM 10-K/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X]JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number 1-9320 Commission File Number 1-9319 PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC. - ------------------------------------- ------------------------------------- (Exact name of registrant as specified (Exact name of registrant as specified in its charter) in its charter) Delaware 94-0358820 Delaware 94-2878485 - ------------------------------------- ------------------------------------- (State or other (I.R.S. Employer (State or other (I.R.S. jurisdiction of Identification jurisdiction of Employer incorporation or No.) incorporation or Identification organization) organization) No.) 1950 Stemmons Freeway, Suite 6001 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Dallas, Texas 75207 - ------------------------------------- ------------------------------------- (Address of principal executive offices)(Address of principal executive offices) (Zip Code) (Zip Code) (214) 863-1000 (214) 863-1000 - ------------------------------------- ------------------------------------- (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, par Common Stock, par value New York Stock value New York Stock $0.01 per share Exchange $0.01 per share Exchange - ------------------------------------- ------------------------------------- (Title of each (Name of each (Title of each (Name of each class) Exchange on which class) Exchange on which registered) registered) Securities registered pursuant to Section 12(g) of the Act: none none Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [_] The aggregate market value of the paired voting stock held by non-affiliates of Patriot American Hospitality, Inc. and Wyndham International, Inc. as of March 22, 1999 was $970,668,027, based upon a price of $4.50 per paired share. As of March 22, 1999, there were 234,131,492 paired shares of Patriot American Hospitality, Inc. and Wyndham International, Inc. common stock issued and outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. Form 10-K/A Annual Report Index
Form 10-K/A Report Item No. Page - -------- ----------- PART I 1. Business........................................................ 3 2. Properties...................................................... 3 Risk Factors.................................................... 23 3. Legal Proceedings............................................... 26 4. Submission of Matters to a Vote of Security Holders............. 27 PART II 5. Market Price for Registrant's Common Equity and Related Stockholder Matters............................................. 29 6. Selected Financial Information.................................. 30 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 35 7a. Qualitative and Quantitative Disclosures about Market Risks..... 56 8. Financial Statements and Supplementary Data..................... 57 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 57 PART III 10. Directors and Executive Officers of the Registrant.............. 57 11. Executive Compensation.......................................... 64 12. Security Ownership of Certain Beneficial Owners and Management...................................................... 80 13. Certain Relationships and Related Transactions.................. 83 PART IV 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K........................................................ 89 SIGNATURES
2 PART I ITEM 1 AND 2. BUSINESS AND PROPERTIES General Development of Business Patriot American Hospitality, Inc. ("Old Patriot") was formed April 17, 1995 as a self-administered real estate investment trust ("REIT"). The Virginia corporation was formed for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Patriot completed an initial public offering of shares of common stock and commenced operations. On July 1, 1997, Old Patriot merged with and into California Jockey Club, with Cal Jockey being the surviving legal entity. Cal Jockey's shares of common stock were paired with the shares of common stock of Bay Meadows Operating Company. The shares traded as a single unit pursuant to a stock pairing arrangement. In connection with the Cal Jockey merger, Cal Jockey changed its name to "Patriot American Hospitality, Inc." referred to herein after as Patriot and Bay Meadows changed its name to "Patriot American Hospitality Operating Company." As a result of the merger with Wyndham Hotel Company ("Old Wyndham") in January, 1998, the operating company subsequently changed its name to "Wyndham International, Inc." ("Wyndham"). Patriot and Wyndham are now collectively referred to as the Companies. Patriot and Wyndham are both Delaware corporations. The Cal Jockey merger has been accounted for as a reverse acquisition. Cal Jockey is considered to be the acquired company for accounting purposes. Consequently, the historical financial information of Old Patriot is the historical financial information for Patriot. For accounting purposes, Wyndham commenced its operations concurrent with the closing of the Cal Jockey merger on July 1, 1997. The financial statements have been adjusted for the purchase method of accounting whereby the Bay Meadows Racecourse facilities and related leasehold improvements owned by Cal Jockey and Bay Meadows have been adjusted to estimated fair market value. The shares of common stock of Patriot and the shares of common stock of Wyndham are paired on a one-for-one basis and may only be held and transferred in units consisting of one share of Patriot common stock and one share of Wyndham common stock. This single unit herein after is referred to as a paired share. 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. referred herein after to as the Patriot Partnership. In addition, Patriot, through its wholly owned subsidiary, PAH LP, Inc., owns an approximate 88.0% limited partnership interest in the Patriot Partnership as of December 31, 1998. The Patriot Partnership was formed in connection with Old Patriot's initial public offering. Old Patriot contributed its assets to the partnership in exchange for units of limited partnership interest ("OP units"). Wyndham owns a 1.0% general partnership interest and an approximate 86.8% limited partnership interest in Patriot American Hospitality Operating Partnership, L.P. as of December 31, 1998. As a result of the merger with Wyndham Hotel Company, the operating company subsequently changed its name to "Wyndham International Operating Partnership, L.P." referred to herein after to as Wyndham Partnership. The Patriot Partnership and Wyndham Partnership are now collectively referred to as the Operating Partnerships. Generally, Patriot owns and leases hotels to Wyndham, which is responsible for managing a majority of the hotels. In order for Patriot to qualify as a REIT under the Internal Revenue Code of 1986 (the "Code"), Patriot leases a substantial majority of its hotels to Wyndham or to other third-party leasees who are responsible for operating the hotels. The paired share structure facilitated the Companies' strategy to become a fully-integrated, multi-brand, multi-product, multi-tiered hotel operating company. Following the merger with and into California Jockey Club and the creation of Patriot paired shares, the Companies acquired major hotel operating companies and brands. Patriot's ability to utilize the paired share structure was limited as a result of tax legislation adopted in July 1998. 3 During 1998, Patriot and Wyndham, either directly or through the Operating Partnerships and their subsidiaries, invested over $4.5 billion in the acquisition of hotels and other related businesses. These acquisitions were financed primarily with funds drawn on the Companies' revolving credit facility as well as issuance of paired shares and OP units. The following describes these acquisitions. Wyndham Hotel Corporation On January 5, 1998, Wyndham Hotel Corporation ("Old Wyndham") merged with and into Patriot, with Patriot being the surviving corporation ("Wyndham merger"). Patriot, as a result of the Wyndham merger, acquired ownership of ten Old Wyndham hotels and 14 ClubHouse hotels and leased such hotels to Wyndham. Thirteen of the 14 hotel leases assumed by Patriot were sub-leased to Wyndham. Old Wyndham's 52 management and franchise contracts excluding the 16 Patriot hotels that Wyndham managed prior to the merger, the Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management company were transferred to certain non-controlled subsidiaries. The total purchase consideration for the Wyndham merger was approximately $982.0 million. The consideration consisted of 21,594,137 paired shares; 4,860,876 shares of Series A Convertible Preferred Stock of Patriot (which are convertible on a one-for-one basis into paired shares); cash of approximately $339.0 million to repay debt and pay Old Wyndham shareholders who elected to receive cash (which was financed with funds drawn on Patriot's credit facility); and the assumption of approximately $59.1 million in debt. In 1998, the Companies issued an aggregate 261,224 paired shares valued at approximately $5.8 million in settlement of certain purchase price adjustment arrangements related to Old Wyndham's acquisition of ClubHouse Hotels, Inc. prior to the merger with Patriot. In the first quarter of 1998, the Companies announced conversion of six ClubHouse Inns to Wyndham Garden Hotels. WHG Casinos & Resorts, Inc. and related transactions On January 16, 1998, a subsidiary of Wyndham merged with and into WHG Casinos & Resorts Inc., with WHG being the surviving corporation, ("WHG merger"). As a result of the WHG merger, Wyndham acquired the 570-room Condado Plaza Hotel & Casino, a 50% interest in the partnership that owns the 389-room El San Juan Hotel & Casino and a 23.3% interest in the partnership that owns the 751-room El Conquistador Resort & Country Club, all of which are located in Puerto Rico. In addition, Wyndham acquired a 62% interest in Williams Hospitality Group, Inc., the management company for the three hotels and the Las Casitas Village at the El Conquistador. A total of 5,004,690 paired shares were issued in connection with the WHG merger and approximately $21.3 million of debt was assumed, resulting in total purchase consideration of approximately $159.4 million. Effective March 1, 1998, Patriot acquired from unaffiliated third parties a 40% interest in the El San Juan Hotel & Casino, an aggregate 68.62% equity interest in the El Conquistador and a 38% interest in Williams Hospitality Group, Inc. for approximately $31 million in cash and issuance of 1,818,182 paired shares valued at approximately $49.2 million and the assumption of approximately $169.6 million of debt. On July 13, 1998, Patriot acquired the remaining minority interests held by a third party in entities that own the El Conquistador and the El San Juan Hotel & Casino for a total purchase price of approximately $3.9 million. Wyndham owns the controlling general partner interest in the partnerships that own the El San Juan Hotel & Casino and the El Conquistador. Wyndham also holds voting control of Williams Hospitality Group, Inc. Therefore, the operating results of these entities have been consolidated with those of Wyndham for financial reporting purposes. During 1998, the El San Juan and the El Conquistador were converted to Wyndham Resorts. Arcadian International Limited On April 6, 1998, Patriot announced the completion of its acquisition of all of the issued and to-be-issued shares of Arcadian International Limited for 60 pence per share. Including the exercise of all outstanding options 4 to purchase shares, the assumption of debt and the acquisition of the remaining shares in the Malmaison Group, the total transaction cost was approximately (Pounds)185.9 million (approximately $308.7 million U.S. based on exchange rates at the time of closing). As a result of the transaction, Patriot acquired ten owned hotels located throughout England; one owned hotel in Jersey; five owned and managed Malmaison Hotels; two resorts under development in Tuscany, Italy and Paris, France; and the proprietary Malmaison brand name. Patriot also acquired Arcadian's 50% partnership interest in the redevelopment of the luxury Great Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated by Wyndham once the development has been completed. The Arcadian acquisition was financed through a short-term financing agreement with PaineWebber Real Estate Services, Inc., for $160 million, at a rate equal to the borrowing rate on Patriot's credit facility. In addition, Patriot assumed approximately $112.6 million of debt in connection with the Arcadian acquisition. Interstate Hotels Company On June 2, 1998, pursuant to an Agreement and Plan of Merger dated as of December 2, 1997, as thereafter amended, between Patriot, Wyndham and Interstate Hotels Company, Interstate merged with and into Patriot with Patriot being the surviving company ("Interstate merger"). Pursuant to the Interstate merger agreement, stockholders of Interstate could elect to convert each of their shares of Interstate common stock into the right to receive either (i) $37.50 in cash, subject to proration in certain circumstances, or (ii) a number of paired shares of Patriot and Wyndham common stock based on an exchange ratio of 1.341 paired shares for each share of Interstate common stock not exchanged for cash. As a result of the Interstate merger, Patriot acquired controlling interest in, or ownership of, 42 hotels representing over 12,000 rooms; leases for 84 hotels representing over 10,100 rooms and management or service agreements for 82 hotels representing over 20,400 rooms located throughout the United States and in Canada, the Caribbean and Russia. During 1998, the Companies converted two hotels acquired in the Interstate merger to Wyndham Hotels. The total purchase consideration for the Interstate merger of approximately $2.1 billion consisted of 28,825,875 paired shares, cash of approximately $525.4 million to pay Interstate shareholders who elected to receive cash, approximately $787.1 million in debt assumed or refinanced by Patriot and approximately $73.4 million to pay other transaction-related costs. In addition, Interstate shareholders received rights to receive a cash distribution of $0.3997 on each share of Interstate common stock that was converted into paired shares, aggregating approximately $9.1 million. SF Hotel Company, L.P. On June 5, 1998, Patriot, through the Patriot Partnership, acquired all of the partnership interests in SF Hotel Company, L.P. for approximately $298.9 million ("Summerfield acquisition"). The total purchase consideration for the Summerfield acquisition consisted of approximately 3,223,795 OP units, 1,397,281 paired shares, cash of approximately $165.5 million and assumption of debt in the amount of approximately $17.1 million. In addition, the purchase price is subject to future adjustment based on (i) the market price of the paired shares through the end of 1998 (the "1998 Summerfield adjustment") and (ii) achievement of certain performance criteria through 2000 for 24 managed hotels which were not open for business (or had recently opened) as of the date of acquisition, and (iii) fulfillment of the companies obligation to develop seven hotels. As a result of the Summerfield acquisition, Patriot acquired four Summerfield Suites(R) hotels, leasehold and management interests in 24 Summerfield Suites(R), Sierra Suites(R) and Sunrise Suites hotels and management contracts and franchise interests for 12 additional Summerfield Suites(R) and Sierra Suites(R) hotels. Patriot has leased or sub-leased 21 of these hotels to Wyndham. In addition, Patriot acquired the development contracts for several additional hotels. Effective January 15, 1999, an additional 1,311,709 OP units valued at approximately $9.0 million were issued in connection with the Summerfield acquisition as additional consideration pursuant to the purchase agreement in satisfaction of the 1998 Summerfield adjustment. 5 CHC International Merger On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 between Patriot, Wyndham and CHCI ("CHCI merger"), the hospitality-related business of CHCI merged with and into Wyndham with Wyndham being the surviving company. CHCI's gaming operations were transferred to a new legal entity prior to the CHCI merger and such operations were not a part of the transaction. As a result of the CHCI merger, Wyndham, through its subsidiaries, acquired the remaining 50% investment interest in GAH-II, L.P., the remaining 17 leases and 16 of the associated management contracts related to the Patriot hotels leased by CHC Lease Partners, 8 third-party management contracts, two third-party asset management contracts, the Grand Bay proprietary brand name and certain other hospitality management assets. The aggregate purchase price of the 17 leasehold interests was approximately $52.7 million, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Wyndham for the year ended December 31, 1998. By operation of the CHCI merger, all the issued and outstanding shares of common stock, par value $0.005 per share, of CHCI and certain stock option rights were exchanged for an aggregate of 1,781,173 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham. In addition, Wyndham assumed CHCI's outstanding debt in the amount of approximately $16.6 million. In addition, on September 30, 2000 and September 30, 2002, Wyndham may be obligated to pay the CHCI stockholders and a subsidiary of Wyndham may be obligated to pay a Gencom-related entity additional consideration, in each case based upon the performance of certain specific assets. During 1998, the Companies converted 4 hotels acquired in the CHCI merger to proprietary branded hotels. Other In July 1998, Wyndham acquired an approximate 49% limited partnership interest in a partnership with affiliates of Don Shula's Steakhouse, Inc., for $1.5 million in cash and 156,272 of Preferred OP units of the Wyndham Partnership which were valued at approximately $3.5 million. During 1998, Patriot also re-acquired the leasehold interests for nine of its hotels from the lessees and purchased certain license agreements for an aggregate purchase price of approximately $11.7 million, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Patriot. The Companies issued 118,812 paired shares valued at $3.0 million and paid cash of $8.7 million. Patriot has leased the hotels to Wyndham. During 1998, Patriot, through the Patriot Partnership and its subsidiaries, invested approximately $234.1 million in the acquisition of four hotels with a total of over 1,700 guest rooms and the Golden Door Spa. These acquisitions were financed primarily with funds drawn on Patriot's credit facility, the issuance of 53,989 OP units valued at approximately $1.5 million, the issuance of 390,335 paired shares valued at approximately $10.0 million and the assumption of mortgage debt in the amount of approximately $80.1 million. In addition, Patriot acquired an office building that will be converted into a hotel for approximately $33.9 million. During 1998, Patriot sold its interest in four hotel assets: Courtyard by Marriott Hotel in Orange, Connecticut, Courtyard by Marriott Hotel in St. Louis, Missouri, Residence Inn in Pittsburgh, Pennsylvania and the Courtyard by Marriott in Westborough, Massachusetts, collectively hereinafter referred to as the Fine Transaction, for a net purchase price of approximately $32.5 million. Patriot recognized no gain or loss on sale as a result of the transaction. The assets were sold to an affiliate of an independent member of the Board of Directors of Patriot. Additionally in December 1998, Patriot sold its interest in three hotel assets previously leased to NorthCoast Hotels, LLC ("NorthCoast") (a third party lessee of Patriot); the WestCoast Roosevelt Hotel, the WestCoast Gateway Hotel located in Seattle, Washington and the WestCoast Wenatchee Hotel located in Wenatchee, Washington to an affiliate of NorthCoast. Patriot received net cash proceeds of approximately $23.7 million plus 6 a mortgage note receivable in the amount of $2.0 million. Patriot has also contracted with an affiliate of NorthCoast to sell a fourth hotel, the WestCoast Long Beach Hotel and Marina located in Long Beach, California, for a total purchase price of approximately $7.0 million. Patriot recognized a loss on sale of approximately $9.5 million as a result of the sale of these assets. Upon completion of the sale, the Companies will no longer have leases on owned hotels with third-party lessees. Recent Developments Asset sales On March 3, 1999, Patriot sold its interest in the Holiday Inn Crockett Hotel located in San Antonio, Texas. The Companies received cash proceeds of approximately $18.0 million after payment of legal costs and other closing costs. Patriot will recognize an estimate gain on sale of asset of $3.3 million in 1999. In connection with the transaction, Patriot terminated its lease to Wyndham for the hotel. In February 1999, Patriot sold its interest in the Bay Meadows Racecourse located in San Mateo, California. The Companies received cash proceeds of approximately $3.4 million after payment of legal costs and other closing costs. Patriot has recognized an estimated impairment loss on assets held for sale of $42.3 million related to the Racecourse facility in 1998. In connection with the transaction, Patriot terminated its lease to Wyndham for the Racecourse facilities. During the first quarter of 1999, the Companies entered into two new management contracts including the conversion of the Marriott I-Drive in Orlando, Florida to a Wyndham and the addition of the Lodge at Mountain Village in Telluride, Colorado as a Wyndham Resort. Acquisitions In January 1999, Patriot acquired the remaining 25% minority interests in each of the five following hotels; Embassy Suites Schaumburg, the Hilton Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover and the Marriott Tysons Corner from CIGNA. The acquisition of such interests was financed through additional mortgage indebtedness totaling $49.8 million and the transfer of an additional 10% interest in the Marriott Warner Center. Consulting Agreements On February 26, 1999, Patriot, Wyndham and Paul A. Nussbaum entered into a Separation Agreement (the "Separation Agreement") whereby Mr. Nussbaum resigned his position as Chairman of the Board of Directors and Chief Executive Officer of Patriot, effective immediately. Pursuant to the Separation Agreement, Mr. Nussbaum has been named Chairman Emeritus of the Board of Directors of Patriot and will remain as a Director of Wyndham. In addition, pursuant to the terms of the Separation Agreement, Mr. Nussbaum has agreed to provide consulting services to the Companies for two years. Securities Purchase Agreement On February 18, 1999, Patriot, Wyndham, Patriot Partnership, Wyndham Partnership and affiliates of each of Apollo Real Estate Management III, L.P., Apollo Management IV, L.P., Thomas H. Lee Equity Fund IV, L.P., Beacon Capital Partners, L.P. and Rosen Consulting Group, entered into a purchase agreement under which the investors will purchase $1 billion of a new series B preferred stock of Wyndham. Patriot and Wyndham currently plan to use the proceeds from the investment to settle their forward equity contracts, as described above, to repay indebtedness, and for working capital and growth purposes. Wyndham will pay dividends on its series B preferred stock quarterly, on a cumulative basis, at a rate of 9.75% per year. For the first six years, dividends will be payable partly in cash and partly in additional shares of preferred stock, with the cash component initially equal to 30% for the first dividend payment and declining over the period to approximately 19.8% for the final dividend payment. Each share of series B preferred stock may be 7 converted, at the option of its holder, into that number of shares of Wyndham common stock equal to $100.00 divided by the conversion price of the series B preferred stock. Initially the conversion price will be $8.59, but is subject to adjustment under certain circumstances. Restructuring Under the terms of the purchase agreement, relating to the $1 billion equity investment, Patriot and Wyndham are required to complete a restructuring of their existing paired share REIT structure prior to the investment. Under the terms of the restructuring, the following events will occur: . A reverse stock split of the common stock of Wyndham and Patriot. . A wholly-owned subsidiary of Wyndham will merge with and into Patriot with Patriot surviving. . The pairing agreement between Patriot and Wyndham will terminate. . Patriot will terminate its status as a real estate investment trust effective January 1, 1999. . The non-voting stock of specified corporate subsidiaries held by the Patriot Partnership will be transferred so that it will be owned directly by Patriot and/or Wyndham, rather than through the Patriot Partnership. . The third party partners in both the Patriot Partnership and the Wyndham Partnership will be offered an opportunity to exchange their limited partner interests for Wyndham common stock. . The preferred stockholders of Wyndham will be offered an opportunity to exchange their preferred stock for Wyndham common stock. Reverse Stock Split Prior to the merger of a subsidiary of Wyndham into Patriot, both Wyndham and Patriot will implement a one-for-twenty reverse stock split of their common stock. Redemption Option For a period of 170 days following the completion of the $1 billion equity investment, Wyndham may redeem up to $300 million of the series B preferred stock at a redemption price of $102.00 per share (102% of the stated amount $100.00) plus all accrued dividends. Wyndham currently plans to fund this redemption through the issuance of $300 million of series A preferred stock to its stockholders. The series A preferred stock has the same economic terms as the series B preferred stock. New Debt Financing New Credit Facility. Patriot has recently signed a commitment letter with Chase Securities Inc. and The Chase Manhattan Bank for senior credit facilities for Wyndham in the amount of $1.8 billion, comprised of a term loan facility and a revolving loan facility. Definitive agreements relating to the new credit facility are expected to be finalized at the same time that the $1 billion equity investment is consummated. The commitment letter provided that the Chase Manhattan Bank will act as the administrative agent and Chase Securities Inc. will act as the lead arranger for a syndicate of lenders which will provide Wyndham with $1 billion in term loans and up to $800 million under the revolving loan facility, of which a maximum of $560 million may be drawn at the closing of the investment. The term loan facility and the revolving facility carry terms of 7 years and 5 years, respectively. The commitment letter based interest rates for the new credit facility upon LIBOR spreads varying from 1.50% to 3.00% per annum (for the revolving loan facility) and 3.00% to 3.75% per annum (for the term loan facility), based both on Wyndham's leverage ratio and on whether any increasing rate loans (described below) are outstanding. However, at Wyndham's election or under other specified circumstances, the term loans and revolving loans may instead bear interest at an alternative base rate plus the applicable spread. The 8 alternative base rate is equal to the greater of The Chase Manhattan Bank's prime rate or federal funds rate plus 0.5%, and the alternative spread is 1.0% below the applicable LIBOR spread. Subject to limited agreed-upon exceptions, the New Credit Facility will be guaranteed by the domestic subsidiaries of Wyndham, and will be secured by pledges of equity interests held by Wyndham and its subsidiaries. The proceeds from the term loan facility will be used to finance the restructuring of Wyndham and Patriot. The proceeds from the revolving loan facility will be used for working capital and general corporate purposes. Increasing Rate Loans. Wyndham and Patriot have signed a commitment letter with The Chase Manhattan Bank, Chase Securities Inc., Bear, Stearns & Co. Inc., and The Bear Stearns Companies Inc. providing that The Chase Manhattan Bank, The Bear, Stearns Companies Inc. and a possible syndicate of other lenders will provide an increasing rate loan facility in the amount of up to $650 million. The increasing rate loans carry a term of 5 years. Interest rates for the increasing rate loans are based on LIBOR spreads and are initially set at 0.25% below the initial LIBOR spread on the term loan facility, but increase by 0.50% every three months, with a cap of LIBOR plus 4.75%. However, under other specified circumstances, interest accrues at an alternate rate equal to the rate borne by three-month treasury securities plus 1.0%, plus the applicable spread. The lenders under the increasing rate loans receive the benefit of the same guarantees and pledges of security provided under the New Credit Facility. The proceeds from the increasing rate loans will be used to finance the restructuring of Wyndham and Patriot. After the six month anniversary of the closing of the investment, lenders transferring increasing rate loans may exchange the increasing rate loans for exchange notes carrying identical terms to the increasing rate loans. To the extent any increasing rate loans or exchange notes are outstanding 180 days after the closing of the investment, Wyndham must by such date file and maintain a shelf registration statement with the Securities and Exchange Commission allowing the resale of any exchange notes outstanding thereafter. Wyndham may also offer registered substitute notes in exchange for all outstanding increasing rate loans and exchange notes. Wyndham's ability to borrow under its revolving facility is subject to Wyndham's compliance with a number of customary financial and other covenants, including total leverage and interest coverage ratios, limitations on additional indebtedness, and limitations on investments and stockholder dividends. In April 1999, The Chase Manhattan Bank and Chase Securities Inc. notified the companies that they were exercising their rights under the "market flex" provisions of the commitment letters to change the terms of the senior credit facilities and the increasing rate loan facility. The total amount of the senior credit facilities was reduced by $200 million to $1.6 billion and the amount of the increasing rate loans was increased by $200 million to $850 million. The revolving credit facility has been reduced from $800 million to $600 million and the maximum that may be drawn at the closing has been reduced from $560 million to $400 million. Forward Equity Contracts Patriot is party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. On December 31, 1997, the Companies sold 3.25 million unregistered paired shares to UBS, for a purchase price per paired share of $28.125, or aggregate consideration of approximately $93.6 million. On February 26, 1998, the Companies sold 4.9 million unregistered paired shares to Nations, for a purchase price per paired share of $24.8625, or aggregate consideration of approximately $121.8 million. On April 6, 1998, the Companies sold 5.15 million unregistered paired shares to PaineWebber for a purchase price per paired share of $27.01125, or aggregate consideration of approximately $139.1 million. The proceeds of these placements were used by the Companies to repay borrowings under the Companies' Credit Facility. The Credit Facility was then used to fund the cash portion of the Companies mergers and acquisitions. Patriot's aggregate obligation under the forward equity transactions was approximately $321.9 million at April 12, 1999. As of such date, Patriot has delivered an aggregate of 84.7 million shares to the counterparties as collateral, including approximately 4 million shares issued as dividends 9 on the collateral shares, in addition to approximately 12.5 million original paired shares currently owned by the counterparties or their affiliates. In a forward equity transaction, a company sells shares of its common stock to an investment bank or similar financial institution. At the same time, the parties enter into a forward contract under which they agree to "settle" the transaction at a stated maturity date based upon the adjusted price of the purchased shares at maturity. During the term of the forward contract, the price of the purchased shares increases at a rate that corresponds to an agreed-upon interest rate. At maturity, the buyer sells a number of shares sufficient to generate proceeds equal to the total adjusted purchase price of the purchased shares. Shares may be sold to the public through an underwritten public offering or by other methods, or to private investors. If the buyer does not receive sufficient proceeds from its sales of the originally purchased shares, the company must issue more shares of common stock to the buyer for resale until the obligation has been satisfied. Often, a company may pay its obligation under a forward equity contract in cash as well as shares of its stock. On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward agreements or to sell paired shares in connection with the forward agreements until the earlier of the closing of the $1 billion equity investment or June 30, 1999. In connection with the standstill agreements, the Companies agreed to pay a 2% fee to the three counterparties. The agreements provide that the standstill obligations terminate if, among other events, the price of the paired shares fell to a specified threshold. As of the date of this Form 10- K/A, the price of the paired shares has fallen below each of the thresholds. As a result, each of the forward counterparties has the right to require an immediate settlement of its forward equity transaction. As of the date of this Form 10 K/A, none of the counterparties has made any sale of paired shares, other than the sale of 754,525 paired shares by one counterparty in December 1998, or required settlement of its forward transaction. However, the Companies cannot assure you that the forward counterparties will not sell paired shares or require settlement in the future. The Companies may settle the forward transactions by delivering either cash or paired shares covered by an effective registration statement. Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure that the bank lenders would consent to any cash settlements prior to the closing of the $1 billion equity investment. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale of one counterparty of an additional 4 million paired shares of which 754,525 paired shares were sold by that counterparty in December 1998. In addition, the Companies filed a registration statement in April 1999 registering an additional 68 million paired shares in connection with the forward equity transactions. If, and when, the April 1999 registration statement becomes effective, there will be 111.2 million paired shares covered by effective registration statements, representing approximately 14 million paired shares more than the total number of paired shares currently owned or held as collateral by the forward counterparties. The Companies cannot assure that these registration statements will remain effective or that the Companies will not be required to register more paired shares in connection with the forward equity transactions. Given the current market price of the paired shares, any settlement in paired shares would have severely dilutive effects on our capital stock. Based on the $5.0625 closing price of the paired shares on April 30, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 65 million paired shares, to settle all of the forward equity transactions in full. The number of shares required would substantially increase if the market price of the paired shares decreases as a result of the sales of paired shares by the forward counterparties. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors will be adjusted downward to the extent that the price recognized by us on the sale is less than $8.75 per share. The Companies intend to settle in full all of the forward transactions with the proceeds of the $1 billion equity investment. If the Companies settle the forward transactions in cash, the counterparties must deliver to the Companies all paired shares then owned by them or held by them as collateral under the forward agreement. 10 Agreements Relating to Existing Credit Facility. Patriot and Wyndham's existing credit facility with The Chase Manhattan Bank, Chase Securities, Inc. and PaineWebber Real Estate consists of a $900 million revolving credit facility and a series of term loans in the aggregate amount of $1.8 billion. Interest rates on the existing Credit Facility are based on Patriot's and Wyndham's leverage ratio and vary from 1.5% to 2.5% over LIBOR. Under the original terms of the Credit Facility, two of the term loans were scheduled to matured on January 31, 1999 ($350 million) and March 31, 1999 ($400 million), respectively. All of the requisite lenders under the Credit Facility have agreed to extend the maturity of these two terms loans to June 30, 1999. If the Companies do not consummate the Investment by June 30, 1999, or our agreement with the Investor Group otherwise terminates, the maturity on these two term loans will be extended to March 31, 2000 and the Companies will be required to make a $300 million amortization payment by December 31, 1999. Additionally, the Companies will be required to secure the Credit Facility with mortgages and other security interests by June 30, 1999. In connection with their agreement to extend the maturities of the term loans to June 30, 1999, the Companies have paid approximately $11.7 million in fees. Interstate's Third-Party Hotel Management Business In May, 1998, the Companies along, with Interstate Hotels Company ("Interstate") entered into a settlement agreement (as amended, the "Settlement Agreement") with Marriott International, Inc. ("Marriott") which addressed certain claims asserted by Marriott in connection with Patriot's then proposed merger with Interstate. The Settlement Agreement provided for the dismissal of litigation brought by Marriott, and allowed Patriot's merger with Interstate to close. In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for the re-branding of ten Marriott hotels under the Wyndham name, Marriott's assumption of the management (the "Assumed Management Contracts") of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and the divestiture of the third-party management business which was operated by Interstate no later than May 14, 1999. If the Companies do not complete the spin-off by May 14, 1999, Marriott will be entitled to receive 110% of the fees otherwise due under the Assumed Management Contracts. The Companies will also be subject to additional penalties including Marriott's right to purchase, subject to third-party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by Patriot at their then appraised values. Moreover, subject to any defenses the Companies may have, the Companies would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels Marriott would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of Marriott-branded hotels that Wyndham manages to replace Wyndham as manager of their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with Wyndham and enter into a contract with another manager. The Companies would owe liquidated damages on any third-party Marriott-franchised hotel which chooses to convert its brand. Description of Business The Companies are a fully-integrated and multi-branded hotel enterprise that operates primarily in the upscale and luxury segments. Through a series of acquisitions, the Companies have grown from 20 hotels at the time of its initial public offering in 1995 to become one of the largest U.S. based hotel operators with a portfolio totaling 472 hotels and approximately 101,000 rooms. The Companies classify their business into proprietary brand and non- proprietary brand hotel divisions, under which they manage the business. Among its proprietary branded hotels, the Companies are positioned in the luxury segment under the Grand Bay Hotels & Resorts(R); in the upscale segment under Wyndham(TM); and in the mid-priced segment under the ClubHouse. The core Wyndham brand offers upscale, full-service accommodations to business and leisure 11 travelers, ensures a quality and consistent product, and delivers outstanding service through any of its four products: Wyndham Hotels, Wyndham Resorts, Wyndham Garden Hotels(R), Wyndham Grand Heritage Hotels(R). Additionally, the Companies offer proprietary branded all-suite accommodations through its upscale Summerfield Suites and its mid-priced Sierra Suites. Other proprietary hotel brands owned and developed by the Companies include Malmaison, Grand Heritage(R) and Carefree(R). The Companies primary growth strategy is to develop their proprietary hotel brands through increasing distribution, generating greater customer awareness, building brand loyalty, and maintaining customer satisfaction. The Companies intends to continue to expand and diversity its hotel portfolio through the rebranding of existing non-proprietary brand hotels to one of its proprietary brands and through the selective acquisition and development of hotels in major metropolitan areas and destination. In 1998, the Companies converted 33 owned hotels to one of its proprietary upscale or luxury hotel brands. Additionally, the Companies have 10 hotels under development which are expected to open in mid to late 1999. These newly constructed hotels will be proprietary branded and are situated in major metropolitan markets including Boston, Chicago, Atlanta and London. Additionally, the Companies own 93 non-proprietary branded hotels which consists of 86 full service hotels, 3 resort hotels and 4 limited service hotels. All but 5 of these hotels are operated under franchise or brand affiliations with nationally recognized hotel companies, including Marriott(R), Crowne Plaza(R), Hilton(R), Hyatt(R), Radisson(R), Holiday Inn(R), Doubletree(R), Embassy Suites(R), Ramada(R), Four Points by Sheraton(R), WestCoast(R), Hampton Inn(R), Courtyard by Marriott(R). The Companies non-proprietary brand hotels are mostly operated by one of two divisions, Patriot American Hospitality Management Services or Interstate Hotel Management. Both divisions are focused on maximizing hotel profitability at the owned hotels or for our third-party hotel owners. The Companies non- proprietary branded business will continue to seek investments in hotels where management believes that profits can be increased by the introduction of more professional and efficient management techniques, a change of franchise affiliation or the injection of capital for market repositioning, renovating, or expanding a property. Proprietary Brands Grand Bay Hotels & Resorts are five-star, luxury hotel properties located in major metropolitan markets and destination locations. Catering to the upscale business and leisure traveler, Grand Bay hotels feature between 150 and 300 rooms, numerous fine dining options, the exclusive Golden Door Spa or Golden Door CitySpa and other luxury amenities. Grand Bay Resorts include the former Carefree Resorts, which are internationally renowned, signature resorts distinguished by unique architecture that complements the indigenous landscape; a wide variety of outdoor activities; Golden Door spas; innovative service; and retail shopping. Wyndham is a four-star, upscale hotel brand that offers full-service accommodations to business and leisure travelers. Wyndham ensures a quality and consistent product and delivers outstanding service through any of its four products described below. Each product is geared to the customers specific needs based on the properties' location and character. . Wyndham Hotels are typically located in major urban centers, providing an average of 400 hotel rooms, generally between 15,000 and 250,000 square feet of meeting space, and a full range of guest services and amenities, including room service and recreational facilities. Wyndham Hotels are marketed primarily to corporate groups as well as individual business travelers. . Wyndham Resorts are full-service, destination resorts targeted to upscale and luxury leisure and incentive travelers. Primary destinations currently include Orlando, South Florida and the Caribbean. Due to the strength and size of the Wyndham Resorts portfolio, the chain is the largest chain in the Caribbean. . Wyndham Garden Hotels are located principally in suburban markets, catering to individual business travelers and small business groups. These full-service hotels feature between 150 and 225 guest rooms, up to 5,000 square feet of meeting space, a three-meal restaurant, signature "Garden" libraries and laundry and room service. 12 . Wyndham Grand Heritage Hotels are the newest addition to the Wyndham brand, introduced in early 1998. Wyndham Grand Heritage Hotels are distinguished by their unique combination of historic ambiance and modern services and amenities. Usually situated in secondary and tertiary markets throughout the United States, Wyndham Grand Heritage Hotels are known for their aesthetic and historic appeal as well as their architectural significance. ClubHouse Inns are mid-priced, limited service hotels located principally in secondary markets throughout the Midwest and the Southwest. ClubHouse Inns are targeted at corporate individual travelers and featuring an average of 135 rooms, two meeting rooms, full-service breakfast buffets and evening receptions. Summerfield Suites and Sierra Suites are upscale and mid-priced, all-suite hotel brands, respectively. Both brands focus on the needs of business travelers attending corporate training programs but at different price points. All-suite properties are designed for the business and leisure traveler who usually anticipates a one to two week stay (suite hotels generally offer weekly rates to their guests). The suite properties usually have limited public space and no or limited food and beverage services. However, these properties generally provide guests with larger partitioned rooms, a full kitchen, or two rooms for added workspace. Malmaison, located in the United Kingdom, are full-service, upscale hotels typically housed in historic buildings that have been redeveloped and retrofitted. Named "Best Hotels in the World Under (Pounds)100 Per Night" by England's Tatler magazine, Malmaison hotels are a European equivalent in size and service to Wyndham Gardens, with award-winning brasseries, which quickly become popular gathering spots. Operating Statistics--Owned Hotels
Occupancy ADR REVPAR ------------ --------------- --------------- 1998 1997 1998 1997 1998 1997 ----- ----- ------- ------- ------- ------- Wyndham Branded Hotels.......... 70.50% 70.80% $119.57 $112.32 $ 84.35 $ 79.54 Grand Bay Hotels & Resorts...... 67.00 70.50 287.30 266.64 192.52 187.86 Summerfield Suites.............. 79.70 74.20 129.42 123.01 103.17 91.27 Malmaison....................... 83.50 75.40 125.65 117.27 104.89 88.44 Clubhouse....................... 66.40 71.50 68.07 65.75 45.23 47.01 Arcadian........................ 68.80 63.80 142.67 128.43 98.10 81.92 Non Proprietary -- Limited Service........................ 67.80 74.10 74.57 65.87 50.54 48.83 Non Proprietary Brands.......... 71.70 71.20 99.59 94.29 71.39 67.16 ----- ----- ------- ------- ------- ------- Weighted Average............... 71.10% 71.00% $109.94 $103.53 $ 78.15 $ 73.55
13 List of Owned Properties The following table sets forth certain information for the hotels the Companies owned as of December 31, 1998, and excludes those leased, managed or franchised from third-party owners.
Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Wyndham Brand Properties: Wyndham Bel Age Hotel Los Angeles California 200 1984 Wyndham Bristol Place Hotel Toronto Canada 287 1974 Wyndham Buena Vista Palace Resort & Spa (1) Orlando Florida 1,014 1977/1983 Wyndham Buttes Resort (1) Tempe Arizona 353 1986 Wyndham City Centre (2) Washington District of Columbia 352 1969 Wyndham Emerald Plaza San Diego California 436 1991 Wyndham Resort & Spa (1) Fort Lauderdale Florida 496 1961 Wyndham Franklin Plaza Philadelphia Pennsylvania 758 1979 Wyndham Greenspoint Hotel Houston Texas 472 1985 Wyndham Miami Beach Resort (1) Miami Florida 424 1963 Wyndham Gateway--Miami Airport (1) Miami Florida 408 1976 Wyndham Myrtle Beach Resort & Golf Club (1) Myrtle Beach South Carolina 385 1974 Wyndham Northwest Chicago Chicago Illinois 408 1983 Wyndham Peachtree Conference Center (1) Atlanta Georgia 250 1984 Wyndham Toledo (1) Toledo Ohio 241 1985 Wyndham Riverfront Hotel New Orleans Louisiana 202 1996 Wyndham Washington D.C. (1) Washington District of Columbia 400 1983 Wyndham Westshore Hotel (1) Tampa Florida 324 1984 Wyndham Wind Watch Hotel & Golf Club Hauppage New York 360 1989 Wyndham El Conquistador Resort & Club (1) San Juan Puerto Rico 751 1962 Wyndham El San Juan Resort & Casino (1) San Juan Puerto Rico 382 1958 Wyndham Rose Hall Golf & Beach Resort Montego Bay Jamaica 489 1984 Wyndham Garden Hotel--Brookfield Brookfield Illinois 178 1990 Wyndham Garden Hotel--Charlotte Charlotte North Carolina 173 1989 Wyndham Garden Hotel--Commerce Los Angeles California 201 1991 Wyndham Garden Hotel--Market Center Dallas Texas 228 1968/1997 Wyndham Garden Hotel--Park Central (1) Dallas Texas 197 1998 Wyndham Garden Hotel--Indianapolis Indianapolis Indiana 171 1990 Wyndham Garden Hotel--K.C. Airport (1) Kansas City Missouri 138 1992 Wyndham Garden Hotel--Knoxville (1) Knoxville Tennessee 137 1989 Wyndham Garden Hotel--LaGuardia Airport New York New York 229 1988 Wyndham Garden Hotel--Las Colinas Dallas Texas 168 1986 Wyndham Garden Hotel--Midtown Atlanta Georgia 191 1987 Wyndham Garden Hotel--Novi Detroit Michigan 148 1988 Wyndham Garden Hotel--Omaha (1) Omaha Nebraska 137 1991 Wyndham Garden Hotel--Overland Park Overland Park Kansas 180 1971/1997 Wyndham Garden Hotel--Pleasanton Pleasanton California 171 1985 Wyndham Garden Hotel--Richardson (1) Richardson Texas 137 1996 Wyndham Garden Hotel--Schaumburg Schaumburg Illinois 188 1985 Wyndham Garden Hotel--West Port (1) St. Louis Missouri 142 1997
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Wyndham Garden Hotel-- Vinings Atlanta Georgia 159 1985 Wyndham Garden Hotel-- Wichita (1) Wichita Kansas 120 1985 Wyndham Garden Hotel-- WoodDale Chicago Illinois 162 1986 Wyndham Grand Heritage-- Ambassador West (1) Chicago Illinois 219 1924 Wyndham Grand Heritage-- Bourbon Orleans (1) New Orleans Louisiana 216 1800s Wyndham Grand Heritage-- The Fairmount (1) San Antonio Texas 37 1906 Wyndham Grand Heritage-- The Mayfair (1) St. Louis Missouri 182 1925 Wyndham Grand Heritage-- The Tutwiler (1) Birmingham Alabama 147 1913 Wyndham Grand Heritage-- Tremont House (1) Boston Massachusetts 322 1925 Wyndham Grand Heritage-- Union Station (1) Nashville Tennessee 124 1986 Grand Bay Hotels & Resort: Carmel Valley Ranch Carmel California 144 1987 Grand Bay Hotel Coconut Grove Miami Florida 178 1983 The Boulders Scottsdale Arizona 160 1985 The Lodge at Ventana Canyon Tucson Arizona 49 1985 The Peaks Resort & Spa Telluride Colorado 174 1992 Las Casitas Spa & Villas San Juan Puerto Rico 157 Summerfield Suites: Summerfield--Denver South Denver Colorado 136 1997 Summerfield--Hanover Whippany New Jersey 136 1997 Summerfield--Morristown (Hanover South) Morristown New Jersey 133 1997 Summerfield--Seattle Downtown (1) Seattle Washington 193 1985 Summerfield--Waltham Waltham Massachusetts 136 1997 Malmaison: Malmaison Edinburgh Edinburgh United Kingdom 60 1994 Malmaison Glasgow Glasgow United Kingdom 72 1997 Malmaison Manchester Manchester United Kingdom 112 1998 Malmaison Newcastle Newcastle United Kingdom 116 1998 ClubHouse Inns: ClubHouse Inn--Nashville Airport Nashville Tennessee 135 1988 ClubHouse Inn-- Albuquerque Albuquerque New Mexico 137 1987 ClubHouse Inn--Atlanta (Norcross) Atlanta Georgia 147 1988 ClubHouse Inn--Overland Park Overland Park Kansas 143 1988 ClubHouse Inn--Savannah Savannah Georgia 138 1989 ClubHouse Inn--Topeka Topeka Kansas 121 1986 ClubHouse Inn--Valdosta Valdosta Georgia 121 1988 ClubHouse Inn & Conference Center Nashville Tennessee 285 1991 Non-Proprietary Brand Properties: Marriott Albany Albany New York 359 1985 Marriott Arlington Arlington Texas 310 1985 Marriott Atlanta North Central Atlanta Georgia 287 1975
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Marriott Boston Andover Andover Massachusetts 293 1985 Marriott Boston Westborough Westbourough Massachusetts 223 1985 Marriott Houston Greenspoint North Houston Texas 391 1981 Marriott Minneapolis Southwest Minnetonka Minnesota 320 1988 Marriott Colorado Springs Colorado Springs Colorado 311 1989 Marriott Harrisburg Harrisburg Pennsylvania 348 1980 Marriott Indian River Plantation Resort Stuart Florida 297 1987 Marriott Casa Marina Resort Key West Florida 311 1980 Marriott Troy Troy Michigan 350 1990 Marriott Reach Resort Key West Florida 149 1978 Marriott Suites At Valley Forge Valley Forge Pennsylvania 229 1985 Marriott Philadelphia West West Conshohocken Pennsylvania 286 1991 Marriott Pittsburgh Airport Pittsburgh Pennsylvania 314 1987 Marriott Roanoke Airport Roanoke Virginia 320 1983 Marriott San Diego Mission Valley San Diego California 350 1988 Marriott St. Louis West St. Louis Missouri 300 1990 Marriott Syracuse East Syracuse New York 250 1977 Marriott Tysons Corner Tysons Corner Virginia 390 1981 Marriott Warner Center Woodland Hills California 463 1986 Courtyard by Marriott Beachwood Ohio 113 1986 Crowne Plaza Ravinia Atlanta Georgia 495 1986 Doubletree Hotel Anaheim Orange California 454 1984 Doubletree Hotel Corporate Woods Overland Park Kansas 356 1982 Doubletree Hotel Post Oak Houston Texas 449 1982 Doubletree Hotel St. Louis St. Louis Missouri 223 1984 Doubletree Hotel Allen Center Houston Texas 341 1978 Doubletree Guest Suites Glenview Illinois 252 1988 Doubletree Hotel Westminster Denver Colorado 180 1980 Doubletree Hotel Tallahassee Florida 244 1977 Doubletree Hotel Des Plaines Chicago Illinois 242 1969 Doubletree Hotel Minneapolis Minnesota 230 1986 Doubletree Hotel Tulsa Oklahoma 417 1982 Doubletree Park Place Minneapolis Minnesota 298 1981 Doubletree Miami Airport Miami Florida 266 1975 Embassy Suites Chicago Illinois 358 1991 Embassy Suites Schaumburg Illinois 209 1984 Embassy Suites Hunt Valley Maryland 223 1985 Embassy Suites Phoenix North Phoenix Arizona 314 1985 Hyatt Newporter Newport Beach California 410 1962 Hyatt Regency Lexington Kentucky 365 1977 Hilton Cleveland South Independence Ohio 191 1980 Hilton Gateway Newark Newark New Jersey 253 1971 Hilton Columbus Columbus Georgia 177 1982 Hilton Del Mar San Diego California 245 1989 Hilton Greenwood Village Denver Colorado 305 1982 Hilton Dania Fort Lauderdale Florida 388 1988 Hilton Huntington Melville New York 302 1988 Hilton Parsipanny Parsippany New Jersey 510 1981 Hilton Melbourne Airport Melbourne Florida 237 1986
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Holiday Inn (3) Sebring Florida 148 1983 Holiday Inn San Angelo Texas 148 1984 Holiday Inn--YO Ranch Kerrville Texas 200 1984 Holiday Inn Aristocrat Dallas Texas 172 1925 Holiday Inn Beachwood (3) Beachwood Ohio 172 1974 Holiday Inn Crockett (4) San Antonio Texas 204 1909 Holiday Inn Lenox Atlanta Georgia 297 1987 Holiday Inn Northwest Houston Texas 193 1982 Holiday Inn Northwest Plaza Austin Texas 193 1984 Holiday Inn Select-- Farmers Branch Dallas Texas 379 1979 Holiday Inn Westlake Beachwood Ohio 266 1980 Holiday Inn Brentwood Brentwood Tennessee 247 1989 Holiday Inn San Francisco California 224 1964 Redmont Hotel Birmingham Alabama 112 1925 Omni Inner Harbor Hotel Baltimore Maryland 707 1968 Radisson Burlington Burlington Vermont 255 1975 Radisson Hotel & Suites Dallas Texas 198 1986 Radisson Englewood Englewood New Jersey 192 1989 Radisson Suite Hotel Kansas City Kansas 240 1931 Radisson Hotel Lisle Illinois 242 1987 Radisson New Orleans Hotel New Orleans Louisiana 759 1924 Radisson Northbrook Northbrook Illinois 310 1976 Radisson Overland Park Overland Park Kansas 190 1974 Radisson Riverwalk Jacksonville Florida 322 1979 Radisson Plaza Hotel San Jose Airport San Jose California 185 1985 Radisson Suites Town & Country Houston Texas 173 1986 Radisson Hotel Beachwood Ohio 196 1968 Radisson Hotel Akron Ohio 130 1989 Ramada Hotel San Francisco California 323 1962 Sheraton Four Points Blacksburg Virginia 148 1971 Sheraton Four Points Saginaw Michigan 156 1984 WestCoast Hotel & Marina (3) Long Beach California 195 1978 WestCoast Valley River Inn Eugene Oregon 257 1973 Condado Plaza Hotel & Casino San Juan Puerto Rico 570 Fort Magruder Inn & Conference Center Williamsburg Virginia 303 1975 Pickwick Hotel San Francisco California 189 1928 Park Shore Honolulu Honolulu Hawaii 227 1968 Regency Hotel San Juan Puerto Rico 127 1963 Limited Service Hotels: Hampton Inn (3) Canton Ohio 107 1985 Hampton Inn (3) Rochester New York 113 1986 Hampton Inn Cleveland Airport (3) North Olmsted Ohio 113 1986 Hampton Inn Jacksonville Airport (3) Jacksonville Florida 113 1985 Arcadian Hotels: Arcadian--Brandschatch Brandschatch Place United Kingdom 41 1980 Arcadian--Chilston Park Chilston Park United Kingdom 53 1985 Arcadian--Ettington Park Ettington Park United Kingdom 48 1984 Arcadian--Haycock Haycock United Kingdom 59 1632 Arcadian--L'Horizon L'Horizon United Kingdom 107 1954
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Year Number of Built/ Property Name City State Rooms Renovated - ------------- ---- ----- --------- --------- Arcadian--Mollington Banastre Mollington Banastre United Kingdom 63 1953 Arcadian--Nutfield Priory Nutfield Priory United Kingdom 60 1988 Arcadian--Priest House Priest House United Kingdom 45 Arcadian--Rookery Hall Rookery Hall United Kingdom 45 1960 Arcadian--Wood Hall Wood Hall United Kingdom 43 1988 Arcadian--Woodlands Park Woodlands Park United Kingdom 59 1988 Other: Bay Meadows Racecourse (4) San Mateo California 1934 Golden Door Spa Escondido California 1954 ------ 43,893 ======
- -------- Notes: (1) Converted to Wyndham in 1998. (2) Converted to Wyndham subsequent to December 31, 1998. (3) Assets sold subsequent to December 31, 1998. (4) Assets sold subsequent to December 31, 1998. Total Portfolio
(Number of Hotels as of December 31, 1998) Owned Leased Managed Franchised Total ----------------------- ----- ------ ------- ---------- ----- Total Wyndham Brand Hotels & Resorts..... 50 14 40 10 114 Grand Bay Hotels & Resorts............... 6 0 0 0 6 Summerfield Suites and Sierra Suites..... 5 25 17 1 48 ClubHouse Inns........................... 8 0 2 1 11 Malmaison Hotels......................... 4 0 0 0 4 Arcadian and Grand Heritage Hotels....... 11 0 7 0 18 --- --- --- --- --- Proprietary Brand Hotels--Subtotal..... 84 39 66 12 201 Non-Proprietary Brand Hotels........... 94 82 95 0 271 --- --- --- --- --- Total.................................... 178 121 161 12 472 === === === === ===
Operation of the Hotels As of March 22, 1999, Patriot and Wyndham, either directly or through the Operating Partnerships and other subsidiaries, own interests in 178 hotels with an aggregate of over 43,800 rooms (excluding hotels under development). In order for Patriot to qualify for favorable tax status as a real estate investment trust ("REIT") under the Code, Patriot leases each of its hotels, to Wyndham or a third party lessee. Currently, Patriot leases all of its hotels to Wyndham except for one hotel (the WestCoast Long Beach Hotel and Marina) which is currently leased to NorthCoast which is under contract to be sold and those hotels which are separately owned through special purpose entities. Currently, Wyndham leases 206 hotels from Patriot pursuant to participating lease agreements. Wyndham manages 184 of these hotels through certain of its hotel management subsidiaries and has entered into separate management agreements with third-party operators to manage 22 of the hotels. In addition, the Companies lease 121 hotels from third parties, manage 161 hotels for independent owners and franchise 12 hotels. All of the leased hotels are managed with 39 franchised under proprietary brands of the Companies. Patriot leases each of the hotels, except those hotels which are separately owned through special purpose entities to Wyndham pursuant to separate participating leases. The Participating Leases with various expiration dates through 2008, subject to earlier termination upon the occurrence of certain contingencies described in the Participating Leases (including, particularly, irreparable damage or destruction of the hotel, condemnation of the 18 hotel property, failure to meet performance goals, or disposition of the hotel). The variation of the lease terms is intended to provide Patriot protection from the risk inherent in simultaneous lease expirations. In general, each participating lease requires the lessee of each hotel to pay the greater of (i) base rent in a fixed amount or (ii) participating rent based on percentages of room revenue, food and beverage revenue and other revenue at each hotel leased by it, plus certain additional charges. In general, Patriot is responsible for paying (i) real estate and personal property taxes on the hotels (except to the extent that personal property associated with the hotels is owned by the Lessee), (ii) casualty insurance on the hotels, (iii) business interruption insurance on the hotels and (iv) ground rent with respect to certain of the hotels. Wyndham is required to pay for all liability insurance on the hotels it leases, with extended coverage, including comprehensive general public liability, workers' compensation and other insurance appropriate and customary for properties similar to the hotels, with Patriot as an additional named insured. Franchise and Brand Affiliations As of December 31, 1998, all but 5 of the Companies' hotels are operated under franchise or brand affiliations with nationally recognized hotel companies. Franchisors and brand operators provide a variety of benefits for hotels which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems. Wyndham generally is the licensee under the franchise agreement related to such hotel. Wyndham is responsible for making all payments under the franchise agreements to the franchisors. Franchise royalties and fees generally range up to approximately 10% of room revenue. The duration of the franchise agreements are varied, but generally may be terminated upon prior notice and/or upon payment of certain specified fees. However, Wyndham is not entitled to terminate the franchise license for a hotel without prior written consent of Patriot. The franchisors have agreed that upon the occurrence of certain events of default by a lessee under a franchise license, the franchisors will transfer the franchise license for the hotel to Patriot (or its designee) or make other arrangements to continue the hotel as part of the franchisor's system. Wyndham's rights related to branded hotels are generally contained in the management agreements related to such hotels. The lessees do not pay additional franchise royalties or fees other than those specified in the management agreements for use of the brands. Generally, the lessees' rights to use the brands terminate upon any termination of the applicable management agreement. Management of the Hotels Wyndham has entered into management agreements with affiliated entities and other third parties to operate and manage each of the hotels leased from Patriot. As of December 31, 1998, all but 23 of Patriot's hotels were managed by operators affiliated with Wyndham. The management agreements provide for management fees based upon a percentage of total revenue at each of the hotels managed by them. The management fees generally range from 2% to 5% of total revenues. Generally, in the event of the termination of any of the Participating Leases with the hotel lessees, the related management agreement also terminates. Generally, the management agreements also provide for the subordination of certain management fee payments to Wyndham's obligations pursuant to the Participating Leases. Maintenance and Improvements The Participating Leases obligate Patriot to establish annually a reserve for capital improvements at the hotels leased to the Lessees (including the periodic replacement and refurbishment of furniture, fixtures and equipment ("FF&E"). Patriot and Wyndham agree on the use of funds in these reserves, and Patriot has the right to approve Wyndham's annual and long-term capital expenditure budgets. The aggregate minimum amount of such reserves average 4.0% of total revenue for the hotels. Patriot, at its election, may choose to expend more 19 than 4.0% on any hotel. Any unexpended amounts will remain the property of Patriot upon termination of the Participating Leases. Otherwise, Wyndham is required, at their own expense, to make repairs (other than capital repairs) which may be necessary and appropriate to keep their leased hotels in good order and repair. Competition The hotel industry is highly competitive and the Companies' hotels are subject to competition from other hotels for guests. Many of the Companies' competitors may have substantially greater marketing and financial resources than the Companies. Each of the Companies' hotels compete for guests primarily with other similar hotels in its immediate vicinity and secondarily with other similar hotels in its geographic market. Management believes that brand recognition, location, the quality of the hotel and services provided, and price are the principal competitive factors affecting the Companies' hotels. Patriot and Wyndham may compete for acquisition and development opportunities with entities that have greater financial resources than the Companies or which may accept more risk than the Companies. Competition may generally reduce the number of suitable investment opportunities and increase the bargaining power of property owners seeking to sell. Further, the Companies' management believes that it will face competition for acquisition opportunities from entities organized for purposes substantially similar to the objectives of Patriot or Wyndham. Seasonality The hotel industry is seasonal in nature. Revenue at certain of the Companies' hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in Patriot's lease revenues and in Wyndham's hotel-related revenues. Employees As of March 22, 1999, Patriot employs 14 persons, including Messrs. Carreker, Evans and Jones, the executive officers of Patriot, and retains appropriate support personnel to manage its operations in lieu of retaining an advisor. Wyndham employs approximately 54,000 persons, including Messrs. Carreker, Alibhai, Koonce, Bentley and Jones, the executive officers of Wyndham, and retains appropriate support personnel to manage its operations, including operation of the 206 hotels leased from Patriot. Environmental Matters Neither Patriot, Wyndham, the Patriot Partnership nor the Wyndham Partnership has been identified by the United States Environmental Protection Agency or any similar state agency as a responsible or potentially responsible party for, nor have they been the subject of any involuntary governmental proceedings with respect to, any hazardous waste contamination. Two of the hotels owned by subsidiaries of the Patriot Partnership are participating in the Texas voluntary clean-up program, the costs of which are to be absorbed by others pursuant to certain indemnification agreements obtained at the time of purchase. If Patriot, Wyndham or any of their respective subsidiaries were to be identified as a responsible party, they would in most circumstances be strictly liable, jointly and severally with other responsible parties, for environmental investigation and clean-up costs incurred by the government and, to a more limited extent, by private persons. Phase I environmental site assessments have been performed on substantially all Patriot hotels owned by the Companies. To date, these assessments have not revealed any environmental liability or compliance concerns that management believes would have a material adverse effect on the Companies' business, assets, results of operations or liquidity. Based on the results of these assessments, the Companies and their outside consultants believe that the Companies' overall potential for environmental impairment is low. 20 Based upon the environmental reports described above, the Companies believe that a substantial number of the hotels incorporate potentially asbestos- containing materials. Under applicable current federal, state and local laws, asbestos need not be removed from or encapsulated in a hotel unless and until the hotel is renovated or remodeled. The Companies have asbestos operation and maintenance plans for each property testing positive for asbestos. Based upon the above-described environmental reports and testing, future remediation costs are not expected to have a material adverse effect on the results of operations, financial position or cash flows of Patriot or Wyndham and compliance with environmental laws has not had and is not expected to have a material adverse effect on the capital expenditures, earnings or competitive position of the Companies. Tax Status Cal Jockey has elected to be taxed as a REIT under Sections 856 through 860 of the Code since 1983. Patriot, as the successor to Cal Jockey in the Cal Jockey Merger, has continued to be taxed as a REIT. As a REIT, Patriot generally has not been subject to federal income tax on its taxable net income that is distributed currently to its shareholders. On March 1, 1999, Patriot announced that it had signed an agreement with an investor group, including affiliates of Apollo Real Estate Management III, L.P., Apollo Management IV, L.P., Thomas H. Lee Equity Fund IV, Beacon Capital Partners, L.P. and Rosen Consulting Group, providing for an equity investment of up to $1 billion in the Companies. In connection with this investment and the related restructuring transactions Patriot would become a subsidiary of Wyndham and convert from a REIT to a C corporation. The termination of REIT status would have a retroactive date of January 1, 1999. The consummation of this investment is subject to numerous conditions, including approval by Patriot shareholders. If the equity investment is consummated in 1999 as planned, or if Patriot otherwise terminates its REIT status beginning in 1999, Patriot will be subject to tax as a C corporation in 1999 and subsequent years. Therefore, Patriot will be subject to federal income tax at regular corporate tax rates, although the Companies will be eligible to file a consolidated federal income tax return following the consummation of the proposed equity investment. Distributions to shareholders will no longer be deductible or required, and the amount of distributions is likely to be reduced. The termination of Patriot's REIT status will also cause Patriot to permanently lose its special status as a grandfathered paired share REIT under the rules described below. If Patriot failed to qualify as a REIT for any year prior to 1999. Patriot would also be taxed as a C corporation beginning in such year. Patriot would therefore be subject to federal income tax and the loss of its status as a grandfathered paired share REIT. Legislation Affecting the Paired Share Structure Patriot's ability to qualify as a REIT is dependent upon its continued exemption from the anti-pairing rules of Section 269B(a)(3) of the Code. Section 269B(a)(3) would ordinarily prevent a corporation from qualifying as a REIT if its stock is paired with the stock of a corporation, such as Wyndham, whose activities are inconsistent with REIT status. The "grandfathering" rules governing Section 296B generally provide, however, that Section 296B(a)(3) does not apply to a paired REIT if the REIT and the paired operating company were paired on June 30, 1983. There are, however, no judicial or administrative authorities interpreting this "grandfathering" rule in the context of a merger or otherwise. Moreover, although Patriot's and Wyndham's respective predecessors, Cal Jockey and Bay Meadows, were paired on June 30, 1983, if for any reason Cal Jockey failed to qualify as a REIT in 1983 the benefit of the grandfathering rule would not be available to Patriot and Patriot would not qualify as a REIT for any taxable year. Patriot's ability to utilize the paired structure was limited as a result of the Internal Revenue Service Restructuring and Reforming Act of 1998 (the "IRS Reform Act of 1998"), which was signed into law by the President on July 22, 1998. Included in the IRS Reform Act of 1998 is a freeze on the grandfathered status of paired share REITs such as Patriot. Under this legislation, the anti-pairing rules generally apply to real property 21 interests acquired after March 26, 1998 by Patriot and Wyndham, or a subsidiary or partnership which a 10% or greater interest is owned by Patriot or Wyndham (collectively, the "REIT Group"), unless (i) the real property interests are acquired pursuant to a written agreement which is binding on March 26, 1998 and all times thereafter or (ii) the acquisition of such real property interests were described in a public announcement or in a filing with the Securities and Exchange Commission on or before March 26, 1998. In addition, the grandfathered status of any property under the foregoing rules would be lost if the rent on a lease entered into or renewed after March 26, 1998, with respect to such property exceeds an arm's-length rate. The IRS Reform Act of 1998 also provides that a property held by Patriot or Wyndham that is not subject to anti-pairing rules would become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (x) the undepreciated cost of the property (prior to the improvement) or (y) in the case of property acquired where there is a substituted basis, the fair market value of the property on the day it was acquired by Patriot and Wyndham. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect as of December 31, 1999 and at all times thereafter. The IRS Reform Act of 1998 also provides an exception that permits Patriot to acquire new assets through taxable subsidiaries of Patriot, although in order to comply with the general REIT rules, Wyndham or persons unrelated to Patriot must own the voting securities of any such taxable subsidiaries. To the extent of Wyndham's proportionate interest in such subsidiaries the Act requires Patriot to treat gross revenues from the assets as nonqualifying REIT income for purposes of the REIT income tests (which generally limit the total amount of such revenues to 5% of Patriot's gross income determined for tax purposes). In addition, Patriot must account for its stock in such subsidiaries and any unsecured loans it makes to them as nonqualifying assets under the REIT asset tests (which generally limit the total value of Patriot's non-real estate assets of 25% of its total assets). Issues Regarding REIT Status As noted above, if Patriot ceases or fails to qualify as a REIT in any year, Patriot will be subject to federal income tax on its taxable income for the entire year of disqualification, and for future taxable years, at regular corporate rates. If the proposed equity investment is not consummated and if Patriot decides to retain its status as a REIT, Patriot will not qualify as a REIT for 1999 or subsequent years unless it operates in accordance with the various REIT qualification requirements imposed by the Internal Revenue Code. These requirements impose numerous restrictions on the Companies' activities and could preclude the Companies from engaging in activities that might otherwise be beneficial. Moreover, compliance with those requirements is more difficult in the case of a paired REIT such as Patriot, is further complicated by the additional requirements of the IRS Reform Act of 1998, and could be impacted by future legislation. Goodwin, Procter & Hoar LLP, special tax counsel to Patriot, has previously rendered an opinion to Patriot dated April 30, 1998 to the effect that commencing with the taxable year ending December, 13, 1983 to the date of such opinion, Patriot had been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and that as of the date of such opinion Patriot's proposed method of operation would enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. Patriot has not received any similar REIT qualification opinion subsequent to April 30, 1998. Stockholders should be aware, however, that opinions of counsel are not binding upon the IRS or any court. Goodwin, Procter & Hoar LLP's opinion was based on certain assumptions and representations or about the date of such opinion as to factual matters, including representations regarding the nature of Patriot's properties and the future conduct of Patriot's business. Any inaccuracy in such assumptions and representations (including as a result of Patriot's activities subsequent to the date of the opinion) could adversely affect the opinion. Pending Adoption of Authoritative Statements Derivative Instruments and Hedging Activities In June 1998, Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in 22 years beginning after June 15, 1999. The Companies expect to adopt Statement 133 effective January 1, 2000. Statement 133 will require the Companies to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Companies. Hotel Industry Risks Operating Risks The Companies primary business is buying, selling, leasing and managing hotels. Patriot leases its hotels to Wyndham and to third-party lessees (the "Lessees") pursuant to separate participating leases (the "Participating Leases"). Consequently, Patriot is dependent on the ability of Wyndham, the Lessees and the hotel management entities that manage the hotels (the "Operators") to manage the operations of the hotels that are leased to or operated by them. The Companies business is subject to operating risks common to the hotel industry. These risks include, among other things, (1) competition for guests from other hotels, a number of which may have greater marketing and financial resources and experience than the Companies do, (2) increases in operating costs due to inflation and other factors, which increases may not have been offset in past years, and may not be offset in future years, by increased room rates, (3) dependence on business and commercial travelers and tourism, which business may fluctuate and be seasonal, (4) increases in energy costs and other expenses of travel, which may deter travelers and (5) adverse effects of general and local economic conditions. These factors could adversely affect the ability of Wyndham and the Lessees to generate revenues. The Companies are also subject to the risk that in connection with the acquisition of hotels and hotel operating companies it may not be possible to transfer certain operating licenses, such as food and beverage licenses, to the Lessees, the Operators or Wyndham, or to obtain new licenses in a timely manner in the event such licenses cannot be transferred. Although hotels can provide alcoholic beverages under interim licenses or licenses obtained prior to the acquisition of these hotels, there can be no assurance that these licenses will remain in effect until Patriot or Wyndham obtains new licenses or that new licenses will be obtained. The failure to have alcoholic beverages licenses or other operating licenses could adversely affect the ability of the affected Lessees, and Operators or Wyndham to generate revenues. Operating Costs and Capital Expenditures; Hotel Renovation Hotels, in general, have an ongoing need for renovations and other capital improvements, particularly in older structures, including periodic replacement or refurbishment of furniture, fixtures and equipment ("F F& E"). Under the terms of the Participating Leases, Patriot is obligated to establish a reserve to pay the cost of certain capital expenditures at its hotel and pay for periodic replacement or refurbishment of F F& E. If capital expenditures exceed Patriot's expectations, the additional cost could have an adverse effect on Patriot's financial condition and results of operations. In addition, Patriot may acquire hotels where significant renovation is either required or desirable. Renovation of hotels involves certain risks, including the possibility of environmental problems, construction cost overruns and delays, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels. Competition for Hotel Acquisition Opportunities The Companies may be competing for investment opportunities with entities that have substantially greater financial resources. These entities may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a hotel operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities offered to us and increase the bargaining power of property owners seeking to sell. 23 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 revenue at our hotels may cause quarterly fluctuations in our revenues. Real Estate Investment Risks General Risks The Companies investments will be subject to varying degrees of risk generally incidental to the ownership of real property. The underlying value of Patriot's real estate investments and its income will be dependent upon the ability of the Lessees, the Operators and Wyndham to operate Patriot's hotels in a manner sufficient to maintain or increase revenues and to generate sufficient income in excess of operating expenses to make rent payments under their leases with Patriot. Income from Patriot's hotels may be adversely affected by changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, particularly in older structures, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws, civil unrest, acts of God, including earthquakes and other natural disasters (which may result in uninsured losses), acts of war and other factors which are beyond our control. Value and Illiquidity of Real Estate Real estate investments are relatively illiquid. The Companies ability to vary our portfolio in response to changes in economic and other conditions is limited. If the Companies must sell an investment, there can be no assurance that the Companies will be able to dispose of it in the time period desired or that the sales price of any investment will equal or exceed the amount of our investment. Property Taxes The Companies hotels are subject to real property taxes. The real property taxes on the Companies hotel properties may increase or decrease as property tax rates change and as the value of the properties are assessed or reassessed by taxing authorities. If property taxes increase, the Companies financial condition and results of operations could be adversely affected. Consents of Ground Lessor Required for Sale of Certain Hotels Certain of the Companies hotels are subject to ground leases with third party lessors. In addition, the Companies may acquire hotels in the future that are subject to ground leases. Any proposed sale by the Companies of a property that is subject to a ground lease or any proposed assignment of the Companies leasehold interest in the ground lease may require the consent of third party lessors. As a result, the Companies may not be able to sell, assign, transfer or convey the Companies interest in any such property in the future absent the consent of such third parties. Environmental Matters The Companies operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator knew of, or 24 was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to borrow by using such real property as collateral. Persons who arrange for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for releases of hazardous materials, including asbestos-containing materials ("ACMs"), into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. Environmental laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and these restrictions may require expenditures. In connection with the ownership and operation of any of our hotels, we may be potentially liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect our results of operations and financial condition. Phase I environmental site assessments ("ESAs") have been conducted at substantially all of our hotels by qualified independent environmental engineers. The purpose of Phase I ESAs is to identify potential sources of contamination for which any of our hotels may be responsible and to assess the status of environmental regulatory compliance. The ESAs have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any such liability or concerns. Nevertheless, it is possible that these ESAs did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware. We have not been notified by any governmental authority, and have no other knowledge of, any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of the hotels. Uninsured and Underinsured Losses Each of the Participating Leases specifies comprehensive insurance to be maintained on each of the applicable leased hotels, including liability, fire and extended coverage. The Companies believe such specified coverage is of the type and amount customarily obtained for or by an owner of hotels. Leases for subsequently acquired hotels will contain similar provisions. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods, that may be uninsurable or not economically insurable. The Companies will use discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on the Companies investments at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore the Companies economic position with respect to such property. Acquisition and Development Risks The Companies currently intend to pursue acquisitions of additional hotels and, under appropriate circumstances, may pursue development opportunities. Acquisitions entail risks that such acquired hotels will fail to perform in accordance with expectations and that estimates of the cost of improvements necessary to market, acquire and operate properties will prove inaccurate as well as general risks associated with any new real estate acquisition. In addition, hotel development is subject to numerous risks, including risks of construction delays or cost overruns that may increase project costs, new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits and the incurrence of development costs in connection with projects that are not pursued to completion. 25 Dependence on Management Contracts Management contracts are acquired, terminated, renegotiated or converted to franchise agreements in the ordinary course of our business. These management contracts generally may be terminated by the owner of the hotel property if the hotel manager fails to meet certain performance standards, if the property is sold to a third party, if the property owner defaults on indebtedness encumbering the property and/or upon a foreclosure of the property. Other grounds for termination of our upscale hotel management contracts include a hotel owner's election to close a hotel and, in the case of the Wyndham Anatole, Dallas, Texas, if James Carreker ceases to be Chairman and Chief Executive Officer of Patriot and Wyndham. The Companies can make no assurances that the Companies will be able to replace terminated management contracts, or that the terms of renegotiated or converted contracts will be as favorable as the terms that existed before such renegotiation or conversion. The Companies are also subject to the risk of deterioration in the financial condition of a hotel owner and such owner's ability to pay management fees to the Companies. In addition, in certain circumstances, the Companies may be required to make loans to or capital investments or advances in hotel properties in connection with management contracts. A material deterioration in the operating results of one or more of these hotel properties and/or a loss of the related management contracts could adversely affect the value of our investment in such hotel properties. Risks Relating to Gaming Operations Regulation of Gaming Operations We own and operate several casino gaming facilities at certain of our hotels, including El San Juan, El Conquistador, Condado Plaza and Old San Juan in Puerto Rico. Each of these gaming operations is subject to extensive licensing, permitting and regulatory requirements administered by various governmental entities. Typically, gaming regulatory authorities have broad powers with respect to the licensing of gaming operations. They may revoke, suspend, condition or limit our gaming approvals and licenses, impose substantial fines and take other actions, any of which could have a material adverse effect on our business and the value of our hotel/casinos. Our directors, officers and some key employees, are subject to licensing or suitability determinations by various gaming authorities. If any of those gaming authorities were to find someone unsuitable, we would have to sever our relationship with that person. Risks Associated with High-End Gaming The high-end gaming business is more volatile than other forms of gaming. Variability in high-end gaming could have a positive or negative impact on cash flow, earnings and other financial measures in any given quarter. In addition, a portion of our table gaming is attributable to the play of a relatively small number of international customers. The loss of, or a reduction in play of, the most significant of such customers could have an effect on our future operating results. ITEM 3. LEGAL PROCEEDINGS Except as indicated below, the Patriot, Wyndham and their respective subsidiaries are currently not subject to any material legal proceedings or claims nor, to management's knowledge, are any material legal proceedings or claims currently threatened. On January 12, 1999, a purported class action lawsuit was filed on behalf of the shareholders of Patriot and Wyndham in the Delaware Chancery Court. The lawsuit, captioned Charles Fraschilla v. Paul A. Nussbaum, et al., No. 16895NC, names as defendants the directors of Patriot, as well as the Investors. The lawsuit alleges that the Directors breached their fiduciary duties to Patriot's shareholders by "effectively selling control" of Patriot to the Investors for inadequate consideration and without having adequately considered or explored all other alternatives to this sale or having taken steps to maximize stockholder value. The lawsuit also alleges that the 26 Investors aided and abetted the Directors in their purported breaches of fiduciary duty. The plaintiffs seek an unspecified amount of monetary damages from the Directors as well as an injunction preventing the consummation of the deal with the Investors. On January 19, 1999, three nearly identical purported class action lawsuits were filed in the same court on behalf of different purported class representatives: (1) Sybil R. Meisel and Steven Langsam, Trustees, No. 16905NC; (2) Crandon Capital Partners, No. 16906NC; and (3) Robert A. Staub, No. 16907NC. In April 1999, the parties entered into a memorandum of understanding to settle these lawsuits. In the memorandum of understanding Wyndham agreed to make the proposed $300 million rights offering no earlier than 60 days after the closing of the $1 billion equity investment and to hold the rights offering open for a period of not less than 30 days. Wyndham also agreed to use good faith efforts to commence the rights offering no later than 120 days after the closing of the $1 billion equity investment. Wyndham will not be required to make the rights offering if: (1) the $1 billion equity investment is not made; (2) the SEC does not declare effective any registration statement with regard to securities of Wyndham to be offered in the rights offering; (3) there is a pending court order, motion, legal proceeding or other action to enjoin, prevent or delay the rights offering; or (4) the rights offering cannot be completed, despite Wyndham's good faith efforts, within 170 days of the closing of the $1 billion investment. The memorandum of understanding and the proposed settlement are conditioned on: . the completion of the $1 billion investment; . the drafting and execution of a stipulation of settlement and related documents; . the completion by plaintiffs of reasonable and appropriate discovery; and . final court approval of the settlement and dismissal of the action with prejudice by the court. In the stipulation, the parties will request that the court certify, for purposes of settlement, a non-opt out, binding class of all persons, exclusive of defendants and their affiliates, who owned shares of Patriot on or after December 15, 1998, and their successors in interest and transferees, through and including the closing of the $1 billion investment; that the court approve the settlement, including the release of all claims by class members against the defendants; and that the court enter final judgment dismissing with prejudice all claims of the plaintiffs and the class against the defendants. Patriot has agreed to pay an award of attorney's fees and expenses not to exceed $1.25 million to counsel for class plaintiffs if ordered by the court. On February 3, 1999, McNeill Investment Company, Inc. filed a lawsuit against the Patriot in the United States District Court for the Western District of Pennsylvania. In the lawsuit, captioned McNeill Investment Company, Inc. v. Patriot American Hospitality, Inc., No. 99-165, the plaintiff alleges that the Patriot breached its obligations under a registration rights agreement that Patriot became obligated under through its merger transaction with Interstate Hotels Corporation. The plaintiff claims approximately $9.0 million in damages. Counsel is currently conducting a factual investigation of the claims made in the complaint. Also, counsel is investigating the possibility of settlement with the plaintiff, but if the matter is not settled, it will have to be litigated. Patriot filed an answer denying all liability in response to the complaint is due on or before March 26, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Patriot and Wyndham each convened special meetings of their stockholders on March 30, 1998, which meetings were subsequently adjourned to April 2, 1998 (the "Special Stockholders Meetings"), to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated December 2, 1997, by and among Interstate Hotels Company, Patriot and Wyndham (the "Interstate Merger Agreement"). On April 2, 1998, the votes of stockholders were submitted at the Patriot and Wyndham Special Stockholders Meetings. For each of 27 Patriot and Wyndham, 63,483,644 shares were voted in favor of the Interstate Merger Agreement; 112,606 shares were voted against the Interstate Merger Agreement; and abstentions were recorded with respect to 269,293 shares. Patriot held its annual meeting of stockholders on May 28, 1998, to elect three directors to serve until 2001. Patriot's stockholders elected the following individuals to serve as directors for additional terms:
Name Votes FOR Withhold ---- ---------- -------- Paul A. Nussbaum....................................... 77,651,439 247,906 Harlan R. Crow......................................... 77,704,598 194,747 John C. Deterding...................................... 77,704,419 194,926
Wyndham held its annual meeting of stockholders on May 28, 1998, to elect three directors to serve until 2001. Wyndham's stockholders elected the following individuals to serve as directors for additional terms:
Name Votes FOR Withhold ---- ---------- -------- James D. Carreker...................................... 74,048,041 228,808 Russ Lyon, Jr. ........................................ 74,094,633 182,216 Sherwood M. Weiser..................................... 74,091,374 185,475
28 PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information On July 1, 1997, Old Patriot merged with and into Cal Jockey and Cal Jockey changed its name to Patriot American Hospitality, Inc. The Cal Jockey merger was accounted for as a reverse acquisition and, consequently, the historical financial information of Old Patriot became the historical financial information of Patriot. The following table sets forth the quarterly high and low sale prices per share as reported on the New York Stock Exchange ("NYSE") of Old Patriot Common Stock (symbol "PAH") through July 1, 1997, and the distributions paid by Old Patriot with respect to each such period. From and after July 2, 1997, the following table sets forth the quarterly high and low sale prices per share of the Paired shares as reported on the NYSE (symbol "PAH"). The sale prices and distributions in the table through July 1, 1997 have been adjusted to reflect (i) Old Patriot's 2-for-1 stock split in March 1997, (ii) the conversion of each share of Old Patriot Common Stock into 0.51895 Paired shares issued in the Cal Jockey Merger, (iii) the Companies' 1.927-for-1 stock split in July 1997 and (iv) the stock dividend of $0.44 declared on December 22, 1998 and distributed to shareholders of record on December 30, 1998.
Per Share High (1) Low (1) Dividend (1) -------- ------- ------------ 1997: First Quarter.................................. $26.38 $20.75 $0.2446 Second Quarter................................. $23.75 $18.50 $0.3005(2) Third Quarter.................................. $32.13 $22.00 $0.2446 Fourth Quarter................................. $34.50 $26.88 $0.2981(3) 1998: First Quarter.................................. $29.50 $24.00 $0.2981 Second Quarter................................. $28.25 $19.75 $0.2981 Third Quarter.................................. $24.50 $11.50 $ -- (4) Fourth Quarter................................. $13.25 $5.313 $0.4400(5)
- -------- (1) Represents shares of Old Patriot common stock for periods through July 1, 1997, and Paired shares for periods after July 1, 1997, except that dividends have been paid only on shares of Patriot common stock for periods after July 1, 1997. No dividends have been paid on shares of Wyndham common stock. (2) Dividends paid for the second quarter of 1997 include a special dividend of $0.0559 share paid by Old Patriot on June 30, 1997. To maintain its qualification as a REIT prior to consummation of the Cal Jockey Merger, Old Patriot was required to distribute to its stockholders any undistributed "real estate investment trust taxable income" of Old Patriot for Old Patriot's short taxable year ending with the consummation of the Cal Jockey Merger. (3) On December 23, 1997, Patriot declared a dividend of $0.2981 common share to holders of record as of January 8, 1998. A portion of this dividend will be used to reduce 1997 REIT taxable income of Patriot. (4) On October 5, 1998, Patriot made a significant capital contribution to Wyndham to facilitate an acquisition by Wyndham. This contribution resulted in a "deemed distribution" for tax purposes to Patriot's shareholders of common stock of $0.7081 share. No cash was actually distributed to the shareholders. However, for tax purposes the shareholders will treat the distribution as though cash was received and then contributed to Wyndham. On November 20, the Company announced that it would not declare a dividend with respect to the third quarter of 1998. (5) On December 22, 1998, Patriot declared a stock dividend of $0.44 cents per share of common stock for the fourth quarter of 1998. The dividend is payable on January 25, 1999 to shareholders of record on December 30, 1998. 29 Holders As of March 22, 1999, there were approximately 3,808 record holders of the Companies' paired shares, including shares held in "street name" by nominees who are record holders, and over 26,000 shareholders. Dividends The Board of Directors, in its sole discretion, determines the actual distribution rate based on a number of factors, including the amount of cash available for distribution, Patriot's financial condition, capital expenditure requirements for Patriot's properties, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended (the "Code") and such other factors as the Board of Directors deems relevant. Patriot's actual cash available for distribution is affected by a number of factors, including changes in occupancy or ADR at its hotels. In order to maintain its qualification as a REIT, Patriot must make annual distributions to its shareholders of at least 95% of its taxable income (excluding net capital gains). Under certain circumstances, Patriot may be required to make distributions in excess of cash available for distribution in order to meet such distribution requirements. In such event, Patriot would seek to borrow the amount of the deficiency or sell assets to obtain the cash necessary to make distributions to retain its qualification as a REIT for federal income tax purposes. If Patriot's status as a REIT is terminated for any reason, including the result of the proposed equity investment of up to $1 billion in the Companies, the Companies will no longer be required to pay dividends to shareholders and the amount of such dividends paid is likely to be reduced or eliminated. Recent Sales of Unregistered Securities None ITEM 6. SELECTED FINANCIAL INFORMATION The following tables set forth selected separate and combined historical financial information for Patriot and Wyndham. The following financial information should be read in conjunction with, and is qualified in its entirety by, the historical financial statements and notes thereto of Patriot and Wyndham included elsewhere in this Annual Report on Form 10-K. 30 PATRIOT AND WYNDHAM SELECTED CONDENSED COMBINED HISTORICAL FINANCIAL DATA
Period October 2, 1995 Year Ended December 31, (Inception of ---------------------------------- Operations) through 1998 1997 1996 December 31, 1995 ---------- ----------- --------- ------------------- (in thousands, except per share data) Operating Data: Total revenue........... $2,056,341 $ 335,035 $ 76,493 $ 11,095 (Loss) income before income tax provision, minority interest and extraordinary item..... (112,508) 4,142 44,813 7,064 (Loss) income before extraordinary item..... (126,406) 362 37,991 6,096 Net (loss) income....... $ (158,223) $ (2,172) $ 37,991 $ 5,359 Per Share Data (1): Basic earnings per share: (Loss) income before extraordinary item... $ (1.13) $ 0.01 $ 0.84 $ 0.16 Extraordinary item, net of minority interest............. (0.23) (0.04) -- (0.02) ---------- ----------- --------- --------- Net (loss) income per paired share......... $ (1.36) $ (0.03) $ 0.84 $ 0.14 ========== =========== ========= ========= Diluted (loss) earnings per share (2).......... $ (2.57) $ (0.03) $ 0.83 $ 0.14 ========== =========== ========= ========= Dividends per paired share (3).............. $ 1.0362 $ 1.0878 $ 0.9154 $ 0.2236 ========== =========== ========= ========= Cash Flow Data: Cash provided by operating activities... $ 244,493 $ 108,110 $ 61,196 $ 7,618 Cash used in investing activities............. (2,076,359) (1,202,124) (419,685) (306,948) Cash provided by financing activities... 1,943,384 1,134,846 360,324 304,099 As of December 31, ------------------------------------------------------- 1998 1997 1996 1995 ---------- ----------- --------- ------------------- (in thousands) Balance Sheet Data: Investment in real estate and related improvements and land held for development, at cost, net........... $5,585,616 $ 2,044,649 $ 641,825 $ 265,759 Total assets............ 7,415,670 2,507,853 760,931 324,224 Total debt.............. 3,857,521 1,112,709 214,339 9,500 Minority interest in Operating Partnerships........... 253,970 220,177 68,562 41,522 Minority interest in consolidated subsidiaries........... 229,537 49,694 11,711 -- Stockholders' equity.... 2,603,037 989,892 437,039 261,778 Period October 2, 1995 Year Ended December 31, (Inception of ---------------------------------- Operations) through 1998 1997 1996 December 31, 1995 ---------- ----------- --------- ------------------- (in thousands) Other Data: Funds from operations (4).................... $ 263,595 $ 111,542 $ 64,463 $ 9,798 Cash available for distribution (5)....... 217,885 94,396 55,132 8,603 Weighted average number of common shares and OP units outstanding (6).. 163,532 76,040 52,259 44,060 Ratio of earnings to fixed charges ......... 0.59 1.08 7.00 80.37
31 PATRIOT SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL DATA (in thousands, except per share amounts)
Period October 2, 1995 Year Ended December 31, (Inception of --------------------------- Operations) through 1998 1997 1996 December 31, 1995 -------- -------- ------- ------------------- Operating Data: Total revenue.................. $595,410 $185,554 $76,493 $11,095 (Loss) income before income tax, minority interests and extraordinary item............ (3,404) 3,769 44,813 7,064 (Loss) income before extraordinary item............ (14,328) 382 37,991 6,096 Net (loss) income.............. $(44,888) $ (2,152) $37,991 $ 5,359 Per Share Data (1): Basic earnings per share: (Loss) income before extraordinary item.......... $ (0.30) $ 0.01 $ 0.84 $ 0.16 Extraordinary item, net of minority interests.......... (0.22) (0.04) -- (0.02) -------- -------- ------- ------- Net (loss) income per common share....................... $ (0.52) $ (0.03) $ 0.84 $ 0.14 ======== ======== ======= ======= Diluted (loss) earnings per share (2)..................... $ (1.73) $ (0.03) $ 0.83 $ 0.14 ======== ======== ======= ======= Dividends per common share (3)........................... $ 1.0362 $ 1.0878 $0.9154 $0.2236 ======== ======== ======= =======
WYNHDAM INTERNATIONAL SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL DATA (in thousands, except per share amounts)
Year Six Months Ended Ended December 31, December 31, 1998 1997 ------------ ------------ Operating Data: Total Revenue....................................... $2,002,227 $204,134 (Loss) income before income tax provision, minority interests and extraordinary item................... (77,826) 373 (Loss) before extraordinary item.................... (111,162) (20) Net loss............................................ $ (112,419) $ (20) Per Share Data (1): Basic loss per share: (Loss) before extraordinary item.................... $ (0.83) $ -- Extraordinary item, net of minority interest........ (0.01) -- ---------- -------- Loss per paired share............................... $ (0.84) $ -- ========== ======== Diluted loss per share (2).......................... $ (0.84) $ -- ========== ======== Dividend per common share........................... $ -- $ -- ========== ========
See accompanying notes on following page. 32 Notes to Patriot and Wyndham Selected Financial Information (1) On January 30, 1997, the Old Patriot Board of Directors declared a 2- for-1 stock split effected in the form of a stock dividend on March 18, 1997 to stockholders of record on March 7, 1997. On July 1, 1997, by operation of the Cal Jockey merger, each issued and outstanding share of Old Patriot Common Stock was converted into 0.51895 paired shares. In addition, on July 10, 1997, the respective Boards of Directors of Patriot and Wyndham declared a 1.927- for-1 stock split on their shares of common stock effected in the form of a stock dividend distributed on July 25, 1997 to shareholders of record on July 15, 1997. All references herein to the number of shares, per share amounts and market prices of the paired shares and options to purchase paired shares have been restated to reflect the impact of the Cal Jockey Merger and the above- described stock splits, as applicable. In addition, 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. The earnings per share amounts presented herein have been restated to reflect the impact of Statement 128. On December 21, 1998, Patriot declared a stock dividend of $0.44 cents per share of common stock for the fourth quarter ended December 31, 1998 (the "Dividend"). The Dividend was payable on January 25, 1999 to shareholders of record on December 30, 1998. Each shareholder received the option to receive the Dividend in the form of additional paired shares or shares of Series B Cumulative Perpetual Preferred Stock, par value $0.01 per share of Patriot. Earnings per common share, weighted average shares outstanding and all stock option activity have been restated to reflect the stock dividend. (2) For 1998 the dilutive effect of unvested stock grants of 880,000 the option to purchase common stock of 753,000 and shares issued in connection with forward equity contracts of 2,507,000 and 6,613,000 preferred shares were not included in the computation of diluted earnings per share for the year ended December 31, 1998 because they are anti-dilutive. For 1997, the dilutive effect of unvested stock grants of 804 and the option to purchase common stock of 1,017,000 were excluded in the computation of diluted earnings per share for the year ended December 31, 1997 because they are anti-dilutive. (3) Dividends paid for the year ended December 31, 1997 include a special dividend of $0.06 per share paid by Old Patriot on June 30, 1997. To maintain its qualification as a REIT prior to consummation of the Cal Jockey merger, Old Patriot was required to distribute to its shareholders any undistributed "real estate investment trust taxable income" of Old Patriot for Old Patriot's short taxable year ending with the consummation of the Cal Jockey merger. No dividends have been paid by Wyndham for the six months ended December 31, 1997. (4) In accordance with the resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), funds from operations ("FFO") represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains or losses from debt restructuring or sales of property, plus depreciation of real property, and after adjustments for unconsolidated partnerships, joint ventures and corporations. Adjustments for Patriot's unconsolidated subsidiaries are calculated to reflect FFO on the same basis. Patriot and Wyndham have also made certain adjustments to FFO for real estate related amortization expense and the write off of certain costs of acquiring leaseholds. FFO should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. Under the Participating Leases, Patriot is obligated to establish a reserve for capital improvements at its hotels (including the replacement or refurbishment of FF&E) and to pay real estate and personal property taxes and casualty insurance. Management believes that FFO is helpful to investors 33 as a measure of performance of an equity REIT, because, along with cash flows from operating activities, investing activities and financing activities, it provides investors with an understanding of the ability of Patriot and Wyndham to incur and service debt and to make capital expenditures. Patriot and Wyndham's FFO may not be comparable to FFO reported by other REITs due to varying interpretations of the NAREIT definition. In order to facilitate a clear understanding of its operating results, management believes FFO should be examined in conjunction with net income (loss) as presented in the audited consolidated combined financial statements of the Companies. See detailed FFO calculation on page 53. (5) Cash available for distributions represents FFO, as adjusted for certain non-cash items (e.g., non-real estate related depreciation and amortization), less reserves for capital expenditures. The reconciliation from FFO to cash available for distribution is as follows:
Period October 2, 1995 (Inception of Operations) Year ended December 31, through ---------------------------- December 31, 1998 1997 1996 1995 -------- -------- -------- --------------- FFO.......................... $263,595 $111,542 $ 64,463 $ 9,798 Amortization of Unearned Compensation................ 7,622 4,686 1,068 71 Non-Real Estate Related Depreciation and Amortization................ 28,660 2,543 495 93 FF&E Reserve ................ (81,992) (24,375) (10,894) (1,359) -------- -------- -------- ------- Cash Available for Distribution................ $217,886 $ 94,396 $ 55,132 $ 8,603 ======== ======== ======== =======
(6) The number of limited partnership units of the Operating Partnerships ("OP units") used in the calculation is based on the equivalent number of paired shares issuable upon redemption (after giving effect to the change in the OP unit conversion factor which coincides with the 2-for-1 stock split, the conversion of shares in the Cal Jockey merger and the 1.927-for-1 stock split). 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements with respect to future events, including, without limitation, statements regarding availability of equity or debt financing, the Companies' ability to successfully refinance or extend the maturity of existing indebtedness, and the Companies' ability to successfully negotiate a settlement to the forward equity contracts in this form 10-K constitute "forward-looking statements" as that term is defined under (S)21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "intend", estimate", and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Although forward- looking statements reflect management's good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievement of the Companies to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Companies undertake no obligation to publicly update or revise any forward- looking statement, whether as a result of new information, future events or otherwise. Certain factors that might cause a difference include, but are not limited to, risks associated with the availability of equity or debt financing at terms and conditions favorable to the Companies, the willingness of the Companies' existing lenders to refinance, extend or amend the terms of existing indebtedness, the willingness of the counterparties to the Companies' forward equity contracts to enter into settlements regarding those agreements; the Companies' ability to effect sales of assets on favorable terms and conditions; risks associated with the hotel industry and real estate markets in general; and risks associated with debt financing. BACKGROUND Organization Patriot American Hospitality, Inc. ("Old Patriot") was formed April 17, 1995 as a self-administered real estate investment trust ("REIT"). The Virginia corporation was formed for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Patriot completed an initial public offering of shares of common stock and commenced operations. Between October 2, 1995 and July 1, 1997, Old Patriot acquired interests in 56 hotel properties. These hotels were leased to various third party lessees. On July 1, 1997, Patriot merged with and into California Jockey Club, with Cal Jockey being the surviving legal entity, hereinafter referred to as the "Cal Jockey merger". Cal Jockey's shares of common stock are paired and trade together with the shares of common stock of Bay Meadows Operating Company ("Bay Meadows") as a single unit pursuant to a stock pairing agreement. In connection with the Cal Jockey merger, Cal Jockey changed its name to "Patriot American Hospitality, Inc." ("Patriot") and Bay Meadows changed its name to "Patriot American Hospitality Operating Company". Subsequent to year end, as a result of the merger of Wyndham Hotel Corporation with and into Patriot as discussed below, Patriot Operating Company changed its name to Wyndham International, Inc. and is referred to herein, collectively with its subsidiaries, as "Wyndham". The term "Companies" as used herein includes Patriot, Wyndham and their respective subsidiaries. Generally, Patriot owns and leases hotels to Wyndham, which is responsible for managing a majority of the hotels. In order for Patriot to qualify as a REIT under the Internal Revenue Code of 1986, Patriot leases a substantial majority of its hotels to Wyndham or to other third party leasees who are responsible for operating the hotels. The paired share structure facilitated the Companies' strategy to become a fully-integrated, multi-brand, multi- product, multi-tiered hotel operating company. Following the merger with and into California Jockey Club and the creation of Patriot paired shares, the Companies acquired major hotel operating companies and brands. Patriot's ability to utilize the paired share structure was limited as a result of tax legislation adopted in July 1998. 35 Subsequent to the Cal Jockey merger through December 31, 1998, the Companies acquired ownership and leasehold interests in an additional 243 hotels through the Wyndham merger, the WHG merger, the Arcadian acquisition, the Interstate merger, the Summerfield acquisition and the CHCI merger. At December 31, 1998, the Companies had 173 management and franchise agreements through these mergers and acquisitions. See Items 1 and 2, "Business and Properties," for a more detailed discussion of these merger agreements. As of December 31, 1998, Patriot and Wyndham, either directly or through the Operating Partnerships and other subsidiaries, own interests in 178 hotels with an aggregate of over 43,800 rooms (excluding hotels under development). The Companies' portfolio consists of proprietary brand hotels including; WyndhamSM, Wyndham Hotels & Resorts, Wyndham Garden Hotels(R), Wyndham Grand Heritage(R), Grand Bay Hotels & Resorts, Summerfield Suites, Sierra Suites, Malmaison and Clubhouse. These hotels are diversified by brand affiliation, service level, price point and location and most serve primarily major U.S. business centers, including Atlanta, Boston, Chicago, Cleveland, Dallas, Denver, Houston, Los Angeles, Miami, Minneapolis, San Diego, San Francisco and Seattle as well as the United Kingdom. Additionally, the Companies offer luxury and upscale resort accommodations through its luxury Grand Bay brand and its upscale Wyndham Resort product, situated in major tourist and destination locations. As of December 31, 1998, the Companies proprietary brand portfolio of owned hotels include 50 Wyndhams (including Wyndham Resorts, Wyndham Grand Heritage and Wyndham Gardens Hotels), 6 Grand Bay, 5 Summerfield Suites, 4 Malmaison Hotels and 8 ClubHouse Inns. Additionally, the Companies have 94 non-proprietary branded hotels which consists of 87 full service hotels, and 3 resort hotels, 4 limited service hotels. All but 5 of these hotels are operated under franchise or brand affiliations with nationally recognized hotel companies, including Marriott(R), Crowne Plaza(R), Hilton(R), Hyatt(R), Radisson(R), Holiday Inn(R), Doubletree(R), Embassy Suites(R), Ramada(R), Four Points by Sheraton(R), WestCoast(R), Hampton Inn(R), and Courtyard by Marriott(R). The Companies also leases 121 hotels from third parties, manages 161 hotels for independent owners and franchises 12 hotels. Additionally, the Companies have 10 hotels under development which are expected to open in mid to late 1999. All of the leased hotels are managed by Wyndham or its subsidiaries with 39 franchised under proprietary brands of the Companies. Patriot leases each of its hotels, except those hotels which are separately owned through special purpose entities, to Wyndham or to third party lessees who are responsible for operating the hotels. As of December 31, 1998, 203 owned and leased hotels were leased to Wyndham and its affiliates and 5 hotels were leased to third party lessees. Certain hotel acquisitions were structured without lessees and are managed directly by Wyndham or other third party operators. Wyndham manages 185 of its hotels through certain of its hotel management subsidiaries and has entered into separate management agreements with third party hotel operators to manage 18 of its hotels. 36 PATRIOT AMERICAN HOSPITALITY, INC. Results of Operations: Year Ended December 31, 1998 Compared with Year Ended December 31, 1997 Patriot's Participating Lease revenue from the lessees (including Wyndham) for the year ended December 31, 1998 increased 220% from $180,451,000 in 1997 to $578,029,000 in 1998. This increase is primarily due to the net increase in owned and leased hotel properties to 299 at December 31, 1998 from 91 at December 31, 1997. Also included in Participating Lease revenue is the income related to the lease of the Racecourse facility and land to Wyndham which increased from $2,792,000 for the year ending December 31, 1997 to $5,594,000 for the year ended December 31, 1998. This increase is due to 1998 including a full year of revenue related to the racecourse, 1997 included only the period subsequent to the acquisition of Cal Jockey by Patriot in July 1997. Interest and other income increased from $5,103,000 in 1997 to $17,381,000 in 1998 which is primarily attributable to the mergers and acquisitions of Interstate, Summerfield, Wyndham Hotel Corporation and Arcadian during 1998, the subscription notes payable from Wyndham and interest and dividend income earned on cash investments. Real estate and personal property taxes and casualty insurance was $55,352,000 for the year ended December 31, 1998, compared to $17,958,000 for the year ended December 31, 1997. This increase is primarily due to the increase in owned and leased hotel properties to 299 at December 31, 1998 from 91 at December 31, 1997. General and administrative expenses were $29,784,000 for the year ended December 31, 1998, compared to $11,157,000 for 1997. The increase is primarily attributable to additional general and administrative expenses incurred related to the growth of the Company's portfolio during 1998 of which the largest component is salaries and wages. General and administrative expenses also include the amortization of unearned stock compensation of $7,622,000 for 1998 which increased from $4,686,000 for 1997. This increase is due to a full year's amortization in 1998 of stock grants issued in 1997. Also included in general and administrative expenses are the costs associated with evaluating properties and companies which were ultimately not acquired of $2,455,000 in 1998 increasing from $1,068,000 in 1997. Although general and administrative expenses increase in dollar value in 1998 over 1997, the expenses expressed as a percentage of total revenues decreased to 5.0% in 1998 from 6.0% in 1997. Ground lease expense increased from $4,117,000 for the year ended December 31, 1997 to $44,972,000 for the year ended December 31, 1998. This increase is attributable to the acquisition of leasehold interests in hotel properties during 1998. Interest expense for the year ended December 31, 1998 was $245,205,000 compared to $51,000,000 in 1997. The primary components of this increase are an increase of approximately $126,355,000 related to additional borrowings, the Credit Facility and Term Loans, an increase of approximately $33,551,000 related to additional mortgage notes, an increase of approximately $22,319,000 related to additional amortization of deferred financing costs and an increase of approximately $21,530,000 related to subscription notes due to Wyndham, other amounts due to Wyndham, unsecured debt, swap arrangements and capital lease obligations. These increases are the result of the increase in Patriot's outstanding debt obligations from $1,112,709,000 as of December 31, 1997 to $3,612,076,000 as of December 31, 1998. The increase in the Company's debt outstanding is the result of borrowings to fund the cash purchase prices of acquisitions of hotel properties and companies during 1998 and the assumption of debt in connection with the various mergers executed during 1998. Additionally, Patriot capitalized interest totaling $12,112,000 and $2,562,000 for the years ended December 31, 1998 and 1997, respectively, associated with major renovations of certain hotel properties. 37 In connection with Patriot's acquisition of 9 leasehold interests and certain license agreements in 1998 for hotels that Patriot owns, Patriot recognized expense of $11,686,000 related to the cost of acquiring these leasehold interests. In connection with Patriot's acquisition of eight leasehold interests in 1997 for hotels that Patriot owns and leased to CHC Lease Partners, Patriot recognized expense of $54,499,000 related to the cost of acquiring these leasehold interests. During 1998, Patriot recorded a $49,334,000 one-time charge to earnings as a result of the settlement of three treasury interest rate lock agreements. These agreements were executed to protect the Companies against the possibility of rising interest rates in anticipation of closing mortgage loans in the near future. Under the rate lock agreements, Patriot received or made payments based on the difference between specified interest rates, 6.06%, 6.07% and 5.62%, and the actual 10-year U.S. Treasury interest rate on a principal amount of $525,000,000. Due to the substantial downward movement in the underlying treasury security market and the Company's liquidity situation, the agreements were settled and the settlement cost was recorded as a charge against earnings. In connection with the sale of three assets in 1998, Patriot recognized a loss on sale of assets of $9,453,000 based on the excess book value over cash proceeds received in the sale. For the year ended December 31, 1998, Patriot recognized approximately $27,897,000 of impairment losses related to assets held for sale. In accordance with SFAS No. 121, when management identifies an asset held for sale a fair value, less cost to sell, is estimated. If the fair value of the asset is less than the carrying amount, a reserve for impairment is established. Depreciation and amortization expense was $161,857,000 for the year ended December 31, 1998, compared to $49,069,000 for the same period in 1997. This increase is primarily due to the net increase in owned and leased hotel properties to 299 at December 31, 1998 from 91 at December 31, 1997. Patriot's share of income from unconsolidated subsidiaries increased to $36,726,000 for the year ended December 31, 1998, compared to $6,015,000 in 1997. This increase is due to unconsolidated subsidiaries acquired through various mergers and acquisitions during 1998. Minority interest share of income in the Patriot Partnership was $98,000 and $1,713,000 for the years ended December 31, 1998 and 1997, respectively. The decrease is due to the dilution of the minority interest as a result of the common shares issued in connection with the various mergers occurring during 1998 and certain non-recurring expenses recognized by the Patriot Partnership during 1998. Minority interest share of income in Patriot's other consolidated subsidiaries was $8,084,000 in 1998 and $1,674,000 in 1997. The increase is due to the various mergers and acquisitions during 1998. Extraordinary items for debt extinguishment increased from $2,534,000 in 1997 to $30,560,000 in 1998. The increase is due to the repayment of certain debt obligations of Old Wyndham, Interstate and Summerfield in 1998. In connection with these repayments, Patriot incurred prepayment penalties and wrote-off the remaining balance of unamortized deferred financing costs associated with such debt. In 1997, the extraordinary item relates to the write-off of the remaining balance of unamortized deferred financing costs associated with the Old Credit Facility which was repaid in 1997. As a result of the factors discussed above, primarily due to non-recurring charges and the costs of acquiring leaseholds, net loss was $44,888,000 for the year ended December 31, 1998, as compared to net loss of $2,152,000 for the year ended December 31, 1997. 38 Results of Operations: Year Ended December 31, 1997 Compared with Year Ended December 31, 1996 Patriot's Participating Lease revenue from the lessees (including Wyndham) for the year ended December 31, 1997 increased 137.7% from $75,893,000 in 1996 to $180,451,000 in 1997. This increase is primarily due to the net increase in owned hotel properties to 91 at December 31, 1997 from 46 at December 31, 1996. Also included in Participating Lease revenue for the year ending December 31, 1997 is the income related to the lease of the Racecourse facility and land to Wyndham of $2,792,000 which was acquired during 1997. Interest and other income increased from $600,000 in 1996 to $5,103,000 in 1997 which is primarily attributable to additional investments in mortgage notes receivable during 1997 and interest and dividend income earned on cash investments. Real estate and personal property taxes and casualty insurance was $17,958,000 for the year ended December 31, 1997, compared to $7,150,000 for the year ended December 31, 1996. This increase is primarily due to the net increase in owned hotel properties to 91 at December 31, 1997 from 46 at December 31, 1996. General and administrative expenses were $11,157,000 for the year ended December 31, 1997, compared to $4,500,000 for 1996. The increase is primarily attributable to additional general and administrative expenses incurred related to the growth of the Company's portfolio during 1997 of which the largest component is salaries and wages. Also included in general and administrative expenses is the amortization of unearned stock compensation which increased to $4,686,000 for 1997 from $1,068,000 for 1996. This increase is due to a full year's amortization in 1997 of stock grants issued in 1996 as well as amortization of stock grants issued in 1997. Also included in general and administrative expenses are the costs associated with evaluating properties and companies which were ultimately not acquired of $1,068,000 in 1997 which increased from $173,000 in 1996. Although general and administrative expenses increased in dollar value in 1997 over 1996, the expenses expressed as a percentage of total revenues remained relatively constant at 6.0% in 1997 and 5.8% in 1996. Ground lease expense increased from $1,075,000 for the year ended December 31, 1996 to $4,117,000 for the year ended December 31, 1997. This increase is primarily due to the ground lease payments for the Race course facility acquired in July of 1997. Interest expense for the year ended December 31, 1997 was $51,000,000 compared to $7,380,000 in 1996. The primary components of this increase are an increase of approximately $29,466,000 related to borrowings under the Credit Facility and Term Loan an increase of approximately $12,585,000 related to additional borrowings under the Old Line of Credit and mortgage financing obtained in 1997, an increase of approximately $2,150,000 related to amortization of deferred financing costs and an increase of approximately $1,890,000 related to additional subscription notes due to Wyndham and other miscellaneous note and commitments payable (including swap arrangements) entered into in 1997. These increases are the result of the increase in Patriot's outstanding debt obligations from $214,339,000 as of December 31, 1996 to $1,112,709,000 at December 31, 1997. The increase in the Company's debt outstanding is the result of borrowings to fund the cash purchase prices of acquisitions of hotel properties and companies during 1997 and the assumption of debt in connection with these acquisitions. Additionally, Patriot capitalized interest totaling $2,562,000 and $91,000 for the years ended December 31, 1997 and 1996, respectively, associated with major renovations of certain hotel properties. In connection with Patriot's acquisition of eight leasehold interests in 1997 for hotels that Patriot owns and leased to CHC Lease Partners, Patriot recognized expense of $54,499,000 related to the cost of acquiring these leasehold interests. Depreciation and amortization expense was $49,069,000 for the year ended December 31, 1997, compared to $17,420,000 for the same period in 1996. This increase is primarily due to the net increase in owned hotel properties to 91 at December 31, 1997 from 46 at December 31, 1996. 39 Minority interest share of income in the Patriot Partnership was $1,713,000 and $6,767,000 for the years ended December 31, 1997 and 1996, respectively. The decrease is due to the dilution of the minority interest as a result of the common shares issued in connection with the various mergers and common stock offerings occurring during 1997. Minority interest share of income in Patriot's other consolidated subsidiaries was $1,674,000 in 1997 and $55,000 in 1996. The increase is due to the acquisition of properties during 1997 in which minority interest holders owned an interest. Concurrent with the repayment of the Old Line of Credit, Patriot wrote off the remaining balance of unamortized deferred financing costs associated with the Old Line of Credit in the amount of $2,534,000. This amount, net of minority interest share of the net loss, has been reported as an extraordinary item for the year ended December 31, 1997. No such write-offs were incurred during 1996. As a result of the factors above, primarily due to the costs of acquiring leaseholds, net loss was $2,152,000 for the year ended December 31, 1997, compared to net income of $37,991,000 for the year ended December 31, 1996. Results of Operations: Year Ended December 31, 1996 Compared with the Period October 2, 1995 (inception of operations) through December 31, 1995 Old Patriot completed its initial public offering of common stock on October 2, 1995 and commenced operations with the acquisition of 20 hotels. Because 1995 was a short fiscal year for Patriot, the operating results for the year ended December 31, 1996 are not directly comparable to 1995. For the year ended December 31, 1996, Patriot's Participating Lease revenue from the Lessees was $75,893,000, compared $10,582,000 in 1995. Interest and other income was $600,000 for the year ended December 31, 1996, compared to $513,000 in 1995. In 1995, interest and other income consisted primarily of interest earned on invested cash balances resulting from the net proceeds of the initial public offering. For the year ended December 31, 1996 as compared to the period October 2, 1995 (inception of operations) through December 31, 1995, Patriot experienced similar increases in expenses as a result of the short fiscal year for Patriot in 1995, as discussed above. General and administrative expenses were $4,500,000 for the year ended December 31, 1996, compared to $607,000 for 1995. General and administrative expenses include the amortization of unearned stock compensation of $1,068,000 for 1996 and $71,000 for 1995. Ground lease expense totaled $1,075,000 in 1996 (none in 1995). Real estate and personal property taxes and insurance was $7,150,000 for 1996, compared to $901,000 for 1995 Patriot reported $7,380,000 of interest expense for the year ended December 31, 1996, compared to $89,000 in 1995. Patriot's outstanding debt obligations as of December 31, 1996 and 1995 were approximately $214,339,000 and $9,500,000, respectively. Interest expense in 1996 consisted primarily of $6,755,000 of interest incurred on the Revolving Credit Facility, the Old Line of Credit and mortgage note balances outstanding and $431,000 of amortization of deferred financing costs. Interest expense in 1995 consisted of $62,000 of interest incurred on the Old Line of Credit balance and $27,000 of amortization of deferred financing costs. Depreciation and amortization expense was $17,420,000 for 1996, compared to $2,590,000 for 1995. Patriot's share of income from unconsolidated subsidiaries was $5,845,000 in 1996, compared to $156,000 in 1995. 40 Minority interest's share of income of the REIT Partnership was $6,767,000 for the year ended December 31, 1996, compared to $968,000 in 1995. Minority interest's share of income of other consolidated Patriot subsidiaries was $55,000 for 1996 (none in 1995). Patriot reported extraordinary losses in 1995 totaling $737,000 (net of the minority interest share of the loss) related to the pay-off of assumed mortgage debt on hotel properties acquired. As a result, net income was $37,991,000 for the year ended December 31, 1996, compared to net income of $5,359,000 for the period October 2, 1995 (inception of operations) through December 31, 1995. WYNDHAM INTERNATIONAL, INC. Results of Operations: Year Ended December 31, 1998 Compared with Six Months Ended December 31, 1997 Concurrent with the closing of the Cal Jockey merger, the entity now known as Wyndham began leasing four hotels from the Patriot Partnership and commenced its hotel management operations on July 1, 1997. During the remainder of 1997, Wyndham acquired the leases for 51 additional Patriot hotels. At December 31, 1997, Wyndham leased 55 hotels from PAH, managing 24 of those hotels, and managed 27 for third parties. As of December 31, 1998, Wyndham leased 203 hotels from Patriot, managing 185 of those hotels, and manages 163 hotels for third parties. Hotel revenues were $1,842,682,000 for the year ended December 31, 1998 as compared to $167,727,000 for the six months ended December 31, 1997. The increase in revenues is due not only to the increase in the number of leased hotels from 51 in 1997 to 203 in 1998, but also due to the increases in REVPAR experienced by the hotel porfolio as a whole (see statistical information). Hotel expenses increased to $1,251,548,000 for the year ended December 31, 1998 as compared to $118,317,000 for the six months ended December 31, 1997. The increases are due to the full year's results in 1998 for hotels leased during 1997 and the additional hotel leases acquired during 1998. As a percentage of hotel revenues, hotel expenses decreased from 70.5% for the 1997 period to 67.9% for 1998 due to the cyclical nature of the revenue stream. The first six months of revenues are higher, but fixed expenses remain constant, which caused the percentage of expenses to revenue to be higher in 1997. Racecourse facility revenue increased from $26,344,000 for the six months ended December 31, 1997 to $51,259,000 for the year ended December 31, 1998. Racecourse facility expenses increased from $24,245,000 for the six months ended December 31, 1997 to $43,198,000 for the year ended December 31, 1998. The increase is due to the number of race days in 1998 of 106 as opposed to the number of race days in 1997 of 63. As a percentage of racecourse facility revenues, racecourse facility expenses decreased from 92.0% for the 1997 period to 84.3% for 1998 due to reductions in administrative payroll expenses. Management fee and service fee income increased from $7,088,000 for the six months ended December 31, 1997 to $89,983,000 for the year ended December 31, 1998. This increase is primarily the result of the acquisition of third party management contracts during 1998. Interest and other income increased from $2,975,000 for the six months ended December 31, 1997 to $18,303,000 for the year ended December 31, 1998. The increase is primarily attributable to the mergers and acquisitions of the hotel management and related businesses of Interstate, Summerfield, Wyndham and Arcadian during 1998, the subscription notes payable from Patriot and interest and dividend income earned on cash investments. General and administrative expenses increased from $6,024,000 for the six months ended December 31, 1997 to $87,882,000 for the year ended December 31, 1998 of which salaries and wages is the major component. This increase is due primarily to the overhead required due to the growth in portfolio of managed and leased hotels during 1998. Also, Wyndham recorded costs associated with evaluating properties and companies which were ultimately not acquired of $12,358,000. 41 Wyndham acquired 17 leaseholds of hotels owned by Patriot during the year ended December 31, 1998 resulting in cost of acquiring leaseholds of approximately $52,721,000. For the year ended December 31, 1998, Wyndham recognized approximately $23,184,000 of impairment losses related to assets held for sale. In accordance with SFAS No. 121, when management identifies an asset held for sale a fair value is estimated. If the fair value of the asset is less than the carrying amount, a reserve for impairment is established. Depreciation and amortization expense was $69,375,000 for the year ended December 31, 1998, compared to $3,616,000 for the six months ended December 31, 1997. This increase is primarily due to amortization of goodwill, management contracts and trade names of approximately $39,286,000. It also includes approximately $30,089,000 in depreciation and amortization, predominantly from the WHG acquisition as well as other miscellaneous acquisitions. Participating Lease expense increased to $519,589,000 for the year ended December 31, 1998 from $50,626,000 for the six months ended December 31, 1997. The increase is due to a full year's expense for the leases acquired in 1997 and the expense related to the leases acquired in 1998. As a percentage of hotel revenues, Participating Lease expense remained constant after accounting for the effect of eliminating lease expense and lease revenue with Wyndham. Interest expense increased to $35,690,000 for the year ended December 31, 1998 from $933,000 for the six months ended December 31, 1997. The increase is primarily due to approximately $19,555,000 in interest expense and loan amortization for the WHG assets, the subscription and other notes with Patriot of approximately $12,493,000 and approximately $1,977,000 in interest expense on the capital lease of the Harbour Island Hotel. Wyndham's share of income from unconsolidated subsidiaries was $3,134,000 during 1998 resulting from the acquisition of hotels owned through unconsolidated subsidiaries during 1998. The provision for income taxes increased from $481,000 for the six months ended December 31, 1997 to $14,381,000 for the year ended December 31, 1998. The increase is due to the operation of certain special purpose Wyndham controlled subsidiaries which separately report and pay taxes on their taxable income. For federal income tax purposes, the taxable income from these Wyndham controlled subsidiaries can not be consolidated with Wyndham's taxable income or loss and can not be offset by net operating losses created at Wyndham. Minority interest's share of loss in the Wyndham Partnership was $12,750,000 for the year ended December 31, 1998 and $29,000 for the six months ended December 31, 1997. The increase is due to the increase in the net loss before minority interest resulting from the increases in the revenues and expenses discussed above. Minority interest's share of income in Wyndham's other consolidated subsidiaries was $31,705,000 for the year ended December 31, 1998 and the minority interest's share of the loss was $59,000 for the six months ended December 31, 1997. The increase is due to Patriot's 99.0% ownership of most of the decontrolled subsidiaries consolidated by Wyndham. As a result of the factors discussed above, primarily due to the non- recurring charges and the costs of acquiring leaseholds, net loss was $112,419,000 for the year ended December 31, 1998, as compared to net loss of $20,000 for the six months ended December 31, 1997. Results of Reporting Segments: For the year ended December 31, 1998 Compared with the year ended December 31, 1997 The Companies' management reviews Patriot's and Wyndham's results of operations on a combined basis. Patriot's revenues and the majority of its expenses are classified in the "other" reportable segment. Patriot 42 classifies real estate and personal property taxes and casualty insurance and ground lease expense with their related hotel operations. Wyndham's results of operations are classified into all six reportable segments. The results of reporting segments discussion includes 12 months of 1998 for Patriot and Wyndham, 12 months of 1997 for Patriot and 6 months of 1997 for Wyndham. The Companies manage the business in six reportable segments. Those segments include Wyndham hotels, resort properties, all suite properties, other proprietary branded properties, non-proprietary branded properties and other. Wyndham hotels properties include Wyndham Hotels, Wyndham Gardens and Wyndham Grand Heritage and represent approximately 29.7% and 3.2% of total revenue for 1998 and 1997, respectively. Total revenue was $610,523,000 for the year ended December 31, 1998 compared to $10,711,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for the Wyndham hotels was $153,723,000 for the year ended December 31, 1998 compared to $2,388,000 for 1997. Resort properties including Grand Bay and Wyndham, represent approximately 15.4% and 9.1% of total revenue for 1998 and 1997, respectively. Total revenue was $315,674,000 for the year ended December 31, 1998 compared to $30,334,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for the resort properties was $76,349,000 for the year ended December 31, 1998 compared to $6,628,000 for 1997. All suite properties, including Summerfield and Sierra, represent approximately 3.6% of total revenue for 1998. Patriot purchased 4 properties and Patriot and Wyndham acquired 26 leaseholds in 1998 and leased them to Wyndham. Total revenue was $74,333,000 for the year ended December 31, 1998 and operating income was $14,690,000 in 1998. Other proprietary branded properties including Malmaison, Grand Heritage, Clubhouse and hotels acquired in the Arcadian acquisition, represent approximately 3.9% and 2.9% of total revenue for 1998 and 1997, respectively. Total revenue was $80,998,000 for the year ended December 31, 1998 compared to $9,595,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for these properties was $26,492,000 for the year ended December 31, 1998 compared to $1,436,000 for 1997. Non-proprietary branded properties including Hampton, Hilton, Holiday Inn, Marriott, Ramada, Radisson and other major hotel franchises, represent approximately 37.0% and 34.4% of total revenue for 1998 and 1997, respectively. Total revenue was $761,154,000 for the year ended December 31,1998 compared to $115,223,000 in 1997. The increase is primarily due to the additional lease agreements entered into with Patriot as a result of the acquisition of hotels and mergers in 1998. Operating income for these properties was $183,703,000 for the year ended December 31, 1998 compared to $29,947,000 for 1997. Other represents revenue from various operating businesses including Bay Meadows racetrack, management and other service companies as well as participating lease revenue for those hotels leased to third parties. Total revenue for the other segment was $213,659,000 and $169,172,000 for the years ended December 31, 1998 and 1997, respectively. The increase in total revenue is a result of a full year of operations reflected in 1998 compared to six months of operations in 1997. Operating loss of the other segment was $576,963,000 for the year ended December 31, 1998 compared to $42,272,000. The increase in operating loss is a result of the following items: the treasury lock settlement of $49,334,000; the loss on the sale of the Fine Transaction assets of $9,453,000; the impairment loss on assets held for sale (including the Bay Meadows racetrack) of $51,081,000; the increase in the costs of acquiring leaseholds in 1998 over 1997 of $9,908,000; the increase in interest expense of $209,572,000 as a result of the increased borrowings to fund the 1998 mergers and acquisitions; and the increase in depreciation and amortization of $178,548,000 as a result of the 1998 mergers and acquisitions. 43 Statistical Information During 1998, Patriot's and Wyndham's portfolio of 178 owned hotels experienced strong growth in both average daily rate ("ADR") and revenue per available room ("REVPAR") of approximately 6.2% and 6.3%, respectively, while occupancy remained relatively stable. Management attributes this growth to continued marketing efforts throughout the portfolio on hotels that have been newly renovated, and repositioned in certain cases, as well as to the current strength of market conditions in the U.S. lodging industry. The following table sets forth certain statistical information for the Companies' 178 owned hotels as of December 31, 1998 and 1997 as if the hotels were owned at the beginning of the periods presented.
Occupancy ADR REVPAR ------------ --------------- --------------- 1998 1997 1998 1997 1998 1997 ----- ----- ------- ------- ------- ------- Wyndham Branded Hotels.......... 70.50% 70.80% $119.57 $112.32 $ 84.35 $ 79.54 Grand Bay Hotels & Resorts...... 67.00 70.50 287.30 266.64 192.52 187.86 Summerfield Suites.............. 79.70 74.20 129.42 123.01 103.17 91.27 Malmaison....................... 83.50 75.40 125.65 117.27 104.89 88.44 Clubhouse....................... 66.40 71.50 68.07 65.75 45.23 47.01 Arcadian........................ 68.80 63.80 142.67 128.43 98.10 81.92 Non Proprietary -- Limited Service........................ 67.80 74.10 74.57 65.87 50.54 48.83 Non Proprietary Brands.......... 71.70 71.20 99.59 94.29 71.39 67.16 ----- ----- ------- ------- ------- ------- Weighted average............... 71.10% 71.00% $109.94 $103.53 $ 78.15 $ 73.55
COMBINED LIQUIDITY AND CAPITAL RESOURCES Combined cash and cash equivalents as of December 31, 1998 were $158.9 million, including restricted cash of $35.9 million. Combined cash and cash equivalents as of December 31, 1997 were $47.4 million, including capital improvement reserves of $5.0 million. The increase is primarily the result of net cash provided by operating and financing activities exceeding the net cash used in investing activities. Cash Flow Provided by Operating Activities The Companies' principal source of cash to fund operating expenses and distributions to its shareholders is cash flow provided by operating activities. Patriot's principal source of revenue is rent payments from the lessees, including Wyndham, under the participating leases. Wyndham's principal source of cash flow is from the operation of the hotels it leases and manages. Wyndham's ability to make the rent payments to Patriot is dependent upon their ability to efficiently manage the hotels and generate sufficient cash flow from operation of the hotels. Combined cash flows from operating activities of the Companies were $244.5 million for the year ended December 31, 1998, which represent a combination of the collection of rents under participating leases with third party lessees and cash flows generated by the hotels operated by Wyndham. Cash flows from operating activities were $108.1 million for the year ended December 31, 1997, which primarily represent the collection of rents under participating leases. The increase is due primarily to the results of operations or the lease payments for 208 hotels acquired during 1998. Cash Flows from Investing and Financing Activities During 1998, the Companies continued to experience rapid growth through the merger and acquisition of hotel properties and management companies. These transactions were funded with a combination of issuance and or assumption of debt as well as sale of registered and unregistered securities. The proceeds from the sale of the unregistered securities were used to repay borrowings under the Companies' Credit Facility. The Credit Facility was then used to fund the cash portion of the Companies mergers and acquisitions. 44 Combined cash flows used in investing activities of the Companies were $2.1 billion for the year ended December 31, 1998, resulting primarily from the merger and acquisition of various hotel properties and management companies, and the renovation expenditures at certain hotels. Combined cash flows used in investing activities of the Companies were $1.2 billion for the year ended December 31, 1997, resulting primarily from the Cal Jockey merger, the acquisition of various hotel properties and management companies, and the renovation expenditures at certain hotels. Combined cash flows used in investing activities were $419.7 million for the year ended December 31, 1996, resulting primarily from the acquisition of hotel properties. Combined cash flows from financing activities of $1.9 billion for the year ended December 31, 1998 were primarily related to borrowings on the Credit Facility, the Term Loans and mortgage notes and net proceeds from public and private placement of equity securities, net of payments of dividends and distributions. Combined cash flows from financing activities of $1.1 billion for the year ended December 31, 1997 were primarily related to borrowings on the Credit Facility, the Term Loans and mortgage notes and net proceeds from public and private placement of equity securities, net of payments of dividends and distributions. Cash flows from Patriot's financing activities of $360.3 million for the year ended December 31, 1996 were primarily related to borrowings on the Old Line of Credit and net proceeds from public and private placement of equity securities, net of payments of dividends and distributions. In June 1998 in connection with the Interstate merger, the Companies closed on the commitment from The Chase Manhattan Bank and Chase Securities, Inc. and Paine Webber Real Estate Securities, Inc. to increase Patriot's existing credit facilities to an aggregate of $2.7 billion (an increase of $1.5 billion from the prior $1.25 billion credit package). The increased credit facilities include the $900 million revolving credit facility ("Credit Facility") and a series of term loans in the aggregate amount of up to $1.8 billion (the "Term Loans"). Proceeds from the increased credit facilities were used to fund the cash portion of the Interstate merger consideration, as well as to refinance certain outstanding indebtedness of the Patriot Companies. Interest rates will be based on the Companies' leverage ratio and may vary from 1.5% to 2.5% over LIBOR. As of December 31, 1998 the effective rate of interest was 7.314% for all borrowings under the credit facility except for Tranche B which was 7.564%. Patriot incurred approximately $27.4 million in loan fees and other expenses associated with this financing arrangement. As of December 31, 1998, the Companies had no additional availability under the Credit Facility. The weighted average interest rate in effect for the Credit Facility for the period ended December 31, 1998 was 7.90% per annum. As of December 31, 1998, there was $875.6 million outstanding under the Credit Facility. Additionally, Patriot had outstanding letters of credit totaling $24.4 million as of December 31, 1998. The Credit Facility matures July 2000. The Term Loans had maturities of January 31, 1999 ($350 million); March 31, 1999 ($400 million); March 31, 2000 ($450 million); and March 31, 2003 ($599 million). All of the lenders under the Credit Facility have agreed to extend maturity of the two term loans which matured on January 31, 1999 and March 31, 1999 to June 30, 1999, subject to Patriot and Wyndham consummating the Investment by that date. If the Companies do not consummate the Investment by June 30, 1999, or the agreement with the Investor Group otherwise terminates, the maturity on these two term loans will be extended to March 31, 2000 and the Companies will be required to make a $300 million amortization payment by December 31, 1999. Additionally, the Companies will be required to secure the Credit Facility with mortgages and other security interest. Fees of $11.7 million have been paid to the lenders under the Credit Facility in connection with their agreement to extend the maturities of the term loans to June 30, 1999. As of March 22, 1999, the Companies had approximately $875.6 million outstanding under the Credit Facility and $1.8 billion outstanding on the Term Loans. Additionally, the Companies had outstanding letters of credit totaling $24.4 million. As of March 22, 1999, Patriot also had over $993 million of mortgage debt outstanding that encumbered 49 hotels and 3 hotels under development and approximately $241 million in other debt, resulting in total indebtedness of approximately $3.9 billion. As of March 22, 1999, the Companies had no additional availability under the Credit Facility. 45 As of March 22, 1999, the Companies have entered into four interest rate swap arrangements to swap floating rate LIBOR-based interest rates for fixed rate interest amounts as a hedge against $822 million of the outstanding balance on the Credit Facility. The interest rate swaps cover borrowings under the Credit Facility and related Term Loans and fixes the LIBOR portion of the Credit Facility and Term Loans interest rate at 5.80%, 6.255% (as amended), 5.84%, and 5.56% respectively. The interest rate swap arrangements expire December 2000 ($72 million--entered January 31, 1996), November 2002 ($375 million--entered February 28, 1999), November 2002 ($125 million--entered January 9, 1998) and June 2003 ($250 million--entered July 1, 1998). If the actual LIBOR rate is less than the specified fixed interest rate, Patriot is obligated to pay the differential interest amount, such amount being recorded as incremental interest expense. If the LIBOR is greater than the specified fixed interest rate, the differential interest amount is refunded to Patriot. The Companies have entered into two additional interest rate swap arrangements to swap floating rate LIBOR-based interest rates for a fixed rate interest amount as a hedge against $51 million of the outstanding balance on specific property related debt. The interest rate swap fixes the LIBOR portion of the debt interest rate at 5.31% per annum through January 2000 ($20 million--entered January 4, 1999) and 5.42% per annum through March 2001 ($31 million--entered January 4, 1999). If the actual LIBOR rate is less than the specified fixed interest rate, Patriot is obligated to pay the differential interest amount, such amount being recorded as incremental interest expense. If the LIBOR is greater than the specified fixed interest rate, the differential interest amount is refunded to Patriot. As of March 22, 1999, Patriot has six interest rate cap arrangements as follows: an interest rate cap that limits LIBOR to 6% on up to $105 million of indebtedness through June 1999; an interest rate cap that limits LIBOR to 7% on up to $208.8 million of indebtedness through October 1999; an interest rate cap that limits LIBOR to 7% on up to $1.5 billion of indebtedness through April 2000; an interest rate cap that limits LIBOR to 8.5% on up to $29.1 million of indebtedness through August 2004; an interest rate cap that limits LIBOR to 7.83% on up to $38 million of indebtedness through October 2001; and an interest rate cap that limits LIBOR to 6.75% on up to $19.5 million of indebtedness through March 2001. Forward Equity Contracts. In additon to its debt obligations and related interest payments, Patriot is a party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. On December 31, 1997, the Companies sold 3.25 million unregistered paired shares to UBS, for a purchase price per paired share of $28.125, or aggregate consideration of approximately $93.6 million. On February 26, 1998, the Companies sold 4.9 million unregistered paired shares to Nations, for a purchase price per paired share of $24.8625, or aggregate consideration of approximately $121.8 million. On April 6, 1998, the Companies sold 5.15 million unregistered paired shares to PaineWebber for a purchase price per paired share of $27.01125, or aggregate consideration of approximately $139.1 million. The proceeds of these placements were used by the Companies to repay borrowings under the Companies' Credit Facility. The Credit Facility was then used to fund the cash portion of the Companies mergers and acquisitions. Patriot's aggregate obligation under the forward equity transactions was approximately $321.9 million at April 12, 1999. As of such date, Patriot has delivered an aggregate of 84.7 million shares to the counterparties as collateral, including approximately 4 million shares issued as dividends on the collateral shares, in addition to approximately 12.5 million original paired shares currently owned by the counterparties or their affiliates. In a forward equity transaction, a company sells shares of its common stock to an investment bank or similar financial institution. At the same time, the parties enter into a forward contract under which they agree to "settle" the transaction at a stated maturity date based upon the adjusted price of the purchased shares at maturity. During the term of the forward contract, the price of the purchased shares increases at a rate that corresponds to an agreed-upon interest rate. At maturity, the buyer sells a number of shares sufficient to generate proceeds equal to the total adjusted purchase price of the purchased shares. Shares may be sold to the public through an underwritten public offering or by other methods, or to private investors. If the buyer does not receive sufficient proceeds from its sales of the originally purchased shares, the company must issue more shares of common stock to the buyer for resale until the obligation has been satisfied. Often, a company may pay its obligation under a forward equity contract in cash as well as shares of its stock. 46 On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward agreements or to sell paired shares in connection with the forward agreements until the earlier of the closing of the $1 billion equity investment or June 30, 1999. In connection with the standstill agreements, the Companies agreed to pay a 2% fee to the three counterparties. The agreements provide that the standstill obligations terminate if, among other events, the price of the paired shares fell to a specified threshold. As of the date of this Form 10- K/A, the price of the paired shares has fallen below each of the thresholds. As a result, each of the forward counterparties has the right to require an immediate settlement of its forward equity transaction. As of the date of this Form 10 K/A, none of the counterparties has made any sale of paired shares, other than the sale of 754,525 paired shares by one counterparty in December 1998, or required settlement of its forward transaction. However, the Companies cannot assure you that the forward counterparties will not sell paired shares or require settlement in the future. The Companies may settle the forward transactions by delivering either cash or paired shares covered by an effective registration statement. Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure that the bank lenders would consent to any cash settlements prior to the closing of the $1 billion equity investment. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale of one counterparty of an additional 4 million paired shares of which 754,525 paired shares were sold by that counterparty in December 1998. In addition, the Companies filed a registration statement in April 1999 registering an additional 68 million paired shares in connection with the forward equity transactions. If, and when, the April 1999 registration statement becomes effective, there will be 111.2 million paired shares covered by effective registration statements, representing approximately 14 million paired shares more than the total number of paired shares currently owned or held as collateral by the forward counterparties. The Companies cannot assure that these registration statements will remain effective or that the Companies will not be required to register more paired shares in connection with the forward equity transactions. Given the current market price of the paired shares, any settlement in paired shares would have severely dilutive effects on our capital stock. Based on the $5.0625 closing price of the paired shares on April 30, 1999 and assuming an average of 2% selling expenses, the forward counterparties would have to sell approximately 65 million paired shares, to settle all of the forward equity transactions in full. The number of shares required would substantially increase if the market price of the paired shares decreases as a result of the sales of paired shares by the forward counterparties. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors will be adjusted downward to the extent that the price recognized by us on the sale is less than $8.75 per share. The Companies intend to settle in full all of the forward transactions with the proceeds of the $1 billion equity investment. If the Companies settle the forward transactions in cash, the counterparties must deliver to the Companies all paired shares then owned by them or held by them as collateral under the forward agreement. Securities Purchase Agreement Investment As of February 18, 1999, Patriot, Wyndham, Patriot Partnership, Wyndham Partnership and affiliates of each of Apollo Real Estate Management III, L.P., Apollo Management IV, L.P., Thomas H. Lee Equity Fund IV, L.P., Beacon Capital Partners, L.P. and Rosen Consulting Group, entered into a purchase agreement under which the investors will purchase $1 billion of a new series B preferred stock of Wyndham. Patriot and Wyndham currently plan to use the proceeds from the investment to settle their forward equity contracts, as described above, to repay indebtedness, and for working capital and growth purposes. Wyndham will pay dividends on its series B preferred stock quarterly, on a cumulative basis, at a rate of 9.75% per year. For the first six years, dividends will be payable partly in cash and partly in additional shares of 47 preferred stock, with the cash component initially equal to 30% for the first dividend payment and declining over the period to approximately 19.8% for the final dividend payment. Each share of series B preferred stock may be converted, at the option of its holder, into that number of shares of Wyndham common stock equal to $100.00 divided by the conversion price of the series B preferred stock. Initially the conversion price will be $8.59, but is subject to adjustment under certain circumstances. Restructuring Under the terms of the purchase agreement, relating to the $1 billion equity investment, Patriot and Wyndham are required to complete a restructuring of their existing paired share REIT structure prior to the investment. Under the terms of the restructuring, the following events will occur: . A reverse stock split of the common stock of Wyndham and Patriot. . A wholly-owned subsidiary of Wyndham will merge with and into Patriot with Patriot surviving. . The pairing agreement between Patriot and Wyndham will terminate. . Patriot will terminate its status as a real estate investment trust effective January 1, 1999. . The non-voting stock of specified corporate subsidiaries held by the Patriot Partnership will be transferred, and subsequently will be owned directly by Patriot and/or Wyndham, rather than through the Patriot Partnership. . The third party partners in both the Patriot Partnership and the Wyndham Partnership will be offered an opportunity to exchange their limited partner interests for Wyndham common stock. . The preferred stockholders of Wyndham will be offered an opportunity to exchange their preferred stock for Wyndham common stock. Reverse Stock Split Prior to the merger of a subsidiary of Wyndham into Patriot, both Wyndham and Patriot will implement a one-for-twenty reverse stock split of their common stock. Redemption Option For a period of 170 days following the completion of the $1 billion equity investment, Wyndham may redeem up to $300 million of the series B preferred stock at a redemption price of $102.00 per share (102% of the stated amount $100.00) plus all accrued dividends. Wyndham currently plans to fund this redemption through the issuance of $300 million of series A preferred stock to its stockholders. The series A preferred stock has the same economic terms as the series B preferred stock. Liquidity As a condition of the $1 billion equity investment, the Companies are required to restructure their existing organization. As discussed above, the pairing agreement between Wyndham and Patriot will terminate, Patriot's status as a REIT will terminate effective January 1, 1999 and Patriot will become a taxable corporation at that date. As a result of that transaction, the Company will be required to record a charge for deferred income taxes for the difference between the income tax basis and the recorded carrying value of assets and liabilities. The Company is continuing its analysis of the expected effects of this non-cash charge. Currently the estimate is in the range of $750 million, however; this amount could vary when the analysis is completed. In addition, the Company will charge off the value of an intangible asset associated with the paired share structure of approximately $84.2 million. In the event that the equity and related debt transaction referred to above are not completed, management has determined that additional capital would have to be raised from other sources or the Companies would have to 48 sell significant amounts of assets to produce proceeds sufficient to meet its existing current debt maturity obligations. These asset sales could include resort properties or Wyndham-managed properties in major cities and could negatively impact operations. Management believes these alternatives, if necessary, represent a viable plan to address Company's liquidity needs. New Debt Financing New Credit Facility. Patriot has recently signed a commitment letter with Chase Securities Inc. and The Chase Manhattan Bank for senior credit facilities for Wyndham in the amount of $1.8 billion, comprised of a term loan facility and a revolving loan facility. Definitive agreements relating to the new credit facility are expected to be finalized at the same time that the $1 billion equity investment is consummated. The commitment letter provided that the Chase Manhattan Bank will act as the administrative agent and Chase Securities Inc. will act as the lead arranger for a syndicate of lenders which will provide Wyndham with $1 billion in term loans and up to $800 million under the revolving loan facility, of which a maximum of $560 million may be drawn at the closing of the investment. The term loan facility and the revolving facility carry terms of 7 years and 5 years, respectively. The commitment letter based interest rates for the new credit facility upon LIBOR spreads varying from 1.50% to 3.00% per annum (for the revolving loan facility) and 3.00% to 3.75% per annum (for the term loan facility), based both on Wyndham's leverage ratio and on whether any increasing rate loans (described below) are outstanding. However, at Wyndham's election or under other specified circumstances, the term loans and revolving loans may instead bear interest at an alternative base rate plus the applicable spread. The alternative base rate is equal to the greater of The Chase Manhattan Bank's prime rate or federal funds rate plus 0.5%, and the alternative spread is 1.0% below the applicable LIBOR spread. Subject to limited agreed-upon exceptions, the New Credit Facility will be guaranteed by the domestic subsidiaries of Wyndham, and will be secured by pledges of equity interests held by Wyndham and its subsidiaries. The proceeds from the term loan facility will be used to finance the restructuring of Wyndham and Patriot. The proceeds from the revolving loan facility will be used for working capital and general corporate purposes. Increasing Rate Loans. Wyndham and Patriot have signed a commitment letter with The Chase Manhattan Bank, Chase Securities Inc., Bear, Stearns & Co. Inc., and The Bear Stearns Companies Inc. providing that The Chase Manhattan Bank, The Bear, Stearns Companies Inc. and a possible syndicate of other lenders will provide an increasing rate loan facility in the amount of up to $650 million. The increasing rate loans carry a term of 5 years. Interest rates for the increasing rate loans are based on LIBOR spreads and are initially set at 0.25% below the initial LIBOR spread on the term loan facility, but increase by 0.50% every three months, with a cap of LIBOR plus 4.75%. However, under other specified circumstances, interest accrues at an alternate rate equal to the rate borne by three-month treasury securities plus 1.0%, plus the applicable spread. The lenders under the increasing rate loans receive the benefit of the same guarantees and pledges of security provided under the New Credit Facility. The proceeds from the increasing rate loans will be used to finance the restructuring of Wyndham and Patriot. After the six month anniversary of the closing of the investment, lenders transferring increasing rate loans may exchange the increasing rate loans for exchange notes carrying identical terms to the increasing rate loans. To the extent any increasing rate loans or exchange notes are outstanding 180 days after the closing of the investment, Wyndham must by such date file and maintain a shelf registration statement with the Securities and Exchange Commission allowing the resale of any exchange notes outstanding thereafter. Wyndham may also offer registered substitute notes in exchange for all outstanding increasing rate loans and exchange notes. Wyndham's ability to borrow under its revolving facility is subject to Wyndham's compliance with a number of customary financial and other covenants, including total leverage and interest coverage ratios, limitations on additional indebtedness, and limitations on investments and stockholder dividends. In April 1999, The Chase Manhattan Bank and Chase Securities Inc. notified the companies that they were exercising their rights under the "market flex" provisions of the commitment letters to change the terms of the senior credit facilities and the increasing rate loan facility. The total amount of the senior credit facilities was 49 reduced by $200 million to $1.6 billion and the amount of the increasing rate loans was increased by $200 million to $850 million. The revolving credit facility has been reduced from $800 million to $600 million and the maximum that may be drawn at the closing has been reduced from $560 million to $400 million. Wyndham and Patriot have agreed to pay to the agents and the lenders customary fees for a facility of this nature. Interstate's Third-Party Hotel Management Business In May, 1998, Patriot along, with Interstate Hotels Company ("Interstate") entered into a settlement agreement (as amended, the "Settlement Agreement") with Marriott International, Inc. ("Marriott") which addressed certain claims asserted by Marriott in connection with Patriot's then proposed merger with Interstate. The Settlement Agreement provided for the dismissal of litigation brought by Marriott, and allowed Patriot's merger with Interstate to close. In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for the Companies re-branding of ten Marriott hotels under the Wyndham name, Marriott's assumption of the management (the "Assumed Management Contracts") of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and the divestiture of the third-party management business which was operated by Interstate no later than May 14, 1999. If the Companies do not complete the spin-off by May 14, 1999, Marriott will be entitled to receive 110% of the fees otherwise due under the Assumed Management Contracts. We will also be subject to additional penalties including Marriott's right to purchase, subject to third-party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by Patriot at their then appraised values. Moreover, subject to any defenses the Companies may have, we would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels Marriott would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of Marriott-branded hotels that Wyndham manages to replace Wyndham as manager of their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with us and enter into a contract with another manager. The Companies would owe liquidated damages on any third-party Marriott-franchised hotel which chooses to convert its brand. Renovations and Capital Improvements During 1998, the Companies completed approximately $175 million in total capital improvements and renovations on various hotel properties, including (i) costs related to converting hotels to one of the Companies' proprietary brands; (ii) costs related to recurring maintenance capital expenditures (iii) costs related to enhancing the revenue-producing capabilities of its hotels. Approximately $76 million of the total capital costs related to 33 hotels that were converted to proprietary brands in 1998. These major renovations included upgrading the quality of the furniture and fixtures in guest rooms, public meeting space and lobby areas as well as adding additional rooms to certain of the hotels. Patriot completed over $82.2 million of capital improvements and renovations during 1997. During 1997, approximately $56.9 million of total capital improvement expenditures were related to significant renovations at certain of the hotel properties. Pursuant to the Participating Leases, Patriot is obligated to establish a reserve for each hotel for capital improvements, including the periodic replacement or refurbishment of furniture, fixtures and equipment ("F F&E"). Management reserves an average of 4.0% of total hotel revenues and believes such amounts are sufficient to fund recurring capital expenditures for the hotels. Capital expenditures, exclusive of renovations, may exceed 4.0% of total revenues in a single year. The Companies attempt to schedule renovations and improvements during traditionally lower occupancy periods in an effort to minimize disruption to the hotel's operations. Therefore, management does not believe 50 such renovations and capital improvements will have a material effect on the results of operations of the hotels. Capital expenditures will be financed through the capital expenditure reserves, the Credit Facility, other financing sources, or with working capital. Legislation Affecting the Paired Share Structure Patriot's ability to qualify as a REIT is dependent upon its continued exemption from the anti-pairing rules of Section 269B(a)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 269B(a)(3) of the Code would ordinarily prevent a corporation from qualifying as a REIT if its stock is paired with the stock of a corporation whose activities are inconsistent with REIT status, such as Wyndham. The "grandfathering" rules governing Section 296B generally provide, however, that Section 296B(a)(3) does not apply to a paired REIT if the REIT and its paired operating company were paired on June 30, 1983. There are, however, no judicial or administrative authorities interpreting this "grandfathering" rule in the context of a merger into a grandfathered REIT or otherwise. Moreover, although Patriot's and Wyndham's respective predecessors, Cal Jockey and Bay Meadows, were paired on June 30, 1983, if for any reason Cal Jockey failed to qualify as a REIT in 1983 the benefit of the grand fathering rule would not be available to Patriot and Patriot would not qualify as a REIT for any taxable year. Patriot's exemption from the anti-pairing rules could be lost, or its ability to utilize the paired structure could be revoked or limited, as a result of future legislation. In this regard, legislation to freeze the grandfathered status of paired share REITS such as Patriot was included in the Internal Revenue Service Restructuring and Reform Act of 1998 (the "IRS Reform Act of 1998"), which was signed into law by the President on July 22, 1998. Under the IRS Reform Act of 1998, the anti-pairing rules generally apply to real property interests acquired after March 26, 1998 by Patriot and Wyndham, or a subsidiary or partnership in which a 10% or greater interest is owned by Patriot or Wyndham (collectively, the "REIT Group"), unless (i) the real property interests are acquired pursuant to a written agreement which is binding on March 26, 1998 and all times thereafter or (ii) the acquisition of such real property interests were described in a public announcement or in a filing with the Securities and Exchange Commission on or before March 26, 1998. In addition, the grandfathered status of any property under the foregoing rules will be lost if the rent on a lease entered into or renewed after March 26, 1998, with respect to such property exceeds an arm's-length rate. The IRS Reform Act of 1998 also provides that a property held by Patriot or Wyndham that is not subject to the anti-pairing rules would become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (x) the undepreciated cost of the property (prior to the improvement) or (y) in the case of property acquired where there is a substituted basis, the fair market value of the property on the day it was acquired by Patriot and Wyndham. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect as of December 31, 1999 and at all times thereafter. The IRS Reform Act of 1998 generally permits Patriot to continue its current method of operations with respect to its existing assets, including the assets acquired in the Interstate merger, the Arcadian acquisition, the Summerfield acquisition and the CHCI merger. However, the legislation would require Patriot to modify its method of operations with respect to newly acquired assets. Year 2000 Compliance Many computer systems were not designed to interpret any dates beyond 1999, which could lead to business disruptions in the United States and internationally (the "Year 2000 issue"). The Companies recognize the importance of minimizing the number and seriousness of any disruptions that may occur as a result of Year 2000 and have adopted an extensive compliance program. The Companies' compliance program involves three major program areas: . corporate information technology infrastructure and reservation systems . other electronic assets (such as, but not limited to, automated time clocks, point-of-sale systems, non-information technology systems, including embedded technologies that operate fire-life safety systems, phone systems, energy management systems and other similar systems) 51 . third parties with whom the Companies conduct business The Companies are applying a three phase approach to each program area: . Inventory Phase (identify systems and third parties that may be affected by Year 2000 issues) . Assessment Phase (prioritize the inventoried systems and third parties, assess their Year 2000 readiness, plan corrective actions) . Remediation Phase (implement corrective actions, verify implementation, formulate contingency plans) The Companies engaged a consulting firm to conduct the inventory and assessment phases of the compliance program. The Companies have completed inventory and assessment phases with respect to their corporate information technology infrastructure and reservation systems. The Companies have also completed the inventory and assessment phases with respect to the information technology and other electronic assets that are located in the Companies' Hotels, other than some of the Hotels which are either managed by Wyndham but not owned by Patriot or owned by Patriot but not leased or operated by Wyndham (the "Third Party Compliance Hotels"). Based on those assessments, the Companies, working with their consultants, determined which systems were not Year 2000 compliant and developed appropriate remediation plans. The Companies have begun the necessary work to remediate those systems at their owned and leased Hotels, and have completed 10 percent of that work. The Companies previously engaged a consulting firm to provide the support and additional skills to effect the necessary remediation in sufficient time for testing and any necessary modifications. Of the 93 Third Party Compliance Hotels that were not acquired in the merger with Interstate Hotels (the "Interstate merger"), 66 Third Party Compliance Hotels have been assessed as part of the Companies' compliance program and the Companies have begun to implement remediation plans at 21 of those hotels. The owners of the other 45 Third Party Compliance Hotels that were assessed have to date neither taken any action to effect the necessary remediation identified in the assessment nor authorized the Companies to effect the remediation on behalf of the owners. While none of the remaining 27 Third Party Compliance Hotels have been assessed by the Companies, 4 of the owners have informed the Companies that the owners completed their own assessments. The Companies are continuing to monitor the status of the Third Party Compliance Hotels and have reminded the owners of the importance of making the Third Party Compliance Hotels Year 2000 compliant in sufficient time to permit adequate testing. The Companies have begun surveying the Year 2000 compliance of the owners of the hotels that are franchised under the Wyndham brand but not managed by Wyndham, and have informed those owners of the appropriate standards to make the equipment operating Wyndham's systems Year 2000 compliant. However, as the systems at the Third Party Compliance Hotels and franchised hotels are not under the Companies' control, the Companies will be required to rely on the information provided by those owners or managers/operators and will not be able to test the assessment or remediation effected by third parties at the Third Party Compliance Hotels or the franchised hotels. The Companies presently expect to expend approximately $34 million in connection with Year 2000 issues. To date, the Companies have incurred $1.75 million in connection with the inventory and assessment phases of their compliance program and $4.6 million to remediate their systems. However, the Companies' anticipated expenditures may increase as the Companies effect the remediation plans. As part of the settlement of litigation arising out of the Interstate merger, the Companies agreed to contribute to a new company management of the Third Party Compliance Hotels acquired in that merger, and then dispose of substantially all of that new company's stock by means of a spin-off to the Companies' shareholders or otherwise. As the hotels acquired in the Interstate merger whose management will be contributed to the new company are owned by third parties, the Companies expect those owners to bear all costs related to the inventory, assessment and remediation of those hotels. The Companies have identified the vendors and service providers that are critical to the Companies' businesses and have requested those parties to provide information concerning their Year 2000 compliance and 52 remediation efforts. The Companies are now seeking additional information from those parties that did not respond or did not provide sufficient information, but cannot guarantee that all vendors or service providers will comply with the Companies' requests. More importantly, the Companies must rely on the information provided by the third parties and will not be able to test the third parties' compliance. As a result, the Companies may not be able to accurately determine the Year 2000 compliance of those vendors or service providers. Based on preliminary responses, the Companies believe that their most critical vendors and service providers will not cause the Companies' operations to be materially disrupted as a result of Year 2000 issues. During 1999, the Companies intend to determine the extent to which they will be able to replace vendors and service providers that are expected to be non- compliant. Due to the lack of an alternative source, there may be instances in which the Companies will have no alternative but to remain with non-compliant vendors or service providers. As the Companies identify the non-compliant vendors and service providers, they will then determine appropriate contingency plans. The Companies believe that their current compliance program will allow them sufficient time to identify which of their systems and other electronic assets are not Year 2000 compliant and to effect the necessary remediation to avoid substantial problems arising from Year 2000 induced failures. The Companies believe that their reprogramming, upgrading and systems replacements will be implemented by the end of the third quarter of 1999. The Companies believe that this should provide adequate time to further correct any problems that did not surface during the implementation and testing for those systems. Notwithstanding that, the Companies do recognize that some vendors and the owners and managers/operators of the Third Party Compliance Hotels may not comply with their present schedules and could affect the Companies' timing and remediation efforts generally. If the Companies are not successful in implementing their Year 2000 compliance plan, the Companies may suffer a material adverse impact on their consolidated results of operations and financial condition. In addition to those systems within the Companies' control and the control of its vendors and suppliers, there are other systems that could have an impact on the Companies' businesses and which may not be Year 2000 compliant by January 1, 2000. These systems could affect the operations of the air traffic control system and airlines or other segments of the lodging and travel industries, or the economy and travel generally. In addition, these systems could affect the Third Party Compliance Hotels or the Hotels franchised under the Companies' brands whose owners and managers/operators are implementing their own compliance programs. These systems are outside of the Companies' control or influence and their compliance may not be verified by the Companies. However, these systems could adversely affect the Companies' financial condition or results of operation. During the second quarter of 1999, the Companies intend to develop contingency plans to address potential Year 2000 induced failures. Because the Companies have no control over third party assessment and remediation efforts, the Companies expect to focus most of their contingency planning on externally caused disruptions. In addition, the Companies will develop their plans on their belief that the consequences of Year 2000 induced failures will be local in nature. These plans will be based on existing contingency plans for operations during storms and other natural disasters. While each Hotel will develop a contingency plan, any disruption in utilities or other key local services could have the effect of disrupting operations of several Hotels located in the affected geographic area. As part of the Companies' contingency planning, they also expect to evaluate their continued management of the Third Party Compliance Hotels that do not become Year 2000 compliant. Inflation Operators of hotels in general possess the ability to adjust room rates quickly. However, competitive pressures may limit Wyndham's and the Lessees' ability to raise room rates in the face of inflation. Seasonality The hotel industry is seasonal in nature. Revenues for certain of Patriot's hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in the Patriot Companies' revenues. 53 FUNDS FROM OPERATIONS Combined Funds from Operations of the Companies (as defined and computed below) was $41.7 million for the three months ended December 31, 1998 and $33.4 million for the three months ended December 31, 1997. Combined Funds from Operations of the Companies was $263.6 million for the year ended December 31, 1998 and $111.5 million for the year ended December 31, 1997. Funds from Operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation of real property, amortization of goodwill and amortization of management contracts and trade names, and after adjustments for unconsolidated partnerships, joint ventures and corporations. Adjustments for Patriot's unconsolidated subsidiaries are calculated to reflect Funds from Operations on the same basis. The Companies have also made certain adjustments to Funds from Operations for real estate related amortization and the write off of certain lease costs. The Companies believe that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating, financing, and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures, and to fund other cash needs. The Companies believe that in order to facilitate a clear understanding of their operating results, Funds from Operations should be examined in conjunction with net income (loss) as presented in the audited combined financial statements of the Companies. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. Funds from Operations does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. 54 The following reconciliation of net (loss) income to Funds from Operations illustrates the difference between the two measures of operating performance for the three months ended December 31, 1998 and 1997:
Three Months Ended December 31, ----------------- 1998 1997 -------- ------- (in thousands) Net income.............................................. $(90,968) $ 1,666 Add: Minority interest in the Operating Partnerships....... (6,483) 375 Minority interest in consolidated subsidiaries........ (2,303) -- Depreciation of buildings and improvements and furniture, fixtures and equipment.................... 56,714 17,155 Amortization of goodwill.............................. 9,925 1,135 Amortization of management contracts franchise and trade names.......................................... 8,800 1,249 Amortization of capitalized lease costs .............. -- -- Cost of acquiring leaseholds.......................... 3,407 10,679 Settlement on Treasury lock and other non-recurring charges.............................................. 685 -- Loss on sale of assets................................ 9,453 -- Impairment loss on assets held for sale............... 51,081 -- Adjustment for Funds from Operations : Equity in earnings of unconsolidated subsidiaries..... (2,124) (1,527) Funds from Operations of unconsolidated subsidiaries.. 3,481 2,698 -------- ------- Funds from Operations................................... $ 41,668 $33,430 ======== ======= Weighted average shares and OP units outstanding: Basic................................................. 171,051 92,089 ======== ======= Diluted............................................... 193,314 94,659 ======== =======
55 The following reconciliation of net (loss) income to Funds from Operations illustrates the difference between the two measures of operating performance for the years ended December 31, 1998, 1997 and 1996 and for the period October 2, 1995 (inception of operations) through December 31, 1995:
Period October 2, 1995 Year Ended December 31, (inception of operations) ---------------------------- through 1998 1997 1996 December 31, 1995 --------- -------- ------- ------------------------- (in thousands) Net (loss) income....... $(158,223) $ (2,172) $37,991 $5,359 Add: Extraordinary loss from early extinguishment of debt................. 31,817 2,534 -- 737 Minority interest in the Operating Partnerships......... (12,651) 1,684 6,767 968 Minority interest in consolidated subsidiaries......... (8,185) -- -- -- Depreciation of buildings and improvements and furniture, fixtures and equipment........ 176,059 47,694 17,302 2,529 Amortization of goodwill............. 28,702 1,851 -- -- Amortization of management contracts and trade names...... 24,323 1,886 204 50 Settlement on Treasury lock and other non- recurring charges.... 52,292 -- -- -- Loss on sale of assets............... 9,453 -- -- -- Impairment loss on assets held for sale................. 51,081 -- -- -- Cost of acquiring leaseholds........... 64,407 54,499 -- -- Adjustment for Funds from Operations of unconsolidated subsidiaries: Equity in earnings of unconsolidated subsidiaries......... (9,498) (6,015) (5,845) (156) Funds from Operations of unconsolidated subsidiaries......... 14,018 9,581 8,044 311 --------- -------- ------- ------ Funds from Operations... $ 263,595 $111,542 $64,463 $9,798 ========= ======== ======= ====== Weighted average shares and OP units outstanding: Basic................. 152,778 74,219 51,721 43,923 ========= ======== ======= ====== Diluted............... 163,532 76,040 52,259 44,060 ========= ======== ======= ======
ITEM 7a. QUALITATIVE AND QUANTATIVE DISCLOSURES ABOUT MARKET RISKS The following table provides information about the Companies derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps, interest rate caps and debt obligations. For fixed rate debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For variable rate debt obligations, the table presents principal cash flows by expected maturity date and contracted interest rates as of the report date. For interest rate swaps and caps, the table presents notional amounts and weighted-average interest rates or strike rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. 56
Face Fair 1999 2000 2001 2002 2003 Thereafter Value Value --------- --------- ------- ------ ------- ---------- --------- --------- (in thousands) Debt Obligations Long-term Debt, including Current Portion Fixed Rate............. 8,169 18,767 8,881 48,163 8,393 301,531 393,904 393,904 Average Interest Rate.. 9.38% 8.60% 9.13% 9.01% 9.02% 8.26% Variable Rate.......... 1,266,749 1,348,500 134,603 17,300 652,431 44,034 3,463,617 3,463,617 Average Interest Rate.. 7.27% 7.29% 7.29% 7.56% 7.24% 6.39% Interest Rate Derivative Financial Instruments Related to Debt Interest Rate Swaps Pay Fixed/Receive Variable.............. 72,000 50,000 250,000 822,000 (24,836) Average Pay Rate....... 5.93% 5.93% 5.94% 5.94% 5.84% Avg. Receive Rate...... 5.08% 5.08% 5.09% 5.09% 5.12% Interest Rate Caps Notional Amount........ 313,750 38,000 29,125 380,875 144 Strike Rate............ 6.92% 8.12% 8.12% 8.50% 8.50% 8.50% Forward Rate........... 4.98% 4.95% 5.18% 5.24% 5.36% 5.45%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The independent auditors' reports, financial statements and financial statement schedules listed in the accompanying index are filed as part of this report. See Index to Financial Statements and Financial Statement Schedules on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following individuals are the principal executive officers of Patriot and Wyndham: James D. Carreker has served as the Chairman of the Board of Directors and Chief Executive Officer of Wyndham as well as a director of Patriot since January 1998. In February 1999, Mr. Carreker was also named Chief Executive Officer of Patriot. Prior to joining Wyndham in January 1998, Mr. Carreker had served as President and Chief Executive Officer of Wyndham Hotel Corporation from May 1988 to January 1998 and as a director of Wyndham Hotel Corporation from February 1996 to January 1998. He also served as Chief Executive Officer of Trammell Crow Company, a national real estate company, from August 1994 to December 1995. Prior to 1988, Mr. Carreker served as President of Burdine's, the Miami based division of Federated Department Stores. Mr. Carreker also serves as a director of Trammell Crow Company and of Carreker-Antinori, Inc., a computer service company that completed its initial public offering in May 1998. Mr. Carreker holds a B.S. and a Master of Business Administration from Oklahoma State University. Mr. Carreker is 51 years old. William W. Evans III currently serves as the President and Chief Operating Officer and a director of Patriot. He also serves as an Executive Vice President of Wyndham. Mr. Evans has been an executive officer of the companies since March 1997, and a director since July 1997. Prior to joining the companies, Mr. Evans was a Managing Director in PaineWebber's Real Estate Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody and Co. Incorporated in December 1994. Prior to joining Kidder, Peabody in 57 1992, Mr. Evans was a First Vice President and head of the Real Estate Financing Division of Swiss Bank Corporation. Mr. Evans is a graduate of the University of Virginia. Mr. Evans is 48 years old. Karim Alibhai serves as the President and Chief Operating Officer and a director of Wyndham. Prior to joining Wyndham in October 1997, Mr. Alibhai was the President and Chief Executive Officer of the Gencom Group, an affiliated group of companies that acquired, developed, renovated, leased and managed hotel properties in the United States and Canada through Gencom American Hospitality. He holds a B.A. from Rice University. Mr. Alibhai is 34 years old. Anne L. Raymond became Chief Financial Officer and an Executive Vice President of Patriot in January 1998 in connection with the closing of the Wyndham merger. Ms. Raymond also served as Treasurer of Patriot from January 1998 to March 1998. Ms. Raymond joined Wyndham's predecessor in 1983 as Controller and served in that and other financial capacities through September 1987. From September 1987 to July 1994, she served as Investment Manager for Crow Family Holdings, where her responsibilities included managing and overseeing Crow Family Holdings' interest in the Trammell Crow Company and Wyndham's predecessor. Upon the formation of the Crow Investment Trust in August 1994, Ms. Raymond was named Director--Capital Markets and had responsibility for developing and maintaining investment relationships with real estate capital sources. In March 1995, Ms. Raymond rejoined Wyndham's predecessor as Executive Vice President and Chief Financial Officer, and was elected a director of Wyndham's predecessor in April 1996. Ms. Raymond holds a B.S. in Business Administration from the University of Missouri. Ms. Raymond is 41 years old. Paul Novak was named Executive Vice President--Acquisitions and Development of Patriot in January 1998. From June 1997 through January 1998, Mr. Novak served as Executive Vice President--Acquisitions and Development of Wyndham. From 1994 through June 1997, Mr. Novak was President and Chief Executive Officer of Bedrock Partners, a private investment group established in 1994 to acquire hotel properties and convert them to Wyndham Hotels or Wyndham Garden Hotels. From 1992 through 1994, Mr. Novak was a principal in his own consulting firm where he directed real estate development, marketing and acquisition assignments from numerous clients. Prior thereto, he served as a Senior Vice President of Marriott International from 1981 until 1992 with responsibility for developing more than 400 properties. Mr. Novak is a member of the Urban Land Institute, The National Realty Committee and the Travel and Tourism Research Association. He holds a B.A. from Michigan State University. Mr. Novak is 52 years old. Mr. Novak's employment with the companies was terminated effective May 1999. Lawrence S. Jones was named Executive Vice President and Treasurer of Patriot and Wyndham in March 1998. Mr. Jones joined Coopers & Lybrand in 1972 and continued there as a partner until March 1998 where he served as Chairman of the firm's REIT industry practice. Mr. Jones holds a B.S. from the University of Berkeley and an M.S. from UCLA. Mr. Jones is a certified public accountant. Mr. Jones is 52 years old. Thomas W. Lattin became an Executive Vice President of Wyndham Hotel Corporation in October 1997. He became President and Chief Operating Officer of Patriot American Hospitality, Inc., a Virginia corporation, in April 1995 and continued in such capacity for Patriot American Hospitality Operating Company from July 1997. From 1987 through 1994, he served as the National Partner of the hospitality industry consulting practice of Laventhol & Horwarth and subsequently as a partner in the national hospitality consulting group of Coopers & Lybrand L.L.P. In 1994, he joined the Hospitality Group of Kidder, Peabody & Co. Incorporated as a Senior Vice President and later served as a Senior Vice President with PaineWebber Incorporated. Mr. Lattin holds a B.S. and M.S. in Hotel Management from the Cornell School of Hotel Administration. He is a certified public accountant. Mr. Lattin is 54 years old. Leslie V. Bentley became an Executive Vice President of Wyndham in January 1998. He was employed by Wyndham Hotel Corporation since March 1985, served as Executive Vice President and President of the Wyndham Garden Division since May 1990 and was elected a director of Wyndham Hotel Corporation in January 1997. From January 1987 to June 1988, Mr. Bentley served as Regional Vice President of Wyndham Hotel Corporation. From June 1988 to December 1988, Mr. Bentley served as Vice President of Operations of 58 Wyndham Hotel Corporation and from December 1988 to May 1990, he served as Senior Vice President of Operations of Wyndham Hotel Corporation. Prior to joining Wyndham Hotel Corporation, Mr. Bentley was employed by Marriott International Hotels for eight years. Mr. Bentley holds a B.S. in Hotel and Restaurant Administration from Pennsylvania State University. Mr. Bentley is 47 years old. Stanley M. Koonce, Jr. became Executive Vice President--Marketing and Strategic Planning of Wyndham in January 1998. He served as Executive Vice President--Marketing, Planning and Technical Services of Wyndham Hotel Corporation since October 1994, was elected a director of Wyndham Hotel Corporation in January 1997 and served as Senior Vice President of Sales and Marketing of Wyndham Hotel Corporation from October 1989 to October 1994. Mr. Koonce served as President of CUC Travel Services, a division of CUC International, in Stamford, Connecticut from 1986 to 1989, as Vice President of the Marketing Department with American Express from 1979 to 1986 and as a Director of Finance and Planning for American Airlines from 1976 to 1979. Mr. Koonce holds a B.S. in Mathematics and an M.B.A. from the University of North Carolina. Mr. Koonce is 50 years old. Richard A. Holtzman serves as Executive Vice President of Wyndham and is the division President of Grand Bay Hotels and Resorts which is a division of Wyndham International, Inc. in January 1997. Mr. Holtzman served as president and chief operating officer with Westcor Resorts from July 1988. Mr. Holtzman is a graduate of Cornell University with a B.A. in hotel administration. Mr. Holtzman is 45 years old. Robert R.A. Breare serves as Executive Vice President of Wyndham and is the divisional President of the companies European division, which includes Arcadian and Malmaison. Mr. Breare founded Arcadian International PLC in April 1990 with an initial focus on leisure resort development and served as chief executive officer until the acquisition of Arcadian by the Companies. Previously, Mr. Breare served in the publishing industry and joined Parkdale Holdings PLC in 1987 as CEO. He was educated at Eton before completing an MA in law at Cambridge University. Mr. Breare is 46 years old. Michael A. Grossman serves as Executive Vice President of Wyndham and divisional president of the management services division of the Companies. From 1977 to 1993, Mr. Grossman owned and operated Grossman and Associates a hotel management company. Mr. Grossman joined Patriot American in August 1993 as a Senior Vice President, heading up its hotel division. Mr. Grossman was subsequently appointed Chief Operating Officer of Gencom American Hospitality (GAH), which initially served as a third party manager for Old Patriot and was subsequently acquired by Patriot. Mr. Grossman holds a B.B.A. from the University of Texas and a J.D. from Southern Methodist University. Mr. Grossman is 46 years old. Carla S. Moreland was named Executive Vice President - General Counsel of Wyndham in April 1999. She served as Senior Vice President - General Counsel of Wyndham since January 1998. Ms. Moreland served as general counsel of Wyndham Hotel Corporation since April 1994. From 1987 to 1994 she practiced law with the firm of Weil Gotshal and Manges. Ms. Moreland holds a B.A. and a J.D. from The College of William and Mary. Ms. Moreland is 39 years old. Directors of Patriot The following is a biographical summary of the experience of the directors of Patriot: James D. Carreker has served as a director of Patriot since January 1998. For biographical information on Mr. Carreker, see "--Principal Executive Officers of Patriot and Wyndham." John H. Daniels has served as a director of Patriot and its predecessor since September 1995. He has served as President of The Daniels Group Inc., a real estate development and management company, since 1984. Prior to forming The Daniels Group Inc., Mr. Daniels served as Chairman and Chief Executive Officer of Cadillac Fairview Corporation, a publicly held real estate development and management company. Mr. Daniels is also a director of Cineplex-Odeon Corporation, Consolidated H.C.I. Corporation, Samoth Capital Corporation and 59 Anitech Enterprises Inc. Mr. Daniels holds a B.S. in Architecture from the University of Toronto. Mr. Daniels is 73 years old. John C. Deterding has served as a director of Patriot and its predecessor since September 1995. He has been the owner of Deterding Associates, a real estate consulting company, since June 1993. From 1975 until June 1993, he served as Senior Vice President and General Manager of the Commercial Real Estate division of General Electric Capital Corporation. From November 1989 to June 1993, Mr. Deterding served as Chairman of the General Electric Real Estate Investment Company, a privately held REIT. He served as Director of GECC Financial Corporation from 1986 to 1993. He holds B.S. from the University of Illinois. Mr. Deterding is 67 years old. Gregory R. Dillon has served as a director of Patriot and its predecessor since September 1995. He has been Vice Chairman Emeritus of Hilton Hotels Corporation since 1993. He has been a director of Hilton since 1977 and was elected Vice Chairman in 1990. Mr. Dillon served as an Executive Vice President of Hilton from 1980 until 1993. Mr. Dillon was also Executive Vice President of Hilton's franchise company, Hilton Inns, Inc., from 1971 to 1986. He is a director of the Conrad N. Hilton Foundation and is a founding member of the American Hotel Association's Industry Real Estate Financing Advisory Council and the National Association of Corporate Real Estate Executives. In addition to his undergraduate degree, Mr. Dillon holds an LL.B. from DePaul University. Mr. Dillon is 76 years old. William W. Evans III has served as a director of Patriot since July 1997. For biographical information on Mr. Evans, see "--Principal Executive Officers of Patriot and Wyndham." Milton Fine became a director of Patriot in June 1998. Mr. Fine co-founded Interstate Hotels Company in 1961 and was Chairman of the Board of Interstate prior to Wyndham's acquisition of Interstate in June 1998. Mr. Fine also served as the Chief Executive Officer of Interstate through March 1996. He is a life trustee of the Carnegie Institute and Chairman of the Board of Trustees of the University of Pittsburgh and a member of the Board of Directors of the Andy Warhol Museum in Pittsburgh, Pennsylvania. Mr. Fine completed his undergraduate studies magna cum laude, and also holds a J.D., from the University of Pittsburgh. Mr. Fine is 72 years old. Arch K. Jacobson has served as a director of Patriot and its predecessor since September 1995. He has served as President of Jacobson-Berger Capital Group, Inc., a commercial mortgage banking firm, since 1993. From 1986 to 1993, Mr. Jacobson was Chairman of Union Pacific Realty Co., a real estate management and development company. He served in various capacities with the Real Estate Department of The Prudential Insurance Company from 1955 to 1980 and was President and Chief Executive Officer of the Prudential Development Company (a subsidiary of the Prudential Insurance Company) from 1982 to 1986. Mr. Jacobson currently serves as a director of Walden Residential Properties, Inc., a publicly traded, multifamily apartment REIT. He was formerly a director of La Quinta Limited Partners, and chaired the committee of independent directors that negotiated the tender offer for and purchase of that company in 1994. Mr. Jacobson holds a B.S. from Texas A&M University. Mr. Jacobson is 71 years old. Paul A. Nussbaum founded Patriot in 1991 and served as its Chief Executive Officer and Chairman of its Board until February 1999. Currently, he serves as Chairman Emeritus of the Board of Directors of Patriot and Wyndham. Prior to his association with Patriot, Mr. Nussbaum practiced real estate and corporate law in New York for 20 years, the last 12 years of which, he was chairman of the real estate department of Schulte Roth & Zabel. Mr. Nussbaum serves as a member of the Board of Directors of the Dallas Symphony and is a member of the Urban Land Institute, the American College of Real Estate Lawyers and the Advisory Board of the Real Estate Center of the Wharton School of Business, University of Pennsylvania. Mr. Nussbaum is a member of the Board of Visitors of the Georgetown University Law Center and a Trustee of Colby College, Waterville, Maine. He also serves on the Boards of Directors of Mack-Cali Realty Corporation. He holds a B.A. from the State University of New York at Buffalo and a J.D. from the Georgetown University Law Center. Mr. Nussbaum is 51 years old. 60 Philip J. Ward has served as a director of Patriot since January 1998. Prior to such time, he had served as a director of Wyndham Hotel Corporation since June 1996. Mr. Ward is the Senior Managing Director in charge of the Real Estate Investment Division of CIGNA Investments, Inc., a division of CIGNA Corporation, a position he has held since December 1985. Mr. Ward joined Connecticut General's Mortgage and Real Estate Department (a predecessor of CIGNA) in 1971 and became an officer in 1987. Mr. Ward is also a director of the Simon DeBartolo Group, Inc., and a director of the Connecticut Housing Investment Fund. Mr. Ward holds a Bachelor of Arts from Amherst College. Mr. Ward is 50 years old. Directors of Wyndham The following is a biographical summary of the experience of the directors of Wyndham: Karim Alibhai has served as the President and Chief Operating Officer and a director of Wyndham since October 1997. For biographical information on Mr. Alibhai, see "--Principal Executive Officers of Patriot and Wyndham." Leonard Boxer has served as a director of Wyndham since July 1997. He had served as a director of Patriot and its predecessor from September 1995 to July 1997. He has been a partner and chairman of the real estate department of the law firm of Stroock & Stroock & Lavan in New York, New York since 1987. Previously, he was a founder and managing partner and head of the real estate department of Olnick Boxer Blumberg Lane & Troy, a real estate law firm in New York. Mr. Boxer is a member of the Board of Trustees of New York University Law School. He is a member of the New York Regional Cabinet of the United States Holocaust Memorial Museum. Mr. Boxer holds a B.A. and an LL.B. from New York University. Mr. Boxer is 60 years old. James D. Carreker has served as Chairman of the Board of Directors of Wyndham since January 1998. For biographical information on Mr. Carreker, see "--Principal Executive Officers of Patriot and Wyndham." Burton C. Einspruch, M.D. has served as a director of Wyndham since July 1997. Dr. Einspruch is a physician and corporate medical consultant and has practiced medicine since 1960. He holds a B.A. and Sc.B. from Southern Methodist University and an M.D. from Southwestern Medical School of the University of Texas. Dr. Einspruch is the Medical Director of First Southwest Company, a national brokerage firm, and also currently serves as a director of Dallas National Bank. He has served as a board member and advisor to numerous corporations and philanthropies and is currently Chairman of the Holocaust Studies Program Advisory Board at the University of Texas at Dallas, as well as the Executive Board of the Libraries of Southern Methodist University. Dr. Einspruch has attained the academic rank of Clinical Professor of Psychiatry of Southwestern Medical School and Clinical Associate Professor of Psychiatry at New York University Medical Center. Dr. Einspruch is 64 years old. Susan T. Groenteman has served as a director of Wyndham since January 1998. Ms. Groenteman had served as a director of Wyndham Hotel Corporation from April 1996 to January 1998. Ms. Groenteman is a Director and chief operating officer of Crow Family Holdings, an investment company managing investments in a variety of real estate related businesses, along with other industries, a position she has held since 1988. In any given year within the past five years, Ms. Groenteman has served as an executive officer or director in over 1,000 partnerships (or affiliates of partnerships) or corporations. In the past five years, Ms. Groenteman has served as an executive officer or director of approximately 95 partnerships or corporations, or for affiliates of such entities, that filed for protection under federal bankruptcy laws. In addition, in the past five years, Ms. Groenteman served as an executive officer or director in approximately 15 partnerships or corporations, or affiliates of such partnerships or corporations, that were placed in receivership. Ms. Groenteman holds a Bachelor of Business Administration from the University of Texas at Arlington. Ms. Groenteman is 44 years old. Arch K. Jacobson has served as a director of Wyndham since July 1997. For biographical information on Mr. Jacobson, see "--Directors of Patriot." 61 James C. Leslie has served as a director of Wyndham since January 1998. He had served as a director of Wyndham Hotel Corporation from June 1996 to January 1998. Mr. Leslie has served as President and Chief Operating Officer of The Staubach Company since March 1996. Mr. Leslie served as Chief Financial Officer of The Staubach Company from 1982 to 1992 and President-Staubach Financial Services from January 1992 to March 1996. Mr. Leslie is also President and a board member of Wolverine Holding Company and serves on the board of Columbus Realty Trust, FM Properties, Inc., Forum Retirement Partners, L.P. and The Staubach Company, as well as other private corporations and charitable organizations. Mr. Leslie is a certified public accountant. Mr. Leslie holds a B.S. from the University of Nebraska and an M.B.A. from the University of Michigan. Mr. Leslie is 43 years old. Paul A. Nussbaum has served as a director of Wyndham since January 1998. For biographical information on Mr. Nussbaum, see "--Directors of Patriot" Rolf E. Ruhfus became a director of Wyndham in June 1998. Mr. Ruhfus served as Chairman of the Board of Directors and Chief Executive Officer of Summerfield Hotel Corporation from 1987 through June 1998 when Summerfield was acquired by Wyndham. Prior to founding Summerfield, Mr. Ruhfus served as President of Residence Inn Corporation from 1983 until the franchise and management system assets were sold to Marriott Corporation. Mr. Ruhfus holds a B.A. from Western Michigan University, an M.B.A. from the Wharton School of Business and a Ph.D. in Marketing from the University of Munster, Germany. Mr. Ruhfus is 54 years old. Sherwood M. Weiser has served as a director of Wyndham since October 1997. Currently, Mr. Weiser is the Chairman and Chief Executive Officer of Carnival Hotels & Casinos, a hotel and gaming management and development firm. In 1970, Mr. Weiser founded The Continental Companies. Carnival Hotels & Casinos was a successor to The Continental Companies. In June 1998, Wyndham acquired the hospitality-related businesses of CHCI, the parent corporation of Carnival Hotels & Casino. Mr. Weiser is a director of Carnival Corporation, United National Bank and Winsloew Furniture Group. He is a graduate of the Ohio State University School of Business and holds a J.D. from the Case Western Reserve University School of Law. Mr. Weiser is 68 years old. Information Regarding the Board of Directors of Patriot and Its Committees Meetings. The Board of Directors of Patriot held 20 meetings during 1998. No director of Patriot attended less than 75% of the aggregate number of meetings held during 1998 of the board of directors and any board committee of which he was a member. Audit Committee. Currently, the audit committee consists of two independent directors: Messrs. Deterding and Dillon. An "independent director" is a director who is not an officer or employee of Patriot, any affiliate of an officer or employee or any affiliate of (1) any advisor to Patriot under an advisory agreement, (2) any lessee of any property of Patriot, (3) any subsidiary of Patriot or (4) any partnership which is an affiliate of Patriot. The audit committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of Patriot's internal accounting controls. The audit committee held 4 meetings during 1998. Compensation Committee. The compensation committee consists of three independent directors: Messrs. Deterding, Dillon and Jacobson. The compensation committee determines compensation of Patriot's executive officers, and administers the Patriot American Hospitality, Inc. 1997 Incentive Plan. The compensation committee held more than 20 meetings during 1998. Coordinating Committee. The coordinating committee consists of three independent directors: Messrs. Deterding, Fine and Ward. The coordinating committee reviews and evaluates various proposals received from potential investors. The coordinating committee held more than 50 meetings during 1998. 62 Information Regarding the Board of Directors of Wyndham and Its Committees Meetings. The Board of Directors of Wyndham held 20 meetings during 1998. No director attended less than 75% of the aggregate number of meetings held during 1998 of the board of directors and any board committee of which he was a member. Audit Committee. The audit committee consists of two independent directors: Messrs. Boxer and Einspruch. An "independent director" is a director who is not an officer or employee of Wyndham, any affiliate of an officer or employee or any affiliate of (1) any advisor to Wyndham under an advisory agreement, (2) any lessee of any property of Wyndham, (3) any subsidiary of Wyndham or (4) any partnership which is an affiliate of Wyndham. The audit committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of Wyndham's internal accounting controls. The audit committee held 4 meetings during 1998. Compensation Committee. The compensation committee consists of two independent directors: Messrs. Leslie and Jacobson. The compensation committee determines compensation of Wyndham's executive officers and administers the Wyndham International 1997 Incentive Plan. The compensation committee held more than 20 meetings during 1998. Coordinating Committee. The coordinating committee consists of three independent directors: Messrs. Boxer and Weiser and Ms. Groenteman. The coordinating committee reviews and evaluates various proposals received from potential investors. The coordinating committee held more than 50 meetings during 1998. Director Compensation for Wyndham and Patriot Currently, any director who is not an employee of Wyndham or Patriot is paid an annual retainer fee of $25,000. The retainer fee is paid in quarterly installments of $6,250 each. In addition, each director is paid $1,250 for attendance at each meeting of Wyndham's or Patriot's Board of Directors, $1,000 for participating in a telephonic board meeting and $750 for attendance, whether in person or telephonic, at each meeting of a committee of Wyndham's or Patriot's Board of which such director is a member. Both the annual retainer fee and meeting fees are payable in cash, but each director may elect in advance to defer the receipt of all or part of their fees and to receive such deferred fees at a later date in the form of paired shares. In addition, Wyndham and Patriot reimburse directors for their out-of-pocket expenses incurred in connection with their service on the Boards of Directors. Directors who are employees of Wyndham or Patriot do not receive any fees for their service on the Boards of Directors or a committee thereof. Under the Wyndham 1997 Incentive Plan or the Patriot 1997 Incentive Plan, as the case may be, on the date of each annual meeting of stockholders, each non- employee director then in office will receive a grant of non-qualified options to purchase an additional 10,000 paired shares at the then current market price. All options granted to non-employee directors vest immediately upon the date of grant. At the 1998 Annual Meeting of Stockholders, Messrs. Boxer, Crow, Daniels, Deterding, Dillon, Leslie, Lyon, Ward and Weiser, Dr. Einspruch and Ms. Groenteman each were granted a non-qualified option to acquire 10,000 paired shares at an exercise price of $24.125. Mr. Jacobson was granted a non- qualified option to acquire 20,000 paired shares at an exercise price of $24.125 at the 1998 Annual Meeting of Stockholders since he serves on both the Wyndham and Patriot Boards. The Wyndham and Patriot Boards of Directors held numerous board meetings to consider strategic alternatives for the companies, including the negotiations with the investors and the Identified Party and the approval of the investment. A special coordinating committee of the Boards of Directors was also established and met numerous times during the last two months of 1998 and the first two months of 1999. The compensation committee also met several times to discuss special compensation issues. One director, Ms. Groenteman, who served as co-point 63 person of the coordinating committee, worked full-time on these matters. In light of their extraordinary effort, in lieu of the normal meeting fees for the last two months of 1998 and the first two months of 1999, each director not serving on either the compensation committee or the coordinating committee received $20,000 in fees; members of the compensation committees, other than Mr. Deterding, received $40,000 in fees; members of the coordinating committee, other than Mr. Deterding and Ms. Groenteman, received $65,000 in fees; Mr. Deterding, who served on both the coordinating committee and the compensation committee, received $85,000 in fees; and Ms. Groenteman received $200,000 in fees. These fees were payable in 1999 in either cash or deferred paired shares, at the election of each director. Messrs. Crow, Deterding, Dillon, Ward and Weiser and Ms. Groenteman elected to receive their fees in cash. Mr. Jacobson elected to receive his fees in deferred paired shares. Messrs. Boxer, Daniels, Fine, Leslie and Ruhfus and Dr. Einspruch are finalizing their elections as of the date of this joint proxy statement/prospectus. ITEM 11. EXECUTIVE COMPENSATION FOR PATRIOT Executive Compensation for Patriot The following table sets forth the base compensation that Patriot paid in 1998, 1997 and 1996 to its Chairman and Chief Executive Officer and to five executive officers other than the Chief Executive Officer of Patriot (collectively, the "Patriot Named Executive Officers") whose base salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1998. Summary Compensation Table
Long Term Annual Compensation(a) Compensation Awards ----------------------------- ------------------------ Securities Name and Restricted Underlying Principal Stock Options All Other Position Year Salary($) Bonus($)(b) Awards($) (#)(c) Compensation($) - --------- ---- --------- ----------- ---------- ---------- --------------- Paul A. Nussbaum (d).... 1998 $555,425 -- -- -- $ 1,630(e) Chief Executive Officer 1997 $407,500 $529,478 $6,930,124(f) 2,790,703(g) $45,869(h) and Chairman of the Board 1996 $247,500 $200,000 -- 161,002(i) -- William W. Evans III............. 1998 $374,461 -- $ 999,996(j) -- $ 289(h) President and Chief 1997 $275,440(k) $303,373 $4,525,068(l) 601,074(m) $ 148(h) Operating Officer Anne L. Raymond (n)..... 1998 $286,992 $ 50,000 -- 117,928(o) $ 252(p) Executive Vice President 1997 $208,300 $168,000 -- -- -- and Chief Financial Officer Paul Novak (q)... 1998 $280,416 -- -- 25,641(r) $ 155(h) Executive Vice President 1997 $131,252 $179,573 $1,286,250(s) 107,335(r) $ 92(h) Lawrence S. Jones........... 1998 (t) (t) (t) (t) (t) Executive Vice President and Treasurer Rex E. Stewart (u)..... 1998 $206,556 -- -- -- $ 75(h) Chief Financial Officer 1997 $207,375 $ 97,961 -- -- $ 201(h) and Treasurer 1996 $174,250 $ 75,000 $ 847,500(v) 42,933(w) --
64 - -------- (a) No Patriot Named Executive Officer received personal benefits or perquisites in excess of the lesser of $50,000 or 10% of their aggregate salary and bonus. (b) In accordance with the Patriot 1997 Incentive Plan, executive officers of Patriot were allowed to elect to receive all or a portion of their bonus either in cash or in paired shares. For 1997, if an executive officer chose to receive their bonus all or in part in paired shares, they received a 15% discount off of the fair market value of the paired shares as of January 6, 1998. The amounts included in the table above represent the fair market value of the paired shares received. For 1997, Mr. Nussbaum elected to receive his entire bonus in paired shares; Mr. Evans elected to receive $81,000 in cash and $222,373 in the form of paired shares; Mr. Novak elected to receive $82,500 in cash and $97,073 in the form of paired shares; Mr. Stewart elected to receive $45,000 in cash and $52,961 in the form of paired shares. (c) Share amounts reflect the stock dividend distributed on January 25, 1999 to stockholders of record on December 30, 1998. (d) Mr. Nussbaum resigned as an officer of Patriot on February 26, 1999. (e) Such amount includes $360 of term life insurance premiums paid by Patriot for the benefit of Mr. Nussbaum and $1,270 contributed by Patriot to Mr. Nussbaum's 401(k) account. (f) On March 18, 1997, Patriot awarded the equivalent of 280,005 restricted paired shares to Mr. Nussbaum. Taking into account the various stock splits which occurred in 1997, the equivalent to the market value of the paired shares on the date of grant was $24.75 and the market value of such paired shares on December 31, 1998 was $1,680,030. The restrictions on these shares lapsed with respect to one-third of the shares on March 18, 1998. The restrictions with respect to the balance of the shares lapsed on February 26, 1999 in connection with Mr. Nussbaum's resignation. (g) On April 1, 1997, Patriot granted non-qualified options to purchase the equivalent of 2,790,703 paired shares to Mr. Nussbaum. These options were intended to vest five years from the date of grant, on April 1, 2002, but became fully vested and exercisable on February 26, 1999 in connection with Mr. Nussbaum's resignation. (h) Such amount represents term life insurance premiums paid by Patriot for the benefit of the named executive officer. (i) On April 19, 1996, Patriot's predecessor granted non-qualified options to purchase the equivalent of 161,002 paired shares to Mr. Nussbaum. These options were intended to vest in seven equal annual installments beginning April 19, 1997, but became fully vested and exercisable on February 26, 1999 in connection with Mr. Nussbaum's resignation. (j) On December 31, 1998, Patriot awarded the equivalent of 166,666 restricted paired shares to Mr. Evans. The equivalent to the market value of the paired shares on the date of grant was $999,996. One-third of the award will become payable upon the closing of the investment and the related transactions and one-third on each of the first and second anniversary thereof. (k) Such amount includes $940 paid to Mr. Evans to cover commuting expenses. (l) On February 14, 1997, Patriot awarded the equivalent of 200,003 restricted paired shares to Mr. Evans. Taking into account the various stock splits which occurred in 1997, the equivalent to the market value of the paired shares on the date of grant was $22.625 and the market value of such paired shares on December 31, 1998 was $1,200,018. The restrictions lapsed with respect to 25% of the shares on March 1, 1998 and with respect to the balance of the shares on December 31, 1998. (m) On February 14, 1997, Patriot granted non-qualified options to purchase the equivalent of 601,074 paired shares to Mr. Evans. These options were to vest in 12 equal quarterly installments beginning on April 1, 1997, but became fully vested and exercisable on November 27, 1998. (n) Ms. Raymond returned from a leave of absence to the position of Executive Vice President, Chief Investment Officer and interim Chief Financial Officer on April 19, 1999. (o) On February 2, 1998, Patriot granted Ms. Raymond: 1) non-qualified options to purchase the equivalent of 10,733 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40% and 2) non-qualified options to purchase the equivalent of 88,925 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. On November 13, 1998, pursuant to an option repricing 65 program, the non-qualified options to purchase the equivalent of 10,733 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 1,967 paired shares and the non-qualified options to purchase the equivalent of 88,925 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 16,303 paired shares. See "Patriot Option Repricing Program". (p) Such amount includes $90 of term life insurance premiums paid by Patriot for the benefit of Ms. Raymond and $162 contributed by Patriot to Ms. Raymond's 401(k) account. (q) Mr. Novak's employment with Patriot terminated in May 1999. (r) On June 24, 1997, Patriot granted non-qualified options to purchase the equivalent of 107,335 paired shares to Mr. Novak which options vest in seven equal annual installments on the anniversary of June 24, 1997. On November 13, 1998, pursuant to an option repricing program, such non- qualified options were surrendered and exchanged for non-qualified options to purchase the equivalent of 25,641 paired shares. See "Patriot Option Repricing Program". (s) On June 24, 1997, Patriot awarded the equivalent of 60,000 restricted paired shares to Mr. Novak. The equivalent to the market price of the paired shares on the date of grant was $21.4375 and the market value of such paired shares on December 31, 1998 was $360,000. The restrictions on the shares were to lapse in five equal annual installments beginning on June 24, 1998 and ending on June 24, 2002, but in connection with Mr. Novak's termination, all restrictions lapsed in May 1999. (t) Mr. Jones commenced as an officer in March 1998 and was paid by Wyndham for his services as an officer of both Patriot and Wyndham. See the "Wyndham Summary Compensation Table." (u) Mr. Stewart resigned as an officer of Patriot on March 31, 1998. (v) On July 25, 1996, Patriot's predecessor awarded the equivalent of 60,000 restricted paired shares to Mr. Stewart. Taking into account the various stock splits which occurred in 1997, the equivalent to the market value of the paired shares on the date of grant was $14.125 and the market value of such paired shares on December 31, 1998 was $360,000. The restrictions lapse in four equal annual installments beginning on July 25, 1997. (w) On April 19, 1996, Patriot's predecessor granted non-qualified options to purchase the equivalent of 42,933 paired shares to Mr. Stewart. These options were to vest in seven equal annual installments beginning April 19, 1997 but became fully vested and exercisable on October 2, 1998 in connection with Mr. Stewart's resignation. 66 Option Grants in Fiscal Year 1998 for Patriot The following table sets forth the options granted with respect to the fiscal year ended December 31, 1998 to the Patriot Named Executive Officers. All amounts reported in the following table have been adjusted to reflect the stock dividend declared in the fourth quarter of 1998.
Potential Realizable Value at Assumed Annual Rates of Share Price Appreciation For Individual Grants Option Term --------------------------------------------------------------- ------------------------ Number of Percent of Total Shares Underlying Options Granted Options to Employees Exercise or Base Expiration Name Granted(#) in Fiscal Year Price($/SH) Date 5%($) 10%($) - ---- ----------------- ---------------- ---------------- ---------- ---------- ---------- Anne L. Raymond......... 88,925(a)(d) 32.2% $24.224 2/2/2008 $ 0(d) $ 0(d) 10,733(b)(d) 3.9% $24.224 2/2/2008 $ 0(d) $ 0(d) 16,303(a)(e) 25.4% $ 7.547 2/2/2008 $ 77,378 $ 196,092 1,967(b)(e) 3.1% $ 7.547 2/2/2008 $ 9,336 $ 23,659 Paul Novak.............. 25,641(c)(e) 39.9% $ 7.547 6/24/2007 $ 121,699 $ 308,409
- -------- (a) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. (b) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. (c) Such non-qualified options vest in seven equal annual installments on the anniversary of June 24, 1997. (d) Such non-qualified options were surrendered and canceled pursuant to the stock option repricing program and are therefore no longer outstanding. See "Patriot Stock Option Repricing Program." (e) Such non-qualified options were granted pursuant to the stock option repricing program. See "Patriot Stock Option Repricing Program." Option Exercises and Year-End Holdings for Patriot The following table sets forth the number of paired shares acquired upon the exercise of options during 1998 and the value of options held at the end of 1998 by the Patriot Named Executive Officers.
Number of Securities Underlying Value of Unexercised Shares Value Unexercised In-The-Money Options at Acquired on Realized Options at December 31, 1998 (#) December 31, 1998 ($) Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ---------- -------------------------------- ------------------------- Paul A. Nussbaum........ 449,818 $5,036,234 37,271/2,968,304 (a) William W. Evans........ -- -- 601,074/0 (a) Anne L. Raymond......... 109,760 $ 904,258 0/18,270 (a) Paul Novak.............. -- -- 3,663/21,978 (a) Rex E. Stewart.......... -- -- 225,403/0 (a)
- -------- (a) None of the unexercised options are in-the-money. 67 Patriot Stock Option Repricing Program Patriot commenced an option repricing program for certain optionees holding stock options with an exercise price per share in excess of $7.547 on November 13, 1998. The new exercise price was based on the average stock price for the five-day period beginning November 9, 1998 and ending November 13, 1998. The following table sets forth information with respect to the executive officers of Patriot relating to the repricing of certain options previously awarded to employees during fiscal years 1997 and 1998. All optionees, other than the directors and the top two executive officers, were given the opportunity to surrender certain options in exchange for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at an exercise price of $7.547 per share. The new options retain the original vesting and expiration dates of the old options. The options set forth below were the only options repriced for the executive officers in the last ten years. Pursuant to the anti-dilution provision of the Patriot 1997 Incentive Plan, the numbers of securities, stock prices and exercise prices reported in the following table have been adjusted to reflect the stock dividend declared for the fourth quarter of 1998. 10 Year Option Repricings
Length of Number of Market Number of Original Securities Price of Securities Option Term Underlying Stock at New Underlying Remaining at Date of Options Time of Exercise Price at Exercise Options Date of Name Repricing Repriced Repricing Time of Repricing Price After Repricing Repricing ---- --------- ---------- --------- ----------------- -------- --------------- ---------------- Anne L. Raymond......... 11/13/98 88,925 $7.279 $24.224 $7.547 16,303 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President and Chief Financial Officer Paul Novak.............. 11/13/98 107,335 $7.279 $21.079 $7.547 25,641 8 years 8 months Executive Vice President John P. Bohlmann........ 11/13/98 32,220 $7.279 $24.224 $7.547 5,903 8 years 8 months Senior Vice President 11/13/98 6,977 $7.279 $24.224 $7.547 1,279 9 years 3 months and General Counsel
Compensation Committee Report on Repricing of Options During fiscal 1998, the compensation committees determined that factors affecting the price of the paired shares made it necessary for Wyndham and Patriot to implement an option repricing program. Under this program, all optionees, other than the directors and the top two executive officers of Wyndham and the top two executive officers of Patriot, were given the opportunity to surrender options granted on or after January 15, 1997 in exchange for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at the average stock price for the five- day period beginning November 9, 1998 and ending November 13, 1998. The new options retain the original vesting and expiration dates of the old options. The objective of the Wyndham and Patriot stock option plans is to align the efforts of all employees toward the success of Wyndham and Patriot and to reward employees for their contributions to that success. The compensation committees determined that this option repricing program was necessary because equity incentives are an important component of the total compensation of each employee and play a substantial role in Wyndham's and Patriot's ability to retain the services of individuals essential to Wyndham's and Patriot's long- term financial success. Prior to implementation of the program, the market price of the paired shares had fallen and Wyndham and Patriot had begun to experience high staff turnover. The compensation committees felt that the effectiveness of the stock option program and Wyndham's and Patriot's ability to retain key employees would be significantly impaired unless value was restored to previously granted stock options in the form of repriced options for paired shares at prices more closely related to the current market price. Non-employee directors and the top two executive officers of Wyndham and the top two executive officers of Patriot were not eligible for participation in the option repricing program. All other executive officers were eligible in the option repricing program because the compensation committees concluded that these executives were not responsible for the decrease in the stock price. 68 Accordingly, during 1998, the compensation committees approved offering all current employees and officers, other than the top two executive officers of Wyndham and the top two executive officers of Patriot, an opportunity to surrender stock options issued between January 15, 1997 and November 13, 1998 with exercise prices above $8.10 for new options with an exercise price of $8.10 per share, the average market price of the paired shares for the five- day period beginning November 9, 1998 and ending November 13, 1998. Each optionee holding such options had the opportunity to elect to retain the old option or to accept new options for a reduced number of shares that have an equivalent Black-Scholes value. Wyndham and Patriot engaged a compensation consultant to assist in the implementation of the repricing program and the Black-Scholes valuation of the previously-granted stock options, with the goals of protecting interests of outside stockholders and maintaining the aggregate economic "value" of the stock options before and after the option repricing. The compensation committees did not accelerate the vesting of any regranted options, nor did they extend the time for exercise of any regranted options. For the fourth quarter of 1998, Wyndham and Patriot declared a stock dividend. Under the anti-dilution provisions of Wyndham's and Patriot's 1997 Incentive Plans, the compensation committees are given the discretion to take such action as they determine to be equitable in the event of stock dividends, stock split-up or similar occurrence. Accordingly, all options are further adjusted (both exercise prices and the number of option shares) to reflect the stock dividend. Therefore, the exercise price of the repriced options is further reduced to $7.547. The compensation committees believe that the stock option repricing program, which reflects both a reduction in the number of shares issuable upon exercise and a reduction in the per share exercise price but preserves the original vesting schedule and expiration dates of the original options, strikes an appropriate balance between the interests of Wyndham and Patriot, their stockholders and option holders. The lower exercise prices in effect under the repriced options make those options valuable once again to the option holders who are critical to Wyndham's and Patriot's future success and financial performance. Submitted by the Wyndham Compensation Committee Arch K. Jacobson James C. Leslie Submitted by the Patriot Compensation Committee John C. Deterding Gregory R. Dillon Arch K. Jacobson 69 Executive Compensation for Wyndham The following table sets forth the base compensation that Wyndham paid to its Chief Executive Officer and President and to five executive officers other than the Chief Executive Officer of Wyndham (collectively, the "Wyndham Named Executive Officers") whose base salary and bonus exceeded $100,000 during the fiscal year ending December 31, 1998. Summary Compensation Table
Long Term Annual Compensation(a) Compensation Awards ----------------------- ------------------------ Securities Restricted Underlying Name and Principal Stock Options All Other Position Year Salary($) Bonus($) Awards($) (#) (b) Compensation($) - ------------------ ---- --------- -------- ---------- ---------- --------------- James D. Carreker (c)... 1998 $571,036 -- -- -- $ 648(d) Chief Executive Officer and Chairman of the Board Karim Alibhai........... 1998 $353,886 $140,000 -- 300,532(e) $1,466(d) President and Chief 1997 $ 72,916 -- -- 300,532(f) -- Operating Officer Leslie V. Bentley....... 1998 $320,192 $120,000 -- 117,928(g) $2,308(d) Executive Vice President Stanley M. Koonce, Jr... 1998 $310,920 $120,000 -- 117,928(g) $ 792(d) Executive Vice President Richard A. Holtzman..... 1998 $348,070 $200,000 $ 930,000(h) 16,511(i) Executive Vice President Lawrence S. Jones....... 1998 $242,308 $150,000 $ 742,500(j) 115,919(k) $ 120(d) Executive Vice President and Treasurer
- -------- (a) No Wyndham Named Executive Officer received personal benefits or perquisites in excess of the lesser of $50,000 or 10% of their aggregate salary and bonus. (b) Share amounts reflect the stock dividend distributed on January 25, 1999 to stockholders of record on December 30, 1998. (c) Mr. Carreker became Chief Executive Officer of Wyndham in January 1998. (d) For Mr. Carreker, such amount includes $360 of term life insurance premiums paid by Wyndham for the benefit of Mr. Carreker and $288 contributed by Wyndham to Mr. Carreker's 401(k) account. For Mr. Alibhai, such amount includes $113 of term life insurance premiums paid by Wyndham for the benefit of Mr. Alibhai and $1,353 contributed by Wyndham to Mr. Alibhai's 401(k) account. For Mr. Bentley, such amount includes $139 of term life insurance premiums paid by Wyndham for the benefit of Mr. Bentley and $2,169 contributed by Wyndham to Mr. Bentley's 401(k) account. For Mr. Koonce, such amount includes $146 of term life insurance premiums paid by Wyndham for the benefit of Mr. Koonce and $646 contributed by Wyndham to Mr. Koonce's 401(k) account. For Mr. Jones, such amount represents term life insurance premiums paid by Wyndham for the benefit of Mr. Jones. (e) On June 12, 1998, Wyndham granted non-qualified options to purchase the equivalent of 300,532 paired shares to Mr. Alibhai. These options vest in 12 equal installments at the beginning of each calendar quarter starting on January 1, 1998 and ending on December 31, 2000. (f) On October 1, 1997, Wyndham granted non-qualified options to purchase the equivalent of 300,532 paired shares to Mr. Alibhai. These options vest in 12 equal installments at the beginning of each calendar quarter starting on January 1, 1997 and ending on December 31, 2000. 70 (g) On February 2, 1998, Wyndham granted the named executive: 1) non-qualified options to purchase the equivalent of 10,733 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40% and 2) non-qualified options to purchase the equivalent of 88,925 paired shares which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. On November 13, 1998, pursuant to an option repricing program, the non-qualified options to purchase the equivalent of 10,733 paired shares were surrendered and exchanged for non- qualified options to purchase the equivalent of 1,967 paired shares and the non-qualified options to purchase the equivalent of 88,925 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 16,303 paired shares. See "Wyndham Option Repricing Program". (h) On June 19, 1998, Wyndham awarded the equivalent of 40,000 restricted paired shares to Mr. Holtzman. The equivalent to the market price of the paired shares on the date of grant was $23.25 and the market value of such paired shares on December 31, 1998 was $240,000. The restrictions on the award will lapse on the anniversary of the date of grant at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. Mr. Holtzman is entitled to receive dividends on the total award during the vesting period. (i) On February 2, 1998, Wyndham granted non-qualified options to purchase the equivalent of 13,953 paired shares to Mr. Holtzman which options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. On November 13, 1998, pursuant to an option repricing program, such non-qualified options were surrendered and exchanged for non-qualified options to purchase the equivalent of 2,558 paired shares. See "Wyndham Option Repricing Program". (j) On March 9, 1998, Wyndham awarded the equivalent of 30,000 restricted paired shares to Mr. Jones. The equivalent to the market price of the paired shares on the date of grant was $24.75 and the market value of such paired shares on December 31, 1998 was $180,000. The restrictions on the award will lapse on the anniversary of the date of grant at the following rates: year 1: 25%; year 2: 50%; year 3: 75% and year 4: 100%. Mr. Jones is entitled to receive dividends on the total award during the vesting period. (k) On March 9, 1998, Wyndham granted non-qualified options to purchase the equivalent of 10,733 paired shares to Mr. Jones which options vest on the anniversary of March 9, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. On April 1, 1998, Wyndham granted non-qualified options to purchase the equivalent of 85,866 paired shares to Mr. Jones which options vest in 12 equal quarterly installments beginning on April 1, 1998. On November 13, 1998, pursuant to an option repricing program, the non-qualified options to purchase the equivalent of 10,733 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 2,147 paired shares and the non-qualified options to purchase the equivalent of 85,866 paired shares were surrendered and exchanged for non-qualified options to purchase the equivalent of 17,173 paired shares. See "Wyndham Option Repricing Program". 71 Option Grants in Fiscal Year 1998 for Wyndham The following table sets forth the options granted with respect to the fiscal year ended December 31, 1998 to the Wyndham Named Executive Officers. All amounts reported in the following table have been adjusted to reflect the stock dividend declared in the fourth quarter of 1998.
Potential Realizable Value at Assumed Annual Rates of Share Price Appreciation For Individual Grants Option Term ---------------------------------------------------------- ------------------------ Number of Percent of Total Shares Underlying Options Granted Exercise Options to Employees or Base Expiration Name Granted(#) in Fiscal Year Price($/SH) Date 5%($) 10%($) - ---- ----------------- ---------------- ----------- ---------- ---------- ---------- Karim Alibhai........... 300,532(a) 11.5% $19.449 6/12/2008 $3,675,919 $9,315,499 Leslie V. Bentley....... 10,733(b)(d) 0.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 88,925(c)(d) 3.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 1,967(e) 0.6% $ 7.547 2/2/2008 $ 9,336 $ 23,659 16,303(e) 4.9% $ 7.547 2/2/2008 $ 77,378 $ 196,092 Stanley M. Koonce, Jr. ................... 10,733(b)(d) 0.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 88,925(c)(d) 3.4% $24.224 2/2/2008 $ 0(d) $ 0(d) 1,967(e) 0.6% $ 7.547 2/2/2008 $ 9,336 $ 23,659 16,303(e) 4.9% $ 7.547 2/2/2008 $ 77,378 $ 196,092 Richard A. Holtzman..... 13,953(b)(d) 0.5% $24.224 2/2/2008 $ 0(d) $ 0(d) 2,558(e) 0.8% $ 7.547 2/2/2008 $ 12,141 $ 30,768 Lawrence S. Jones....... 85,866(f)(d) 3.3% $23.059 3/9/2008 $ 0(d) $ 0(d) 10,733(g)(d) 0.4% $23.059 3/9/2008 $ 0(d) $ 0(d) 17,173(e) 5.2% $ 7.547 3/9/2008 $ 81,508 $ 206,556 2,147(e) 0.6% $ 7.547 3/9/2008 $ 10,190 $ 25,824
- -------- (a) Such non-qualified options vest in 12 equal installments at the beginning of each calendar quarter starting on January 1, 1998 and ending on December 31, 2000. (b) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. (c) Such non-qualified options vest on the anniversary of February 2, 1998 at the following rates: year 1: 20%; year 2: 20%; year 3: 30% and year 4: 30%. (d) Such non-qualified options were surrendered and canceled pursuant to the stock option repricing program and are therefore no longer outstanding. See "Wyndham Stock Option Repricing Program." (e) Such non-qualified options were granted pursuant to the stock option repricing program. See "Wyndham Stock Option Repricing Program." (f) Such options vest in 12 quarterly installments beginning on April 1, 1998. (g) Such options vest on the anniversary of March 9, 1998 at the following rates: year 1: 30%; year 2: 30% and year 3: 40%. 72 Option Exercises and Year-End Holdings for Wyndham The following table sets forth the number of paired shares acquired upon the exercise of options during 1998 and the value of options held at the end of 1998 by the Wyndham Named Executive Officers.
Number of Securities Underlying Value of Unexercised Shares Value Unexercised In-The-Money Options at Acquired on Realized Options at December 31, 1998 (#) December 31, 1998 ($) Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ---------- -------------------------------- ------------------------- James D. Carreker....... 178,360 $2,200,606 78,048/0 (a) Leslie V. Bentley....... 82,320 $1,082,549 29,452/18,720 (a) Stanley M. Koonce, Jr... 82,320 $1,118,564 29,452/18,720 (a) Lawrence S. Jones....... -- -- 3,220/16,100 (a)
- -------- (a) None of the unexercised options are in-the-money. 73 Wyndham Stock Option Repricing Program Wyndham commenced an option repricing program for certain optionees holding stock options with an exercise price per share in excess of $7.547 on November 13, 1998. The new exercise price was based on the average stock price for the five-day period beginning November 9, 1998 and ending November 13, 1998. The following table sets forth information with respect to the executive officers of Wyndham relating to the repricing of certain options previously awarded to employees during fiscal years 1997 and 1998. All optionees, other than the directors and the top two executive officers, were given the opportunity to surrender certain options in exchange for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at an exercise price of $7.547 per share. The new options retain the original vesting and expiration dates of the old options. The options set forth below were the only options repriced for the executive officers in the last ten years. Pursuant to the anti-dilution provision of the Wyndham 1997 Incentive Plan, the numbers of securities, stock prices and exercise prices reported in the following table have been adjusted to reflect the stock dividend declared for the fourth quarter of 1998. 10 Year Option Repricings
Number of Number of Market Securities Length of Securities Price of Exercise Underlying Original Option Underlying Stock at Price at New Options Term Remaining Date of Options Time of Time of Exercise After at Date of Repricing Repriced Repricing Repricing Price Repricing Repricing Name --------- ---------- --------- --------- -------- ---------- ---------------- Leslie V. Bentley ...... 11/13/98 88,925 $7.279 $24.224 $7.547 16,303 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President Stanley M. Koonce, Jr... 11/13/98 88,925 $7.279 $24.224 $7.547 16,303 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President Lawrence S. Jones....... 11/13/98 85,866 $7.279 $23.059 $7.547 17,173 9 years 4 months Executive Vice 11/13/98 10,733 $7.279 $23.059 $7.547 2,147 9 years 4 months President and Treasurer Richard A. Holtzman..... 11/13/98 13,953 $7.279 $24.224 $7.547 2,558 9 years 3 months Executive Vice President Thomas W. Lattin........ 11/13/98 33,625 $7.279 $24.224 $7.547 6,617 9 years 3 months Executive Vice President Michael A. Grossman..... 11/13/98 41,806 $7.279 $24.224 $7.547 7,665 9 years 3 months Executive Vice 11/13/98 10,733 $7.279 $24.224 $7.547 1,967 9 years 3 months President Carla S. Moreland....... 11/13/98 32,200 $7.279 $24.224 $7.547 5,903 9 years 3 months Senior Vice President 11/13/98 6,977 $7.279 $24.224 $7.547 1,279 9 years 3 months and General Counsel
For Compensation Committee Report on Repricing of Options, see page 68. Report of the Compensation Committees of the Boards of Directors of Wyndham and Patriot on Executive Compensation This compensation committee report relates to compensation decisions made by Wyndham's and Patriot's compensation committees. This compensation committee report shall not be deemed incorporated by reference by any general statement incorporating by reference this joint proxy statement/prospectus into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that Wyndham or Patriot specifically incorporates this information by reference, and shall not otherwise be deemed filed under such laws. 74 Objectives of Executive Compensation. Wyndham's and Patriot's executive compensation programs are intended to attract, motivate and retain key executives who are capable of leading Wyndham and Patriot effectively and continuing their long-term growth. The compensation programs for executives are comprised of base salary, annual incentives and long-term incentive awards. Base salary is targeted to be within a reasonable range of compensation for comparable companies and for comparable levels of expertise by executives. Annual incentives are based upon the achievement of one or more performance goals. Wyndham and Patriot use stock options and other equity based compensation in their long-term incentive programs. Compensation Committee Procedures. The compensation committees of the Boards of Directors establish the general compensation policies of Wyndham and Patriot and implement and monitor the compensation and incentive plans and policies of Wyndham and Patriot. The Wyndham compensation committee is composed of two independent directors, none of whom is currently an officer or employee of Wyndham. The Patriot compensation committee is composed of three independent directors, none of whom is currently or was formerly an officer or employee of Patriot. Final compensation determinations for each fiscal year are generally made after the end of the fiscal year, after audited financial statements for such year become available. At that time, bonuses, if any, are determined for the past year's performance, base salaries for the following fiscal year are set and long-term incentives, if any, are granted. The compensation committees engage compensation consultants to advise the committees with respect to executive compensation matters, including compensation amounts and the relative allocation of compensation among base salary, annual incentive compensation and long-term incentive compensation. The compensation committees, working with these compensation consultants, established quantitative and qualitative performance targets for the year ending December 31, 1998 for both annual and long-term compensation awards. The results of this review are reflected in the annual incentive compensation decisions for the fiscal year ended December 31, 1998 and in the base salary levels for the fiscal year ending December 31, 1999. In setting base salary and determining annual incentive and long-term incentive awards, the compensation committees review compensation levels of executive officers at other hospitality companies and real estate investment trusts with revenues comparable to those of Wyndham and Patriot . Some of these companies are the same companies that comprise the NAREIT Total Return Equity Index to which Wyndham's and Patriot's stock performances are compared in this joint proxy statement/prospectus. The compensation committees believe that the compensation information for these groups is comparable since both groups contain hospitality companies of similar size and performance. The compensation committees also review data contained in published surveys on executive compensation. The compensation committees based their decisions regarding 1999 base salary and annual cash bonus amounts for the year ended December 31, 1998, in part, upon their review of such data. In general, the 1999 base salary for most executives is slightly above the median base salary for comparable companies. The cash bonus for 1998 is generally below the median for comparable companies. Members of the compensation committees consult periodically by telephone prior to their joint meetings at which compensation decisions are made. The compensation committees exercise their independent discretion in determining the compensation of the executive officers. Each element of the executive compensation, as well as the compensation of the Wyndham Chief Executive Officer and the Patriot Chief Executive Officer, is discussed separately below. Base Salary. Base salaries are determined by the compensation committees after reviewing salaries paid by hospitality companies of similar size and performance. For 1999, most executives received a base salary increase of about 5 percent. Annual Incentives. Annual incentives are provided in the form of cash bonuses. Annual incentives are designed to reward executives and management for the annual growth and achievement of Wyndham and Patriot. The compensation committees award cash bonuses to those executives who meet established goals, with the amount 75 of the award based upon each executive's base salary and the level to which such executive's performance met and exceeded the established goal. For the three top senior executives, the goal for bonus is two-fold: FFO per share growth and individual performance. The FFO per share growth for 1998 was not met, and therefore, the three top senior executives did not receive any cash bonuses. For executives in hotel operations, the goal for bonus is three-fold: revenue growth versus competition, EBITDA targets and individual performance. The revenue growth goals for hotel operations for 1998 were met, while EBITDA results were mixed. Executives in hotel operations with the title Executive Vice President and above who received commendable ratings from their immediate superiors received average bonuses equal to 40 percent of their base salaries. For executives in corporate operations, the goal for bonus is two-fold: achievement of key corporate objectives such as merger integrations and corporate procurement program and individual performance. Some of the corporate objectives were met and executives in corporate operations who received commendable ratings from their immediate superiors received average bonuses equal to 40 percent of their base salaries. In some instances, bonuses have been awarded pursuant to requirements in the employment agreements. Long-term Incentives. Long-term incentives are provided through the grant of restricted stock awards and stock options. These grants are designed to align executives' interests with the long-term goals of Wyndham and Patriot and the interests of Wyndham's and Patriot's stockholders and encourage high levels of stock ownership among executives. Wyndham and Patriot have a broad-based stock option award program that is granted annually to generally all employees with the title "General Manager" and up. These annual option grants vest over three years. New executives are eligible to receive a one-time initial option grant that vests over four years. In addition, executives who are marked as high potential and key to the long-term growth of Wyndham and Patriot may receive a Chairman's award which entitles them to receive a special option award that vests over five years. Both the one-time initial option grants and the Chairman's awards are more generous in size than the annual option grants. Executives who are parties to employment agreements and other selected executives may receive restricted stock grants that vest over four years. It is intended that only a select group of executives will receive restricted stock grants. Termination Agreement with Mr. Stewart. On March 31, 1998, Mr. Stewart's employment with Patriot terminated. In consideration of Mr. Stewart's agreement to provide consulting services, the compensation committee approved certain severance arrangements which are described in more detail in the section captioned "Wyndham and Patriot Employment Agreement and Termination Agreements." Compensation of Chief Executive Officers. The compensation committees set Mr. Carreker's and Mr. Nussbaum's base salaries for the year ended December 31, 1998 substantially in accordance with the policies described above relating to all executive officers. Mr. Carreker's 1998 base salary was $571,036. Mr. Nussbaum's 1998 base salary was $555,425, an amount that represents an increase of 11% over his 1997 base salary of $500,000. In both instances, the base salary was set to be at or around the median base salary of chief executive officers of comparable companies. In light of Wyndham's and Patriot's financial difficulties in 1998, the compensation committees did not award Mr. Carreker or Mr. Nussbaum a bonus for 1998. Except for the award made pursuant to the special retention plan described below, neither Mr. Carreker nor Mr. Nussbaum received any equity award in 1998. The compensation committees considered that it was very important to keep the top executives focused on facilitating a strategic transaction or investment that would be in the best interests of the stockholders. Towards this end, the compensation committees engaged a compensation consultant to assist them in designing a special retention and incentive plan for the top executives that would motivate the executives to support the best possible transactions for Wyndham and Patriot and that would be fair and reasonable to stockholders. The consultant advised the compensation committees that market practice would support the adoption of a special retention plan for those selected executives whose continued employment and active role in supporting a strategic transaction was critical. After careful review of the compensation consultant's report and consultation with counsel, the compensation committees approved a special retention plan. Payments would be made under the special retention plan upon the execution of, and in some instances, the closing of a strategic transaction. 76 The compensation committees considered the purchase agreement to be a strategic transaction that would entitle executives to receive payments under the special retention plan. Pursuant to the special retention plan, in February, 1999, Mr. Carreker received a paired share award in the amount of 216,666 paired shares. The first installment of 72,222 paired shares will become payable upon the closing of the investment and the related transactions, and 72,222 paired shares will become payable on each of the first and second anniversaries thereof. Pursuant to the special retention plan, in February, 1999, Mr. Nussbaum received a paired share award in the amount of 250,000 paired shares, payable in three installments. The first installment of 83,334 paired shares became payable upon the execution of the purchase agreement, and 83,333 paired shares will become payable on each of the first and second anniversaries thereof. Pursuant to the special retention plan, Mr. Evans received a paired share award in the amount of 166,666 paired shares. The first installment of 55,556 paired shares will become payable upon the closing of the investment and the related transactions, and 55,555 will become payable on each of the first and second anniversaries thereof. No other executive is eligible to receive an award under the special retention plan. Mr. Nussbaum was not initially eligible for the 1998 stock option repricing program described below. However, as part of his resignation, the Patriot compensation committee allowed Mr. Nussbaum to file an election, between June 30, 1999 and December 31, 1999, to exchange his outstanding options and new options of equal "Black-Scholes" value for fewer shares at the then current market price. Tax Considerations. The compensation committees' executive compensation strategies are designed to be cost- and tax-effective. Therefore, the compensation committees' policies are, where possible and considered appropriate, to preserve corporate tax deductions, including the deductibility of compensation paid to the Wyndham Named Officers and the Patriot Named Officers pursuant to Section 162(m) of the Internal Revenue Code, while maintaining the flexibility to approve compensation arrangements which they deem to be in the best interests of Wyndham and Patriot and their stockholders, but which may not always qualify for full tax deductibility. Submitted by the Wyndham Compensation Committee Arch K. Jacobson James C. Leslie Submitted by the Patriot Compensation Committee John C. Deterding Gregory R. Dillon Arch K. Jacobson Compensation Committee Interlocks and Insider Participation for Wyndham and Patriot With respect to Wyndham, during 1998 Mr. Carreker served on the compensation committee of Crow Family Holdings and Ms. Groenteman is a director of Wyndham and the chief operating officer of Crow Family Holdings. Wyndham and Patriot Employment Agreements and Termination Agreements Patriot entered into an employment agreement as of April 14, 1997 with Mr. Carreker, pursuant to which Mr. Carreker serves as Chief Executive Officer and as Chairman of the Board of Wyndham for a term of five years beginning on January 5, 1998, with an initial base salary of $500,000. This agreement is automatically extended for an additional two-year term unless either party elects to terminate it by notice in writing at least 90 days prior to the second anniversary of the agreement or even-numbered anniversary date thereafter. Mr. Carreker is eligible to receive incentive compensation to be determined by the compensation committee of an amount up to 100% of his base compensation. 77 Patriot entered into an employment agreement as of April 14, 1997 with Mr. Nussbaum, pursuant to which Mr. Nussbaum serves as Chief Executive Officer and Chairman of the Board of Patriot from July 1, 1997 until January 5, 2003, the fifth anniversary of the effective date of the Wyndham merger. Mr. Nussbaum's employment with Patriot terminated as of February 26, 1999, for reasons other than for cause. Pursuant to the terms of his separation agreement, which was based in part on the provisions of Mr. Nussbaum's employment agreement, Patriot has agreed to pay Mr. Nussbaum severance in the amount of $3.2 million, to provide for certain benefits for two years and an office and secretarial support for three years. In addition, all of Mr. Nussbaum's outstanding stock options vested and became exercisable and all of Mr. Nussbaum's restricted stock became fully vested and nonforfeitable. In accordance with the separation agreement, the stock options will remain outstanding for their remaining terms and at Mr. Nussbaum's election, which must be made between June 1, 1999 and December 31, 1999, Mr. Nussbaum's existing stock options will be exchanged on a Black-Scholes neutral basis for new options with an exercise price equal to the fair market value of the common stock at the time of the exchange. Pursuant to the separation agreement, Patriot also agrees to guarantee the repayment of Mr. Nussbaum's outstanding indebtedness to NationsBank, and upon the earlier of the closing of the investment and related transactions or December 31, 1999, Patriot will assume the NationsBank loan in exchange for a personal recourse note of Mr. Nussbaum which will become payable at the end of six years and will carry an interest rate of 5.5% per annum. Further, Mr. Nussbaum received a new grant of 250,000 shares of restricted stock, payable in three installments over two years. Finally, Mr. Nussbaum agreed to provide consulting services to Patriot for two years, for which he will receive a fee of $75,000 per month for the first 12 months and $50,000 per month for the next 12 months. Wyndham entered into an employment agreement as of October 1, 1997 with Mr. Alibhai, pursuant to which Mr. Alibhai serves as President and Chief Operating Officer of Wyndham for a term of three years beginning on September 30, 1997, with an initial base salary of $350,000. This agreement is automatically extended for an additional two-year term unless either party elects to terminate it by notice in writing at least 45 days prior the second anniversary of the agreement or even-numbered anniversary date thereof, to expiration of the agreement. Additionally, Mr. Alibhai is eligible to receive incentive compensation to be determined by the compensation committee of an amount up to 80% of his annual base compensation, but in no event less than $75,000. Upon termination of employment due to the death or disability of Messrs. Carreker, Nussbaum or Alibhai, all unexercisable stock options and non-vested stock-based grants will immediately vest and will be exercisable for one year. Additionally, Wyndham or Patriot as applicable, will pay health insurance premiums for one year. If employment is terminated by Messrs. Carreker, Nussbaum or Alibhai for "good reason," or if Wyndham or Patriot, as applicable, terminates his employment without "cause," Wyndham or Patriot, as applicable, will pay such executive a severance payment in accordance with Wyndham's or Patriot's, as applicable, then current severance policies. At a minimum, Messrs. Carreker and Nussbaum would be entitled to a severance payment equal to three times the sum of his average base compensation, (determined in accordance with Mr. Nussbaum's or Mr. Carreker's employment agreement, respectively, and average incentive compensation, determined in accordance with Mr. Nussbaum's or Mr. Carreker's employment agreement, respectively. Mr. Alibhai would be entitled to a minimum severance payment equal to the sum of his average base compensation and average incentive compensation for the remaining term of his agreement or 24 months, whichever is higher, subject to certain offsets. Additionally, for a period of three years, Wyndham or Patriot, as applicable, will provide Messrs. Carreker and Nussbaum with an office and related facilities and an assistant at a location of their respective choosing. For a period of one year, Wyndham or Patriot, as applicable, would pay for Messrs. Carreker and Nussbaum the cost of executive placement services. Certain stock options and stock-based grants held by the Messrs. Carreker, Nussbaum or Alibhai will also become exercisable or nonforfeitable. If a "change in control", as defined in the employment agreements, occurs and the executive's employment is terminated for any reason other than death, disability or voluntary resignation within 18 months of such change in control, Wyndham or Patriot, as applicable, must pay the executive a lump sum amount equal to the severance payment (as defined in the employement agreements) and all stock options and other stock-based awards will become immediately exercisable or non-forfeitable. In addition, Patriot will provide the executive with a tax gross-up payment to cover any excise tax due. 78 In June 1997, Patriot entered into an employment agreement with Mr. Novak, pursuant to which Mr. Novak serves as Executive Vice President--Acquisitions and Development for a three-year term beginning June 1997, with an initial base salary of $275,000. Mr. Novak's employment with Patriot terminated May, 1999, for reasons other than for cause. Pursuant to the terms of Mr. Novak's employment agreement, he is entitled to receive severance in the amount of $705,500 plus health insurance for two years. In addition, all of Mr. Novak's outstanding stock options vested and became exercisable and all of Mr. Novak's restricted stock became fully vested and nonforfeitable. Mr. Novak will also be reimbursed for executive outplacement and legal fees. In February 1997, Patriot entered into an employment agreement with William W. Evans III for a three- year term beginning March 1, 1997, with an initial base salary of $300,000. Pursuant to the agreement, Mr. Evans initially served in the Office of the Chairman of Patriot. In the event Mr. Evans' employment is terminated due to death or disability: (1) Mr. Evans' beneficiaries will receive the proceeds under applicable insurance policies, (2) all stock options and other stock-based awards will become immediately exercisable or nonforfeitable and (3) for a period of one year, Mr. Evans' spouse and dependents will receive medical and related health benefits under Patriot's existing plans. In the event Mr. Evans' employment is terminated for cause or Mr. Evans voluntarily terminates his employment, he will be entitled to receive any accrued but unpaid cash compensation and benefits through the date of termination and all vested options will continue to be exercisable for their exercise term, as if his employment had not been terminated. If Patriot terminates Mr. Evans without cause or if Mr. Evans terminates his employment due to a constructive termination (as defined in his employment agreement): (i.) all stock option and other stock-based awards will become immediately exercisable or nonforfeitable, (2) for the longer of one year or the remaining length of the term of the agreement, Mr. Evans and his spouse and dependents will receive medical and related health benefits under Patriot's existing plans and (3) Patriot will pay Mr. Evans within 30 days after the date of termination, a lump sum equal to his average base salary and average incentive compensation for the remaining length of the term of the agreement, or 12 months, whichever is greater. Mr. Evans is entitled to the same benefits as Messrs. Carreker and Nussbaum in the event of a change in control as defined in the employment agreement. Mr. Evans' employment agreement was amended in late 1998 to increase his base salary to $450,000, effective November, 1998, and provide for an incentive performance bonus payable upon successful completion of certain goals established by the compensation committee. Further, the employment agreement was amended to provide for a grant of 166,666 restricted paired shares, payable in three installments over two years, contingent upon the closing of the investment and the related transactions. In addition, Mr. Evans' outstanding stock options all became vested and exercisable and all his restricted stock grants became fully vested and non-forfeitable. Finally, Patriot provided Mr. Evans with a loan pursuant to his amended employment agreement to assist him with the payment of income taxes on paired shares that vested in February 1998. As of April 14, 1997, Patriot entered into an employment agreement with Ms. Raymond and Wyndham entered into employment agreements with Messrs. Bentley and Koonce, with initial base salaries of $275,000, $250,000 and $250,000, respectively. These employment agreements became effective on January 5, 1998. These employment agreements have a term of three years and have substantially similar provisions as Mr. Novak's employment agreement except that the severance payment is equal to the sum of the average base and incentive compensation payable for the remaining length of the three-year term, or 18 months, whichever is greater. Ms. Raymond's position is that of Executive Vice President and Chief Financial Officer of Patriot. Mr. Bentley's position is that of Executive Vice President of Wyndham, and Mr. Koonce's position is that of Executive Vice President, Marketing and Strategic Planning of Wyndham. On March 9, 1998, Mr. Jones entered into employment agreements with both Wyndham and Patriot for a three-year term with an initial base salary of $300,000. Mr. Jones's position is that of Executive Vice President and Treasurer of both Wyndham and Patriot. Mr. Jones's employment agreements have provisions that are 79 substantially similar to the employment agreements for Messrs. Bentley and Koonce, except that Mr. Jones's employment agreements provide for a minimum guarantee of incentive compensation equal to 50% of his base salary. Mr. Jones is also entitled to borrow up to $750,000 from Wyndham and Patriot. Upon Mr. Jones's termination of employment, if his total compensation earned while employed at Wyndham and Patriot, including stock-based compensation, is less than $3,000,000, a portion of the loan will be forgiven. On June 19, 1998, Wyndham entered into an employment agreement with Mr. Holtzman for a three-year term with an initial base salary of $300,000. Mr. Holtzman's position is that of Executive Vice President of Wyndham and President of Grand Bay Hotels and Resorts. Under Mr. Holtzman's employment agreement, he is entitled to receive a guaranteed bonus of $200,000 in his initial year of employment. If Mr. Holtzman's employment is terminated by Wyndham without "cause" or Mr. Holtzman resigns for a "good reason," he will be entitled to a severance payment equal to the sum of 50% of his average base pay and bonus and the amount payable under the Wyndham's then current severance policy. Certain stock options and stock-based grants held by Mr. Holtzman will become exercisable or nonforfeitable. For a period of six months, Wyndham would pay Mr. Holtzman the cost of executive placement services. Upon a "change in control," all of Mr. Holtzman's stock options and stock-based grants will become exercisable and nonforfeitable. On March 31, 1998, Mr. Stewart's employment with Patriot terminated. Pursuant to the terms of Mr. Stewart's separation agreement, Mr. Stewart continued to receive his base salary through October 2, 1998. In addition, all of Mr. Stewart's outstanding stock options vested and became exercisable on October 2, 1998 and will remain outstanding until October 2, 2000. Mr. Stewart's restricted stock will continue to vest in accordance to its original vesting schedule and will not be forfeited as a result of Mr. Stewart's termination. In consideration for the foregoing severance arrangements, Mr. Stewart provided consulting services to Patriot for 60 days. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Except as otherwise noted, the following table sets forth certain information as of March 22, 1999 as to the security ownership of those persons owning of record or known to Patriot and Wyndham to be the beneficial owner of more than five percent of the paired shares and the security ownership of Patriot preferred stock and paired shares by each of the directors of Patriot and Wyndham, director nominees and each of the executive officers of Patriot and Wyndham, and all directors and executive officers of Patriot and Wyndham as a group. All information with respect to beneficial ownership has been furnished by the respective director, director nominee, executive officer or five percent beneficial owner, as the case may be. Unless otherwise indicated, the persons named below have sole voting and investment power with respect to the number of shares set forth opposite their names. Beneficial ownership of the Patriot preferred stock and paired shares has been determined for this purpose in accordance with applicable rules and regulations promulgated under the Exchange Act. Except as otherwise described below, all shares of Patriot preferred stock and paired shares are owned directly and the indicated person has sole voting and investment power. The number of shares of Patriot preferred stock or paired shares also includes the number of shares that the person could receive if he, she or it redeemed his partnership units under certain circumstances. As of May 6, 1999, there were 239,838,771 paired shares; 4,860,876 shares of Patriot series A and 558,656 of Patriot series B preferred stock; 1,781,173 shares of Wyndham series A preferred stock; 1,781,181 shares of Wyndham series B preferred stock; 7,717,601 options to purchase a like number of paired shares; 1,324,804 preferred B paired partnership units, 655,892 preferred A Wyndham partnership units and 586,814 preferred C Wyndham partnership units outstanding. 80
Number of Shares and Amount and Nature of Percentof Name of Beneficial Owner Beneficial Ownership Class(a) - ------------------------ ------------------------ --------- Karim Alibhai............................ 5,347,240(b) 2.18% Karim Alibhai............................ 171,200(w)*** 4.81%*** Leslie V. Bentley........................ 624,432(c) * John P. Bohlmann......................... 42,428(d) * Leonard Boxer............................ 59,117(e) * James D. Carreker........................ 2,028,661(f) 1.01% Harlan R. Crow........................... 12,126,729(g)(v) 4.72% Harlan R. Crow........................... 4,860,876(h)** 100%** John H. Daniels.......................... 204,987(e) * John C. Deterding........................ 54,697(e) * Gregory R. Dillon........................ 54,697(e) * Burton C. Einspruch, M.D................. 24,472(i) * William W. Evans III..................... 773,637(j) * Milton Fine.............................. 5,066,390 2.07% Susan T. Groenteman...................... 30,768(v) * Michael Grossman......................... 13,986(k) * Richard Holtzman......................... 98,353(x) * Arch K. Jacobson......................... 77,237(l) * Lawrence S. Jones........................ 15,711(m) * Stanley M. Koonce........................ 613,438(n) * Thomas W. Lattin......................... 386,663(o) * James C. Leslie.......................... 15,033(v) * Carla S. Moreland........................ 70,879(p) * Paul Novak............................... 96,837(q) * Paul A. Nussbaum......................... 4,301,647(r) 1.83% Anne Raymond............................. 609,167(y) * Rolf E. Ruhfus........................... 1,896,505(z) * Philip J. Ward........................... 11,790(v) * Sherwood M. Weiser....................... 1,137,736(i)(s) * Sherwood M. Weiser....................... 788,795(w)*** 22.14%*** Executive officers and directors as a group (27 persons)...................... 35,765,236 14.77% CFHS, L.L.C./Crow Family, Inc............ 11,074,443(t) 4.73% 4,768,874(u)** 98.1%**
- -------- * Less than 1%. ** Patriot preferred stock *** Wyndham series A preferred stock and Wyndham series B preferred stock (a) Assumes that all partnership units and shares of Patriot preferred stock held by each person are redeemed for a paired share. The total number of shares outstanding in calculating the percentage assumes that none of the partnership units or shares of Patriot preferred stock held by other persons are redeemed for paired shares. Also assumes that all vested options to purchase paired shares are exercised. The total number of shares outstanding used in calculating the percentage assumes that no other vested or unvested options held by other persons are exercised. (b) Includes options to purchase 300,531 paired shares issued to Mr. Alibhai which are currently exercisable. The number of shares beneficially held by Mr. Alibhai includes an aggregate of 441,059 partnership units beneficially owned by Gencom Interest, Inc., a family corporation for which he serves as Vice President and of which he owns 30% of the outstanding capital stock. Mr. Alibhai disclaims beneficial ownership of these partnership units, except to the extent of his 40% ownership interest in such corporation. (c) Includes options to purchase 33,303 paired shares issued to Mr. Bentley which are currently exercisable. (d) Includes options to purchase 10,765 paired shares issued to Mr. Bohlmann which are currently exercisable. 81 (e) Includes options to purchase: 42,933, paired shares, all of which are currently exercisable. (f) Includes options to purchase 78,088 paired shares issued to Mr. Carreker which are currently exercisable. (g) The number of shares beneficially held by Mr. Crow include an aggregate of 7,265,853 paired shares held by various family limited partnerships, in which Mr. Crow controls the general partner and various family corporations and trust in which Mr. Crow exercises control over investment decisions. Mr. Crow disclaims beneficial ownership of such paired shares. The number of shares also include 4,860,876 shares of Patriot preferred stock held by the same family limited partnerships, corporations and trusts. Mr. Crow disclaims beneficial ownership of such Patriot preferred stock. Certain of such paired shares and Patriot preferred stock are also reported being held by CFHS LLC and Crow Family, Inc. (h) Shares of Patriot preferred stock. Mr. Crow disclaims beneficial ownership of such Patriot preferred stock to the extent such stock exceeds his pecuniary interest in the limited partnerships that directly hold the stock. Certain of such shares are also reported as held by CFHS LLC and Crow and Family, Inc. (i) Includes options to purchase 21,467 paired shares, all of which are currently exercisable. (j) Includes options to purchase 601,074 paired shares issued to Mr. Evans, all of which are currently exercisable. (k) Includes options to purchase 2,023 paired shares issued to Mr. Grossman, which are currently exercisable. (l) Includes options to purchase 64,400 paired shares issued to Mr. Jacobson, all of which are currently exercisable. (m) Includes options to purchase 6,011 paired shares issued to Mr. Jones which are currently exercisable. (n) Includes options to purchase 33,303 paired shares issued to Mr. Koonce which are currently exercisable. (o) Includes options to purchase 185,392 paired shares issued to Mr. Lattin which are currently exercisable. (p) Includes options to purchase 56,788 paired shares issued to Ms. Moreland which are currently exercisable. (q) Includes options to purchase 25,641 paired shares issued to Mr. Novak which are currently exercisable. (r) Includes options to purchase 3,005,575 paired shares issued to Mr. Nussbaum which are currently exercisable. (s) Includes an aggregate of 10,984 paired partnership units held by W L Tampa, Ltd., and 129,900 paired shares held by CHC International, Inc. Mr. Weiser disclaims beneficial ownership of such securities to the extent that they exceed his pecuniary interest in such entities. (t) Includes 6,305,569 paired shares and 4,768,874 shares of Patriot preferred stock held by various limited partnerships in which CFHS LLC serves as the general partner. All of such shares are also reported in Mr. Crow's beneficial holdings. Beneficial ownership information is based on the Schedule 13D filed by G-3 Securities, L.P., CFHS, LLC and Crow Family, Inc. on January 8, 1998. (u) Shares of Patriot preferred stock. All of such shares are also reported in Mr. Crow's beneficial holdings above. (v) Includes options to purchase 10,733 paired shares, all of which are currently exercisable. (w) Shares of Wyndham series A preferred stock and shares of Wyndham series B preferred stock. (x) Includes options to purchase 95,420 paired shares which are currently exercisable. (y) Includes options to purchase 3,851 paired shares which are currently exercisable. (z) Includes an aggregate of 1,766,936 of paired partnership units held by Summerfield Suites Management Corp., Summerfield Development Corp., Summerfield Suites Lease Corp., SFHC Lease Corp., Summerfield Investment Corp., and Witchita Consulting Co. 82 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Title Insurance Unity Title Company, a corporation wholly-owned by Mr. Nussbaum and members of his family, receives a portion of the title insurance premiums paid in connection with substantially all of the hotel acquisitions by the Companies. In many cases, these premiums are paid by the seller of the hotel, and in other cases are paid by the Companies. In 1998, Unity Title Company received in excess of $60,000 in title premiums related to hotel acquisitions by the companies. Wyndham Merger In connection with the merger of Wyndham Hotels Corporation with and into Patriot in January 1998 (the "Wyndham Merger"), Patriot entered into an Omnibus Purchase and Sale Agreement, as well as 11 individual purchase and sale agreements with various descendants of Mr. and Mrs. Trammell Crow, and various corporations, partnerships, trusts and other entities beneficially owned or controlled by such persons (collectively, the "Crow Family Members"), Mr. Carreker, Mr. Bentley and Mr. Koonce, for the acquisition of 11 hotels. Messrs. Carreker, Bentley and Koonce are referred to herein collectively as the "Wyndham Senior Executives." In connection with the Wyndham merger, the Crow Family Members received $52,227,598, 6,427,217 shares of paired common stock and 4,860,876 shares of Patriot preferred stock. Mr. Carreker received $7,661,087 and 1,638,988 shares of Paired Common Stock, Mr. Bentley received $2,189,652 and 468,423 shares of paired common stock and Mr. Koonce received $2,166,908 and 463,580 shares of paired common stock, and Ms. Groenteman received $174,530 and 37,337 shares of paired common stock. Additionally, after payment of outstanding indebtedness and other transactional expenses, the entities had available for distribution approximately $64,731,000 for the Crow Family Members, approximately $1,527,000 for Mr. Carreker, and approximately $462,000 for each of Mr. Bentley and Mr. Koonce. Also, in connection with the Wyndham Merger, stock option granted to Messrs. Carreker, Bentley and Koonce and Ms. Moreland became immediately exercisable in accordance with their terms. In connection with the Wyndham merger, Crow Family Members and certain Wyndham senior executives retained the right to receive additional consideration on April 30, 2000 based on a formula pertaining to the performance of Wyndham Riverfront New Orleans and Wyndham Garden Laguardia as set forth in the Omnibus Purchase and Sale Agreement dated April 14, 1997. Based on the performance of such properties as of December 31, 1998, the additional consideration would be $9,152,000 and $9,971,000, respectively. Mortgage Notes and Other Receivables from Unconsolidated Subsidiaries Patriot loaned $40,500,000 in the form of mortgage notes to PAH Ravinia, a corporation owned directly and indirectly by Paul Nussbaum Tom Lattin and Rex Stewart, as part of the financing for PAH Ravinia's acquisitions of the Crowne Plaza Ravinia Hotel. Patriot recognized $43,000 of interest income in 1998 related to such mortgage notes (excluding $4,268,000 of such interest eliminated for financial reporting purposes in 1998). Patriot has aggregate receivable (including mortgage notes) of $42,264,000 due from PAH Ravinia as of December 31, 1998. Patriot also loaned $31,400,000 in the form of a mortgage note to PAH Windwatch, a limited liability company owned directly and indirectly by Paul Nussbaum, Tom Lattin and Rex Stewart, as part of the financing for PAH Windwatch's acquisition of the Wyndham WindWatch Hotel. Patriot recognized $79,000 of interest income in 1998 related to such mortgage notes (excluding $2,759,000 of such interest eliminated for financial reporting purposes). Patriot had aggregate receivables (including the mortgage notes) of $32,830,000 due from PAH Windwatch as of December 31, 1998. Interstate Merger In connection with the Companies acquisition of Interstate Hotels Company in June 1998, Milton Fine and various entities beneficially owned or controlled by Mr. Fine received cash and 9,706,019 shares of paired common stock. 83 Summerfield Acquisition In connection with Wyndham's acquisition (the "Summerfield Acquisition") of SF Hotels Company, L.P. in June 1998, Rolf Ruhfus and entities beneficially owned or controlled by Mr. Ruhfus (the "Summerfield Entities") received $40,885,214 in cash and 1,368,009 units (the "Units") of limited partnership interest in each of the Patriot Partnership and the Wyndham Partnership. Additionally, pursuant to the terms of Contribution Agreement relating to the Summerfield Acquisition, the Summerfield Entities received an additional 327,993 Units in January 1999 and have earned the right to receive an additional estimated $55 million of consideration in January 2000 and January 2001 (payable, at the election of the Summerfield Entities, in either cash or additional OP Units). In connection with the Summerfield Acquisition, Rolf Ruhfus retained the right to a 15% participation with the Company in the appreciation in value of the Miami Airport Summerfield based on terms set forth in the carried interest payment agreement included as an exhibit to the Contribution Agreement. GAH Acquisition--Phase II In June 1998, in connection with certain transactions with affiliates of Gencom American Hospitality, Inc. and CHCI to acquire certain real estate and other assets, Mr. Alibhai received 156,863 partnership units and 85,600 shares of Wyndham Series A and B preferred stock. In connection with the company's acquisition of CHCI on June 30, 1998 the Company may be obligated on September 30, 2000 and September 30, 2002 to pay Mr. Alibhai and Mr. Weiser additional consideration, in each case based upon the performance of certain specific assets, based on formulas as set forth in certain merger and contribution agreements. Sale of Hotels to Milton Fine In November 1998, the companies sold the Courtyard by Marriott in Westborough, Massachusetts and the Residence Inn by Marriott in Pittsburgh, Pennsylvania, as well as 50% equity interest in each of the Courtyard by Marriott in Orange, Connecticut and the Courtyard by Marriott in St. Louis, Missouri to Milton Fine for an aggregate purchase price of $41.5 million. Loan from Beacon Capital Partners, L.P. In May 1999, Beacon Capital Partners, L.P. loaned $25 million to the companies. The loan, which bears interest at LIBOR plus 2.5% is due June 30, 1999. The loan is secured by a first mortgage on the Wyndham Batterymarch hotel, a property under construction in Boston, Massachusetts. The companies paid Beacon Capital Partners, L.P. a financing fee of 2.50% of the loan principal in May and will pay Beacon an additional fee of 0.75% of the loan principal upon maturity of the loan. Other Related Party Transactions The company licenses from Paul Nussbaum the name and trademark of Patriot American Hospitality, Inc. under a perpetual no-cost license agreement. During 1998, Wyndham received hotel management fees in the aggregate amount of $8,301,956 from the partnership owning Wyndham hotels ("Hotel Partnerships") listed below, in which Crow Family Members have an interest. Some or all of the Wyndham Senior Executive Officers have an ownership interest in such Hotel Partnerships. During 1998, Wyndham received payments in the aggregate amount of $14,285,904 from the Hotel Partnerships listed below, in which Crow Family Members have an interest. Some or all of the Wyndham Senior Executive Officers have an ownership interest in such Hotel Partnerships. The payments were received as reimbursements for certain administrative, tax legal, accounting, finance, risk management, sales and marketing services provided by Wyndham to such entities. 84
Hotel Partnership Hotel ----------------- ----- Anatole Hotel Investors, L.P................... Wyndham Anatole Bristol Hotel Associates, Ltd.................. Wyndham Bristol Playhouse Square Hotel Limited Partnership..... Wyndham Playhouse Square MTD Associates................................. Wyndham Milwaukee Center Hotel and Convention Center Partners I-XI. Ltd........................................... Wyndham Palm Springs Amgreen-Heritage Hotel Partnership, Ltd........ Wyndham Garden Hotel-Orange Waterfront-Hotel Associates, S.E............... Wyndham Old San Juan
During 1998, Wyndham received hotel management fees in the aggregate of $14,285,904 from the ownership entity of the hotel listed below in which Milton Fine, Paul Nussbaum, Karim Alibhai, Rolf Ruhfus, or Sherwood Weiser has an interest.
1998 Aggregate Management Milt Fine and Service Fees --------- ------------------------- Marriott-Harrisburg, PA $ 265,734 Marriott Reach Resort; Key West, Fla. 201,187 Marriott-Pittsburgh Airport 294,884 Marriott-Albany, NY 340,144 Marriott Mission Valley, San Diego 323,684 Marriott Minnetonka, Minneapolis 273,466 Marriott Courtyard; St. Louis 378,029 Marriott Courtyard-Westborough; Boston 208,065 Marriott Courtyard Orange 210,486 Marriott-Ft. Lauderdale 173,532 Marriott Greentree, Pittsburgh 658,613 Marriott Providence 1,383,983 Marriott Trumbull 1,554,174 Embassy Suites Chicago 377,213 Residence Inn Pittsburgh 46,866 Hilton Garden Inn-Chicago 99 Opening Paul Nussbaum ------------- Marriott Residence Inn, Houston $ 210,737 Holiday Inn Astrodome 215,020 Days Inn Astrodome 49,350 Sheraton Astrodome 524,190 Radisson Astrodome 94,849 Ramada Astrodome -- Sheraton Edmonton 216,335 Inn at Maingate dba Doubletree Maingate 204,220
85
Karim Alibhai ------------- Days Inn Astrodome, Houston $49,350 Days Inn Greenspoint, Houston 45,530 Hampton Inn Corpus Christi 46,824 Hawthorne Suites, Houston 86,974 Holiday Inn Stevens Point, Portage County, Wisconsin 273,629 Holiday Inn Astrodome, Houston 161,733 Inn at Maingate dba Doubletree Maingate, Kissimmee, FL 204,220 Marriott Residence Inn, Houston Medical Center 210,737 Sheraton Astrodome, Houston 524,190 Sheraton Edmonton, Alberta Canada 216,335 Omni Baltimore 916,675 Wyndham Miami-Biscayne Bay 449,110 Radisson Astrodome, Houston 94,849 Holiday Inn-Lenox 221,928 Wyndham Garden Market Center, Dallas 137,813 Days Inn Austin 40,314 Radisson Acapulco 21,639 Wyndham Montreal 256,793
Rolf Ruhfus ----------- Summerfield Suites-Bridgewater $141,990 Summerfield Suites-Burlington 136,446 Summerfield Suites Chicago Downtown 158,621 Summerfield Suites Charlotte 36,006 Summerfield Suites Gaithersburg 98,982 Summerfield Suites Pleasanton 51,339 Summerfield Suites Scottsdale 4,889 Summerfield Suites Harrison -- Summerfield Suites Plymouth Meeting -- Sierra Suites-Atlanta Perimeter -- Sierra Suites-Bothell 45,901 Sierra Suites-Chantilly 332 Sierra Suites-Orlando 40,272 Sierra Suites-Lake Buena Vista 36,740 Sierra Suites-Phoenix Metro Center 25,621 Sierra Suites-Piscataway 29,637 Sierra Suites-Pleasanton 23,613 Sierra Suites-Scottsdale 54,871 Sierra Suites-Waltham 32,470 Sierra Suites-Woburn 53,678 Sierra Suites-Atlanta Brookhaven -- Sierra Suites-San Jose -- Sherwood Weiser --------------- Holiday Inn Dayton Mall, Ohio 37,161 Sheraton University City, Philadelphia 161,089 Wyndham Miami-Biscayne Bay 449,110 Westin Hotel Providence, RI 143,982 Washington Duke 359,750
86 During 1998, the Company made lease payments of $455,414 to an affiliate of Summerfield Associates L.P., a partnership in which Rolf Ruhfus has an ownership interest, related to the hotels listed below: Sierra Suites Atlanta Cumberland 82,894 Sierra Suites Phoenix Camelback 181,989 Sierra Suites Westborough 190,531
During 1996, the Wyndham Senior Executive Officers incurred indebtedness to Wyndham Finance Limited Partnership ("WFLP"), a partnership owned by the Crow Family Members. Notes representing such loans were purchased by Wyndham Hotel Corporation in May of 1996 in connection with its formation for a cash payment to WFLP in the amount of $18,576,000, which is equivalent to the aggregate outstanding principal and accrued interest severally owing by the Wyndham Senior Executive Officers to WFLP. Such promissory notes, which are made payable to Wyndham, accrue interest at 6% per annum and are secured by the pledge of certain paired shares held by the note obligors. The outstanding principal and accrued interest (compounded quarterly) is payable in a single lump sum in May 2001. The aggregate principal amount of such loans, including interest are as follows:
December 31, 1998 ----------------- James D. Carreker.......................................... $5,770,000 Leslie V. Bentley.......................................... $2,124,000 Stanley M. Koonce, Jr. .................................... $2,163,000 Anne L. Raymond............................................ $5,197,000
During 1998, the Companies made payments in the aggregate amount of $1.2 million as lease payments for its corporate office space to an entity in which Crow Family Members have an ownership interest. In 1998 the Company made payments in the aggregate amounts of $66,000 as lease payments for the Summerfield divisional offices in Wichita, Kansas to Summerfield Associates L.P., a partnership in which Rolf Ruhfus has an ownership interest. The leases terminate in June 2001. During 1998, Wyndham made payments in the aggregate amount of $3,423,000 to Wyndham Travel Management Ltd. an entity owned by Lucy Billingsley (the daughter of Mr. Trammell Crow), for travel services provided to Wyndham. During 1998, Wyndham received payments in the aggregate amount of $117,900 from Crow-Los Patriots Limited, a senior assisted living facility in which certain Crow Family Members have an ownership interest. The payments were received as management fees. During 1998, Patriot provided William W. Evans, III with a non-recourse loan of $424,375 to assist Mr. Evans with the payment of income taxes in the vesting of his shares of Paired Common Stock. This loan is secured by 53,667 shares of Paired Common Stock and bears interest at 7.5% per annum. The loan is due on November 27, 2003, or 60 days after Mr. Evans' termination of employment, if earlier. During 1998, Wyndham provided Lawrence S. Jones with a non-recourse loan of $300,000. This loan bears interest at 7% per annum and is due on October 5, 2001. As provided in Mr. Jones's employment agreements, a portion of the loan may be forgiven upon Mr. Jones's termination of employment with the Companies. Wyndham is a guarantor of the obligations of Playhouse Square Hotel Limited Partnership (the owners of which include Crow Family Members and the Wyndham Senior Executive Officers) to fund operating deficits relating to such Hotel Partnership. The guarantee requires the guarantors (including Wyndham) to advance up to $600,000 per year to the extent the Hotel Partnership experiences operating deficits, with maximum required advances of $2.3 million over the term of the guarantee extending from 1995 to 2000. Playhouse Square Hotel Limited Partnership has caused to be deposited the sum of $1,000,000 as reserve to secure the payment of the guaranteed obligations and to fund operating deficits. Wyndham has not to date been required to make any advance under the guarantee. 87 Pursuant to the terms of its management agreement relating to the Wyndham Hotel at Los Angeles Airport (the "LAX"), Wyndham agreed to loan $4,560,000 to be applied to costs of refurbishment of the LAX. The refurbishment loan is evidenced by a promissory note (the "Note Receivable"), which has been partially funded in the amount of $4,237,000 as of December 31, 1998. Wyndham's obligation to make the remaining advances under the refurbishment loan is secured by a letter of credit, which, in turn, is collateralized by $440,241 (in cash) as of December 31, 1998. Prior to the formation of Wyndham, WHC LAX Associates, L.P. ("WHC LAX"), a limited partnership owned by Crow Family Members and the Wyndham Senior Executive Officers, paid Wyndham $4,560,000 in return for Wyndham's agreement to pay to WHC LAX all payments that Wyndham receives under the Note Receivable. Wyndham also agreed that, insofar as the WHC LAX's $4,560,000 payment to Wyndham exceeds advances that Wyndham is obligated to make, but has not yet made, under the Note Receivable, it would pay to WHC LAX interest at a variable rate that has ranged from 5.25% to 5.81% per annum on the unfunded amounts. As of December 31, 1998, Wyndham has accrued such interest in the amount of $71,226. In 1996, Wyndham entered into a five year service agreement with ISIS 2000, an entity owned by Crow Family Members and the Wyndham Senior Executive Officers, whereby ISIS 2000 will provide centralized reservations and property management services to all Wyndham brand hotels. The services will be provided for a fee comprised of an initial link-up charge plus a per reservation fee and a per hotel charge for the property management system. The service fee incurred by Wyndham totaled $4,368,000 in 1998. Wyndham has entered into an asset management agreement with ISIS 2000 providing for human resource, finance, accounting, payroll, legal and tax services. In addition, Wyndham had guaranteed operating leases on behalf of ISIS 2000 in the approximate amount of $1.8 million as of December 31, 1998. In connection with the Wyndham Merger, each of the owners of ISIS 2000 granted an option (collectively, the "ISIS Options") to Patriot to purchase their ownership interests in ISIS 2000. The exercise price of the ISIS Options is equal to an amount that would yield an internal rate of return equal to 12.5% on total capital contribution by the owners of ISIS 2000 as of the date of exercise. On May 7, 1999, Patriot exercised the ISIS options for an aggregate exercise price of $3,073,000. In 1998 the Company made payments in the aggregate amount of $5,467,000 to Kinetic Group Limited Partnership, an entity 50% owned by Trammell Crow Company and 50% owned by an entity owned by Crow Family Members and certain Senior Executive Officers. The payments were made under the terms of a service agreement whereby Kinetic Group Limited Partnership provides management information services to the Companies. In connection with the Wyndham merger, the 50% entity owned by Crow Family Members and certain Senior Executive Officers granted options to Patriot to purchase their ownership interests in the 50% owner of Kinetic Group Limited Partnership. The exercise price of such options is $100.00. In 1997, Wyndham entered into a construction loan agreement with the Wyndham Anatole Hotel (the "Anatole Hotel"), in which Crow Family Members have an ownership interest. Under the agreement, Wyndham made a loan in the amount of $10,000,000 for the construction costs of the hotel. Crow Family Members retained the right to receive additional consideration in an aggregate amount of up to $3,000,000 related to Wyndham Greenspoint- Houston and Wyndham-Midtown Atlanta based on contingencies related to target returns on invested capital as set forth in certain purchase and sale agreements prior to the Wyndham merger and which survive the applicable termination agreement. In 1998 the Company managed Wyndham branded hotels for certain affiliates of Hampstead Group L.L.C. An entity owned by Crow Family Members and certain Senior Executive Officers (Hamcontinpay) may be entitled to a contingent payment at such time as all such hotels achieve an investment return target of 15% on all equity capital invested through such program plus certain overhead costs. The amount of such contingent payment is 10% of all cash proceeds realized in excess of the investment return target. Wyndham has made insurance premium payments to Wynright Insurance ("Wynright"), an entity owned by Crow Family Members and the Wyndham Senior Executive Officers, with respect to certain insurance policies maintained for the benefit of Wyndham and hotels owned or leased by Wyndham. Such payments totaled $730,000 in 1998. 88 In 1996, a subsidiary of Wyndham entered into a master management agreement with Homegate, an entity in which Crow Family Members have an interest. On October 31, 1997, the management agreement with Homegate was terminated and Wyndham received $8,000,000 in cash and a promissory note in the amount of $3,000,000 in exchange for the termination. The promissory note was collected on January 9, 1998. Leonard Boxer, a director of Wyndham, is a partner is Stroock & Stroock & Lavan, a law firm that has advised Patriot on certain matters relating to the acquisition of certain real property. In 1998 the Company paid Rolf Ruhfus in excess of $598,393 in consulting fees under terms set forth in a consulting agreement entered into in connection with the Summerfield Acquisition. The Consulting Agreement expires in June 1999. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act, requires the companies' officers, directors and persons who beneficially own more than ten percent of the paired shares to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent beneficial owners also are required by rules promulgated by the SEC to furnish the companies with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to the companies, or written representations that no Form 5 filings were required, Wyndham and Patriot believe that during 1998 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with except that: (1) Mr. Lyon inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the redemption and distribution of certain paired partnership units; (2) Mr. Lyon inadvertently failed to file a Form 4 with the SEC on a timely basis to report several sales of paired shares; (3) Mr. Weiser inadvertently failed to file a Form 5 with the SEC on a timely basis with respect to the redemption and distribution of certain paired partnership units and the sale of certain paired shares; (4) Mr. Holtzman inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to certain employee stock options and he and Ms. Priest both inadvertently failed to file a Form 3 with the SEC on a timely basis when they became reporting persons; (5) Mr. Alibhai inadvertently failed to file a Form 4 with the SEC on a timely basis to report the disposition of certain preferred C Wyndham partnership units; (6) Mr. Grossman inadvertently failed to file a Form 4 with the SEC on a timely basis to report the grant of certain paired shares as a bonus; (7) Mr. Novak inadvertently failed to file a Form 4 with the SEC on a timely basis to report the acquisition of certain paired shares acquired in the Wyndham merger;(8) Mr. Weiser inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the redemption of certain paired partnership units and a Form 4 with respect to the redemption of certain paired partnership units and the sale of certain paired shares; (9) Mr. Bohlmann inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the repricing of certain employee stock options and with respect to the purchase of certain paired shares; and (10) Mr. Lattin inadvertently failed to file a Form 4 with the SEC on a timely basis with respect to the repricing of certain employee stock options. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K (a) The index to the audited financial statements and financial statement schedules is included on page F-1 of this report. The financial statements are included herein at pages F-2 through F-59. The following financial statement schedules are included herein at pages F-60 through F-71: Schedule III--Real Estate and Accumulated Depreciation for Patriot American Hospitality, Inc. Schedule IV--Mortgage Loans on Real Estate for Patriot American Hospitality, Inc. All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted. 89 (b) Reports on Form 8-K for the quarter ended December 31, 1998: Joint Current Report on Form 8-K, of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated November 9, 1998 (Nos. 001-09319 and 001-09320 filed November 9, 1998), as amended November 10, 1998, reporting under Item 5 current developments regarding combined liquidity and capital resources, the forward contracts the treasury rate lock agreements, Hurricane Georges and third quarter 1998 earnings. Joint Current Report on Form 8-K, of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated November 27, 1998 (Nos. 001-09319 and 001-09320 filed December 3, 1998) reporting under Item 5 current developments regarding combined funds from operations for the three months ending December 31, 1998. Joint Current Report on Form 8-K, of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated December 16, 1998 (Nos. 001-09319 and 001-09320 filed December 16, 1998) reporting under Item 5 current developments regarding a letter of intent with a group of investors for a $1 billion equity investment. Joint Current Report on Form 8-K, of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated December 16, 1998 (Nos. 001-09319 and 001-09320 filed December 18, 1998) reporting under Item 5 current developments regarding potential asset sales, the forward contracts and fourth quarter 1998 earnings. Joint Current Report on Form 8-K, of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated December 20, 1998 (Nos. 001-09319 and 001-09320 filed December 22, 1998) reporting under Item 5 the adoption by the Boards of Directors of a Shareholder Rights Agreement. (c) Exhibits:
Exhibit No. Description ------- ------------------------------------------------- Statement regarding computation of ratios (filed 12.1 herewith). Significant Subsidiaries of Patriot and Wyndham 21.1 (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith). 24.1 Powers of Attorney (included on signature pages). Financial Data Schedule of Patriot (filed 27.1 herewith). Financial Data Schedule of Wyndham (filed 27.2 herewith). 99. 1 Letter dated February 28, 1999 by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and UBS, AG, London Branch 99.2 Letter dated February 28, 1999 by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and PaineWebber Financial Products, Inc. 99.3 Letter dated February 28, 1999 by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and NationsBanc Mortgage 99.4 Executive employment agreement dated December 11, 1998 between Carla Moreland and Wyndham International, Inc. 99.5 Letter agreement dated April 1, 1998 between Rex E. Stewart and Wyndham International, Inc.
90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of the Registrants has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, May 7, 1999. PATRIOT AMERICAN HOSPITALITY, INC. /s/ James D. Carreker By: _________________________________ James D. Carreker Chief Executive Officer 91 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of the Registrants has duly caused the Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, May 7, 1999. WYNDHAM INTERNATIONAL, INC. /s/ James D. Carreker By: _________________________________ James D. Carreker Chairman of the Board and Chief Executive Officer 92 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page ---- HISTORICAL FINANCIAL INFORMATION Combined Patriot American Hospitality, Inc. and Wyndham International, Inc.: Report of Independent Auditors--Ernst & Young LLP....................... F-2 Combined Balance Sheets as of December 31, 1998 and 1997................ F-3 Combined Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................................................... F-4 Combined Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996................................................ F-5 Combined Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................................................... F-6 Patriot American Hospitality, Inc.: Consolidated Balance Sheets as of December 31, 1998 and 1997.......... F-7 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.................................................. F-8 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996..................................... F-9 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997and 1996................................................... F-10 Wyndham International, Inc.: Consolidated Balance Sheets as of December 31, 1998 and 1997.......... F-11 Consolidated Statements of Operations for the year ended December 31, 1998 and the six months ended December 31, 1997...................... F-12 Consolidated Statements of Shareholders' Equity for the year ended December 31, 1998 and the six months ended December 31, 1997......... F-13 Consolidated Statements of Cash Flows for the year ended December 31, 1998 and the six months ended December 31, 1997...................... F-14 Notes to Financial Statements........................................... F-15 Financial Statement Schedules: Schedule III--Real Estate and Accumulated Depreciation.................. F-60 Schedule IV--Mortgage Loans on Real Estate.............................. F-71
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Patriot American Hospitality, Inc. and Wyndham International, Inc. We have audited (i) the accompanying consolidated balance sheets of Patriot American Hospitality, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998; (ii) the accompanying consolidated balance sheets of Wyndham International, Inc. (formerly known as Patriot American Hospitality Operating Company) as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended December 31, 1998 and the six months ended December 31, 1997; and (iii) the accompanying combined balance sheets of Patriot American Hospitality, Inc. and Wyndham International, Inc. (the "Companies") as of December 31, 1998 and 1997, and the related combined statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements and schedules are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements and schedules 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, (i) the consolidated financial position of Patriot American Hospitality, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998; (ii) the consolidated financial position of Wyndham International, Inc. at December 31, 1998 and 1997 and the consolidated results of its operations and its cash flows for the year ended December 31, 1998 and the six months ended December 31, 1997; and (iii) the combined financial position of the Companies at December 31, 1998 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Dallas, Texas March 1, 1999 F-2 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. COMBINED BALANCE SHEETS (in thousands, except share amounts)
December 31, December 31, 1998 1997 ------------ ------------ ASSETS Investment in real estate and related improvements and land held for development, net of accumulated depreciation of $252,580 in 1998 and $68,805 in 1997................................................ $5,585,616 $2,044,649 Cash and cash equivalents............................ 123,085 42,431 Restricted cash...................................... 35,869 5,005 Accounts and lease revenue receivable................ 194,583 57,046 Investment in unconsolidated subsidiaries............ 146,912 11,802 Mortgage notes and other receivables from unconsolidated subsidiaries......................... 78,403 76,419 Mortgage notes and other receivables................. 41,334 12,983 Management contracts, net of accumulated amortization of $11,258 in 1998 and $1,574 in 1997............... 194,014 20,879 Leaseholds, net of accumulated amortization of $5,989 in 1998............................................. 179,922 -- Trade names and franchise costs, net of accumulated amortization of $6,670 in 1998 and $122 in 1997..... 125,974 11,166 Goodwill and intangibles, net of accumulated amortization of $20,895 in 1998 and $1,851 in 1997.. 553,889 126,007 Deferred expenses, net of accumulated amortization of $29,136 in 1998 and $2,097 in 1997.................. 37,998 21,417 Deferred acquisition costs........................... 16,144 52,500 Inventories.......................................... 23,583 10,450 Other assets......................................... 78,344 15,099 ---------- ---------- Total assets........................................ $7,415,670 $2,507,853 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under credit facility, term loans, mortgage notes and capital leases................... $3,857,521 $1,112,709 Accounts payable and accrued expenses................ 313,831 78,468 Dividends and distributions payable.................. -- 27,636 Deposits............................................. 26,392 12,423 Due to unconsolidated subsidiaries................... 7,919 7,304 Deferred income taxes................................ 123,463 9,550 Minority interest in the Operating Partnerships...... 253,970 220,177 Minority interest in consolidated subsidiaries....... 229,537 49,694 Commitment and contingencies Shareholders' equity: Preferred stock, $0.01 par value, authorized: 100,000,000 shares each; shares issued and outstanding: 8,981,886 shares in 1998.............. 90 -- Excess stock (paired shares), $0.01 par value, authorized: 750,000,000 shares each; no shares issued and outstanding............................. -- -- Common stock (paired shares), $0.01 par value, authorized: 650,000,000 shares each; issued and outstanding: 213,521,647 shares in 1998 and 73,276,716 shares in 1997.......................... 4,270 1,466 Additional paid in capital.......................... 3,024,540 1,070,973 Notes receivable from shareholders and affiliates... (16,364) -- Unearned stock compensation, net of accumulated amortization of $13,447 in 1998 and $5,825 in 1997............................................ (5,494) (13,116) Unrealized loss on securities available for sale.... (1,245) -- Unrealized foreign exchange gain.................... 2,749 -- Accumulated deficit and dividend distributions...... (405,509) (69,431) ---------- ---------- Total shareholders' equity.......................... 2,603,037 989,892 ---------- ---------- Total liabilities and shareholders' equity.......... $7,415,670 $2,507,853 ========== ==========
See notes to financial statements. F-3 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. COMBINED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years Ended December 31, ----------------------------- 1998 1997 1996 ---------- -------- ------- Revenue: Hotel revenue................................. $1,842,682 $167,727 $ -- Participating lease revenue................... 58,440 127,033 75,893 Racecourse facility and land lease revenue.... 51,259 26,511 -- Management fee and service fee income......... 89,067 7,088 -- Interest and other income..................... 14,893 6,676 600 ---------- -------- ------- Total revenue............................... 2,056,341 335,035 76,493 ---------- -------- ------- Expenses: Hotel expenses................................ 1,173,756 118,317 -- Racing facility operations.................... 43,198 21,620 -- Real estate and personal property taxes and casualty insurance........................... 68,008 17,958 7,150 General and administrative.................... 117,666 17,181 4,500 Ground lease expense.......................... 110,108 4,117 1,075 Interest expense.............................. 260,103 50,531 7,380 Cost of acquiring leaseholds and license agreements................................... 64,407 54,499 -- Treasury lock settlement...................... 49,334 -- -- Loss on sale of assets........................ 9,453 -- -- Impairment loss on assets held for sale....... 51,081 -- -- Depreciation and amortization................. 231,233 52,685 17,420 ---------- -------- ------- Total expenses.............................. 2,178,347 336,908 37,525 ---------- -------- ------- Operating (loss) income......................... (122,006) (1,873) 38,968 Equity in earnings of unconsolidated subsidiaries................................. 9,498 6,015 5,845 ---------- -------- ------- (Loss) income before income tax provision, minority interests and extraordinary item...... (112,508) 4,142 44,813 Income tax provision.......................... (17,122) (481) -- ---------- -------- ------- (Loss) income before minority interests and extraordinary item............................. (129,630) 3,661 44,813 Minority interest in the Operating Partnerships................................. 12,651 (1,684) (6,767) Minority interest in consolidated subsidiaries................................. (9,427) (1,615) (55) ---------- -------- ------- (Loss) income before extraordinary item......... (126,406) 362 37,991 Extraordinary loss from early extinguishment of debt, net of minority interest and income taxes........................................ (31,817) (2,534) -- ---------- -------- ------- Net (loss) income............................... $ (158,223) $ (2,172) $37,991 ========== ======== ======= Basic (loss) income (attributable) available to common shareholders: Net (loss) income............................. $ (158,223) $ (2,172) $37,991 Adjustment for equity forwards................ (21,151) -- -- Preferred stock dividends..................... (7,956) -- -- ---------- -------- ------- Basic net (loss) income....................... $ (187,330) $ (2,172) $37,991 ========== ======== ======= Basic (loss) earnings per common paired share: (Loss) income before extraordinary item....... $ (1.13) $ 0.01 $ 0.84 Extraordinary loss............................ (0.23) (0.04) -- ---------- -------- ------- Net (loss) income per common paired share... $ (1.36) $ (0.03) $ 0.84 ========== ======== ======= Diluted (loss) income (attributable) available to common shareholders: Net (loss) income............................. $ (158,223) $ (2,172) $37,991 Adjustment for equity forwards................ (188,392) -- -- Preferred stock dividends..................... (7,956) -- -- ---------- -------- ------- Diluted net (loss) income..................... $ (354,571) $ (2,172) $37,991 ========== ======== ======= Diluted (loss) earnings per common paired share: (Loss) income before extraordinary item....... $ (2.34) $ 0.01 $ 0.83 Extraordinary loss............................ (0.23) (0.04) $ -- ---------- -------- ------- Net (loss) income per common paired share... $ (2.57) $ (0.03) $ 0.83 ========== ======== =======
See notes to financial statements. F-4 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and per share data)
Preferred Stock Common Stock Notes --------------- -------------------------------- Receivable Unearned Accumulated Patriot Wyndham Additional From Share- Stock Deficit and Number Par Number Number Par Paid in holders and Compen- Dividend of Shares Value of Shares of Shares Value Capital affiliates sation Distributions --------- ----- ----------- ----------- ------ ---------- ----------- -------- ------------- Balance, December 31, 1995......... -- $ -- 29,331,870 -- $ 293 $ 264,515 $ -- $(1,351) $ (1,679) Issuance of shares, net of offering expenses........ -- -- 13,916,186 -- 139 181,253 -- -- -- Issuance of shares to employees and directors....... -- -- 365,440 -- 4 5,177 -- (5,144) -- Redemption price of OP units in excess of book value........... -- -- -- -- -- (8,841) - -- -- Net income...... -- -- -- -- -- -- -- -- 37,991 Amortization of unearned stock compensation.... -- -- -- -- -- -- -- 1,068 -- Cash dividends.. -- -- -- -- -- -- -- -- (36,386) --------- ----- ----------- ----------- ------ ---------- -------- ------- --------- Balance, December 31, 1996......... -- -- 43,613,496 -- 436 442,104 -- (5,427) (74) Issuance of shares for mergers and acquisition of properties...... -- -- 12,824,433 57,135,658 699 231,247 -- -- -- Issuance of shares, net of offering expenses........ -- -- 15,830,033 15,830,033 318 386,417 -- -- -- Issuance of shares to employees and directors....... -- -- 547,867 4,167 5 12,896 -- (12,839) -- Forfeiture of unvested employee stock grants.......... -- -- (42,900) (42,900) -- (464) -- 464 -- Issuance of shares for exercise of options......... -- -- 314,967 310,938 6 2,301 -- -- -- Issuance of shares to redeem OP units........ -- -- 188,820 38,820 2 2,554 -- -- -- Redemption price of OP units in excess of book value........... -- -- -- -- -- (6,082) -- -- -- Net loss........ -- -- -- -- -- -- -- -- (2,172) Amortization of unearned stock compensation.... -- -- -- -- -- -- -- 4,686 -- Cash dividends -- -- -- -- -- -- -- -- (67,185) --------- ----- ----------- ----------- ------ ---------- -------- ------- --------- Balance, December 31, 1997......... -- -- 73,276,716 73,276,716 1,466 1,070,973 -- (13,116) (69,431) Issuance of shares for mergers and acquisition of properties...... 8,423,230 85 59,491,863 59,491,863 1,190 1,607,050 -- -- -- Issuance of shares, net of offering expenses........ -- -- 64,084,627 64,084,627 1,282 257,439 -- -- -- Return of capital......... -- -- -- -- -- (52,873) -- -- -- Issuance of shares to employees and directors....... -- -- 39,790 39,790 -- 928 -- -- -- Issuance of shares for exercise of options......... -- -- 1,210,737 1,210,737 24 15,250 -- -- -- Issuance of shares to redeem OP units........ -- -- 1,362,316 1,362,316 28 27,868 -- -- -- Issuance of notes receivable from shareholders and affiliates for mergers and acquisitions.... -- -- -- -- -- -- (18,617) -- -- Accrued interest on notes receivable from shareholders and affiliates...... -- -- -- -- -- -- (863) -- 863 Collections on notes receivable from shareholders and affiliates...... -- -- -- -- -- -- 3,116 -- -- Amortization of unearned stock compensation.... -- -- -- -- -- -- -- 7,622 -- Net loss........ -- -- -- -- -- -- -- -- (158,223) Foreign currency translation adjustment...... -- -- -- -- -- -- -- -- -- Unrealized loss on securities held for sale... -- -- -- -- -- -- -- -- -- --------- ----- ----------- ----------- ------ ---------- -------- ------- --------- Comprehensive loss............. --------- ----- ----------- ----------- ------ ---------- -------- ------- --------- Cash dividends.. -- -- -- -- -- -- -- -- (87,390) Stock dividends declared........ 558,656 5 14,055,598 14,055,598 280 97,905 -- -- (91,328) --------- ----- ----------- ----------- ------ ---------- -------- ------- --------- Balance, December 31, 1998......... 8,981,886 $ 90 213,521,647 213,521,647 $4,270 $3,024,540 $(16,364) $(5,494) $(405,509) ========= ===== =========== =========== ====== ========== ======== ======= ========= Accumulated Other Comprehensive Income ------------------- Unrealized Loss on Foreign Securities Currency Held for Exchange Sale Total -------- ---------- ----------- Balance, December 31, 1995......... $ -- $ -- $ 261,778 Issuance of shares, net of offering expenses........ -- -- 181,392 Issuance of shares to employees and directors....... -- -- 37 Redemption price of OP units in excess of book value........... -- -- (8,841) Net income...... -- -- 37,991 Amortization of unearned stock compensation.... -- -- 1,068 Cash dividends.. -- (36,386) -------- ---------- ----------- Balance, December 31, 1996......... -- -- 437,039 Issuance of shares for mergers and acquisition of properties...... -- -- 231,946 Issuance of shares, net of offering expenses........ -- -- 386,735 Issuance of shares to employees and directors....... -- -- 62 Forfeiture of unvested employee stock grants.......... -- -- -- Issuance of shares for exercise of options......... -- -- 2,307 Issuance of shares to redeem OP units........ -- -- 2,556 Redemption price of OP units in excess of book value........... -- -- (6,082) Net loss........ -- -- (2,172) Amortization of unearned stock compensation.... -- -- 4,686 Cash dividends -- -- (67,185) -------- ---------- ----------- Balance, December 31, 1997......... -- -- 989,892 Issuance of shares for mergers and acquisition of properties...... -- -- 1,608,325 Issuance of shares, net of offering expenses........ -- -- 258,721 Return of capital......... -- -- (52,873) Issuance of shares to employees and directors....... -- -- 928 Issuance of shares for exercise of options......... -- -- 15,274 Issuance of shares to redeem OP units........ -- -- 27,896 Issuance of notes receivable from shareholders and affiliates for mergers and acquisitions.... -- -- (18,617) Accrued interest on notes receivable from shareholders and affiliates...... -- -- -- Collections on notes receivable from shareholders and affiliates...... -- -- 3,116 Amortization of unearned stock compensation.... -- -- 7,622 Net loss........ -- -- (158,223) Foreign currency translation adjustment...... 2,749 -- 2,749 Unrealized loss on securities held for sale... -- (1,245) (1,245) -------- ---------- ----------- Comprehensive loss............. (156,719) -------- ---------- ----------- Cash dividends.. -- -- (87,390) Stock dividends declared........ -- -- 6,862 -------- ---------- ----------- Balance, December 31, 1998......... $2,749 $(1,245) $2,603,037 ======== ========== ===========
See notes to financial statements. F-5 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. COMBINED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- Cash flows from operating activities: Net loss................................... $ (158,223) $ (2,172) $ 37,991 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.............. 231,233 52,787 17,536 Amortization of unearned stock compensation.............................. 7,622 4,686 1,068 Amortization of deferred loan costs........ 26,914 2,630 431 Loss on sale of assets..................... 9,453 -- -- Impairment loss on assets held for sale.... 51,081 -- -- Cost of acquiring leaseholds............... 64,407 54,499 -- Payment of interest on notes receivable from unconsolidated subsidiaries.......... -- 5,001 4,833 Treasury lock settlement................... 49,225 -- -- Award of unearned stock compensation and other..................................... 928 61 37 Equity in earnings of unconsolidated subsidiaries.............................. (9,498) (6,015) (5,845) Minority interest in Operating Partnerships.............................. (12,652) 1,684 6,767 Minority interest in consolidated subsidiaries.............................. 9,427 1,615 55 Deferred income tax benefits............... (14,665) -- -- Extraordinary items........................ 31,817 2,534 -- Changes in assets and liabilities: Accounts receivable....................... (65,927) (19,494) -- Prepaid expenses and other assets......... 47,020 (5,965) (1,003) Lease revenue receivable.................. 924 (4,359) (3,091) Due to/from affiliates.................... -- (421) (324) Accounts payable and accrued expenses..... (24,593) 21,039 2,741 ---------- ---------- --------- Net cash provided by operating activities.............................. 244,493 108,110 61,196 ---------- ---------- --------- Cash flows from investing activities: Acquisition of hotel properties and related working capital assets, net of cash acquired (1,946,227) (933,948) (353,217) Improvements and additions to hotel properties................................ (189,885) (82,269) (21,889) Proceeds from sale of assets............... 77,325 -- -- Changes in other assets.................... 880 -- 1,219 Collections on other notes receivable...... 12,009 -- 399 Deferred acquisition costs................. (19,926) (67,743) (14,797) Investment in unconsolidated subsidiaries.. (24,557) (1,574) -- Principal payments received on mortgage and other notes receivable.................... -- (500) (31,400) Investment in mortgage notes and other receivables............................... 14,022 (116,090) -- ---------- ---------- --------- Net cash used in investing activities.... (2,076,359) (1,202,124) (419,685) ---------- ---------- --------- Cash flows from financing activities: Borrowings under credit facility, term loans and mortgage notes.................. 2,883,719 1,865,634 396,302 Repayments of borrowings under credit facility and other debt................... (997,436) (1,001,236) (191,463) Payment of deferred loan costs............. (39,923) (24,471) (1,189) Proceeds from issuance of common stock..... 273,995 388,621 199,261 Contributions received from minority interest in consolidated subsidiarries.... 5,952 35,829 11,656 Distribution made to minority interest in other partnerships........................ (11,081) -- -- Collections on notes receivable from shareholders.............................. 3,116 -- -- Payments to redeem OP units................ -- (63,826) (16,584) Dividends and distributions paid........... (124,834) (65,705) (37,659) Forward equity settlements................. (52,873) -- -- Foreign currency translation adjustment.... 2,749 -- -- ---------- ---------- --------- Net cash provided by financing activities.............................. 1,943,384 1,134,846 360,324 ---------- ---------- --------- Net increase in cash and cash equivalents... 111,518 40,832 1,835 Cash and cash equivalents at beginning of year....................................... 47,436 6,604 4,769 ---------- ---------- --------- Cash and cash equivalents at end of year.... $ 158,954 $ 47,436 $ 6,604 ========== ========== ========= Supplemental disclosure of cash flow information: Cash paid for interest during the year...... $ 224,444 $ 48,254 $ 6,938 ========== ========== ========= Cash paid for income taxes during the year.. $ 26,729 $ 325 -- ========== ========== =========
See notes to financial statements. F-6 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
December 31, December 31, 1998 1997 ------------ ------------ ASSETS Investment in real estate and related improvements and land held for development, net of accumulated depreciation of $216,548 in 1998 and $67,501 in 1997................................................ $4,960,429 $2,016,267 Cash and cash equivalents............................ 72,360 15,355 Restricted cash...................................... 17,525 5,005 Accounts receivable.................................. 8,589 14,458 Investment in unconsolidated subsidiaries............ 975,591 11,802 Mortgage notes and other receivables from unconsolidated subsidiaries......................... 78,403 76,419 Subscription Notes receivable from Wyndham........... 133,669 -- Notes and other amounts receivable from Wyndham...... 180,152 42,946 Other notes receivable............................... 20,079 -- Leaseholds, net of accumulated amortization of $3,301.............................................. 102,088 -- Goodwill and intangibles, net of accumulated amortization of $5,287 in 1998 and $1,257 in 1997... 139,240 87,999 Deferred expenses, net of accumulated amortization of $27,426 in 1998 and $2,097 in 1997.................. 36,900 21,417 Deferred acquisition costs........................... 1,587 21,374 Inventories.......................................... -- 1,306 Other assets......................................... 22,594 6,757 ---------- ---------- Total assets........................................ $6,749,206 $2,321,105 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under credit facility, term loans, mortgage notes and capital leases................... $3,612,076 $1,112,709 Subscription Notes payable to Wyndham................ 91,020 12,875 Notes and other amounts payable to Wyndham........... 19,109 -- Accounts payable and accrued expenses................ 63,850 28,151 Dividends and distributions payable.................. -- 27,185 Deferred income taxes................................ 38,912 -- Due to unconsolidated subsidiaries................... 7,919 7,304 Minority interest in Patriot Partnership............. 217,924 174,640 Minority interest in consolidated subsidiaries....... 229,537 49,214 Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; authorized: 100,000,000 shares; shares issued and outstanding: 5,419,532 in 1998.................................. 54 -- Excess stock, $0.01 par value; authorized: 750,000,000 shares; no shares issued and outstanding........................................ -- -- Common stock, $0.01 par value; authorized: 650,000,000 shares; shares issued and outstanding: 213,521,647 shares in 1998 and 73,276,716 shares in 1997............................................... 2,135 733 Additional paid in capital.......................... 2,775,722 990,821 Notes receivable from shareholders.................. (15,254) -- Unearned stock compensation, net of accumulated amortization of $13,447 in 1998 and $5,825 in 1997............................................ (5,494) (13,116) Unrealized foreign exchange gain.................... 1,142 -- Accumulated deficit and dividend distributions ..... (289,446) (69,411) ---------- ---------- Total shareholders' equity......................... 2,468,859 909,027 ---------- ---------- Total liabilities and shareholders' equity......... $6,749,206 $2,321,105 ========== ==========
See notes to financial statements. F-7 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years Ended December 31, ---------------------------- 1998 1997 1996 --------- -------- ------- Revenue: Participating lease revenue.................... $ 578,029 $180,451 $75,893 Interest and other income...................... 17,381 5,103 600 --------- -------- ------- Total revenue................................ 595,410 185,554 76,493 --------- -------- ------- Expenses: Real estate and personal property taxes and casualty insurance............................ 55,352 17,958 7,150 General and administrative..................... 29,784 11,157 4,500 Ground lease expense........................... 44,972 4,117 1,075 Interest expense............................... 245,205 51,000 7,380 Cost of acquiring leaseholds and license agreements.................................... 11,686 54,499 -- Treasury lock settlement....................... 49,334 -- -- Loss on sale of assets......................... 9,453 -- -- Impairment loss on assets held for sale........ 27,897 -- -- Depreciation and amortization.................. 161,857 49,069 17,420 --------- -------- ------- Total expenses............................... 635,540 187,800 37,525 --------- -------- ------- Operating (loss) income........................ (40,130) (2,246) 38,968 Equity in earnings of unconsolidated subsidiaries.................................. 36,726 6,015 5,845 --------- -------- ------- (Loss) income before income tax, minority interest and extraordinary item............... (3,404) 3,769 44,813 Income tax provision........................... (2,742) -- -- --------- -------- ------- (Loss) income before minority interests and extraordinary item............................ (6,146) 3,769 44,813 Minority interest in the Patriot Partnership... (98) (1,713) (6,767) Minority interest in consolidated subsidiaries.................................. (8,084) (1,674) (55) --------- -------- ------- (Loss) income before extraordinary item........ (14,328) 382 37,991 Extraordinary loss from early extinguishment of debt, net of minority interest................ (30,560) (2,534) -- --------- -------- ------- Net (loss) income................................ $ (44,888) $ (2,152) $37,991 ========= ======== ======= Basic (loss) income (attributable) available to common shareholders: Net (loss) income.............................. $ (44,888) $ (2,152) $37,991 Adjustment for equity forwards................. (21,151) -- -- Preferred stock dividends...................... (5,249) -- -- --------- -------- ------- Basic net (loss) income...................... $ (71,288) $ (2,152) $37,991 ========= ======== ======= Basic (loss) earnings per common share: (Loss) income before extraordinary item........ $ (0.30) $ 0.01 $ 0.84 Extraordinary loss............................. (0.22) (0.04) -- --------- -------- ------- Net (loss) income per common share........... $ (0.52) $ (0.03) $ 0.84 ========= ======== ======= Diluted (loss) income (attributable) available to common share: Net (loss) income.............................. $ (44,888) $ (2,152) $37,991 Adjustment for equity forwards................. (188,392) -- -- Preferred stock dividends...................... (5,249) -- -- --------- -------- ------- Diluted net (loss) income.................... $(238,529) $ (2,152) $37,991 ========= ======== ======= Diluted (loss) earnings per common share: (Loss) income before extraordinary item........ $ (1.51) $ 0.01 $ 0.83 Extraordinary loss............................. (0.22) (0.04) -- --------- -------- ------- Net (loss) income per common share........... $ (1.73) $ (0.03) $ 0.83 ========= ======== =======
See notes to financial statements. F-8 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and per share data)
Accumulated Other Comprehensive Income Item ------------- Preferred Stock Common Stock ------------------- ---------------------- Notes Accumulated Additional Receivable Unearned Deficit and Foreign Number of Par Value Number of Par Value Paid in from Stock Dividend Currency Shares Stock Shares Stock Capital Shareholders Compensation Distributions Translation --------- --------- ----------- --------- ---------- ------------ ------------ ------------- ------------- Balance, December 31, 1995......... -- $ -- 29,331,870 $ 293 $ 264,515 $ -- $(1,351) $ (1,679) $ -- Issuance of shares, net of offering expenses........ -- -- 13,916,186 139 181,253 -- -- -- -- Issuance of shares to employees and directors....... -- -- 365,440 4 5,177 -- (5,144) -- -- Redemption price of OP units in excess of book value........... -- -- -- -- (8,841) -- -- -- -- Net income...... -- -- -- -- -- -- -- 37,991 -- Amortization of unearned stock compensation.... -- -- -- -- -- -- 1,068 -- -- Cash dividends.. -- -- -- -- -- -- -- (36,386) -- --------- ----- ----------- ------ ---------- -------- ------- --------- ------ Balance, December 31, 1996......... -- -- 43,613,496 436 442,104 -- (5,427) (74) -- Issuance of shares for mergers and acquisition of properties...... -- -- 12,824,433 128 170,222 -- -- -- -- Issuance of shares, net of offering expenses........ -- -- 15,830,033 159 367,076 -- -- -- -- Issuance of shares to employees and directors....... -- -- 547,867 5 12,896 -- (12,839) -- -- Forfeiture of unvested employee stock grants.......... -- -- (42,900) -- (464) -- 464 -- -- Issuance of shares for exercise of options......... -- -- 314,967 3 2,192 -- -- -- -- Issuance of shares to redeem OP units........ -- -- 188,820 2 2,494 -- -- -- -- Redemption price of OP units in excess of book value........... -- -- -- -- (5,699) -- -- -- -- Net loss........ -- -- -- -- -- -- -- (2,152) -- Amortization of unearned stock compensation.... -- -- -- -- -- -- 4,686 -- -- Cash dividends.. -- -- -- -- -- -- -- (67,185) -- --------- ----- ----------- ------ ---------- -------- ------- --------- ------ Balance, December 31, 1997......... -- -- 73,276,716 733 990,821 -- (13,116) (69,411) -- Issuance of shares for mergers and acquisition of properties...... 4,860,876 49 59,491,863 595 1,454,845 -- -- -- -- Issuance of shares, net of offering expenses........ -- -- 64,084,627 641 245,068 -- -- -- -- Return of capital......... -- -- -- -- (52,460) -- -- -- -- Issuance of shares to employees and directors....... -- -- 39,790 -- 882 -- -- -- -- Issuance of shares for exercise of options......... -- -- 1,210,737 12 14,498 -- -- -- -- Issuance of shares to redeem OP units........ -- -- 1,362,316 14 26,337 -- -- -- -- Issuance of notes receivable from shareholders for mergers......... -- -- -- -- -- (17,389) -- -- -- Accrued interest on notes receivable from shareholders.... -- -- -- -- -- (863) -- 863 -- Collections on notes receivable from shareholders.... -- -- -- -- -- 2,998 -- -- -- Amortization of unearned stock compensation.... -- -- -- -- -- -- 7,622 -- -- Net loss........ -- -- -- -- -- -- -- (44,888) -- Foreign currency translation adjustment...... -- -- -- -- -- -- -- -- 1,142 --------- ----- ----------- ------ ---------- -------- ------- --------- ------ Comprehensive loss............. --------- ----- ----------- ------ ---------- -------- ------- --------- ------ Cash dividends.. -- -- -- -- -- -- -- (86,250) -- Stock dividends declared........ 558,656 5 14,055,598 140 95,731 -- -- (89,760) -- --------- ----- ----------- ------ ---------- -------- ------- --------- ------ Balance, December 31, 1998......... 5,419,532 $ 54 213,521,647 $2,135 $2,775,722 $(15,254) $(5,494) $(289,446) $1,142 ========= ===== =========== ====== ========== ======== ======= ========= ====== Total ----------- Balance, December 31, 1995......... $ 261,778 Issuance of shares, net of offering expenses........ 181,392 Issuance of shares to employees and directors....... 37 Redemption price of OP units in excess of book value........... (8,841) Net income...... 37,991 Amortization of unearned stock compensation.... 1,068 Cash dividends.. (36,386) ----------- Balance, December 31, 1996......... 437,039 Issuance of shares for mergers and acquisition of properties...... 170,350 Issuance of shares, net of offering expenses........ 367,235 Issuance of shares to employees and directors....... 62 Forfeiture of unvested employee stock grants.......... -- Issuance of shares for exercise of options......... 2,195 Issuance of shares to redeem OP units........ 2,496 Redemption price of OP units in excess of book value........... (5,699) Net loss........ (2,152) Amortization of unearned stock compensation.... 4,686 Cash dividends.. (67,185) ----------- Balance, December 31, 1997......... 909,027 Issuance of shares for mergers and acquisition of properties...... 1,455,489 Issuance of shares, net of offering expenses........ 245,709 Return of capital......... (52,460) Issuance of shares to employees and directors....... 882 Issuance of shares for exercise of options......... 14,510 Issuance of shares to redeem OP units........ 26,351 Issuance of notes receivable from shareholders for mergers......... (17,389) Accrued interest on notes receivable from shareholders.... -- Collections on notes receivable from shareholders.... 2,998 Amortization of unearned stock compensation.... 7,622 Net loss........ (44,888) Foreign currency translation adjustment...... 1,142 ----------- Comprehensive loss............. (43,746) ----------- Cash dividends.. (86,250) Stock dividends declared........ 6,116 ----------- Balance, December 31, 1998......... $2,468,859 ===========
See notes to financial statements. F-9 PATRIOT AMERICAN HOSPITALITY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ----------------------------------- 1998 1997 1996 ----------- ----------- --------- Cash flows from operating activities: Net loss ................................ $ (44,888) $ (2,152) $ 37,991 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............ 161,857 49,171 17,536 Amortization of unearned stock compensation............................ 7,622 4,686 1,068 Amortization of deferred loan costs...... 25,210 2,630 431 Loss on sale of assets................... 9,453 -- -- Impairment loss on assets held for sale.................................... 27,897 -- -- Cost of acquiring leaseholds............. 11,686 54,499 -- Payment of interest on notes receivable from unconsolidated subsidiaries........ -- 5,001 4,833 Treasury lock settlement................. 49,225 -- -- Award of unearned stock compensation and other................................... 882 61 37 Equity in earnings of unconsolidated subsidiaries............................ (36,726) (6,015) (5,845) Minority interest in Patriot Partnership............................. 98 1,713 6,767 Minority interest in consolidated subsidiaries............................ 8,084 1,674 55 Extraordinary items...................... 30,560 2,534 -- Changes in assets and liabilities: Accounts receivable..................... (7,549) (550) -- Lease revenue receivable................ -- (6,754) (3,091) Prepaid expenses and other assets....... 28,438 (2,407) (1,003) Participating lease payments receivable ....................................... (14,549) -- -- Due to/from affiliates.................. 35,879 85 (324) Accounts payable and accrued expenses... (25,082) 10,657 2,741 ----------- ----------- --------- Net cash provided by operating activities............................ 268,097 114,833 61,196 ----------- ----------- --------- Cash flows from investing activities: Acquisition of hotel properties and related working capital assets, net of cash acquired........................... (1,987,429) (937,135) (353,217) Improvements and additions to hotel properties.............................. (161,674) (82,269) (21,889) Proceeds from sale of assets............. 69,266 -- -- Changes in other assets.................. -- (38,921) 1,618 Collections on other notes receivable.... 6,998 -- -- Deferred acquisition costs............... (6,507) (36,617) (14,797) Investment and receivables from unconsolidated subsidiaries............. (24,979) (2,074) (31,400) Investment in mortgage notes and other receivables............................. (6,925) (103,875) -- ----------- ----------- --------- Net cash used in investing activities.. (2,111,250) (1,200,891) (419,685) ----------- ----------- --------- Cash flows from financing activities: Borrowings under credit facility, term loans and mortgage notes................ 2,696,381 1,865,634 396,302 Payments on subscription notes........... (12,875) -- -- Repayments of borrowings under credit facility and other debt................. (825,013) (1,017,447) (191,463) Payment of deferred loan costs........... (34,759) (24,471) (1,189) Proceeds from issuance of common stock... 260,219 369,430 199,261 Contributions received from minority interest in consolidated subsidiaries... 5,952 35,829 11,656 Distribution made to minority interest in consolidated subsidiaries............... (7,587) -- -- Collections on notes receivable from shareholders 2,998 -- -- Payments to redeem OP units.............. -- (63,826) (16,584) Dividends and distributions paid......... (121,320) (65,335) (37,659) Forward equity settlements............... (52,460) -- -- Other.................................... 1,142 -- -- ----------- ----------- --------- Net cash provided by financing activities............................ 1,912,678 1,099,814 360,324 ----------- ----------- --------- Net increase in cash and cash equivalents.............................. 69,525 13,756 1,835 Cash and cash equivalents at beginning of year..................................... 20,360 6,604 4,769 ----------- ----------- --------- Cash and cash equivalents at end of year.. $ 89,885 $ 20,360 $ 6,604 =========== =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest during the year.... $ 207,716 $ 48,254 $ 6,938 =========== =========== =========
See notes to financial statements. F-10 WYNDHAM INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
December 31, December 31, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................... $ 50,725 $ 27,076 Restricted cash..................................... 18,344 -- Accounts receivable................................. 185,994 46,340 Notes and other receivables from Patriot............ 19,109 12,875 Inventories......................................... 23,583 9,144 Prepaid expenses and other current assets........... 28,195 5,227 ---------- -------- Total current assets................................ 325,950 100,662 Investment in real estate and related improvements, net of accumulated depreciation of $36,032 in 1998 and $1,304 in 1997.................................. 626,103 28,382 Investments in unconsolidated subsidiaries........... 86,812 -- Subscription Notes receivable from Patriot........... 91,020 -- Mortgage notes and other receivables................. 21,255 12,983 Management contract costs, net of accumulated amortization of $11,258 in 1998 and $1,574 in 1997.. 194,014 20,879 Leaseholds, net of accumulated amortization of $2,688.............................................. 77,834 -- Trade names and franchise costs, net of accumulated amortization of $6,198 in 1998 and $122 in 1997..... 125,974 11,166 Deferred acquisition costs........................... 14,557 31,126 Goodwill, net of accumulated amortization of $15,608 in 1998 and $594 in 1997............................ 414,649 38,008 Deferred expenses, net of accumulated amortization of $1,710.............................................. 1,098 -- Other assets......................................... 27,555 8,882 ---------- -------- Total assets........................................ $2,006,821 $252,088 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses............... $ 249,981 $ 50,317 Dividends and distributions payable................. -- 451 Participating lease payments payable to Patriot..... 40,996 9,519 Deposits............................................ 26,392 12,423 Notes and other amounts payable to Patriot.......... 139,156 42,946 Current portion of mortgage notes and capital lease obligations........................................ 145,969 -- ---------- -------- Total current liabilities........................... 602,494 115,656 Subscription notes payable to Patriot................ 133,669 -- Mortgage notes payable and capital lease obligations......................................... 99,476 -- Deferred income taxes................................ 84,551 9,550 Minority interest in Wyndham Partnership............. 36,046 45,537 Minority interest in consolidated subsidiaries....... 915,491 480 Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; authorized: 100,000,000 shares; shares issued and outstanding: 3,562,354 in 1998.................................. 36 -- Excess stock, $0.01 par value; authorized: 750,000,000 shares; no shares issued and outstanding........................................ -- -- Common stock, $0.01 par value; authorized: 650,000,000 shares; issued and outstanding: 213,521,647 shares in 1998 and 73,276,716 shares in 1997............................................... 2,135 733 Additional paid in capital.......................... 248,818 80,152 Notes receivable from affiliates.................... (1,110) -- Unrealized loss on securities held for sale......... (1,245) -- Unrealized foreign exchange gain.................... 1,607 -- Accumulated deficit and dividend distributions...... (115,147) (20) ---------- -------- Total shareholders' equity.......................... 135,094 80,865 ---------- -------- Total liabilities and shareholders' equity......... $2,006,821 $252,088 ========== ========
See notes to financial statements. F-11 WYNDHAM INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
For the Six Year Ended Months Ended December 31, December 31, 1998 1997 ------------ ------------ Revenue: Hotel revenue...................................... $1,842,682 $167,727 Racecourse facility revenue........................ 51,259 26,344 Management fee and service fee income.............. 89,983 7,088 Interest and other income.......................... 18,303 2,975 ---------- -------- Total revenue.................................... 2,002,227 204,134 ---------- -------- Expenses: Hotel expenses..................................... 1,251,548 118,317 Racecourse facility operations..................... 43,198 24,245 General and administrative......................... 87,882 6,024 Cost of acquiring leaseholds....................... 52,721 -- Impairment loss on assets held for sale............ 23,184 -- Depreciation and amortization...................... 69,375 3,616 Participating lease payments....................... 519,589 50,626 Interest expense................................... 35,690 933 ---------- -------- Total expenses................................... 2,083,187 203,761 ---------- -------- Operating (loss) income............................ (80,960) 373 Equity in earnings of unconsolidated subsidiaries.. 3,134 -- ---------- -------- (Loss) income before income tax provision, minority interests and extraordinary item.................. (77,826) 373 Income tax provision............................... (14,381) (481) ---------- -------- Loss before minority interests and extraordinary item.............................................. (92,207) (108) Minority interest in Wyndham Partnership........... 12,750 29 Minority interest in consolidated subsidiaries..... (31,705) 59 ---------- -------- Loss before extraordinary item..................... (111,162) (20) Extraordinary loss from early extinguishment of debt, net of applicable taxes..................... (1,257) -- ---------- -------- Net loss......................................... $ (112,419) $ (20) ========== ======== Basic (loss) income (attributable) available to common shareholders: Net (loss) income.................................. $ (112,419) $ (20) Preferred stock dividends.......................... (2,707) -- ---------- -------- Basic net loss..................................... $ (115,126) $ (20) ========== ======== Basic loss per common share: Loss before extraordinary item..................... $ (0.83) $ -- Extraordinary loss................................. (0.01) -- ---------- -------- Loss per common share............................ $ (0.84) $ -- ========== ======== Diluted (loss) income (attributable) available to common shareholders: Net (loss) income.................................. $ (112,419) $ (20) Preferred stock dividends.......................... (2,707) -- ---------- -------- Diluted net loss................................. $ (115,126) $ (20) ========== ======== Diluted loss per common share: Loss before extraordinary item..................... $ (0.83) $ -- Extraordinary loss................................. (0.01) -- ---------- -------- Loss per common share............................ $ (0.84) $ -- ========== ========
See notes to financial statements. F-12 WYNDHAM INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
Accumulated Other Comprehensive Income Items ---------------------- Preferred Stock Common Stock Unrealized --------------- ------------------- Notes Accumulated Loss on Additional Receivable Deficit and Securities Foreign Number of Par Number of Par Paid in from Dividend Held for Currency Shares Value Shares Value Capital Affiliates Distributions Sale Translation Total --------- ----- ----------- ------ ---------- ---------- ------------- ---------- ----------- -------- Issuance of shares for mergers and acquisition of properties...... -- $-- 57,135,658 $ 571 $ 61,025 $ -- $ -- $ -- $ -- $ 61,596 Issuance of shares, net of offering expenses........ -- -- 15,830,033 159 19,341 -- -- -- -- 19,500 Issuance of shares to employees and directors....... -- -- 4,167 -- -- -- -- -- -- -- Forfeiture of unvested employee stock grants.......... -- -- (42,900) -- -- -- -- -- -- -- Issuance of shares for exercise of options......... -- -- 310,938 3 109 -- -- -- -- 112 Issuance of shares to redeem OP units........ -- -- 38,820 -- 60 -- -- -- -- 60 Redemption price of OP units in excess of book value........... -- -- -- -- (383) -- -- -- -- (383) Net loss........ -- -- -- -- -- -- (20) -- (20) --------- ---- ----------- ------ --------- ------- --------- ------- ------ -------- Balance, December 31, 1997......... -- -- 73,276,716 733 80,152 -- (20) -- -- 80,865 Issuance of shares for mergers and acquisition of properties...... 3,562,354 36 59,491,863 595 152,205 -- -- -- -- 152,836 Issuance of shares, net of offering expenses........ -- -- 64,084,627 641 12,371 -- -- -- -- 13,012 Return of capital......... -- -- -- -- (413) -- -- -- -- (413) Issuance of shares to employees and directors....... -- -- 39,790 -- 46 -- -- -- -- 46 Note receivable from affiliates...... -- -- -- -- -- (1,228) -- -- -- (1,228) Collections on note receivable from affiliate.. -- -- -- -- -- 118 -- -- -- 118 Issuance of shares for exercise of options......... -- -- 1,210,737 12 752 -- -- -- -- 764 Issuance of shares to redeem OP units........ -- -- 1,362,316 14 1,531 -- -- -- -- 1,545 Net loss........ -- -- -- -- -- -- (112,419) -- -- (112,419) Unrealized loss on securities held for sale... -- -- -- -- -- -- -- (1,245) -- (1,245) Foreign currency translation adjustment...... -- -- -- -- -- -- -- -- 1,607 1,607 --------- ---- ----------- ------ --------- ------- --------- ------- ------ -------- Comprehensive loss............. (112,057) --------- ---- ----------- ------ --------- ------- --------- ------- ------ -------- Cash dividend... -- -- -- -- -- -- (1,140) -- -- (1,140) Stock dividend declared........ -- -- 14,055,598 140 2,174 -- (1,568) -- -- 746 --------- ---- ----------- ------ --------- ------- --------- ------- ------ -------- Balance, December 31, 1998......... 3,562,354 $ 36 213,521,647 $2,135 $ 248,818 $(1,110) $(115,147) $(1,245) $1,607 $135,094 ========= ==== =========== ====== ========= ======= ========= ======= ====== ========
See notes to financial statements. F-13 WYNDHAM INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Six Year Ended Months Ended December 31, December 31, 1998 1997 ------------ ------------ Cash flows from operating activities: Net loss........................................... $(112,419) $ (20) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................... 69,375 3,616 Amortization of deferred loan costs.............. 1,705 -- Impairment loss on assets held for sale.......... 23,184 -- Cost of acquiring leaseholds..................... 52,721 -- Award of unearned stock compensation............. 46 -- Equity in earnings of unconsolidated subsidiaries.................................... (3,134) -- Minority interest in Wyndham Partnership......... (12,750) (29) Minority interest in consolidated subsidiaries... 31,705 (59) Deferred income tax benefit...................... (14,665) -- Extraordinary items.............................. 1,257 -- Changes in assets and liabilities: Accounts receivable............................ (39,758) (18,944) Prepaid expenses and other assets.............. 19,582 (1,204) Participating lease payments payable/receivable............................ 15,473 2,395 Due to/from affiliates......................... (42,624) (506) Accounts payable and accrued expenses.......... 489 8,028 --------- ------- Net cash used in operating activities........ (9,813) (6,723) --------- ------- Cash flows from investing activities: Acquisition of hotel properties and related working capital assets.................................... (44,494) 5,147 Cash received upon acquisition of hotel assets..... 85,696 -- Improvements and additions to hotel properties..... (29,127) (2,099) Proceeds from sale of assets....................... 8,059 -- Changes in other assets............................ 880 -- Collections on other notes receivable.............. 5,011 -- Deferred acquisition costs......................... (13,419) -- Investment in unconsolidated subsidiaries.......... 422 -- Due to/from affiliates............................. (20,676) -- Investment in mortgage notes and other receivables....................................... 20,947 (4,281) --------- ------- Net cash provided by (used in) investing activities.................................. 13,299 (1,233) --------- ------- Cash flows from financing activities: Borrowings under credit facility, term loans and mortgage notes.................................... 187,338 -- Payments on subscription notes..................... 12,875 -- Repayments of borrowings under credit facility, and other debt........................................ (172,423) 141 Payment of deferred loan costs..................... (5,164) -- Proceeds from issuance of common stock............. 13,776 19,191 Distributions made to minority interest in other partnerships...................................... (3,494) -- Collections on notes receivable from shareholders.. 118 16,070 Dividends and distributions paid................... (3,514) (370) Forward equity settlements......................... (413) -- Due to/from affiliates............................. 7,801 -- Foreign currency translation adjustment............ 1,607 -- --------- ------- Net cash provided by financing activities.... 38,507 35,032 --------- ------- Net increase in cash and cash equivalents............ 41,993 27,076 Cash and cash equivalents at beginning of period..... 27,076 -- --------- ------- Cash and cash equivalents at end of period........... $ 69,069 $27,076 ========= ======= Supplemental disclosure of cash flow information: Cash paid for interest during the period............. $ 16,728 $ -- ========= ======= Cash paid for taxes during the period................ $ 26,729 $ 325 ========= =======
See notes to financial statements. F-14 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands, except share amounts) 1. Organization: Patriot American Hospitality, Inc. ("Old Patriot") was formed April 17, 1995 as a self-administered real estate investment trust ("REIT"). The Virginia corporation was formed for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Old Patriot completed an initial public offering of shares of common stock and commenced operations. On July 1, 1997, Old Patriot merged with and into California Jockey Club, with Cal Jockey being the surviving legal entity. Cal Jockey's shares of common stock are paired and trade together with the shares of common stock of Bay Meadows Operating Company. In connection with the Cal Jockey merger, Cal Jockey changed its name to "Patriot American Hospitality, Inc" referred hereinafter as Patriot and Bay Meadows changed its name to "Patriot American Hospitality Operating Company". As a result of the merger with Wyndham Hotel Company in January, 1998, the operating company subsequently changed its name to "Wyndham International, Inc." ("Wyndham"). Patriot and Wyndham are now collectively referred to as the Companies. Patriot and Wyndham are both Delaware corporations. The Cal Jockey merger has been accounted for as a reverse acquisition whereby, Cal Jockey is considered to be the acquired company for accounting purposes. Consequently, the historical financial information of Old Patriot became the historical financial information of Patriot. For accounting purposes, Wyndham commenced its operations concurrent with the closing of the Cal Jockey merger on July 1, 1997. The financial statements have been adjusted for the purchase method of accounting whereby the Bay Meadows Racecourse facilities and related leasehold improvements owned by Cal Jockey and Bay Meadows have been adjusted to estimated fair market value. In connection with the Cal Jockey merger, Bay Meadows formed an operating partnership, Wyndham International Operating Partnership, L.P. referred to as the Wyndham Partnership into which Bay Meadows contributed its assets in exchange for units of limited partnership interest ("OP units") of the Wyndham Partnership, and Cal Jockey contributed certain of its assets to Patriot American Hospitality Partnership, L.P. referred to herein after as the Patriot Partnership, in exchange for OP units. Patriot Partnership (collectively, the Patriot Partnership and Wyndham Partnership are referred to herein as the "Operating Partnerships"). Subsequent to the completion of the Cal Jockey merger, substantially all of the operations of the Companies have been conducted through the majority owned and controlled Operating Partnerships and their subsidiaries. The shares of common stock of Patriot are paired and trade together with the shares of common stock of Wyndham as a single unit pursuant to a stock pairing arrangement. The single unit is comprised of one share of common stock of Patriot and one share of common stock of Wyndham and is referred to as a paired share. 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 the Patriot Partnership. In addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an approximate 88.0% limited partnership interest in the Patriot Partnership as of December 31, 1998. Wyndham owns the 1.0% general partnership interest and an approximate 86.8% limited partnership interest in the Wyndham Partnership as of December 31, 1998. At December 31, 1998, Patriot and Wyndham, through the Operating Partnerships and other subsidiaries including hotels owned through unconsolidated subsidiaries, owned interests in 178 hotels with an aggregate of over 43,800 guest rooms and leased 121 hotels from third parties with over 15,800 guest rooms. In addition, F-15 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Wyndham manages 161 hotels for third party owners with over 38,300 guest rooms and franchises 12 hotels with over 2,900 guest rooms. Patriot leases 203 of its owned and leased hotels to Wyndham and five of its hotels are leased to third party lessees. Generally, the participating leases between Patriot and the hotel lessees provide for the payment of the greater of base or participating rent, plus certain additional charges, as applicable. The lessees, in turn, have entered into separate agreements with hotel management entities to manage the hotels. The Companies own interests in nine hotels along with 82 leaseholds for hotels leased from third parties through special purpose entities which are non-controlled subsidiaries. Patriot owns the non-voting interest and Wyndham owns the controlling voting interest in each of the non-controlled subsidiaries. As a result of this ownership, the operating results of the non- controlled subsidiaries are consolidated with Wyndham for financial reporting purposes. Patriot accounts for its investment in the non-controlled subsidiaries using the equity method of accounting. 2. Summary of Significant Accounting Policies: Principles of Consolidation The separate consolidated financial statements include the accounts of Patriot and Wyndham, their respective wholly-owned subsidiaries, and the partnerships, corporations and limited liability companies in which Patriot or Wyndham own a controlling interest. Partnerships--control is determined in accordance with GAAP. The condition for control is the ownership of a majority voting interest and the ownership of the general partnership interest. Corporations and Limited Liability Companies--control is determined in accordance with GAAP. The condition for control is the ownership of a majority voting interest. The separate consolidated financial statements of Patriot and Wyndham have also been combined for purposes of financial statement presentation. All significant intercompany accounts and transactions have been eliminated. Investment in Real Estate and Related Improvements 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 to 40 years for the hotel buildings and improvements, 7 years for the Racecourse facility and 3 to 10 years for furniture, fixtures and equipment. These estimated useful lives are based on management's knowledge of the properties and the industry in general. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Companies 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. When management identifies an asset as held for sale, the Companies estimate the fair value of such assets. If in management's opinion the fair value of the asset is less than the carrying amount of the asset, a reserve for impairment is established. Fair value is estimated as the amount at which the asset could be bought or sold less costs to sell. For the year ended December 31, 1998, Patriot and Wyndham recognized approximately $27,897 F-16 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) and $2,681, respectively, of impairment losses. Patriot recognized approximately $9,453 of losses related to other assets sold during the year. 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 $12,112, $2,562 and $91 was capitalized in 1998, 1997 and 1996, respectively. 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. Restricted Cash Certain debt agreements and the franchise agreements provide that cash from hotel operations be restricted for the future acquisition or replacement of property and equipment each year based on a percentage of gross hotel revenues and premiums for property taxes and insurance. The requirements range from 3% to 6%. Investment in Unconsolidated Subsidiaries The Companies' investments in unconsolidated subsidiaries include investments in 23 assets ranging from approximately 5% to 99%. These investments are accounted for using the equity method of accounting. Generally, Patriot owns an approximate 99% non-voting interest in each investment. Wyndham owns an approximate 1% voting interest in each investment, except for PAH Ravinia, Inc. which owns the Crowne Plaza Ravinia Hotel and PAH Windwatch, L.L.C. which owns the Wyndham Windwatch Hotel for which the 1% voting interest is held by certain officers of the Companies. Management contracts, trade names and franchise costs The costs associated with the acquisition of management contracts, trade names and franchises have been recorded as deferred costs. Amortization is computed using the straight-line method over estimated useful lives ranging from 6 to 30 years. Certain management agreements include repayment provisions if termination occurs prior to the term of the agreement. During 1998, Wyndham recorded $2,950 for termination of management contracts that is included in interest and other income. Leaseholds The costs associated with the acquisition of 121 leaseholds for hotel properties leased from third party owners have been recorded as deferred costs. Leasehold costs are amortized using the straight-line method over the terms of the related leasehold agreement. Goodwill and intangibles Goodwill and intangibles recognized in connection with the acquisition of certain businesses are amortized utilizing the straight-line method over a period of 5 to 40 years. The carrying value of goodwill is reviewed based on undiscounted cash flows over the remaining amortization period. Should this review indicate that the goodwill will not be recoverable, a reserve for impairment is established. For the year ended December 31, 1998, Wyndham recognized an approximate $20,503 impairment loss on goodwill, related to assets and businesses held for sale at December 31, 1998. F-17 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Deferred Expenses Deferred expenses consist of the following:
December 31, ----------------- 1998 1997 -------- ------- Deferred loan costs....................................... $ 61,708 $22,798 Costs of non-compete agreements........................... 1,479 -- Franchise fees............................................ 616 429 Other..................................................... 3,331 287 -------- ------- 67,134 23,514 Less: accumulated amortization............................ (29,136) (2,097) -------- ------- $ 37,998 $21,417 ======== =======
Deferred loan costs are amortized to interest expense on a straight-line basis (which approximates the interest method) over the terms of the related loans, which range from one to ten years. Deferred loan costs include $4,132 of fully-amortized costs associated with Patriot's old credit facility which was repaid in July 1997. Costs of non-compete agreements are amortized using the straight-line method over the terms of the related agreement. Franchise costs are amortized using the straight-line method over the terms of the related franchise agreements. Inventories Inventories consist of food, beverages, china, linen, glassware and silverware and are stated at cost, which approximates market. Other Assets Leasehold improvements and furniture, fixtures and equipment related to the Companies' corporate offices are carried at cost and amortized over estimated useful lives of 5 to 7 years. Insurance premiums included in other assets are expensed on a pro-rata basis over the life of the related policies. Security deposits paid in connection with certain leasehold agreements of approximately $42,988 are included in other assets. Dividends Patriot has paid sufficient dividends in order to maintain its status as a REIT under the Internal Revenue Code of 1996 (the "Code"). Payment of such dividends is dependent upon receipt of distributions from the Patriot Partnership. Dividends may be paid in cash or securities. Deposits Deposits represent cash received from guests for future hotel reservations at the hotels that Wyndham manages. Income Taxes Patriot has qualified to be a REIT under Sections 856 through 860 of the Code. Under the Code, if certain requirements are met in a given 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 shareholders. Patriot has declared dividends F-18 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) in excess of its taxable income through 1998. Accordingly, no provision for federal income taxes has been reflected in the Patriot's financial statements. For federal income tax purposes, 1998 dividends totaled $2.04 per common share, of which 1% and 39% were considered capital gain and return of capital, respectively. In 1997, dividends totaled $1.02 per common share, none of which was considered return of capital and in 1996, dividends totaled $0.92 per common share, none of which was considered return of capital. Wyndham records its provision for income taxes in accordance with SFAS No. 109. Under the liability method of SFAS No. 109, deferred taxes are determined based on the difference between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases of assets and liabilities using enacted tax rates in effect in the years the differences are expected to reverse. See Note 15. Minority Interest in the Operating Partnerships Minority interest in the Operating Partnerships includes adjustments for the minority partners' share of the current period net income and certain other adjustments for the issuance or redemption of OP units. Minority Interest in Consolidated Subsidiaries The Companies have entered into a number of joint ventures in which a third party owns a minority interest. For financial reporting purposes, the financial position and results of operations for each controlled joint venture is included in the consolidated financial statements of the Companies. Forward Equity Transactions Subject to Price Adjustments The Companies are parties to transactions with three counterparties involving the sale of paired shares, with related price adjustment mechanisms. The original agreements and subsequent amendments provide for a settlement mechanism in either cash or additional paired shares. At each settlement date, the Companies have and will record an adjustment to equity for the change in fair market value of the Companies' paired shares until the forward equity contracts are settled in full. See Note 11 for additional details on the forward equity transactions. Stock Splits On January 30, 1997, the Board of Directors declared a 2-for-1 stock split on Patriot common stock effected in the form of a stock dividend distributed on March 18, 1997 to shareholders of record on March 7, 1997. In addition, on July 10, 1997, the respective Boards of Directors of Patriot and Wyndham declared a 1.927-for-1 stock split on its shares of common stock effected in the form of a stock dividend distributed on July 25, 1997 to shareholders of record on July 15, 1997. Unless otherwise indicated, all references in the combined and consolidated financial statements to the number of shares, per share amounts, and market prices of the common stock and options to purchase common stock have been restated to reflect the impact of the conversion of each share of Patriot common stock into F-19 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 0.51895 paired shares issued in the Cal Jockey merger and the 1.927-for-1 stock split. In addition, all references in the combined and consolidated financial statements to the number of shares, per share amounts, and market prices of the common stock and options to purchase common stock related to periods prior to the 2-for-1 stock split distributed in March 1997 have been restated to reflect the impact of such stock split. As a result of the 2-for-1 stock split in March 1997, the Cal Jockey merger and the 1.927-for-1 stock split in July 1997, the number of OP units outstanding and the OP unit conversion factor has been adjusted to re- establish a 1-for-1 exchange ratio of OP units to common shares. Stock Dividend On December 22, 1998, Patriot declared a stock dividend of $0.44 per share of common stock for the fourth quarter ended December 31, 1998 (the "Dividend"). The Dividend was payable on January 25, 1999 to shareholders of record on December 30, 1998. Each shareholder received the option to receive the Dividend in the form of additional paired shares or shares of Series B Cumulative Perpetual Preferred Stock, par value $0.01 per share of Patriot. Per share data (including dividends), weighted average shares outstanding and all stock option activity have been restated to reflect the stock dividend. Earnings per Share The Companies have adopted SFAS No. 128 "Earnings Per Share". SFAS No. 128 specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Earnings per share disclosures for all periods presented have been calculated in accordance with requirements of SFAS No. 128. Basic earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period presented. Shares of common stock granted to officers and employees of Patriot and Wyndham are included in the computation only after the shares become fully vested. Diluted earnings per share is computed based upon the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the periods presented. The diluted earnings per share computations also include the dilutive impact of options to purchase common stock which were outstanding during the period calculated by the "treasury stock" method, unvested stock grants and other restricted awards to officers and employees of Patriot and Wyndham, convertible preferred shares and collateral shares issued in conjunction with certain forward equity transactions (see Note 10). Stock Compensation The Companies account for their stock compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25"), and intend to continue to do so. See Note 14 for a discussion of the Companies' 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 SFAS No. 123, "Accounting for Stock-Based Compensation". Revenue Recognition Patriot and the Patriot Partnership lease their hotel properties to Wyndham and other lessees pursuant to separate participating leases. In addition, the Patriot Partnership leases the Racecourse facilities to Wyndham pursuant to a separate lease agreement. Lease income is recognized when earned under the related leases. Wyndham primarily operates and manages hotel properties. Hotel revenue, management fees, service and other fees, are recognized when earned. F-20 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Foreign Currency Translation Financial statements of foreign subsidiaries not maintained using U.S. dollars are remeasured into the U.S. dollar functional currency for consolidation and reporting purposes. Assets and liabilities of non-U.S. operations are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues and expenses of non-U.S. operations are translated at the weighted average exchange rate during the year. Resulting translation adjustments are reflected in shareholders' equity. Realized foreign currency gains and losses are included in results of operations. Advertising Costs The Companies participate in various advertising and marketing programs. All costs are expensed in the period in which the advertising first takes place. The Companies have recognized advertising expenses of $61,468 for 1998. Self Insurance The Company is self insured for various levels of general liability, workers' compensation and employee medical coverage. Accrued expenses include the estimated cost from unpaid incurred claims. 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 With the exception of its investment in the Racecourse facility, Patriot currently invests primarily 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, quality of the hotel, services provided and price are the principal competitive factors affecting its hotel investments. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that all components of comprehensive income and the ending accumulated balances for each item, classified by their nature, be reported in the financial statements in the period in which they are recognized. The Companies adopted SFAS No. 130 beginning with the interim financial statements for the quarter ended March 31, 1998. Business Segments In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS No. 131 changes current practice by establishing a new framework on which to base segment reporting, including the determination of a segment and the financial F-21 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) information to be disclosed for each segment, referred to as the "management" approach. The management approach requires that management identify "operating segments" based on the way that management reviews the entity for making internal operating decisions. SFAS No. 131 was adopted by the Companies with the fiscal year ended December 31, 1998. See Note 18. Derivative Instruments and Hedging Activities In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The Companies expect to adopt SFAS No. 133 effective January 1, 2000. SFAS No. 133 will require the Companies to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined what the effect of SFAS No. 133 will have on the earnings and financial position of the Companies. 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. 3. Investments in Real Estate and Related Improvements and Land Held for Development: Investment in Real Estate and Related Improvements and Land Held for Development consists of the following:
As of December 31, 1998 ------------------------------------------------ Patriot --------------------------------- Hotel Racecourse Wyndham Properties Facility Total International ---------- ---------- ---------- ------------- Land...................... $ 376,794 $ 2,340 $ 379,134 $114,664 Land held for development.............. 81,314 -- 81,314 -- Buildings and improvements............. 4,063,747 21,865 4,085,612 416,427 Furniture, fixtures and equipment................ 515,224 837 516,061 122,290 Renovations in progress... 142,217 536 142,753 11,435 ---------- ------- ---------- -------- 5,179,296 25,578 5,204,874 664,816 Less: impairment reserve.. (8,803) (19,094) (27,897) (2,681) Less: accumulated depreciation............. (212,800) (3,748) (216,548) (36,032) ---------- ------- ---------- -------- $4,957,693 $ 2,736 $4,960,429 $626,103 ========== ======= ========== ========
F-22 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 ------------------------------------------------ Patriot --------------------------------- Hotel Racecourse Wyndham Properties Facility Total International ---------- ---------- ---------- ------------- Land...................... $ 168,222 $ -- $ 168,222 $ -- Land held for development.............. 17,980 -- 17,980 -- Buildings and improvements............. 1,676,551 18,795 1,695,346 -- Furniture, fixtures and equipment................ 187,705 517 188,222 29,686 Renovations in progress... 13,998 -- 13,998 -- ---------- ------- ---------- ------- 2,064,456 19,312 2,083,768 29,686 Less: accumulated depreciation............. (66,122) (1,379) (67,501) (1,304) ---------- ------- ---------- ------- $1,998,334 $17,933 $2,016,267 $28,382 ========== ======= ========== =======
The Companies have approximately $550,315 of assets held for sale which are included in investments in real estate and related improvements and land held for development in the accompanying financial statements which are expected to be sold during 1999. The assets held for sale include approximately $435,906 of non-proprietary branded segment assets, $93,337 of resort segment assets and $21,072 of other segment assets. See Note 18 for Segment Reporting. Additionally, the Companies have recorded an impairment reserve of approximately $30,578 related to these assets held for sale. The impairment relates in part to six hotels which had a combined net income of $1,323 for the year ended December 31, 1998. Additionally, the impairment relates to the Bay Meadows Racecourse which had operating income of $969 for the year ended December 31, 1998 and was sold in February of 1999. See Note 22. Investments in Hotel Properties During 1996, Patriot acquired investments in 23 hotels for approximately $372,147 (including closing costs and approximately $3,456 related to the assumption of operating liabilities and acquisition costs). These acquisitions were financed primarily with funds drawn on Patriot's credit facility and the issuance of 600,703 OP units valued at approximately $16,391. In addition, the payment of a portion of the purchase price related to the acquisition of six of the hotels, in the amount of $2,000, was paid in February 1998. This amount is included in accounts payable and accrued expenses at December 31, 1997. During 1997, Patriot, through the Patriot Partnership and its subsidiaries, invested approximately $1,331,459 in the acquisition of 45 hotels with a total of approximately 12,000 guest rooms. These acquisitions were financed primarily with funds drawn on Patriot's Credit Facility, a $350,000 term loan, new mortgage financing in the amount of $236,892, the issuance of 5,629,172 OP units valued at approximately $130,137, the issuance of 1,719,535 paired shares valued at approximately $38,492, like-kind exchange of properties (see discussion below) and the assumption of mortgage debt in the amount of approximately $34,263. During 1998, Patriot, through the Patriot Partnership and its subsidiaries, invested approximately $234,116 in the acquisition of four hotels with a total of over 1,700 guest rooms and the Golden Door Spa. These acquisitions were financed primarily with funds drawn on Patriot's Credit Facility, the issuance of 53,989 OP units valued at approximately $1,496, the issuance of 390,335 paired shares valued at approximately $10,000 and the assumption of mortgage debt in the amount of approximately $80,074. In addition, Patriot acquired an office building that will be converted into a hotel for approximately $33,900. Cal Jockey Merger At the closing of the Cal Jockey merger, 11,105,795 paired shares of Cal Jockey and Bay Meadows were outstanding, resulting in total purchase consideration for the transaction of approximately $190,188 (of which $130,516 related to Cal Jockey and $59,672 related to Bay Meadows). The estimated value of the Cal Jockey F-23 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) and Bay Meadows paired shares was $33.00 per paired share based on a conversion ratio of Patriot common stock into paired shares equal to 0.51895, and the closing market price of Patriot's common stock on October 30, 1996 (the date the Cal Jockey merger agreement was executed) of $17.125. Land Leases PaineWebber, a PaineWebber affiliate and Patriot entered into a ground lease covering a portion of the land on which the Racecourse is situated for a term of seven years. The lease provides for quarterly rental payments of $750 through March 1998, $813 through March 1999, $875 through March 2000, $1,000 through March 2002 and $1,250 through July 2004. Patriot has subleased the Racecourse land and leased the related improvements to a wholly owned subsidiary of Wyndham in order to permit Wyndham to continue horseracing operations at the Racecourse through the term of Patriot's lease. The sublease is for a term of seven years with annual payments based on percentages of revenue generated. In addition, Patriot has leased certain land adjacent to the Racecourse to Borders, Inc. for an initial term of 20 years with a fixed net annual rent of $279 for years 1 through 10, $362 for years 11 through 15 and $416 for years 16 through 20. In connection with the sale, Patriot assigned all of its rights and benefits under existing leases, contracts, permits and entitlements relating to the land sold (excluding the Borders lease) to the PaineWebber affiliate. The PaineWebber affiliate assumed substantially all of Patriot's development obligations including, but not limited to, all obligations for on and off-site improvements and all obligations under existing lease and contracts. Pursuant to the agreement, Patriot has funded $10,250 of development costs for new stables as of December 31, 1998). The parties have the option to renew such leases upon their expiration under certain circumstances. See Note 22. Asset Sales During 1998, Patriot sold its interest in four hotel assets: Courtyard by Marriott Hotel in Orange, Connecticut; Courtyard by Marriott Hotel in St. Louis, Missouri; Residence Inn by Marriott in Pittsburgh, Pennsylvania; and the Westborough by Marriott in Westborough, Massachusetts, collectively hereinafter referred to as the Fine Transaction, for a net purchase price of approximately $32,500. The assets were sold to an affiliate of an independent member of the Patriot Board of Directors. Patriot recognized no gain or loss on sale as a result of this transaction. Additionally in December 1998, Patriot sold its interest in three hotel assets previously leased to NorthCoast Hotels, LLC (a third party lessee of Patriot); the WestCoast Roosevelt Hotel, the WestCoast Gateway Hotel located in Seattle, Washington and the WestCoast Wenatchee Hotel located in Wenatchee, Washington to an affiliate of NorthCoast. Patriot received net cash proceeds of approximately $23,700 plus a mortgage note receivable in the amount of $2,000. Patriot has also contracted with an affiliate of NorthCoast to sell a fourth hotel; the WestCoast Long Beach Hotel and Marina located in Long Beach, California for a total purchase price of approximately $7,000. Patriot recognized a loss on sale of approximately $9,453 as a result of the sale of these assets. 4. Other Businesses Acquired: Grand Heritage In August 1997, Wyndham acquired Grand Heritage Hotels, Inc. a hotel management and marketing company, and other Grand Heritage subsidiaries including Grand Heritage Leasing, L.L.C. which leased three hotels from Patriot for a purchase price of approximately $22,500. The purchase was financed primarily through the issuance of 931,972 Class A preferred OP units of Wyndham. F-24 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Gencom American Hospitality and CHC International, Inc. On September 1, 1997, Patriot acquired the leasehold interests related to seven Patriot hotels which were previously leased by CHC Lease Partners and re-leased such hotels to Wyndham. On October 1, 1997, Patriot acquired one additional leasehold interest related to a Patriot hotel previously leased by CHC Lease Partners and re- leased such hotel to Wyndham. The hotels' management contracts with CHCI related to these eight leaseholds were terminated prior to the acquisition. The aggregate purchase price of the eight leasehold interests was approximately $52,766, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Patriot for the year ended December 31, 1997. Concurrently, Wyndham purchased an approximate 50% managing, controlling ownership interest in GAH-II, L.P. from affiliates of Gencom American Hospitality for a purchase price of approximately $13,860. These transactions were financed with approximately $644 of cash, and by issuing 2,388,932 paired OP units of the Operating Partnerships and 476,682 preferred OP units of the Wyndham Partnership. On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 between Patriot, Wyndham and CHCI ("CHCI merger"), the hospitality-related businesses of CHCI merged with and into Wyndham with Wyndham being the surviving company. CHCI's gaming operations were transferred to a new legal entity prior to the CHCI merger and such operations were not a part of the transaction. As a result of the CHCI merger, Wyndham, through its subsidiaries, acquired the remaining 50% investment interest in GAH-II, L.P., the remaining 17 leases and 16 of the associated management contracts related to the Patriot hotels leased by CHC Lease Partners, 8 third-party management contracts, two third-party asset management contracts, the Grand Bay proprietary brand name and certain other hospitality management assets. The aggregate purchase price of the 17 leasehold interests was approximately $52,721, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Wyndham for the year ended December 31, 1998. These transactions are collectively referred to as the GAH acquisition. By operation of the CHCI Merger, all the issued and outstanding shares of common stock, par value $0.005 per share, of CHCI and certain stock option rights were exchanged for an aggregate of 1,781,173 shares of Series A Redeemable Convertible Preferred Stock, par value $0.01 per share of Wyndham and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham. In addition, Wyndham assumed CHCI's outstanding debt in the amount of approximately $16,600. In addition, on September 30, 2000 and September 30, 2002, Wyndham may be obligated to pay the CHCI stockholders and a subsidiary of Wyndham may be obligated to pay a Gencom-related entity additional consideration, in each case based upon the performance of certain specified assets. Wyndham Hotel Corporation On January 5, 1998, Wyndham Hotel Corporation ("Old Wyndham") merged with and into Patriot, with Patriot being the surviving corporation ("Wyndham merger"). Patriot, as a result of the Wyndham merger, acquired ownership of ten Old Wyndham hotels and 14 ClubHouse hotels and leased such hotels to Wyndham. Thirteen of the 14 hotel leases assumed by Patriot were sub-leased to Wyndham. Wyndham's remaining 52 management and franchise contracts (excluding 16 Patriot hotels that Wyndham managed prior to the merger), the Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management company were transferred to certain non-controlled subsidiaries. The total purchase consideration for the Wyndham merger was approximately $982,000. The consideration consisted of: 21,594,137 paired shares; 4,860,876 shares of Series A Convertible Preferred Stock of Patriot (which are convertible on a one-for-one basis into paired shares); cash of approximately $339,000 to repay debt and pay Wyndham shareholders who elected to receive cash (which was financed with funds drawn on Patriot's Credit Facility); and the assumption of approximately $59,063 in debt. In connection with the repayment of debt F-25 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) assumed in the Wyndham merger, Patriot incurred certain prepayment penalties and wrote off the remaining balance of unamortized deferred financing costs associated with such debt of approximately $18,716, net of minority interest. Such amount has been reported as an extraordinary item in Patriot's consolidated statement of operations. In connection with the Wyndham merger, which was accounted for using the purchase method of accounting, goodwill of $323,959 was recognized. In 1998, the Companies issued an aggregate 261,224 paired shares valued at approximately $5,847 in settlement of certain purchase price adjustment arrangements related to Old Wyndham's acquisition of ClubHouse Hotels, Inc. prior to the merger with Patriot. WHG Casinos & Resorts, Inc. and related transactions On January 16, 1998, a subsidiary of Wyndham merged with and into WHG Casinos & Resorts Inc., with WHG being the surviving corporation, ("WHG merger"). As a result of the WHG merger, Wyndham acquired the 570-room Condado Plaza Hotel & Casino, a 50% interest in the partnership that owns the 389-room El San Juan Hotel & Casino and a 23.3% interest in the partnership that owns the 751-room El Conquistador Resort & Country Club, all of which are located in Puerto Rico. In addition, Wyndham acquired a 62% interest in Williams Hospitality Group, Inc., the management company for the three hotels and the Las Casitas Village at the El Conquistador. A total of 5,004,690 paired shares were issued in connection with the WHG merger and approximately $21,300 of debt was assumed, resulting in total purchase consideration of approximately $159,400. In connection with the WHG merger, which was accounted for using the purchase method of accounting, goodwill of $22,758 was recognized. Effective March 1, 1998, Patriot acquired from unaffiliated third parties a 40% interest in the El San Juan Hotel & Casino, an aggregate 68.62% equity interest in the El Conquistador and a 38% interest in Williams Hospitality Group, Inc. for approximately $31,000 in cash, issuance of 1,818,182 paired shares valued at approximately $49,227 and assumed approximately $169,572 of debt. On July 13, 1998, Patriot acquired the remaining minority interests held by a third party in entities that own the El Conquistador and the El San Juan Hotel & Casino for a total purchase price of approximately $3,890. Wyndham owns the controlling general partner interest in the partnerships that own the El San Juan Hotel & Casino and the El Conquistador. Wyndham also holds voting control of Williams Hospitality Group, Inc. Therefore, the operating results of these entities have been consolidated with those of Wyndham for financial reporting purposes. Arcadian International Limited In April 1998, Patriot announced the completion of its acquisition of all of the issued and to-be-issued shares of Arcadian International Limited for 60 pence per share referred to hereinafter as the Arcadian acquisition. Including the exercise of all outstanding options to purchase shares, the assumption of debt and the acquisition of the remaining shares in the Malmaison Group, the total transaction cost was approximately (Pounds)185,900 (approximately $308,700 U.S. based on exchange rates at the time of closing). As a result of the transaction, Patriot acquired ten owned hotels located throughout England; one owned hotel in Jersey; five owned and managed Malmaison Hotels; two resorts under development in Tuscany, Italy and Paris, France; and the proprietary Malmaison brand name. Patriot also acquired Arcadian's 50% partnership interest in the redevelopment of the luxury Great Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated by Wyndham once the development has been completed. The Arcadian acquisition, was financed through a short-term financing agreement with PaineWebber Real Estate Securities, Inc. for $160,000, at a rate equal to the borrowing rate on Patriot's revolving credit facility. In addition, Patriot assumed approximately $112,600 of debt in connection with the Arcadian acquisition. See Note 6. F-26 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) In connection with the Arcadian acquisition which was accounted for using the purchase method of accounting, goodwill of $54,405 was recognized. Interstate Hotels Company On June 2, 1998, pursuant to an Agreement and Plan of Merger dated as of December 2, 1997, as thereafter amended, between Patriot, Wyndham and Interstate Hotels Company, Interstate merged with and into Patriot with Patriot being the surviving company ("Interstate merger"). Pursuant to the Interstate merger agreement, stockholders of Interstate could elect to convert each of their shares of Interstate common stock into the right to receive either (i) $37.50 in cash, subject to proration in certain circumstances, or (ii) a number of paired shares of Patriot and Wyndham common stock based on an exchange ratio of 1.341 paired shares for each share of Interstate common stock not exchanged for cash. As a result of the Interstate merger, Patriot acquired controlling interest in, or ownership of, 42 hotels representing over 12,000 rooms; leases for 84 hotels representing over 10,100 rooms and management or service agreements for 82 hotels representing over 20,400 rooms located throughout the United States and in Canada, the Caribbean and Russia. The total purchase consideration for the Interstate merger of approximately $2,086,812 consisted of 28,825,875 paired shares, cash of approximately $525,385 to pay Interstate shareholders who elected to receive cash, approximately $787,117 in debt assumed or refinanced by Patriot and approximately $73,351 to pay other transaction-related costs. In addition, Interstate shareholders received rights to receive a cash distribution of $0.40 on each share of Interstate common stock that was converted into paired shares, aggregating approximately $9,138. In connection with the repayment of debt assumed in the Interstate merger, Patriot incurred certain prepayment penalties and wrote off the remaining balance of unamortized deferred financing costs associated with such debt of approximately $11,553, net of minority interest. Such amount has been reported as an extraordinary item in Patriot's consolidated financial statement. In connection with the Interstate merger which was accounted for using the purchase method of accounting, goodwill of $254 was recognized. Interstate's Third-Party Hotel Management Business In May, 1998, the Companies, along with Interstate, entered into a settlement agreement (as amended, the "Settlement Agreement") with Marriott International, Inc. ("Marriott") which addressed certain claims asserted by Marriott in connection with Patriot's then proposed merger with Interstate. The Settlement Agreement provided for the dismissal of litigation brought by Marriott, and allowed Patriot's merger with Interstate to close. . In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for three principal transactions: (1) the re- branding of ten Marriott hotels under the Wyndham name, (2) Marriott's assumption of the management (the "Assumed Management Contracts") of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and (3) the divestiture, either through a sale or a spin-off of assets, of the third-party management business which was operated by Interstate (the "Divestiture"). . For Patriot to sell the third-party management business which was operated by Interstate to a third party (a "Sale Transaction"), Patriot must (1) sign a non-binding letter of intent (the "Letter of Intent") for the Sale Transaction on or before March 31, 1999, (2) sign a final binding contract (the "Final Binding Contract") for the Sale Transaction no later than midnight on April 14, 1999, and (3) consummate the Sale Transaction no later than June 14, 1999. If Patriot does not complete a Sale Transaction, it must consummate the spin- off of the third-party management business which was operated by Interstate (the "Spin-off") no later than the earliest of (1) June 14, 1999, (2) April 30, 1999 (if Patriot does not enter into a Letter of Intent by March 31, 1999), (3) thirty F-27 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) days after the date Marriott disapproves the Letter of Intent, (4) May 14, 1999 (if Patriot does not enter into a Final Binding Contract by April 14, 1999), or (5) thirty days after the date of Marriott disapproves of the Final Binding Contract. The last date on which either the Sale Transaction or the Spin-off may be complete pursuant to the Settlement Agreement is the "Final Divestiture Date." The assets expected to be included in the spin-off include management contracts, leaseholds, and other net assets with an approximate carrying value of approximately $68,000 at December 31, 1998. These assets contributed approximately $6,655 of net income for the period June 2, 1998 through December 31, 1998. If the Companies do not complete the Spin-off or the Sale Transaction by the Final Divestiture Date, Marriott will be entitled to receive 110% of the fees otherwise due under the Assumed Management Contracts. The Companies will also be subject to additional penalties including Marriott's right to purchase, subject to third-party consents, the hotels to be submanaged by Marriott and six additional Marriott hotels owned by Patriot at their then appraised values. Moreover, subject to any defenses the Companies may have, the Companies would owe Marriott liquidated damages with respect to the hotels converted to the Wyndham brand, those to be submanaged by Marriott, and the six additional Marriott hotels Marriott would have the option to purchase. The Companies also anticipate that Marriott would require third-party owners of Marriott-branded hotels that Wyndham manages to replace Wyndham as manager of their hotels. As a result, each respective hotel would either: (1) lose the Marriott brand, at which time the Companies would have to compensate Marriott for any lost franchise fees or (2) terminate the management contract with Wyndham and enter into a contract with another manager. The Companies would owe liquidated damages on any third-party Marriott-franchised hotel which chooses to convert its brand. SF Hotel Company, L.P. On June 5, 1998, Patriot, through the Patriot Partnership, acquired all of the partnership interests in SF Hotel Company, L.P. for approximately $298,915 ("Summerfield acquisition"). The total purchase consideration for the Summerfield acquisition consisted of approximately 3,223,795 OP units, 1,397,281 paired shares, cash of approximately $165,514 and assumption of debt in the amount of approximately $17,083. In addition, the purchase price is subject to future adjustment based on (i) the market price of the paired shares through the end of 1998 (the "1998 Summerfield adjustment") and (ii) achievement of certain performance criteria through 2000 for 24 managed hotels which were not open for business (or had recently opened) as of the date of acquisition, and (iii) fulfillment of the Companies obligation to develop seven hotels. As a result of the Summerfield acquisition, Patriot acquired four Summerfield Suites(R) hotels, leasehold and management interests in 24 Summerfield Suites(R), Sierra Suites(R) and Sunrise Suites hotels and management contracts and franchise interests for 12 additional Summerfield Suites(R) and Sierra Suites(R) hotels. Patriot has leased or sub-leased 21 of the 24 hotels to Wyndham. In addition, Patriot acquired the development contracts for several additional hotels. Estimated obligations related to these future purchase price adjustments are approximately $55,000 part of which is payable in 2000 and in part in 2001. In connection with the Summerfield acquisition which was accounted for using the purchase method of accounting, goodwill of $45,207 was recognized. In connection with the repayment of debt assumed in the Summerfield acquisition, Patriot incurred certain repayment penalties and wrote off the remaining balance of unamortized deferred financing costs associated with such debt of approximately $291, net of minority interest. Such amount has been reported as an extraordinary item in Patriot's consolidated financial statement. Effective January 15, 1999, an additional 1,311,709 OP units valued at approximately $8,969 were issued in connection with the Summerfield acquisition as additional consideration pursuant to the purchase agreement in satisfaction of the 1998 Summerfield adjustment. F-28 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Other In July 1998, Wyndham acquired an approximate 49% limited partnership interest in a partnership with affiliates of Don Shula's Steakhouse, Inc. for $1,500 in cash and 156,272 of Preferred OP units of the Wyndham Partnership which were valued at approximately $3,500. During 1998, Patriot also re-acquired the leasehold interests for nine of its hotels from the lessees and purchased certain license agreements for an aggregate purchase price of approximately $11,686, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Patriot. The Companies issued 118,812 paired shares valued at $3,000 and paid cash of $8,686. Patriot has leased the hotels to Wyndham. 5. Mortgage Notes Receivable and Other Receivables from Unconsolidated Subsidiaries: In December 1995, Patriot, through the Patriot Partnership, acquired an approximate 99% non-voting ownership interest in PAH Ravinia, a Virginia corporation, for $4,458 and 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 Patriot 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 January 1, 2000. 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. In September 1996, Patriot, through the Patriot Partnership, acquired an approximate 99% non-voting ownership interest in PAH Windwatch, a Delaware limited liability company. Patriot's investment in PAH Windwatch of approximately $6,217 is evidenced by a promissory note. PAH Windwatch acquired the 362-room Wyndham WindWatch Hotel in Hauppauge (Long Island), New York for approximately $31,102. As part of the financing for the acquisition of the Wyndham WindWatch Hotel, Patriot, through the Patriot Partnership, 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 Wyndham WindWatch Hotel. These acquisitions have been accounted for using the equity method of accounting. As a result, profits and losses related to these acquisitions are reflected in equity in earnings of unconsolidated subsidiaries for financial accounting purposes. 6. Credit Facility, Term Loans, Mortgage and Other Notes and Capital Lease Obligations: Outstanding borrowings under Patriot's credit facility, term loans, various mortgage and other notes and capital lease obligations consist of the following:
December 31, --------------------- 1998 1997 ---------- ---------- Credit Facility...................................... $ 875,587 $ 455,743 Term Loans........................................... 1,799,500 350,000 Paine Webber Mortgage Financing...................... 298,000 138,000 El Conquistador and Condado Financing................ 170,000 -- Royal Bank of Scotland and Coutts Consortium Financing........................................... 97,140 -- Mortgage notes payable to Metropolitan Life Insurance Company............................................. 98,892 98,892 Unsecured Financing.................................. 66,753 -- Other mortgage debt.................................. 421,944 69,702 Capital lease obligations............................ 29,705 372 ---------- ---------- $3,857,521 $1,112,709 ========== ==========
F- 29 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Credit Facility and Term Loans In connection with the Interstate merger, the Companies closed on the commitment from the Chase Manhattan Bank and Chase Securities, Inc. and Paine Webber Real Estate Securities, Inc. to increase Patriot's existing credit facilities to an aggregate of $2,700,000 (an increase of $1,450,000 from the prior $1,250,000 credit package). The increased credit facilities include the $900,000 revolving credit facility ("Credit Facility") and a series of term loans in the aggregate amount of up to $1,800,000 (the "Term Loans"). Proceeds from the increased credit facilities were used to fund the cash portion of the Interstate merger consideration, as well as to refinance certain outstanding indebtedness of the Patriot Companies. Interest rates will be based on the Companies' leverage ratio and may vary from 1.5% to 2.5% over LIBOR. As of December 31, 1998 the effective rate of interest was 7.314% for all borrowings under the Credit Facility except for Tranche B which was 7.564%. Patriot incurred approximately $27,405 in loan fees and other expenses associated with this financing arrangement. As of December 31, 1998, the Companies had no additional availability under the Credit Facility. The weighted average interest rate in effect for the Credit Facility for the period ended December 31, 1998 was 7.90% per annum. As of December 31, 1998, there was $875,587 outstanding under the Credit Facility. Additionally, Patriot had outstanding letters of credit totaling $24,413 as of December 31, 1998. The Credit Facility matures July 2000. The Term Loans mature on January 31, 1999 ($350,000); March 31, 1999 ($400,000); March 31, 2000 ($450,000); and March 31, 2003 ($599,500). Under the original terms of the Credit Facility, two of the term loans matured on January 31, 1999 ($350 million) and March 31, 1999 ($400 million), respectively. All of the lenders under the Credit Facility have agreed to extend maturity of these two term loans to June 30, 1999, subject to Patriot and Wyndham consummating the Securities Purchase Agreement by that date (see Note 22). In addition to the maturity extension dates, the lenders have waived certain debt covenants to June 30, 1999 which the Companies would have been in default if not waived. If the Securities Purchase Agreement is not consummated by June 30, 1999, or the Securities Purchase Agreement otherwise terminates, the maturity on these two Term Loans will be extended to March 31, 2000, and require $300,000 of principal amortization by December 31, 1999. Additionally the Companies will be required to secure the Credit Facility with mortgages and other security interests. In connection with their agreement to extend the maturities of the term loans to June 30, 1999, the Companies have paid approximately $11,700 in fees. Treasury Rate Lock Agreements Patriot previously entered into three treasury interest rate lock agreements to protect the Companies against the possibility of rising interest rates. Under the rate lock agreements, Patriot receives or makes payments based on the difference between specified interest rates, 6.06%, 6.07%, and 5.62%, and the actual 10-year U.S. Treasury interest rate on a principal amount of $525,000. The Patriot settled the entire $525,000 in treasury interest rate locks resulting in a $49,334 one-time charge to earnings in 1998. Interest Rate Swaps and Caps Patriot enters into interest rate swap and cap agreements to modify the interest characteristics of its outstanding debt. These agreements involve the exchange of amounts based on a variable interest rate for amounts based on fixed interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt using a method which approximates the effective interest method (the accrual accounting method). The related amount payable to or receivable from counterparties is included in accrued expenses or other assets. F-30 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Patriot also enters into interest rate cap agreements that are designed to limit its exposure to increasing interest rates and are designated as hedges of its outstanding debt. An interest rate cap entitles Patriot to receive a payment from the counterparty equal to the excess, if any, of the hypothetical interest expense (strike price) on a specified notional amount at a current market interest rate over an amount specified in the agreement. The only amount Patriot is obligated to pay the counterparty is an initial premium. The cost of the agreements (the initial premium) is included in other assets and amortized to interest expense ratably during the life of the agreement. The fair value of interest rate swap and cap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. As of December 31, 1998 Patriot has entered into six interest rate swap arrangements to swap floating rate LIBOR-based interest rates for fixed rate interest amounts as a hedge against $822,000 of the outstanding balance on the Credit Facility and related term loans. The interest rate swaps, cover borrowings under the Credit Facility and Term Loans as follows:
Amount Rate Maturity ------ ---- -------- $125,000 6.255% 11/01/02 125,000 6.044% 11/01/02 125,000 6.090% 11/01/02 72,000 5.80% 12/15/00 125,000 5.56% 11/01/02 250,000 5.84% 06/01/03
Patriot paid $2,331 and $587 of net incremental interest expense related to the interest rate swap arrangements in 1998 and 1997, respectively. Additionally, Patriot has four interest rate cap arrangements as follows: an interest rate cap that limits LIBOR to 6% on up to $105,000 of indebtedness through June 1999; an interest rate cap that limits LIBOR to 7% on up to $208,750 of indebtedness through October 1999; an interest rate cap that limits LIBOR to 8.5% on up to $29,125 of indebtedness through August 2004; and an interest rate cap that limits LIBOR to 7.83% on up to $38,000 of indebtedness through October 2001. Paine Webber Mortgage Financing In July 1997, Patriot entered into a short-term financing arrangement (the "Paine Webber Mortgage Financing") with an affiliate of Paine Webber Real Estate Securities, Inc. ("Paine Webber Real Estate") whereby such affiliate loaned Patriot $103,000 through April 15, 1998. The loan was amended to extended the maturity to December 1998 then amended and extended to April 15, 1999, at a rate equal to the greater of 30-day LIBOR plus 1.75% or the borrowing rate on the Credit Facility. The effective interest rate and weighted average interest rate incurred under this borrowing was 7.314% and 7.81%, respectively for the period ended December 31, 1998. The proceeds of the Paine Webber Mortgage Financing were used by Patriot to fund or acquire four mortgage loans to certain partnerships affiliated with members of CHC Lease Partners. The Paine Webber Mortgage Financing is secured by a collateral assignment of the first lien mortgage loans encumbering four hotels (which have an aggregate net book value as of December 31, 1998 of $122,060). Patriot, through the Patriot Partnership and certain other subsidiaries, owns the hotels securing these mortgage notes. Effective February 15, 1999 the agreement was amended and extended to the earlier of June 30, 1999 or the closing of the Securities Purchase Agreement (see Note 22). Additionally, the amendment provides for an increase in the rate of interest to LIBOR plus 2.75% per annum. F-31 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) In connection with the acquisition of the Wyndham Emerald Plaza Hotel located in San Diego, California and the Arcadian acquisition, Paine Webber Real Estate provided loans of $35,000 and $160,000, respectively. The $160,000 loan bears interest at a rate equal to the borrowing rate of Patriot's Credit Facility and matures December 1998 (amended to April 15, 1999). The $35,000 loan bears interest at a rate of LIBOR plus 1.9% and matures December 1998 (April 15, 1999, as amended). This loan is secured by a first lien mortgage on the property (which has an aggregate net book value as of December 31, 1998 of $64,699) and the $160,000 loan is unsecured. The weighted average interest rate incurred under these borrowings was 7.76% for the period ended December 31, 1998. The effective interest rate as of December 31, 1998 was 6.964% for the $35,000 mortgage loan and 7.314% for the $160,000 unsecured loan. Effective February 15, 1999 these agreements were amended and extended to the earlier of June 30, 1999 or the closing of the Securities Purchase Agreement (see Note 22). Additionally, the amendments provide for an increase in the rate of interest to LIBOR plus 2.75% per annum for the $35,000 loan and to LIBOR plus 5% per annum for the $160,000 loan. El Conquistador and Condado Hotel & Casino Financing In August 1998, the Companies refinanced certain debt related to the El Conquistador and the Condado Hotel & Casino. Proceeds of $145,000 from the refinancing were used to repay outstanding indebtedness of approximately $139,350, to pay legal and closing costs and to establish certain reserves, including interest reserves, required by the loan agreements. In connection with the refinancing, unamortized deferred financing costs of $1,257, net of minority interest, was written off. Such amount has been reported as an extraordinary item in Wyndham's consolidated financial statements. The loans are secured by mortgages on the properties (which have an aggregate net book value as of December 31, 1998 of $324,734), bear interest at a rate of LIBOR plus 2.25% and prior to the extension as described below, matured on November 3, 1998. The effective interest rate at December 31, 1998 was 7.314%. On October 20, 1998, the El Conquistador Partnership, L.P., which is beneficially owned 100% by the Companies, filed a Form S-11 with the SEC with respect to the offering of the undivided interests in a Loan Agreement between Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority ("AFICA") and the El Conquistador Partnership relating to certain AFICA tourism revenue bonds. It is contemplated that the AFICA Bonds will be issued in a total principal amount of $104,000, will consist of serial bonds and term bonds and will be issued in registered form, without coupons, in denominations which are multiples of $5. The proceeds from the AFICA Bond offering will be used to repay existing debt on the property, fund reserve requirements and pay costs and expenses of issuing the AFICA Bonds. In November 1998, the Companies entered into agreements to amend and extend the maturity dates of certain debt related to the El Conquistador and Condado Hotel and Casino to January 29, 1999. The extension agreements required that $10,000 be deposited into escrow accounts in installments beginning on the date of the extension through January 29, 1999 to secure the Companies obligations to complete the renovations caused by Hurricane Georges. Additionally the amendments provide for an increase in the rate of interest to LIBOR plus 2.75%. Upon receipt of all proceeds related to the insurance claims from Hurricane Georges, the $10,000 will be released from escrow. The financing has been subsequently extended to June 30, 1999. As a condition of the extension for the El Conquistador loan, the Companies must obtain a release from the second lien mortgage holder or repay the outstanding obligation by March 31, 1999. Additionally, the Companies have a term loan agreement with the Government Development Bank for Puerto Rico (GDB). As of December 31, 1998, the loan had an outstanding balance of $25,000. The loan bears F-32 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) interest at a rate of LIBOR plus 0.09% and matures February 2006. The Companies are required to deposit 50% of available cash flow, as defined per the loan agreement with GDB, to a maximum of $1,667 plus any prior year requirements. The loan is secured through a second lien mortgage on the property. The effective interest rate at December 31, 1998 was 5.964%. The weighted average interest rate incurred under these borrowings was 7.47% for the period ended December 31, 1998. Royal Bank of Scotland and Coutts Consortium Debt Obligations In connection with the Arcadian acquisition, the Companies assumed debt obligations to the Royal Bank of Scotland and Coutts Consortium which have a total outstanding balance of $97,140 as of December 31, 1998. The debt obligations include approximately $70,103 of syndicated debt to the Royal Bank of Scotland which bear interest ranging from Sterling LIBOR plus 1.25% to Sterling LIBOR plus 1.75% and UK Base Rate plus 1.25% and matures from 1999 through 2001. As of December 31, 1998 Sterling LIBOR and the UK Base Rate were 6.375% and 6.25% respectively. The Companies have negotiated with the banks to extend certain of the debt obligations which mature prior to June 30, 1999, through this date. Additionally, the amendments provide for an increase in the rate of interest of 50 to 125 basis points. The debt is secured by first lien mortgages encumbering 11 hotels of Arcadian (which have an aggregate net book value as of December 31, 1998 of $143,268). The weighted average interest rate incurred under these borrowings was 9.02% for the period ended December 31, 1998. The Companies also assumed debt obligations which have a total outstanding balance of approximately $27,037 as of December 31, 1998 to the Coutts Consortium debt which bear interest at Sterling LIBOR plus 2% and matures December 2003. The debt is secured by first lien mortgages encumbering four Malmaison hotels and one Malmaison hotel currently under development (which have an aggregate net book value as of December 31, 1998 of $77,290). The weighted average interest rate incurred under these borrowings was 10.8% for the period ended December 31, 1998. The effective rate for the Royal Bank of Scotland loans range from 7.5% to 8.0% at December 31, 1998. The effective rate of the debt obligations with the Coutts Consortium are at 8.375% at December 31, 1998. Metropolitan Life Insurance Company Mortgage Notes In connection with the purchase of four hotels in September 1997, Patriot obtained $98,892 of mortgage financing with Metropolitan Life Insurance Company encumbering six hotels (which have an aggregate net book value as of December 31, 1998 of $196,948). The loans bear interest at 8.08% per annum and require monthly payments of interest only until October 1999. Thereafter, monthly payments of principal and interest in the amount of $755 are required until the October 1, 2007 maturity date. Unsecured Financing Patriot, through the Patriot Partnership and other subsidiaries, is obligated under notes with various banks and financial institutions that as of December 31, 1998, had an outstanding balance of $66,753. These notes are unsecured and bear interest at a rate ranging from 5.5% to 10.5% per annum. The notes mature from June 1999 through 2023. The weighted average interest rate incurred under these borrowings was 6.58% for the period ended December 31, 1998. Other Mortgage Debt Patriot, through the Patriot Partnership and other subsidiaries, is obligated under other mortgage notes with various banks and financial institutions that, as of December 31, 1998, had outstanding balances totaling F-33 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) $421,944. These notes are collateralized by mortgage liens on the property and equipment of 22 hotels including two hotels under development (which have an aggregate net book value as of December 31, 1998 of $954,423). The notes bear interest at rates ranging from 5.56% to 9.75% per annum and maturity dates in 1999 through 2005. The weighted average interest rate incurred by Patriot under these borrowings during the year ended December 31, 1998 was 8.37%. Under the terms of the related loan agreements and capital lease obligations, principal amortization and balloon payment requirements at December 31, 1998 are as follows for each of the next five years:
Year ---- 1999.............................................................. $1,274,918 2000.............................................................. 1,371,266 2001.............................................................. 139,485 2002.............................................................. 65,463 2003.............................................................. 660,824 2004 and thereafter............................................... 345,565 ---------- $3,857,521 ==========
7. Subscription Notes: In order to effect the issuance of the paired shares of common stock and OP units which were issued in connection with certain of the Companies' mergers, other acquisition transactions and equity transactions, Patriot and Wyndham have issued promissory notes to fund the issuance of paired shares and OP units. These promissory notes are referred to as subscription notes. As of December 31, 1998, Patriot's obligations to Wyndham under the subscription notes totaled $91,020. In connection with each issuance of shares and OP units pursuant to a specific transaction, these subscriptions for shares and OP units are funded through the issuance of promissory notes between the Companies. The notes bear interest ranging from 6.06% to 8.7% per annum and mature from 1999 through 2001. As of December 31, 1998, Wyndham's obligations to Patriot under a subscription note totaled $133,669. The note bears interest at 8.7% per annum and mature January 2001. 8. Participating Leases: As of December 31, 1998 the Patriot Partnership leased all but five of its hotels to Wyndham. The remaining five hotels were leased to third party lessees. Subsequent to year end and pursuant to a prior agreement, four of the leases were terminated effective January 1, 1999. The remaining hotel leased to a third party is currently under contract to be sold. The leases as of December 31, 1998 have terms expiring through 2008. Minimum future rental income under these non-cancelable operating leases for the next five years and thereafter is as follows:
Year ---- 1999................................................................ $246,672 2000................................................................ 197,045 2001................................................................ 163,891 2002................................................................ 123,839 2003................................................................ 51,896 2004 and thereafter................................................. 117,163 -------- $900,506 ========
F-34 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 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. Such reserve amount is to average 4.0% of total revenues for the hotels. Generally, Patriot is responsible for the 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. 9. Management Services and Related Revenues: In connection with the Grand Heritage acquisition, the GAH acquisition, the Wyndham merger, the Interstate merger and other transactions, Wyndham entered into or acquired management agreements. As of December 31, 1998, Wyndham and certain unconsolidated subsidiaries manage 185 of the hotels owned and leased by Patriot and its subsidiaries and 161 hotels owned by third parties. Management fees and related service fees earned for hotels owned by Patriot and its subsidiaries were $42,859 in 1998 and $3,626 in 1997. Income and expense for such fees have been eliminated in the accompanying combined financial statements of the Companies. F-35 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 10. Computation of Earnings Per Share: Basic and diluted earnings per share have been computed as follows: Combined Basic and Diluted Earnings per Share
Year Ended Year Ended Year Ended December 31, 1998 December 31, 1997 December 31, 1996 -------------------- ------------------- ------------------ Basic Diluted Basic Diluted Basic Diluted --------- --------- -------- --------- -------- --------- (in thousands, except per share amounts) (Loss) income before extraordinary item..... $(126,406) $(126,406) $ 362 $ 362 $ 37,991 $ 37,991 Adjustment for equity forwards (1)........... (21,151) (188,392) -- -- -- -- Preferred stock dividends.............. (7,956) (7,956) -- -- -- -- --------- --------- -------- -------- -------- -------- (Loss) income (attributable) available to common shareholders before extraordinary item..... (155,513) (322,754) 362 362 37,991 37,991 Extraordinary loss...... (31,817) (31,817) (2,534) (2,534) -- -- --------- --------- -------- -------- -------- -------- Net (loss) income (attributable) available to common shareholders........... $(187,330) $(354,571) $ (2,172) $ (2,172) $ 37,991 $ 37,991 ========= ========= ======== ======== ======== ======== Weighted average number of common shares outstanding............ 137,764 137,764 64,260 64,260 45,459 45,459 ========= ========= ======== ======== ======== Dilutive securities (2): Effect of unvested stock grants......... 264 Dilutive options to purchase paired shares............... 274 -------- 45,997 ======== (Loss) earnings per share: (Loss) income (attributable) available to common shareholders before extraordinary item... $ (1.13) $ (2.34) $ 0.01 $ 0.01 $ 0.84 $ 0.83 Extraordinary loss.... (0.23) (0.23) (0.04) (0.04) -- -- --------- --------- -------- -------- -------- -------- Net (loss) income..... $ (1.36) $ (2.57) $ (0.03) $ (0.03) $ 0.84 $ 0.83 ========= ========= ======== ======== ======== ========
- -------- (1) The adjustment relates to the mark-to-market adjustment for the UBS Transaction and the Nations Transaction (see Note 11), which can be settled in cash or stock, at the Companies' option. At December 31, 1998, the PaineWebber Transaction can only be settled in stock; therefore only the guaranteed return portion is adjusted in the earnings per share calculation. There is no mark-to-market adjustment for the PaineWebber Transaction which is accounted for by the Reverse Treasury Method. (2) For 1998 the dilutive effect of unvested stock grants of 880, the option to purchase common stock of 753, shares issued in connection with forward equity contracts of 2,507 and 6,613 of preferred shares were not included in the computation of diluted earnings per share for the year ended December 31, 1998 because they are anti-dilutive. For 1997, the dilutive effect of unvested stock grants of 804 and the option to purchase common stock of 1,017 were not included in the computation of diluted earnings per share for the year ended December 31, 1997 because they are anti- dilutive. F-36 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Patriot Basic and Diluted Earnings Per Share
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1996 ------------------- ---------------- --------------- Basic Diluted Basic Diluted Basic Diluted -------- --------- ------- ------- ------- ------- (in thousands, except per share amounts) (Loss) income before extraordinary item..... $(14,328) $ (14,328) $ 382 $ 382 $37,991 $37,991 Adjustment for equity forwards (1)........... (21,151) (188,392) -- -- -- -- Preferred stock dividends.............. (5,249) (5,249) -- -- -- -- -------- --------- ------- ------- ------- ------- (Loss) income (attributable) available to common shareholders before extraordinary item..... (40,728) (207,969) 382 382 37,991 37,991 Extraordinary loss...... (30,560) (30,560) (2,534) (2,534) -- -- -------- --------- ------- ------- ------- ------- Net (loss) income (attributable) available to common shareholders........... $(71,288) $(238,529) $(2,152) $(2,152) $37,991 $37,991 ======== ========= ======= ======= ======= ======= Weighted average number of common shares outstanding............ 137,764 137,764 64,260 64,260 45,459 45,459 ======== ========= ======= ======= ======= Dilutive securities (2): Effect of unvested stock grants......... 264 Dilutive options to purchase common stock................ 274 ------- 45,997 ======= (Loss) earnings per share: (Loss) income (attributable) available to common shareholders before extraordinary item... $ (0.30) $ (1.51) $ 0.01 $ 0.01 $ 0.84 $ 0.83 Extraordinary loss.... (0.22) (0.22) (0.04) (0.04) -- -- -------- --------- ------- ------- ------- ------- Net (loss) income..... $ (0.52) $ (1.73) $ (0.03) $ (0.03) $ 0.84 $ 0.83 ======== ========= ======= ======= ======= =======
- -------- (1) The adjustment relates to the mark-to-market adjustment for the UBS Transaction and the Nations Transaction (described in Note 11), which can be settled in cash or stock, at the Companies' option. At December 31, 1998, the PaineWebber Transaction can only be settled in stock; therefore only the guaranteed return portion is adjusted in the earnings per share calculation. There is no mark-to-market adjustment for the PaineWebber Transaction which is accounted for by the Reverse Treasury Method. (2) For 1998 the dilutive effect of unvested stock grants of 880, the option to purchase common stock of 753, shares issued in connection with forward equity contracts of 2,507 and 6,613 of preferred shares were not included in the computation of diluted earnings per share for the year ended December 31, 1998 because they are anti-dilutive. For 1997, the dilutive effect of unvested stock grants of 804 and the option to purchase common stock of 1,017 were not included in the computation of diluted earnings per share for the year ended December 31, 1997 because they are anti- dilutive. F-37 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Wyndham Basic and Diluted Earnings Per Share (1)
For the Six Year Ended Months ended December 31, 1998 December 31, 1997 Basic and Diluted Basic and Diluted ----------------- ----------------- (in thousands, except per share amounts) Loss before extraordinary item......... $(111,162) $ (20) Preferred stock dividends.............. (2,707) -- --------- ------- Loss attributable to common shareholders.......................... (113,869) (20) Extraordinary loss..................... (1,257) -- --------- ------- Net loss attributable to common shareholders.......................... $(115,126) $ (20) ========= ======= Weighted average number of common shares outstanding.................... 137,764 64,260 Earnings per share: Loss attributable to common shareholders........................ $ (0.83) $ -- Extraordinary loss................... (0.01) -- --------- ------- Net loss............................. $ (0.84) $ -- ========= =======
- -------- (1) For 1998, the dilutive effect of unvested stock grants of 880, the option to purchase common stock of 753 and 6,613 of preferred shares were not included in the computation of diluted earnings per share for the year ended December 31, 1998 because they are anti-dilutive. For 1997, the dilutive effect of unvested stock grants of 804 and the option to purchase common stock of 1,017 were not included in the computation of diluted earnings per share for the year ended December 31, 1997 because they are anti-dilutive. See Note 14 for a discussion of the impact of SFAS No. 123 ("Accounting for Stock-Based Compensation") on earnings per share. 11. Commitments and Contingencies: Office Lease The Companies have entered into agreements to lease office space for the Companies' corporate headquarters and other regional offices. In general, the agreements provide for monthly payments of rent plus reimbursement for certain other costs as specified per each agreement and are accounted for as operating leases for financial reporting purposes. The leases have terms from 1 to 25 years and expire between 1999 and 2009. Annual rental payments of $3,125, $127 and $126 for 1998, 1997 and 1996, respectively are reflected in general and administrative expense in the accompanying financial statements. The lease agreement entered into for the Companies' corporate headquarters is with an affiliated entity (see Note 12). Future five year minimum lease payments under these lease agreements are as follows:
Year ---- 1999................................................................. $ 4,366 2000................................................................. 3,834 2001................................................................. 3,486 2002................................................................. 3,414 2003................................................................. 3,361 2004 and thereafter.................................................. 7,940 ------- $26,401 =======
F-38 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Hotel and Ground Leases The Companies lease both land and hotels under agreements with terms ranging from one to 100 years. The Companies have incurred rent expense totaling $110,108, $4,117 and $1,075 for 1998, 1997 and 1996, respectively. Future five year minimum lease payments under these lease agreements are as follows:
Year ---- 1999.............................................................. $ 87,449 2000.............................................................. 87,567 2001.............................................................. 87,576 2002.............................................................. 87,692 2003.............................................................. 87,900 2004 and thereafter............................................... 1,009,738 ---------- $1,447,922 ==========
Employment Agreements The Companies have entered into employment agreements with each of their respective executive officers. Generally, the agreements provide for annual base compensation with any increases during the three-year term of the agreement to be approved by the Compensation Committees of Patriot's or Wyndham's Board of Directors, as applicable. Future Earnout Obligations In connection with the CHCI merger and the Gencom acquisition, Wyndham and a subsidiary of Wyndham may be obligated to pay CHCI shareholders and a Gencom related entity additional purchase consideration, in each case based on the performance of certain specified assets. In connection with the Summerfield acquisition, Patriot may be obligated to pay in cash or OP units additional purchase consideration if certain performance criteria are met based on (i) the average market price of the paired shares of the Companies through December 31, 1998 and (ii) the achievement of certain performance criteria for certain hotels under development through the year 2000 (see Note 13). Pursuant to the joint venture agreement related to the Wyndham Chicago St. Claire Hotel (the hotel is currently under development), the agreement provides for an earnout payment payable based on the net operating income from the hotel for the year ended December 31, 2001, as calculated per the agreement. Forward Equity Contracts. Patriot is a party to forward equity contracts with three counterparties involving the sale of an aggregate of 13.3 million paired shares, with related price adjustment mechanisms. Patriot's aggregate obligation under the forward equity contracts was approximately $313,300 at December 31, 1998. As of such date, Patriot has delivered an aggregate of 54 million shares to the counterparties as collateral in addition to approximately 12.5 million paired shares currently owned by the counterparties or their affiliates. Patriot currently intends to settle in full all of the forward transactions with the proceeds of the $1 billion equity investment. If the forward transactions are settled in cash, the counterparties must deliver to the Companies' paired shares then owned or held by them by them as collateral under the respective forward agreements. F-39 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) On February 28, 1999, all three counterparties agreed, subject to specified conditions, not to require settlement under their respective forward equity agreements or to sell paired shares in connection with the forward equity agreements until the earlier of (a) the closing of the investment and (b) June 30, 1999. The agreements provide that the standstill obligations terminate if: (i) the agreement is terminated or the parties publicly announce that they do not intend to close the investment and Patriot has not entered into another agreement that provides for a complete settlement of the forward transactions on or before June 30, 1999; (ii) the Companies' default on certain of covenants under the forward agreements or under our credit facility: (iii) any of the counterparties sells or agrees to sell paired shares; or (iv) the price of the paired shares falls to a specified threshold, as described below. Any counterparty whose standstill agreement terminates will have the right to require an immediate settlement of its forward equity transaction. The standstill agreement with PaineWebber Financial Products, Inc. provides that the PaineWebber standstill obligation will terminate if the closing price of the paired shares on any trading day is less than or equal to $4.50. If the closing price of the paired shares fell below $4.50 PaineWebber's standstill obligation would terminate and PaineWebber would be entitled to require settlement under its forward contract. PaineWebber has not indicated that it intends to sell paired shares or require settlement of its forward transaction. The standstill agreement with NationsBanc Mortgage Capital Corporation provides that the NationsBanc standstill obligation will terminate if the weighted average trading price of the paired shares (excluding the last 30 minutes of trading) on any trading day is less than or equal to $4.50. The standstill agreement with UBS AG, London Branch provides that the UBS standstill obligation will terminate if the paired share price (calculated as provided in the UBS forward contract) falls below $4.50. Nations has asserted that its standstill obligation has terminated by virtue of the termination of PaineWebber's standstill obligation, based upon a "most favored counterparty" clause in the Nations forward contract. UBS has asserted that its standstill obligation has terminated based upon its interpretation of the measure of the paired share price. The Companies have disputed both the Nations and UBS assertions. Neither Nations nor UBS has indicated that it intends to sell paired shares or require settlement of its forward transaction. The Companies may settle the forward transactions by delivering either cash or paired shares (if such shares are covered by an effective registration statement). Sources of cash are not currently available for the Companies to make the payments that would be required to settle one or more of the forward transactions in cash. Moreover, the Companies cannot assure you that their bank lenders would consent to any cash settlements prior to the closing of the transaction. In addition, given the current market price of the paired shares, any settlement in paired shares would have severely dilutive effects on the Companies' capital stock. The dilutive effects increase as the market price of the paired shares decreases below the applicable forward prices. If any of the counterparties sells paired shares, the conversion price of the preferred stock to be issued to the investors will be adjusted downward to the extent that the price recognized by the Companies on the sale is less than $8.75 per share. Generally, the Companies may settle by delivering paired shares only if a registration statement covering such paired shares is effective. There are currently effective registration statements covering the sale by the three forward counterparties of up to 40 million paired shares and the sale by UBS of an additional 4 million paired shares in connection with the forward equity transactions. The Companies cannot assure you that these registration statements will remain effective or that they will not be required to register more paired shares in F-40 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) connection with the forward equity transactions. Two of the counterparties have requested that the Companies register the balance of the paired shares delivered as collateral to all three counterparties. The Companies intend to seek to register all such shares. Contingencies On January 12, 1999, a purported class action lawsuit was filed on behalf of the stockholders of Patriot and Wyndham in the Delaware Chancery Court. The lawsuit, captioned Charles Fraschilla v. Paul A. Nussbaum, et al., No. 16895NC, names as defendants the directors of Patriot ("Directors"), as well as the Investors. The lawsuit alleges that the Directors breached their fiduciary duties to Patriot's shareholders with respect to the Companies financial condition. The lawsuit also alleges that the Directors breached their fiduciary duty by "effectively selling control" of Patriot to the investors for inadequate consideration and without having adequately considered or explored all other alternatives to this sale or having taken steps to maximize stockholder value. The lawsuit also alleges that the Investors aided and abetted the Directors in their purported breaches of fiduciary duty. The plaintiffs seek monetary damages from the Directors as well as an injunction preventing the consummation of the deal with the investors. On January 19, 1999, three nearly identical purported class action lawsuits were filed in the same court on behalf of different purported class representatives: (1) Sybil R. Meisel and Steven Langsam, Trustees, No. 16905NC; (2) Crandon Capital Partners, No. 16906NC; and Robert A. Staub, No. 16907NC. The plaintiffs have proposed an order of consolidation for these four purported class action suits, and the parties are currently negotiating the terms of that order. On February 3, 1999, McNeill Investment Company, Inc. filed a lawsuit against Patriot in the United States District Court for the Western District of Pennsylvania. In the lawsuit, captioned McNeill Investment Company, Inc. v. Patriot American Hospitality, Inc., No. 99-165, the plaintiff alleges that Patriot breached its obligations under a registration rights agreement that Patriot became obligated under through its merger transaction with Interstate Hotels Corporation. The plaintiff claims approximately $9 million in damages. Counsel is currently conducting a factual investigation of the claims made in the complaint. Also, counsel is investigating the possibility of settlement with the plaintiff, but if the matter is not settled, it will have to be litigated. Patriot's answer or pleading in response to the complaint is due on or before March 26, 1999. The Companies are currently involved in certain guest and customer claims and other disputes arising in the ordinary course of business. In the opinion of management, the pending litigation will not have a material effect on the financial statements. 12. Related Party Transactions: Mortgage Notes and Other Receivables from Unconsolidated Subsidiaries As described in Note 5, Patriot, through the Patriot 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 of interest income in 1998, 1997 and 1996 related to such mortgage notes (excluding $4,268 of such interest eliminated for financial reporting purposes in 1998, and $4,280 in both 1997 and 1996). Patriot had aggregate receivables (including mortgage notes) of $42,264 and $41,587 due from PAH Ravinia as of December 31, 1998 and 1997, respectively. Patriot through the Patriot Partnership, also loaned $31,400 in the form of a mortgage note to PAH Windwatch (see Note 5), as part of the financing for PAH Windwatch's acquisition of the Wyndham WindWatch Hotel. Patriot recognized $79, $28 and $8 of interest income in 1998, 1997 and 1996, respectively, related to such mortgage notes (excluding $2,759, $2,810 and $754 of such interest eliminated for financial reporting purposes). Patriot had aggregate receivables (including the mortgage note) of $32,830 and $34,060 due from PAH Windwatch as of December 31, 1998 and 1997, respectively. F-41 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Additionally, the 1% voting stock of these entities is owned in part by Senior Executive Officers of Patriot and Wyndham. Acquisition and Sale of Interests From and to Officers and Affiliates In September and October 1997, in connection with certain transactions with affiliates of Gencom and CHCI to acquire ten hotels, eight leasehold interests and an investment interest in GAH (see Note 4), two of the Companies' Executive Officers and one of the Directors received cash in the aggregate amount of approximately $3,577 and a total of 2,544,308 OP units of the Operating Partnerships and 476,682 preferred OP units of the Wyndham Partnership (with an aggregate value of approximately $70,238) as consideration for their ownership interests in such assets acquired. In connection with the CHCI Merger, Mr. Karim Alibhai, President and Chief Operating Officer of Wyndham, received 156,863 OP units of the Operating Partnerships valued at approximately $5,000 and entities affiliated with Mr. Alibhai received 85,600 shares of Wyndham Series A Preferred Stock and 85,600 shares of Wyndham Series B Preferred Stock with an aggregate value of approximately $3,946. These units and shares were issued in consideration of Mr. Alibhai's ownership interests in CHCI and its affiliates. In addition, Mr. Sherwood M. Weiser, a director of Wyndham, received 394,397 shares of Wyndham Series A Preferred Stock and 394,398 shares of Wyndham, Series B Preferred Stock valued at $18,182 in connection with the CHCI Merger as consideration for his ownership interest in CHCI and its affiliates. Additionally, the Companies issued 65,485 Paired Shares as part of the consideration for the transaction of which Mr. Sherwood M. Weiser received 43,403 Paired Shares with an approximate value of $994. During 1998, Patriot sold its interest in four hotel assets: Courtyard by Marriott Hotel in Orange, Connecticut, Courtyard by Marriott Hotel in St. Louis, Missouri, Residence Inn by Marriott in Pittsburgh, Pennsylvania and the Westborough by Marriott in Westborough, Massachusetts, for a net purchase price of approximately $32,500 million. The assets were sold to an affiliate of an independent member of the Board of Directors of Patriot. Patriot recognized no gain or loss as a result of this transaction. Effective January 15, 1999, in connection with the Summerfield acquisition an additional 1,311,709 OP units valued at approximately $8,969 were issued as additional consideration pursuant to the purchase agreement. Of the OP units issued, Mr. Rolf E. Ruhfus III, a member of the Wyndham Board of Directors received 344,082 of the OP units issued with an approximate value of $2,353. Management and related services Wyndham and certain subsidiaries provide management and related services to a majority of the hotels owned and leased by Patriot and its subsidiaries and leased to Wyndham. The management contracts provide for fees ranging from 2% to 5%. Fees paid to Wyndham and certain subsidiaries totaled $42,859 and $3,626 in 1998 and 1997, respectively. No such fees were earned in 1996. Thc Companies received $22,940 fees in the aggregate from entities owned in whole or in part by affiliates of the Companies. During 1998, Wyndham received payments in the aggregate amount of $4,207 from hotel partnerships in which Crow Family Members have an interest. Some or all of the Wyndham senior executive officers have an ownership interest in such hotel partnerships. The payments were received as reimbursements for certain administrative, tax legal, accounting, finance, risk management, sales and marketing services provided by Wyndham to such entities. Notes receivable from Affiliates, Officers and Employees The Companies have provided funding to certain affiliated hotels as working capital and have made loans to certain officers. As of December 31, 1998, notes receivable from affiliated hotels totaled $35,766 and notes receivable from officers and employees totaled $3,554. As of December 31, 1997 notes receivable from affiliated hotels totaled $3,315. F-42 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Additionally, in connection with the Wyndham merger, Patriot assumed notes receivable from senior executive officers of the merged company. As of December 31, 1998, these promissory notes had an outstanding balance of $15,254. The notes bear interest at 6% per annum and are fully secured by the pledge of paired shares of the Companies held by the note obligors. The balance of the notes including principal and accrued interest are due and payable in one payment in May 2001. These notes are classified in shareholders' equity for financial accounting purposes. Other During 1998, the Companies made payments totaling $3,423 to Wyndham Travel Management Ltd., an entity owned by Lucy Billingsley (the daughter of Mr. Trammell Crow), for travel services provided to Wyndham. During 1998, the Companies made rent payments totaling $1,492 related to an agreement with an affiliate of Mr. Harlan Crow to lease office space for the Companies' corporate headquarters in Dallas, Texas and rent payments totaling $81 related to an agreement with a board member Mr. Rolf E. Ruhfus. The Companies, in connection with the Wyndham merger, have assumed a service agreement with ISIS 2000, an entity affiliated with a member of the Crow Family and Senior Executive Officers of the Companies, to provide centralized reservations and property management services to all Wyndham branded hotels as well as other hotels owned by the Companies. The service fees incurred by Wyndham in 1998 were $4,368. No such fees were incurred in 1997 or 1996. Pursuant to the Wyndham merger, the Companies have the option to purchase the entity through April 1999 for approximately $3,000. In addition, the Companies have a service contract with the Kinetic Group, an entity affiliated with a member of the Crow Family, and senior executive officers of the Companies, to provide the Companies with management information services. Fees paid for the year ended December 31, 1998 totaled $5,467. Pursuant to the Wyndham merger, the Companies have the option to purchase the entity through April 1999 for approximately one hundred dollars. In 1998, the Companies incurred lease expenses in the aggregate amount of $455 for lease obligations to entities owned in whole or part by an affiliate of the Companies. In 1998, the Companies paid $598 as a consulting fee to a director, Mr. Rolf E. Ruhfus. In connection with the Wyndham merger, Crow Family Members and certain Wyndham senior executives retained the right to receive additional consideration on April 30, 2000 based on a formula pertaining to the performance of Wyndham Riverfront New Orleans and Wyndham Garden Laguardia as set forth in the Omnibus Purchase and Sale Agreement dated April 14, 1997. Based on the performance of such properties as of December 31, 1998, the additional consideration would be $9,152 and $9,971 respectively. Wyndham has made insurance premium payments to Wynright Insurance ("Wynright"), an entity owned by Crow Family Members and the Wyndham senior executive officers, with respect to certain insurance policies maintained for the benefit of Wyndham and hotels owned or leased by Wyndham. Such payments totaled $730,000 in 1998. 13. Minority Interest in the Operating Partnerships: Pursuant to the Operating Partnerships' respective limited partnership agreements, the common limited partners of the Operating Partnerships, including certain affiliates of the Companies, received rights (the "Redemption Rights") that enable them to cause the Operating Partnerships to redeem each pair of OP units (consisting of one OP unit of the Patriot Partnership and one OP unit of the Wyndham Partnership) in exchange F-43 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) for cash equal to the value of a paired share (or, at the Companies' election, the Companies may redeem each pair of OP units offered for redemption for one paired share of common stock). In the case of the Wyndham Partnership's Class A preferred OP units and Class C preferred OP units described below, each of these preferred OP units may be redeemed for cash equal to the value of a paired share (or, at Wyndham's election, Wyndham may redeem each preferred OP unit offered for redemption for one paired share of common stock). The Redemption Rights generally may be exercised at any time after one year following the issuance of the OP units. The number of shares of common stock issuable upon exercise of the Redemption Rights will be adjusted for share splits, mergers, consolidations or similar pro rata transactions which would have the effect of diluting the ownership interests of the limited partners of the Operating Partnerships or the shareholders of the Companies. As a result of the 2-for-1 stock split in March 1997, the Cal Jockey merger and the 1.927-for-1 stock split in July 1997, the number of OP units outstanding and the OP unit conversion factor was adjusted to re-establish a one-for-one exchange ratio of OP units to common shares. The Patriot Partnership had a total of 49,974,000 OP units outstanding as of December 31, 1996, of which 43,613,496 OP units were held by Patriot and 5,035,700 OP units and 1,324,804 Preferred OP units were held by minority partners, which represent the minority interest in the Patriot Partnership. During 1997, the Patriot Partnership issued an additional 20,376 OP units valued at approximately $370 in connection with The Tutwiler Hotel acquisition, and 2,590,197 OP units valued at approximately $58,662 in connection with the acquisition of the four resort properties. In accordance with their redemption rights, during the first six months of 1997 certain partners elected to redeem a total of 379,606 OP units for a total of $14,441 in cash (based upon the market price of Patriot common stock on the effective dates of the redemptions) and 150,000 shares of Patriot common stock (such amounts have not been adjusted to reflect the stock splits and Cal Jockey merger). As of June 30, 1997, the Patriot Partnership had 6,887,049 OP units and 1,324,804 preferred OP units outstanding. In connection with the Cal Jockey merger, the holders of Patriot Partnership OP units and preferred OP units received OP units and Class B preferred OP units of the Wyndham Partnership in an amount equal to the number of Patriot Partnership units held by them at the closing of the Cal Jockey merger. In addition, during 1997, the Operating Partnerships each issued 2,456,172 OP units in connection with the acquisition of hotel properties, and 2,388,932 OP units in connection with Patriot's acquisition of eight leasehold interests from CHC Lease Partners and Wyndham's acquisition of its approximate 50% ownership interest in GAH and redeemed 6,298 OP units. In addition, the Wyndham Partnership issued 931,972 Class A Preferred OP units in connection with the Grand Heritage Acquisition and 476,682 Class C Preferred OP units in connection with the acquisition of the approximate 50% ownership interest in GAH. On September 30, 1997, the Companies exercised their right to call 2,000,033 OP units in each of the Operating Partnerships held by The Morgan Stanley Real Estate Fund, L.P. and certain related entities (the "Morgan Stanley Call"). The exercise price on the Morgan Stanley Call was $25.875 per pair of OP units. The Morgan Stanley Call was funded with the proceeds of certain direct placements of the Companies' paired shares. See Note 14. As of December 31, 1997, the Patriot Partnership had a total of 84,868,079 OP units outstanding of which 73,276,716 OP units were held by Patriot and 10,266,559 OP units and 1,324,804 preferred OP units were held by minority partners, which represent the minority interest in the Patriot Partnership. The Wyndham Partnership had a total of 86,276,733 OP units outstanding as of December 31, 1997, of which 73,276,716 OP units were held by Wyndham and 10,266,559 OP units, 931,972 Class A Preferred OP units, 1,324,804 Class B Preferred OP units and 476,682 Class C Preferred OP units were held by minority partners, which represent the minority interest in the Wyndham Partnership. F-44 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) During 1998, the Operating Partnerships issued 53,989 OP units valued at approximately $1,496 in connection with the Buena Vista hotel acquisition, and 3,223,795 OP units valued at approximately $81,146 in connection with the Summerfield acquisition. In accordance with their redemption rights, during 1998, certain partners of the Operating Partnerships elected to redeemed 1,010,340 OP units, of which 1,009,570 were redeemed for paired shares of common stock, and 770 OP units were redeemed for a total of $19 in cash (based on the 10 day average price of the common stock immediately preceding the date of valuation). In addition, certain limited partners of the Wyndham Partnership elected to redeem 324,809 preferred Class A OP units for common paired shares, and 46,731 preferred Class C OP units were redeemed for 28,019 common paired shares in 1998 with the remaining paired shares of 18,712 to be issued in 1999. In connection with the Grand Heritage acquisition in 1997, the contribution agreement provided that preferred Class A units with a value of $500 be placed in escrow and released, subject to certain 1997 operating targets. In April of 1998, 20,942 preferred Class A OP units were issued. In connection with the acquisition of GAH, preferred OP units of the Wyndham Partnership with a value of approximately $5,000 were held back, subject to the hotels and leaseholds acquired meeting certain operating targets over the period prior to the CHCI Merger. On June 30 1998, 156,863 Preferred Class A Op units were issued as those targets were met. On July 30, 1998, the Wyndham Partnership, issued 156,272 Preferred Class A OP units valued at approximately $3,500 in connection with the acquisition of an approximate 49% ownership of Don Shula's Steak Houses Inc. As of December 31, 1998, the Patriot Partnership had a total of 125,961,945 OP units outstanding of which 112,103,138 OP units were held by Patriot and 12,534,003 OP units, and 1,324,804 preferred OP units were held by minority partners, which represent the minority interest in the Patriot Partnership. The Wyndham Partnership had a total of 125,012,672 OP units outstanding as of December 31, 1998, of which 109,782,674 OP units were held by Wyndham and 12,534,003 OP units, 784,377 Class A Preferred OP units, 1,324,804 Class B Preferred OP units and 586,814 Class C Preferred OP units were held by minority partners which represent the minority interest in the Wyndham Partnership. Subsequent to December 31, 1998, the Companies issued 1,311,709 OP units valued at approximately $8,969 as additional purchase consideration in the Summerfield acquisition. 14. Shareholders' Equity: Capital Stock Patriot's and Wyndham's respective Boards of Directors have authorized the issuance of up to 100,000,000 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, 1997, no preferred stock was issued. During 1998, Patriot issued 4,860,876 Series A Convertible Preferred Stock ("Patriot Series A") in connection with the Wyndham merger. The holders of Patriot Series A are entitled to receive dividends on a quarterly basis payable concurrently with and in the same amount as dividends on paired shares. Patriot Series A may convert into one paired share for each share of Series A share which is held by the respective holder. Holders of Patriot Series A are entitled to vote, on the basis of one vote for each share of Patriot common stock as if the shares had been converted. Upon merger, the holder has a right to receive upon conversion of Series A shares, shares which could have been converted immediately prior to the merger. F-45 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) During 1998, Wyndham issued 1,781,173 shares of Wyndham Series A Redeemable Convertible Preferred Stock ("Wyndham Series A") and 1,781,181 Wyndham Series B Redeemable Convertible Preferred Stock ("Wyndham Series B") in connection with the CHCI merger. Holders of Wyndham Series A and Series B stock are entitled to receive dividends payable concurrently with and in the same amount as dividends on paired shares. Wyndham Series A and Series B stock may be converted into cash based on the current market price, or at the option of Wyndham, may receive one paired share for each share of Series A or Series B stock which may be converted. Both Series A and B are non-voting. Old Patriot was initially capitalized through the issuance of 2,850 shares of no par value common stock to three of Old Patriot's executive officers for which the executive officers paid nominal consideration. In connection with the initial public 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, was recorded as unearned stock compensation and is being amortized over the three-year vesting period. In May 1996, Old Patriot sold an aggregate of approximately $40,000 of equity securities in a private placement to an institutional investor that purchased the securities on behalf of two owners. The securities consisted of 1,622,786 shares of common stock sold at $13.475 per share and 1,324,804 Class B Preferred OP units sold at $13.688 per unit. The common stock is of the same class as Old Patriot's then-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 Class B Preferred OP units are entitled to quarterly distributions equal to 103% of the quarterly dividends paid on the common stock (and, subsequent to the Cal Jockey merger, paired shares). Generally, three years following issuance, the Class B Preferred OP units may be converted into paired shares on a one-for-one basis (i.e., one paired share for one Class B Preferred OP Unit), subject to certain limitations. After 10 years, Patriot will have the right to exchange all the outstanding Class B Preferred OP units for paired shares on a one-for-one basis. On December 31, 1997, the Companies sold 3,250,000 unregistered paired shares to UBS Limited, an English corporation, for a purchase price per paired share of $28.8125, or aggregate consideration of approximately $91,300, net of a 2.5% discount. On February 26, 1998, the Companies sold 4,900,000 unregistered paired shares to Nations, for a purchase price per paired share of $24.8625, or aggregate consideration of approximately $121,800, net of a 2.5% discount. On April 6, 1998, the Companies sold 5,150,000 unregistered paired shares to PaineWebber for a purchase price per paired share of $27.01125, or aggregate consideration of approximately $139,108, net of a 2% discount. Shareholders Rights Agreement On December 20, 1998, the Board of Directors of Patriot adopted a Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the terms of the Rights Agreement, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (a "Right") for each outstanding share of Common Stock of the Patriot (the "Common Stock") and for each outstanding share of Series A Convertible Preferred Stock of the Patriot (the "Series A Preferred Stock") to stockholders of record as of December 20, 1998 (the "Record Date"). In addition, one Right will automatically attach to each share of Common Stock and to each share of Series A Preferred Stock issued between the Record Date and the Distribution Date as defined per the F-46 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Rights Agreement. Each Right entitles the registered holder thereof to purchase from Patriot a unit consisting of one one-thousandth of a share of Series X Junior Participating Cumulative Preferred Stock, par value $0.01 per share, at a cash exercise price of $35.00 per Unit, subject to adjustment. Dividends On December 23, 1997, Patriot declared a $0.2981 per common share dividend to holders of record on January 5, 1998. Patriot paid dividends of $0.2446 per common share for each of the first three quarters of 1997. In addition, in connection with the Cal Jockey Merger, Old Patriot also declared a special dividend of $0.0559 per common share payable to holders of record on June 27, 1997, which was paid on June 30, 1997. Concurrent with each of the dividend declarations, the Operating Partnerships authorized distributions in the same amount on outstanding OP units. Old Patriot paid dividends of $0.2236 per common share for the fourth quarter of 1995 (its first quarter of operations) and for the each of the first three quarters of 1996. Old Patriot paid dividends of $0.2446 per common share for the fourth quarter of 1996. On October 5, 1998, Patriot made a capital contribution to Wyndham to facilitate an acquisition by Wyndham. This contribution resulted in a "deemed distribution" for tax purposes to Patriot's shareholders of common stock of $0.7081 per share. No cash was actually distributed to the shareholders. However, for tax purposes the shareholders will treat the distribution as though cash were received and then contributed to Wyndham. On May 4, 1998, Patriot declared a $0.2981 per common share dividend to holders of record on May 20, 1998 and on July 28, 1998, Patriot declared a $0.2981 per common share dividend to holders of record on August 10, 1998. On December 22, 1998, Patriot declared a stock dividend of $0.44 per share of common stock for the fourth quarter ended December 31, 1998 (the "Dividend"). The Dividend was payable January 25, 1999 to stockholders of record on December 30, 1998. Each stockholder received the option to receive the Dividend in the form of additional paired shares or shares of Series B Cumulative Perpetual Preferred Stock, par value $0.01 per share of Patriot. Per share data (including dividends), weighted average shares outstanding and all stock option activity have been restated to reflect the stock dividend. The holders of Series B Preferred Stock shall be entitled to receive, when, as and if declared by Patriot's Board of Directors out of funds legally available for the payment of dividends, cumulative preferential cash dividends per share at the rate of 15% on the stated value of $25.00 per share per annum. The Series B Preferred Stock is redeemable by Patriot on or after January 2, 2000 at a redemption price of $25.00 per share and has a liquidation preference of $25.00 per share. Stock Incentive Plans The Companies have adopted certain employee incentive programs for the purpose of (i) attracting and retaining employees, directors and others, (ii) providing incentives to those deemed important to the success of the Companies, and (iii) associating the interests of these individuals with the interests of the Companies and their shareholders through opportunities for increased stock ownership. Certain of the stock options and restricted stock grants issued under the incentive stock programs will fully vest and become non-forfeitable upon consummation of the investment. The Directors' Plan. The Directors' Plan provides for the award of stock options and stock awards with respect to Director compensation through June 1997 for each eligible non-employee director of the Companies. F-47 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 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 $25 payable to each such director through June 1997. 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 non-forfeitable. The 1997 Incentive Plans. The 1997 Incentive Plans provide for the award of stock options, stock awards or performance shares to each eligible employee and director of Patriot and Wyndham. Under each 1997 Incentive Plan, the aggregate number of paired shares available for grants of awards shall be the sum of (i) 3,000,000 paired shares plus (ii) 10% of any future net increase in the total number of shares of paired common stock. Under the Companies' 1997 Incentive Plans, each independent director may elect to take all or a portion of his/her fees in the form of deferred paired share units. In addition, the independent directors of Patriot and Wyndham will automatically be granted a non-qualified stock option, immediately exercisable in full, to acquire 10,000 paired shares at an exercise price per paired share equal to the fair market value of a paired share on the date of grant. Option terms are fixed by the Compensation Committees and may not exceed ten years from the date of grant. Stock Grant Awards During 1996, pursuant to the Directors' Plan and the Incentive Plan, Old 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. In addition, the directors were granted 2,640 shares of common stock with an aggregate value of $37 in payment of one-half of the annual retainer payable to each director. Old Patriot recorded a total of $5,144 (the aggregate value of Old Patriot's common stock based on the market price at the date of the award) as unearned stock compensation in 1996, which is being amortized over the vesting period of four years. During 1997, pursuant to the Incentive Plans, the Board of Directors awarded 547,867 paired shares of common stock to certain officers of the Companies. The Companies recorded a total of $12,897 (the aggregate value of the common stock based on the market price at the date of the award) as unearned stock compensation in 1997, which is being amortized over the vesting periods of one to five years. For 1998, 1997 and 1996, $7,622 $4,686 and $1,068, 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. During 1998, pursuant to the Incentive Plans, the Board of Directors awarded 331,755 restricted awards to certain officers of the Companies. The Companies have recorded $1,613 related to the restricted awards and such amount is included in general and administrative expense in the accompanying consolidated financial statements. Stock Option Awards Upon completion of the initial public offering in 1995, 1,073,333 options were granted to the executive officers to purchase shares of Old Patriot common stock. Each option is exercisable at an amount equal to the initial public offering price of $11.18 per share. Of the options granted, 59,634 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 Old Patriot's Board as of September 27, 1995, was awarded nonqualified options to purchase 16,100 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 $11.18 per share and vested immediately. During 1996, pursuant to the Directors' Plan and the Incentive Plan, Old Patriot's Board of Directors granted stock options to purchase 32,200 shares of common stock to Old Patriot's directors and stock options to purchase 381,676 shares of common stock to Old Patriot's officers and certain employees. The exercise price of F-48 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) the options granted to the directors is $13.22 (the market price of Old Patriot's common stock on May 23, 1996, the date of the grant). For the officers and employees employed as of the grant date of April 19, 1996, the exercise price of the options is $12.52 (the market price of Old 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 Old Patriot's common stock on the employee's date of hire. The options to purchase common stock vest annually over a period of seven years. During 1997, pursuant to the Directors' Plan, 1995 Incentive Plan and the 1997 Incentive Plan, the Companies awarded directors, officers and employees nonqualified options to purchase an aggregate of 4,744,184 of paired shares of common stock at prices ranging from $20.85 to $33.58. As of December 31, 1998, pursuant to the Directors' Plan, the 1995 Incentive Plan and the 1997 Incentive Plans, the Companies have authorized the grant of options for up to 10,912,938 paired shares with exercise prices ranging from $5.13 to $33.58 per paired share (2,981,685 of such options were vested). During 1997, a total of 338,064 paired shares were issued pursuant to exercise of options (at exercise prices ranging from $5.13 to $13.28) resulting in net proceeds of $2,307. During 1998, a total of 1,299,250 paired shares were issued pursuant to exercise of options (at exercise prices ranging from $11.18 to $17.82) resulting in net proceeds of $15,274. The Companies have 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 SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Companies' employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Wyndham Stock Option Exchange Program All optionees, other than the directors and the top two executive officers, were given the opportunity to exchange certain options for new options which have a Black-Scholes value equal to the old options, but were for fewer shares, at the then current stock price and with the same term as the remaining term of the old options. Statement 123 Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Companies had accounted for their compensatory 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 1998, 1997 and 1996, respectively: risk-free interest rates of 5.31%, 6.61% and 6.09%; dividend yields of 6%; volatility factors of the expected market price of the Companies' common stock of 0.735, 0.389 and 0.173, and a weighted average expected life of the options of 4 years, 4 years and 5 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 the Companies' 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. F-49 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Companies' pro forma information is as follows:
1998 1997 1996 --------- ------- ------- Basic Pro forma net (loss) income available to common shareholders.................................. $ 185,566 $(4,949) $37,607 Pro forma earnings per share: ................. $ (1.35) $ (0.08) $ 0.81 Diluted Pro forma net (loss) income available to common shareholders.................................. $(352,807) $(4,949) $37,607 Pro forma earnings per share: ................. $ (2.56) $ (0.09) $ 1.04
A summary of the Companies' stock option activity, and related information for the years ended December 31 is as follows:
1998 1997 1996 ----------------- ---------------- ---------------- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise (000's) Price (000's) Price (000's) Price ------- -------- ------- -------- ------- -------- Outstanding, beginning of year................ 6,241 $20.82 1,584 $11.54 1,170 $11.18 Granted................. 3,997 17.50 4,692 24.51 414 12.59 Exercised............... (578) 11.38 (6) 12.89 -- Forfeited............... (1,943) 23.48 (29) 12.85 -- ------ ----- ----- Outstanding, end of year................... 7,717 19.28 6,241 20.82 1,584 11.54 ====== ===== ===== Exercisable at end of year................... 972 $14.89 430 $11.18 Weighted average fair value of options granted during year.... $ 7.70 $ 4.28 $ 1.27
Exercise prices for options outstanding as of December 31, 1998 ranged from $7.55 to $33.58. The weighted average remaining contractual life of those options was 8 years. Exercise prices for options outstanding as of December 31, 1997 ranged from $11.18 to $33.58. The weighted average remaining contractual life of those options was nine years. Exercise prices for compensatory options outstanding as of December 31, 1996 ranged from $11.18 to $14.09. The weighted average remaining contractual life of those options was nine years. 15. Income Taxes: Patriot Patriot, in accordance with SFAS No. 109, recorded a deferred tax liability during 1998 in conjunction with the acquisition of foreign operations, the Arcadian transaction. As of December 31, 1998, Patriot had a deferred tax liability of approximately $38,912 and recognized $1,148 of deferred tax expense associated with foreign operations. F-50 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Wyndham The income tax provision of Wyndham for year ended and six months ended December 31, 1998 and 1997, respectively consists of the following:
1998 1997 -------- ---- Current: Federal.................................................... $ 25,691 $199 State...................................................... 3,355 130 -------- ---- Total current................................................ 29,046 329 -------- ---- Deferred: Federal.................................................... (13,130) 136 State...................................................... (1,535) 16 -------- ---- Total deferred............................................... (14,665) 152 -------- ---- Total income tax expense................................. $ 14,381 $481 ======== ==== The reason for the difference between total tax expense and the amount computed by applying the statutory Federal income tax rate of 35% to income before income taxes is as follows: 1998 1997 -------- ---- Tax at statutory rate........................................ $(27,874) $127 State income taxes........................................... 1,820 118 Valuation allowance.......................................... 17,866 -- Assets held for sale......................................... 7,573 -- Goodwill..................................................... 5,330 -- Lease buyout costs........................................... 20,033 -- Minority interest and other.................................. (10,367) 236 -------- ---- Total income tax expense................................... $ 14,381 $481 ======== ====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Wyndham's deferred tax assets and liabilities for the year ended and six months ended December 31, 1998 and 1997, respectively are as follows:
1998 1997 -------- ------- Deferred tax assets: Net operating losses................................... $ 21,221 $ -- Disposition of assets.................................. 887 -- Other non-current assets............................... 8,569 89 -------- ------- Total deferred tax assets............................ 30,677 89 Valuation allowance.................................... (17,866) -- -------- ------- Net deferred asset................................. $ 12,811 $ 89 ======== ======= Deferred tax liabilities: Depreciation........................................... (25,754) (600) Management contracts and tradenames.................... (70,319) (8,896) Other non-current liabilities.......................... (1,289) (143) -------- ------- Total deferred tax liabilities....................... (97,362) (9,639) -------- ------- Net deferred income tax liability.................. $(84,551) $(9,550) ======== =======
As of December 31, 1998, Wyndham and certain affiliated subsidiaries have net operating loss carryforwards for federal income tax purposes of approximately $78,651, which are available to offset future federal taxable income, if any, through 2018. F-51 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 16. Employee Benefit Plans: The Companies sponsors 401(K) retirement savings plans. Employees who are over 21 years of age and have completed one year of service are eligible to participate in the plans. The Companies match 50% of employee contributions up to 4% of an employee's salary. The aggregate expense under the plans totaled $511 for 1998. No plans were in effect prior to 1998. The Companies maintain self-insured group health plans through a Voluntary Employee Benefit Association referred to hereinafter as VEBA. The plans are funded to the limits provided by the Internal Revenue Service, and liabilities have been recorded for estimated incurred but unreported claims. Aggregate and stop loss insurance exists at amounts which limit exposure to the Companies. The Companies have recognized expense related to the plan of $2,313 for 1998. No plan such as this was in effect prior to 1998. 17. Fair Value of Financial Instruments: SFAS No. 107 requires disclosures about the fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about fair value of financial instruments is based on pertinent information available to management as of December 31, 1998. 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 that 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 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 Credit Facility, Term Loan and various other mortgage notes approximate carrying value because these borrowings accrue interest at floating interest rates based on market or accrue interest at fixed rates which approximate market rates. Patriot manages its debt portfolio by using interest rate caps and swaps to achieve an overall desired position of fixed and floating rates. The fair value of interest rate hedge contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that Patriot would expect to receive or pay to terminate the contracts. Credit and market risk exposures are limited to the net interest differentials. The estimated unrealized loss on the interest rate swaps was approximately $24,836 at December 31, 1998, which represents the amount Patriot would pay to terminate the swap agreements based upon current market rates. The fair value of the interest rate cap agreements is based upon quoted market prices and approximated $144 at December 31, 1998. 18. Segment Reporting: The Companies' classify their business into proprietary owned brands and non-proprietary brand hotel divisions, under which they manage the business. Among its proprietary branded hotels, the Company is positioned in the luxury segment under the Grand Bay Hotels & Resorts(R) brand; in the upscale segment under Wyndham(TM); and in the mid-priced segment under the ClubHouse brand. Additionally, the Company offers proprietary branded all-suite accommodations through its upscale Summerfield Suites brand and its mid-priced Sierra Suites brand. Other proprietary hotel brands owned and developed by the Companies include Malmaison, Grand Heritage(R) and Carefree(R). F-52 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Description of reportable segments The Companies have six reportable segments: Wyndham hotel properties, resort properties, all suite properties, non-proprietary branded properties and other proprietary branded hotel properties and other. . Wyndham hotel properties include Wyndham Hotels, Wyndham Gardens and Wyndham Grand Heritage. The Wyndham hotel properties are full-service properties that generally offer a full range of meeting and conference facilities and banquet space. Facilities generally include restaurants and lounge areas, gift shops and recreational facilities, including swimming pools. Full-service hotels generally provide a significant array of guest services, including room service, valet services and laundry. . Resort properties include Wyndham Resorts, Grand Bay resort properties and other resort properties. Resorts are designed to offer unique destinations which appeal to today's sophisticated vacation traveler and to blend with their environment, enhancing the natural surroundings with design that fits the locale. Each resort's recreational activities are of the highest caliber and are designed to capitalize on the natural attractions of the location. Many offer a combination of golf, tennis, skiing, health spa, hiking and other sports. . All suite properties include the Summerfield and Sierra Suite properties. The Summerfield and Sierra Suite properties generally target the business travelers who usually anticipate a one to two week stay. The suites generally have limited public space and offer limited food and beverage service. However, the suites provide guests with larger rooms and work space. . Non-proprietary branded properties include all properties which are not Wyndham hotel properties, resort properties, all suite properties or other proprietary branded properties. The properties consist of non Wyndham branded assets such as: Crowne Plaza(R), Radisson(R), Hilton(R), Hyatt(R), Four Points by Sheraton(R), Holiday Inn(R), DoubleTree(R), Embassy Suites(R), Marriott(R), Courtyard by Marriott(R), Sheraton(R) and independents. . Other proprietary branded hotel properties include Malmaison, Grand Heritage, Clubhouse and hotels acquired in the Arcadian Acquisition. . Other includes participating lease revenues, racecourse facility revenue and expenses, management fee and service fee income, interest and other income, general and administrative costs, interest expense, depreciation and amortization and other one-time charges. General and administrative costs, interest expenses and depreciation and amortization are not allocated to each reportable segment; therefore, they are reported in the aggregate within this segment. Measurement of segment profit or loss and segment assets The Companies evaluate performance based on the operating income or loss from each business segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Factors management used to identify the reportable segments The Companies' reportable segments are determined by brand affiliation and type of property. The reportable segments are each managed separately due to the specific characteristics of each segment.
Year ended Non- Other December 31, Wyndham Suite proprietary proprietary 1998 Hotels Resorts properties branded branded Other(1) Total ------------ ---------- -------- ---------- ----------- ----------- --------- ---------- Total revenue........... $ 610,523 $315,674 $ 74,333 $ 761,154 $ 80,998 $ 213,659 $2,056,341 Operating income (loss)................. 153,723 76,349 14,690 183,703 26,492 (576,963) (122,006) Segment assets.......... 1,461,037 900,431 245,578 2,906,527 297,609 1,604,488 7,415,670 Capital additions....... 635,853 544,060 204,292 1,930,121 296,769 16,264 3,627,359
- -------- (1) Operating income (loss) for 1998 includes unusual items related to the treasury rate lock settlement of $49,334 and the cost of reacquiring leaseholds of $64,407. F-53 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued)
Year ended Non- Other December 31, Wyndham Suite proprietary proprietary 1997(2) Hotels Resorts properties branded branded Other(3) Total ------------ -------- -------- ---------- ----------- ----------- -------- ---------- Total revenue........... $ 10,711 $ 30,334 $ -- $115,223 $ 9,595 $169,172 $ 335,035 Operating income (loss)................. 2,388 6,628 -- 29,947 1,436 (42,272) (1,873) Segment assets.......... 435,452 348,013 -- 795,679 47,999 880,710 2,507,853 Capital additions....... 366,280 311,378 -- 577,788 25,287 125,946 1,406,679
- -------- (2) Total revenue and operating income (loss) for the reportable segments is reported for the six months ended December 31, 1997. Prior to July 1, 1997, revenue and operating income (loss) related to the operations of the hotel properties was reported by the third party lessees who operated the properties pursuant to Participating Leases. (3) Operating income (loss) for 1997 includes unusual items related to the cost of reacquiring leaseholds of $54,499.
Year ended Non- Other December 31, Wyndham Suite proprietary proprietary 1996 (4) Hotels Resorts properties branded branded Other Total ------------ ------- ------- ---------- ----------- ----------- -------- ------- Total revenue........... $ -- $ -- $ -- $ -- $ -- $ 76,493 $76,493 Operating income (loss)................. -- -- -- -- -- 38,968 38,968 Segment assets.......... -- -- -- -- -- 760,931 760,931 Capital additions....... -- -- -- -- -- 393,599 393,599
- -------- (4) Revenue and operating income (loss) related to the operations of the hotel properties was reported by the third party lessees who operated the properties pursuant to Participating Leases. The following table represents revenue and long-lived asset information by geographic area as of and for the period ending December 31, 1998. Revenues are attributed to the United States and its territories and Europe based on the location of hotel properties. The hotel properties in Europe were acquired on April 6, 1998 with the Arcadian acquisition. Prior to this date, all of the Companies' business was attributed to hotel properties located in the United States and its territories.
United 1998 States Europe Total ---- ---------- ------- ---------- Revenues...................................... $2,034,949 $21,392 $2,056,341 Long-lived assets............................. 7,157,617 258,053 7,415,670
19. Non-cash Investing and Financing Activities:
1998 1997 1996 ---------- -------- ------- In connection with the Cal Jockey Merger, the acquisition of management companies, hotel properties and other operating assets, the Companies issued common stock, preferred stock, options and OP units in exchange for net assets as follows: Patriot and Wyndham............................. $1,698,542 $449,415 $16,391 ========== ======== ======= Patriot......................................... $1,532,649 $340,794 $16,391 ========== ======== ======= Wyndham......................................... $ 165,893 $108,621 $ -- ========== ======== =======
F-54 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 20. Quarterly Financial Information (unaudited):
Combined Patriot Wyndham ------------------ ------------------ ------------------ 1998 1997 1998 1997 1998 1997 -------- -------- -------- -------- -------- -------- (in thousands, except per share amounts) First Quarter: Total revenue.......... $349,807 $ 35,388 $113,165 $ 35,388 $329,982 $ -- Income before extraordinary item.... $ 37,128 $ 11,348 $ 34,213 $ 11,348 $ 3,180 $ -- Net income............. $ 18,412 $ 11,348 $ 15,497 $ 11,348 $ 3,180 $ -- Net income per share/paired share: Basic.................. $ 0.17 $ 0.21 $ 0.14 $ 0.21 $ 0.03 $ -- Diluted................ $ 0.16 $ 0.21 $ 0.13 $ 0.21 $ 0.03 $ -- Weighted average number of shares: Basic.................. 109,549 53,248 109,549 53,248 109,549 -- Diluted................ 117,090 54,613 117,090 54,613 117,090 -- Second Quarter: Total revenue.......... $465,463 $ 37,730 $140,257 $ 37,730 $452,247 $ -- (Loss) income before extraordinary item.... $(14,411) $ 11,818 $ 23,902 $ 11,818 $(43,832) $ -- Net (loss) income...... $(26,254) $ 11,818 $ 12,059 $ 11,818 $(43,832) $ -- Net (loss) income per share/paired share: Basic.................. $ (0.21) $ 0.22 $ 0.08 $ 0.22 $ (0.33) $ -- Diluted................ $ (0.21) $ 0.21 $ 0.09 $ 0.21 $ (0.33) $ -- Weighted average number of shares: Basic.................. 132,804 53,382 132,804 53,382 132,804 -- Diluted................ 132,804 55,029 140,476 55,029 132,804 -- Third Quarter: Total revenue.......... $603,850 $ 81,638 $184,696 $ 50,190 $593,680 $ 44,184 (Loss) income before extraordinary item (1)................... $(58,158) $(24,470) $(37,436) $(25,179) $(25,777) $ 709 Net (loss) income...... $(59,415) $(27,004) $(37,436) $(27,713) $(27,034) $ 709 Net (loss) income per share/paired share: Basic.................. $ (0.40) $ (0.38) $ (0.25) $ (0.39) $ (0.18) $ 0.01 Diluted................ $ (1.02) $ (0.38) $ (0.87) $ (0.39) $ (0.18) $ 0.01 Weighted average number of shares: Basic.................. 154,510 71,706 154,510 71,706 154,510 71,706 Diluted................ 154,510 71,706 154,510 71,706 154,510 73,679 Fourth Quarter: Total revenue.......... $630,259 $180,279 $157,291 $ 62,246 $625,982 $159,950 (Loss) income before extraordinary item (2)................... $(90,968) $ 1,666 $(35,010) $ 2,395 $(44,732) $ (729) Net (loss) income...... $(90,968) $ 1,666 $(35,010) $ 2,395 $(44,732) $ (729) Net (loss) income per share/paired share: Basic.................. $ (0.65) $ 0.02 $ (0.28) $ 0.03 $ (0.30) $ (0.01) Diluted................ $ (1.01) $ 0.02 $ (0.64) $ 0.03 $ (0.30) $ (0.01) Weighted average number of shares: Basic.................. 154,139 78,346 154,139 78,346 154,139 78,346 Diluted................ 154,139 80,915 154,139 80,915 154,139 78,346
- -------- (1) Income (loss) before extraordinary item for the third quarter of 1998 includes the cost of the Treasury Lock Settlement, a non-recurring expense, of $49,225 that was reported by Patriot. (2) Income (loss) before extraordinary item for the fourth quarter of 1998 includes the following non-recurring expense items: . Impairment in value of assets held for sale of $27,897 reported by Patriot . Impairment in value of assets held for sale of $23,184 reported by Wyndham F-55 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 21. Pro Forma Results of Operations: The following unaudited separate and combined pro forma results of operations of Patriot and Wyndham are presented as if (i) the merger and acquisition of the WHG Casinos and Resorts and related third party minority interests consummated in January 1998 and the acquisition of the remaining minority interests completed in March and July 1998, the acquisition included the Condado Plaza Hotel & Casino, El San Juan Hotel and Casino and the El Conquistador Hotel and Casino and the management company for the three resorts, located in San Juan, Puerto Rico, the acquisition of the Buena Vista Hotel located in Orlando, Florida in January 1998, and the acquisition of the Golden Door Spa located in Escondido, California in June 1998; (ii) the acquisition of Arcadian International Limited and the Malmaison Group including 10 hotels, land held for developments and the proprietary Malmaison brand in April 1998; (iii) the merger of Interstate Hotels Company with and into Patriot and the related financing in June 1998; (iv) the acquisition of the partnership interests in SF Hotel Company, L.P. in June 1998, which included four hotels, 24 management and leasehold interests, 12 management contracts and the proprietary brand names Summerfield Suites, Sierra Suites and Sunrise Sierra Suites; (v) the merger of the hospitality related businesses of CHC International with and into Wyndham in June 1998 including the remaining 50% interest in GAH-II, L.P., the remaining 17 leases and 16 management contracts related to Patriot Hotels leased by CHC Lease Partners, 10 management and asset management contracts and the Grand Bay proprietary brand name which occurred in 1998 and 1997 had occurred on January 1, 1997. The following unaudited pro forma financial information is not necessarily indicative of what actual results of operations of Patriot and Wyndham would have been assuming such transactions had been completed as of January 1, 1997, nor do they purport to represent the results of operations for future periods. PATRIOT AND WYNDHAM Combined Pro Forma Results of Operations
Years Ended December 31, ---------------------- 1998 1997 ---------- ---------- (in thousands, except per share data) Total revenue....................................... $2,564,690 $2,457,182 Net loss............................................ (147,947) (55,656) Basic loss per Paired Share......................... $ (1.17) $ (0.37) ========== ========== Diluted loss per Paired Share....................... $ (2.28) $ (0.37) ========== ========== Weighted average number of Paired Shares............ 151,313 151,313 ========== ========== PATRIOT Consolidated Pro Forma Results of Operations Years Ended December 31, ---------------------- 1998 1997 ---------- ---------- (in thousands, except per share data) Total revenue....................................... $ 722,790 $ 713,582 Net loss............................................ (14,175) (97,337) Basic loss per share................................ $ (0.27) $ (0.64) ========== ========== Diluted loss per share.............................. $ (1.37) $ (0.64) ========== ========== Weighted average number of common shares............ 151,313 151,313 ========== ==========
F-56 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) WYNDHAM Consolidated Pro Forma Results of Operations
Years Ended December 31, ---------------------- 1998 1997 ---------- ---------- (in thousands, except per share data) Total revenue........................................ $2,531,678 $2,433,794 Net (loss) income.................................... (132,856) 41,681 Basic (loss) income per share........................ $ (0.90) $ 0.28 ========== ========== Diluted (loss) income per share...................... $ (0.90) $ 0.26 ========== ========== Weighted average number of common shares............. 151,313 151,313 ========== ========== Dilutive Securities: Effect of unvested stock grants...................... -- 880 Dilutive options to purchase paired shares........... -- 753 Dilutive convertible preferred shares................ -- 8,423 Weighted average number of common shares............. 151,313 161,369 ========== ==========
22. Subsequent Events: Asset sales In February 1999, Patriot sold its interest in the Bay Meadows Racecourse located in San Mateo, California. The Companies received cash proceeds of approximately $3,446 after payment of legal costs and other closing costs. The Companies recognized an estimated impairment loss on assets held for sale of $42,278 related to the Racecourse facility in 1998. In connection with the transaction Patriot terminated its lease to Wyndham for the Racecourse facilities. The actual loss on sale of asset recognized was $42,766. Acquisitions In January 1999, Patriot acquired the remaining 25% minority interests in each of the five following hotels; Embassy Suites Schaumburg, the Hilton Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover and the Marriott Tysons Corner from CIGNA. The acquisition of such interests was financed through additional mortgage indebtedness totaling $49,800 and the sale of an additional 10% interest in the Marriott Warner Center. Consulting Agreements On February 26, 1999, Patriot, Wyndham and Paul A. Nussbaum entered into a Separation Agreement (the "Separation Agreement") whereby Mr. Nussbaum resigned his position as Chairman of the Board of Directors and Chief Executive Officer of Patriot. Pursuant to the Separation Agreement, Mr. Nussbaum has been named Chairman Emeritus of the Board of Directors of Patriot and will remain as a Director of Wyndham. In accordance with terms of the Separation Agreement, Patriot will: (i) guarantee the repayment of the remaining outstanding principal on Mr. Nussbaum's NationsBank Loan of approximately $7,000; (ii) make all interest payments that become due and payable on the NationsBank Loan on or after the date of separation; (iii) shall pay severance of $3,200 reduced by any interest payments made by Patriot on the NationsBank Loan through June 30, 1999. F-57 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Additionally, Mr. Nussbaum's outstanding unvested options to purchase paired shares shall vest and remain fully exercisable for the period of their respective terms and within six months Mr. Nussbaum may elect to exchange such options on a Black Scholes neutral basis for new options with an exercise price equal to the fair market value of a Paired Share on the election date. Mr Nussbaum will also receive 250,000 Paired Shares equally over a three year period and any restrictions will be lifted from existing paired shares held by Mr. Nussbaum. As a condition to receiving the second and third installments of the paired shares, Mr. Nussbaum has agreed to provide non-exclusive consulting services to the Companies for a period of two years following the resignation date. Additionally, Mr. Nussbaum will receive other compensation as provided for in the separation agreement. Interest Rate Swaps and Caps Patriot has entered into two additional interest rate swap arrangements to swap floating rate LIBOR-based interest rates for a fixed rate interest amount as a hedge against $50,987 of the outstanding balance on specific property related debt. The interest rate swap fixes the LIBOR portion of the debt interest rate at 5.31% per annum through January 2000 ($19,987) and 5.42% per annum through March 2001 ($31,000). If the actual LIBOR rate is less than the specified fixed interest rate, Patriot is obligated to pay the differential interest amount, such amount being recorded as incremental interest expense. If the LIBOR rate is greater than the specified fixed interest rate, the differential interest amount is refunded to Patriot. Additionally, Patriot entered into two interest rate cap arrangements as follows; an interest rate cap that limits LIBOR to 7% on up to $1,500,000 of indebtedness through April 2000, and an interest cap that limits LIBOR to 6.75% on up to $19,475 of indebtedness through March 2001. Securities Purchase Agreement Wyndham and Patriot have entered into an agreement with investors providing for a $1,000,000 equity investment and related restructing of the two companies. The Companies have also received financing commitments for a $2,450,000 credit facility to be put into place upon the completion of the $1 billion equity investment. The new $2,450,000 credit facility will consist of: $1,000,000 of term loans with a seven year term; an $800,000 credit facility with a five year term; and, a $650,000 increasing rate loan facility with a five year term will provide financing which may be redeemed with the proceeds of the issuance of senior unsecured notes. As a condition of the $1,000,000 equity investment, the Companies are required to restructure their existing organization. Under the contemplated restructuring, a subsidiary of Wyndham will merge with and into Patriot and Patriot will become a wholly-owned subsidiary of Wyndham and new shares of Wyndham will be issued in exchange for the then outstanding shares of Patriot common stock. In addition, the pairing agreement between Wyndham and Patriot will terminate, Patriot's status as a REIT will terminate effective January 1, 1999 and Patriot will become a taxable corporation at that date. As a result of that transaction, the Company will be required to record a charge for deferred income taxes for the difference between the income tax basis and the recorded carrying value of assets and liabilities. The Company is continuing its analysis of the expected effects of this non-cash charge. Currently the estimate is in the range of $750,000, however; this amount could vary when the analysis is completed. In addition, the Company will charge off the value of an intangible asset associated with the paired share structure of approximately $84,000. F-58 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) In the event that the equity and related debt transaction referred to above are not completed, management has determined that additional capital would have to be raised from other sources or the Companies would have to sell significant amounts of assets to produce proceeds sufficient to meet its existing current debt maturity obligations. These asset sales could include resort properties or Wyndham-managed properties in major cities and could negatively impact operations. Management believes these alternatives, if necessary, represent a viable plan to address Company's liquidity needs. F-59 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period(a) --------------------- ------------------ ------------------------------ Buildings and Buildings and Accumulated Year Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation(b)(c) Built ----------- ------------ ------- ------------- ----- ------------ ------- ------------- -------- ------------------ ----- Wyndham Brand Properties: Wyndham Bel Age Hotel Los Angeles, California...... $ -- $ 5,653 $ 32,212 $ -- $ 106 $ 5,653 $ 32,318 $ 37,971 $ 961 1984 Wyndham Bristol Palace Hotel Toronto, Canada.......... -- 3,048 15,503 -- -- 3,048 15,503 18,551 424 1974 Wyndham Buena Vista Palace Resort & Spa Orlando, Florida......... 49,353 -- 144,264 -- 123 -- 144,387 144,387 3,533 1977 Wyndham Buttes Resort Tempe, Arizona.. -- -- 55,297 -- 165 -- 55,462 55,462 1,931 1986 Wyndham City Centre Washington, District of Columbia........ -- 3,675 30,569 -- 91 3,675 30,660 34,335 1,143 1969 Wyndham Emerald Plaza San Diego, California...... 35,000 5,551 60,462 17 95 5,568 60,557 66,125 1,730 1991 Wyndham Resprt & Spa Fort Lauderdale, Florida......... -- 2,134 16,448 23 9,198 2,157 25,646 27,803 1,516 1961 Wyndham Franklin Plaza Philadelphia, Pennsylvania.... -- 4,878 62,793 -- 117 4,878 62,910 67,788 2,016 1979 Wyndham Greenspoint Hotel Houston, Texas.. 40,156 1,930 39,815 20 1,091 1,950 40,906 42,856 2,863 1985 Wyndham Miami Beach Resort Miami, Florida.. -- 13,000 54,875 -- 3 13,000 54,878 67,878 626 Wyndham Gateway--Miami Airport Miami, Florida.. 25,625 2,561 23,009 -- 43 2,561 23,052 25,613 823 1976 Wyndham Myrtle Beach Resort & Golf Club Myrtle Beach, South Carolina.. -- 5,644 26,470 61 5,411 5,705 31,881 37,586 1,222 1974 Wyndham Northwest Chicago Chicago, Illinois........ -- 1,212 52,025 -- 76 1,212 52,101 53,313 1,549 1983 Wyndham Peachtree Conference Center Peachtree City (Atlanta), Georgia......... 37,873 3,059 21,915 33 4,833 3,092 26,748 29,840 2,185 1984 Wyndham Richmond Airport Richmond, Virginia........ (h) -- 4,262 -- 2,800 -- 7,062 7,062 527 1997 Wyndham Toledo Toledo, Ohio.... -- -- 16,082 -- 105 -- 16,187 16,187 599 1985 Wyndham Riverfront Hotel New Orleans, Louisiana....... -- 2,774 28,023 -- 6 2,774 28,029 30,803 835 1996 Wyndham Washington, D.C. Washington, District of Columbia........ -- 4,750 40,439 -- -- 4,750 40,439 45,189 1,155 1983 Date of Description Acquisition ----------- ----------- Wyndham Brand Properties: Wyndham Bel Age Hotel Los Angeles, California...... 1997 Wyndham Bristol Palace Hotel Toronto, Canada.......... 1998 Wyndham Buena Vista Palace Resort & Spa Orlando, Florida......... 1998 Wyndham Buttes Resort Tempe, Arizona.. 1997 Wyndham City Centre Washington, District of Columbia........ 1997 Wyndham Emerald Plaza San Diego, California...... 1997 Wyndham Resprt & Spa Fort Lauderdale, Florida......... 1996 Wyndham Franklin Plaza Philadelphia, Pennsylvania.... 1997 Wyndham Greenspoint Hotel Houston, Texas.. 1996 Wyndham Miami Beach Resort Miami, Florida.. 1998 Wyndham Gateway--Miami Airport Miami, Florida.. 1997 Wyndham Myrtle Beach Resort & Golf Club Myrtle Beach, South Carolina.. 1997 Wyndham Northwest Chicago Chicago, Illinois........ 1997 Wyndham Peachtree Conference Center Peachtree City (Atlanta), Georgia......... 1995 Wyndham Richmond Airport Richmond, Virginia........ 1998 Wyndham Toledo Toledo, Ohio.... 1997 Wyndham Riverfront Hotel New Orleans, Louisiana....... 1997 Wyndham Washington, D.C. Washington, District of Columbia........ 1998
F-60 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ------------------- ----------------- ------------------------------------ Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ----- ------------- ---- ------------ --------- --------------- ---------- ------------------- Wyndham Westshore Hotel Tampa, Florida.. 31,675 1,448 31,565 -- 166 1,448 31,731 33,179 1,130 Wyndham Garden Hotel-- Brookfield Brookfield, Illinois........ -- 1,787 17,564 -- -- 1,787 17,564 19,351 481 Wyndham Garden Hotel--Charlotte Charlotte, North Carolina........ -- 792 17,535 -- -- 792 17,535 18,327 480 Wyndham Garden Hotel--Commerce Los Angeles, California...... -- 2,116 26,497 -- -- 2,116 26,497 28,613 726 Wyndham Garden Hotel--Market Center Dallas, Texas... -- 967 12,796 -- -- 967 12,796 13,763 350 Wyndham Garden Hotel--Park Central Dallas, Texas... -- 4,523 -- -- 8,711 4,523 8,711 13,234 48 Wyndham Garden Hotel-- Indianapolis Indianapolis, Indiana......... -- 513 15,497 -- -- 513 15,497 16,010 424 Wyndham Garden Hotel--K.C. Airport Airport--Kansas City, Missouri.. -- 970 7,993 -- -- 970 7,993 8,963 219 Wyndham Garden Hotel--Knoxville Knoxville, Tennessee....... 4,539 825 6,467 -- -- 825 6,467 7,292 177 Wyndham Garden Hotel LaGuardia Airport New York, New York............ -- 1,800 16,443 -- 7 1,800 16,450 18,250 490 Wyndham Garden Hotel--Las Colinas Dallas, Texas... -- 1,884 16,963 -- 6 1,884 16,969 18,853 505 Wyndham Garden Hotel--Midtown Atlanta, Georgia......... -- 2,322 13,785 -- 749 2,322 14,534 16,856 1,010 Wyndham Garden Hotel--Novi Detroit, Michigan........ -- 555 10,401 -- 6 555 10,407 10,962 310 Wyndham Garden Hotel--Omaha Omaha, Nebraska........ 5,618 710 10,086 -- -- 710 10,086 10,796 276 Wyndham Garden Hotel--Overland Park Overland Park, Kansas.......... -- 769 3,532 -- -- 769 3,532 4,301 97 Wyndham Garden Hotel-- Pleasanton Pleasanton, California...... -- 1,568 12,845 -- 6 1,568 12,851 14,419 369 Wyndham Garden Hotel-- Richardson Richardson, Texas........... -- 530 8,048 -- -- 530 8,048 8,578 220 Wyndham Garden Hotel-- Schaumburg, Illinois........ -- 1,613 14,464 -- -- 1,613 14,464 16,077 396 Wyndham Garden Hotel--West Port St. Louis, Missouri........ -- 862 9,273 -- 4 862 9,277 10,139 254 Year Date of Description Built Acquisition ----------- ----- ----------- Wyndham Westshore Hotel Tampa, Florida.. 1984 1997 Wyndham Garden Hotel-- Brookfield Brookfield, Illinois........ 1990 1998 Wyndham Garden Hotel--Charlotte Charlotte, North Carolina........ 1989 1998 Wyndham Garden Hotel--Commerce Los Angeles, California...... 1991 1998 Wyndham Garden Hotel--Market Center Dallas, Texas... 1968 1998 Wyndham Garden Hotel--Park Central Dallas, Texas... 1998 1998 Wyndham Garden Hotel-- Indianapolis Indianapolis, Indiana......... 1990 1998 Wyndham Garden Hotel--K.C. Airport Airport--Kansas City, Missouri.. 1992 1998 Wyndham Garden Hotel--Knoxville Knoxville, Tennessee....... 1989 1998 Wyndham Garden Hotel LaGuardia Airport New York, New York............ 1988 1997 Wyndham Garden Hotel--Las Colinas Dallas, Texas... 1986 1997 Wyndham Garden Hotel--Midtown Atlanta, Georgia......... 1987 1996 Wyndham Garden Hotel--Novi Detroit, Michigan........ 1988 1997 Wyndham Garden Hotel--Omaha Omaha, Nebraska........ 1991 1998 Wyndham Garden Hotel--Overland Park Overland Park, Kansas.......... 1971 1998 Wyndham Garden Hotel-- Pleasanton Pleasanton, California...... 1985 1997 Wyndham Garden Hotel-- Richardson Richardson, Texas........... 1996 1998 Wyndham Garden Hotel-- Schaumburg, Illinois........ 1985 1998 Wyndham Garden Hotel--West Port St. Louis, Missouri........ 1997 1998
F-61 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) -------------------- ------------------- ----------------------------------- Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ------ ------------- ----- ------------ --------- ------------------------- ------------------- Wyndham Garden Hotel--Vinings Atlanta, Georgia......... 9,675 1,700 22,853 -- -- 1,700 22,853 24,553 626 Wyndham Garden Hotel--Wichita Wichita, Kansas.......... 3,143 960 5,978 -- -- 960 5,978 6,938 164 Wyndham Garden Hotal--WoodDale Chicago, Illinois........ -- 2,266 12,939 -- 7 2,266 12,946 15,212 446 Wyndham Grand Heritage - Ambassador West Chicago, Illinois........ -- 2,059 11,856 -- 1,659 2,059 13,515 15,574 502 Wyndham Grand Heritage - - Bourbon Orleans Hotel New Orleans, Louisiana....... 13,500 1,942 14,209 171 1,168 2,113 15,377 17,490 1,391 Wyndham Grand Heritage - The Fairmount San Antonio, Texas........... -- -- 2,957 -- 137 -- 3,094 3,094 278 Wyndham Grand Heritage - The Mayfair St. Louis, Missouri........ -- 250 7,559 3 960 253 8,519 8,772 536 Wyndham Grand Heritage - The Tutwiler Birmingham, Alabama......... -- 1,444 8,124 (26) 812 1,418 8,936 10,354 505 Wyndham Grand Heritage - Tremont House Boston, Massachusetts... -- 1,776 14,066 18 10,033 1,794 24,099 25,893 1,445 Wyndham Grand Heritage - Union Station Nashville, Tennessee....... -- -- 7,512 -- 716 -- 8,228 8,228 326 Grand Bay Hotels & Resort: Carmel Valley Ranch Carmel, California...... -- 4,430 14,704 -- 10,888 4,430 25,592 30,022 1,011 Grand Bay Hotel Coconut Grove Miami, Florida.. 25,200 3,066 28,442 1,237 (920) 4,303 27,522 31,825 1,007 The Boulders Scottsdale, Arizona......... -- 13,188 121,700 -- 1,051 13,188 122,751 135,939 6,833 The Lodge at Ventana Canyon Tucson, Arizona......... 28,489 13,287 23,332 -- (208) 13,287 23,124 36,411 1,312 The Peaks Resort & Spa Telluride, Colorado........ -- 5,141 13,997 -- 669 5,141 14,666 19,807 869 Summerfield Suites: Summerfield-- Denver South Denver, Colorado........ -- 1,072 8,183 -- 36 1,072 8,219 9,291 203 Summerfield-- Hanover Whippany, New Jersey.......... -- 2,223 18,585 -- 16 2,223 18,601 20,824 268 Year Date of Description Built Acquisition ----------- ------ ----------- Wyndham Garden Hotel--Vinings Atlanta, Georgia......... 1985 1998 Wyndham Garden Hotel--Wichita Wichita, Kansas.......... 1985 1998 Wyndham Garden Hotal--WoodDale Chicago, Illinois........ 1986 1997 Wyndham Grand Heritage - Ambassador West Chicago, Illinois........ 1924 1997 Wyndham Grand Heritage - - Bourbon Orleans Hotel New Orleans, Louisiana....... 1800s 1995 Wyndham Grand Heritage - The Fairmount San Antonio, Texas........... 1906 1995 Wyndham Grand Heritage - The Mayfair St. Louis, Missouri........ 1925 1996 Wyndham Grand Heritage - The Tutwiler Birmingham, Alabama......... 1913 1996 Wyndham Grand Heritage - Tremont House Boston, Massachusetts... 1925 1996 Wyndham Grand Heritage - Union Station Nashville, Tennessee....... 1986 1997 Grand Bay Hotels & Resort: Carmel Valley Ranch Carmel, California...... 1987 1997 Grand Bay Hotel Coconut Grove Miami, Florida.. 1983 1997 The Boulders Scottsdale, Arizona......... 1985 1997 The Lodge at Ventana Canyon Tucson, Arizona......... 1985 1997 The Peaks Resort & Spa Telluride, Colorado........ 1992 1997 Summerfield Suites: Summerfield-- Denver South Denver, Colorado........ 1997 1998 Summerfield-- Hanover Whippany, New Jersey.......... 1997 1998
F-62 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ------------------- ----------------- ------------------------------------ Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ----- ------------- ---- ------------ --------- --------------- ---------- ------------------- Summerfield-- Morristown Morristown, New Jersey.......... -- 3,050 20,920 -- 24 3,050 20,944 23,994 272 Summerfield-- Seattle Downtown Seattle, Washington...... -- 1,515 24,276 16 624 1,531 24,900 26,431 1,938 Summerfield-- Waltham Waltham, Massachusetts... -- 2,639 16,351 -- 140 2,639 16,491 19,130 286 Malmaison: Malmaison Edinburgh Edinburgh, United Kingdom.. (i) 2,674 7,747 6 496 2,680 8,243 10,923 188 Malmaison Glasgow Glasgow, United Kingdom......... (i) 2,859 8,056 6 21 2,865 8,077 10,942 285 Malmaison Manchester Manchester, United Kingdom.. (i) 5,332 9,859 12 3,565 5,344 13,424 18,768 203 Malmaison Newcastle Newcastle, United Kingdom.. (i) 3,672 12,183 7 -- 3,679 12,183 15,862 197 Malmaison Leeds Leeds, United Kingdom......... (i) -- 10,315 -- -- -- 10,315 10,315 -- ClubHouse Inns: ClubHouse-- Nashville Airport Nashville, Tennessee....... -- 907 5,526 -- -- 907 5,526 6,433 151 ClubHouse Inn-- Albuquerque Albuquerque, New Mexico.......... -- 990 5,793 -- -- 990 5,793 6,783 159 ClubHouse Inn-- Atlanta (Norcross) Atlanta, Georgia......... 4,530 785 9,691 -- -- 785 9,691 10,476 265 ClubHouse Inn-- Overland Park Overland Park, Kansas.......... 4,846 830 7,397 -- -- 830 7,397 8,227 203 ClubHouse Inn-- Savannah Savannah, Georgia......... -- 925 4,555 -- 105 925 4,660 5,585 127 ClubHouse Inn-- Topeka Topeka, Kansas.. -- 390 5,312 -- -- 390 5,312 5,702 145 ClubHouse Inn-- Valdosta Valdosta, Georgia......... -- 825 5,588 -- -- 825 5,588 6,413 153 ClubHouse Inn & Conference Center Nashville, Tennessee....... -- 1,582 12,337 -- -- 1,582 12,337 13,919 338 Year Date of Description Built Acquisition ----------- ----- ----------- Summerfield-- Morristown Morristown, New Jersey.......... 1997 1998 Summerfield-- Seattle Downtown Seattle, Washington...... 1985 1996 Summerfield-- Waltham Waltham, Massachusetts... 1997 1998 Malmaison: Malmaison Edinburgh Edinburgh, United Kingdom.. 1994 1998 Malmaison Glasgow Glasgow, United Kingdom......... 1997 1998 Malmaison Manchester Manchester, United Kingdom.. 1998 1998 Malmaison Newcastle Newcastle, United Kingdom.. 1997 1998 Malmaison Leeds Leeds, United Kingdom......... 1998 (e) ClubHouse Inns: ClubHouse-- Nashville Airport Nashville, Tennessee....... 1988 1998 ClubHouse Inn-- Albuquerque Albuquerque, New Mexico.......... 1987 1998 ClubHouse Inn-- Atlanta (Norcross) Atlanta, Georgia......... 1988 1998 ClubHouse Inn-- Overland Park Overland Park, Kansas.......... 1988 1998 ClubHouse Inn-- Savannah Savannah, Georgia......... 1989 1998 ClubHouse Inn-- Topeka Topeka, Kansas.. 1986 1998 ClubHouse Inn-- Valdosta Valdosta, Georgia......... 1988 1998 ClubHouse Inn & Conference Center Nashville, Tennessee....... 1991 1998
F-63 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) -------------------- ----------------- ----------------------------------- Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ------ ------------- ---- ------------ --------- ------------------------- ------------------- Non-Proprietary Brand Properties: Marriott Albany Albany, New York............ -- 4,000 68,856 -- 32 4,000 68,888 72,888 1,010 Marriott Arlington Arlington, Texas........... -- -- 63,045 -- 91 -- 63,136 63,136 932 Marriott Atlanta North Central Atlanta, Georgia......... -- -- 36,462 -- 185 -- 36,647 36,647 536 Marriott Boston Andover Andover, Massachusetts... -- 2,318 33,245 -- 375 2,318 33,620 35,938 498 Marriott Boston Westborough Westborough, Massachusetts... -- 1,500 41,968 -- 107 1,500 42,075 43,575 609 Marriott Houston Greenspoint North Houston, Texas.. -- 3,600 44,211 -- 29 3,600 44,240 47,840 649 Marriott Minneapolis Southwest Minnetonka, Minnesota....... -- 2,968 36,933 -- 87 2,968 37,020 39,988 520 Marriott Colorado Springs Colorado Springs, Colorado........ -- 1,783 53,252 -- (5) 1,783 53,246 55,029 810 Marriott Harrisburg Harrisburg, Pennsylvania.... 19,988 3,400 38,304 -- 246 3,400 38,550 41,951 560 Marriott Indian River Plantation Resort Stuart, Florida......... -- 6,800 48,606 -- 590 6,800 49,196 55,996 575 Marriott Casa Marina Resort Key West, Florida......... 31,000 15,158 85,078 -- 136 15,158 85,214 100,372 415 Marriott Troy Troy, Michigan.. -- 1,790 29,220 19 2,114 1,809 31,334 33,143 2,820 Marriott Reach Resort Key West, Florida......... 24,911 10,029 24,947 -- 833 10,029 25,780 35,809 386 Marriott Suites At Valley Forge Valley Forge, Pennsylvania.... -- 2,619 41,997 -- 23 2,619 42,020 44,639 605 Marriott Philadelphia West West Conshohocken, Pennsylvania.... -- 2,500 67,279 -- -- 2,500 67,279 69,779 992 Marriott Pittsburgh Airport Pittsburgh, Pennsylvania.... 14,743 3,000 54,780 -- 46 3,000 54,826 57,826 801 Marriott Roanoke Airport Roanoke, Virginia........ -- 1,653 27,693 -- 20 1,653 27,713 29,366 417 Marriott San Diego Mission Valley San Diego, California...... -- 8,000 40,743 -- 26 8,000 40,769 48,769 593 Year Date of Description Built Acquisition ----------- ----- ----------- Non-Proprietary Brand Properties: Marriott Albany Albany, New York............ 1985 1998 Marriott Arlington Arlington, Texas........... 1985 1998 Marriott Atlanta North Central Atlanta, Georgia......... 1975 1998 Marriott Boston Andover Andover, Massachusetts... 1985 1998 Marriott Boston Westborough Westborough, Massachusetts... 1985 1998 Marriott Houston Greenspoint North Houston, Texas.. 1981 1998 Marriott Minneapolis Southwest Minnetonka, Minnesota....... 1988 1998 Marriott Colorado Springs Colorado Springs, Colorado........ 1989 1998 Marriott Harrisburg Harrisburg, Pennsylvania.... 1980 1998 Marriott Indian River Plantation Resort Stuart, Florida......... 1987 1998 Marriott Casa Marina Resort Key West, Florida......... 1980 1998 Marriott Troy Troy, Michigan.. 1990 1995 Marriott Reach Resort Key West, Florida......... 1978 1998 Marriott Suites At Valley Forge Valley Forge, Pennsylvania.... 1985 1998 Marriott Philadelphia West West Conshohocken, Pennsylvania.... 1991 1998 Marriott Pittsburgh Airport Pittsburgh, Pennsylvania.... 1987 1998 Marriott Roanoke Airport Roanoke, Virginia........ 1983 1998 Marriott San Diego Mission Valley San Diego, California...... 1988 1998
F-64 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ------------------- ----------------- ---------------------------------- Buildings and Buildings and Accumulated Year Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) Built ----------- ------------ ----- ------------- ---- ------------ -------- ------------------------- ------------------- ----- Full Service Hotels: Marriott St. Louis West St. Louis, Missouri........ 16,496 1,800 48,251 -- 58 1,800 48,309 50,109 717 1990 Marriott Syracuse East Syracuse, New York........ 10,374 1,150 29,236 -- 563 1,150 29,799 30,949 436 1977 Marriott Tysons Corner Tysons Corner, Virginia........ -- 3,650 64,333 -- 113 3,650 64,446 68,096 956 1981 Marriott Warner Center Woodland Hills, California...... -- 6,250 100,063 -- 10 6,250 100,073 106,323 1,485 1986 Courtyard by Marriott Beachwood, Ohio............ -- 1,510 7,553 -- 190 1,510 7,743 9,253 324 1986 Doubletree Hotel Anaheim Orange, California...... 13,467 2,464 23,297 -- 403 2,464 23,700 26,164 889 1984 Doubletree Hotel Corporate Woods Overland Park, Kansas.......... 21,909 3,317 38,088 -- 318 3,317 38,406 41,723 1,456 1982 Doubletree Hotel Post Oak Houston, Texas.. 29,748 4,441 43,672 -- 1,059 4,441 44,731 49,172 1,689 1982 Doubletree Hotel St. Louis St. Louis, Missouri........ 13,366 2,160 18,300 -- 453 2,160 18,753 20,913 701 1984 Doubletree Hotel Allen Center Houston, Texas.. 11,156 2,280 24,707 -- 1,810 2,280 26,517 28,797 1,530 1978 Doubletree Guest Suites Glenview, Illinois........ 20,500 3,237 19,709 -- 181 3,237 19,890 23,127 759 1988 Doubletree Hotel Westminster Westminster (Denver), Colorado........ -- 1,454 9,973 15 1,099 1,469 11,072 12,541 768 1980 Doubletree Hotel Tallahassee, Florida......... -- 2,127 7,779 -- 2,792 2,127 10,571 12,698 637 1977 Doubletree Hotel Des Plaines Des Plaines (Chicago), Illinois........ -- 1,903 5,555 -- 3,211 1,903 8,766 10,669 530 1969 Doubletree Hotel Minneapolis, Minnesota....... -- 1,650 15,895 -- 1,269 1,650 17,164 18,814 861 1986 Doubletree Hotel Tulsa, Oklahoma........ 9,246 1,428 18,596 -- 39 1,428 18,635 20,063 1,071 1982 Doubletree Park Place Minneapolis, Minnesota....... -- 2,188 13,531 -- 3,466 2,188 16,997 19,185 745 1981 Doubletree Miami Airport Miami, Florida.. -- 3,808 7,052 -- 2,644 3,808 9,696 13,504 572 1975 Date of Description Acquisition ----------- ----------- Full Service Hotels: Marriott St. Louis West St. Louis, Missouri........ 1998 Marriott Syracuse East Syracuse, New York........ 1998 Marriott Tysons Corner Tysons Corner, Virginia........ 1998 Marriott Warner Center Woodland Hills, California...... 1998 Courtyard by Marriott Beachwood, Ohio............ 1997 Doubletree Hotel Anaheim Orange, California...... 1997 Doubletree Hotel Corporate Woods Overland Park, Kansas.......... 1997 Doubletree Hotel Post Oak Houston, Texas.. 1997 Doubletree Hotel St. Louis St. Louis, Missouri........ 1997 Doubletree Hotel Allen Center Houston, Texas.. 1996 Doubletree Guest Suites Glenview, Illinois........ 1997 Doubletree Hotel Westminster Westminster (Denver), Colorado........ 1996 Doubletree Hotel Tallahassee, Florida......... 1996 Doubletree Hotel Des Plaines Des Plaines (Chicago), Illinois........ 1996 Doubletree Hotel Minneapolis, Minnesota....... 1997 Doubletree Hotel Tulsa, Oklahoma........ 1996 Doubletree Park Place Minneapolis, Minnesota....... 1997 Doubletree Miami Airport Miami, Florida.. 1996
F-65 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ------------------- ----------------- ------------------------------------ Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ----- ------------- ---- ------------ --------- --------------- ---------- ------------------- Full Service Hotels: Embassy Suites Chicago, Illinois........ 41,329 -- 82,017 -- -- -- 82,017 82,017 1,269 Embassy Suites Schaumburg, Illinois........ -- 2,001 29,350 -- 185 2,001 29,535 31,536 438 Embassy Suites Hunt Valley, Maryland........ -- 529 13,872 6 314 535 14,186 14,721 1,257 Embassy Suites Phoenix North Phoenix, Arizona......... -- 2,028 40,160 -- 40 2,028 40,200 42,229 622 Hyatt Newporter Newport Beach, California...... -- -- 15,611 -- 1,685 -- 17,296 17,296 1,293 Hyatt Regency Lexington, Kentucky........ -- -- 11,958 -- 1,280 -- 13,238 13,238 964 Hilton Cleveland South Independence, Ohio............ -- 2,760 12,264 29 1,280 2,789 13,544 16,333 1,212 Hilton Gateway Newark Newark, New Jersey.......... -- 1,740 31,262 -- 32 1,740 31,294 33,035 484 Hilton Columbus Columbus, Georgia......... -- 570 13,132 -- -- 570 13,132 13,702 203 Hilton Del Mar Del Mar (San Diego), California...... -- 1,900 11,435 20 539 1,920 11,974 13,894 934 Hilton Greenwood Village (Denver South) Greenwood Village, Colorado........ -- 1,800 42,003 -- -- 1,800 42,003 43,803 650 Hilton Dania Dania, Florida.. -- 2,651 24,748 -- -- 2,651 24,748 27,399 367 Hilton Huntington Melville, New York............ -- 3,000 49,435 -- -- 3,000 49,435 52,435 765 Hilton Parsipanny Parsippanny, New Jersey.......... -- 5,350 87,775 -- 36 5,350 87,811 93,161 1,359 Hilton Melbourne Airport Melbourne, Florida......... -- 1,502 6,391 -- 145 1,502 6,536 8,038 234 Holiday Inn Sebring, Florida......... -- 626 2,387 7 420 633 2,807 3,440 242 Holiday Inn San Angelo, Texas........... -- 428 3,982 11 197 439 4,179 4,618 383 Holiday Inn--YO Ranch Kerrville, Texas........... -- 410 6,099 -- 119 410 6,218 6,628 230 Year Date of Description Built Acquisition ----------- ----- ----------- Full Service Hotels: Embassy Suites Chicago, Illinois........ 1991 1998 Embassy Suites Schaumburg, Illinois........ 1984 1998 Embassy Suites Hunt Valley, Maryland........ 1985 1995 Embassy Suites Phoenix North Phoenix, Arizona......... 1985 1998 Hyatt Newporter Newport Beach, California...... 1962 1996 Hyatt Regency Lexington, Kentucky........ 1977 1996 Hilton Cleveland South Independence, Ohio............ 1980 1995 Hilton Gateway Newark Newark, New Jersey.......... 1971 1998 Hilton Columbus Columbus, Georgia......... 1982 1998 Hilton Del Mar Del Mar (San Diego), California...... 1989 1996 Hilton Greenwood Village (Denver South) Greenwood Village, Colorado........ 1982 1998 Hilton Dania Dania, Florida.. 1988 1998 Hilton Huntington Melville, New York............ 1988 1998 Hilton Parsipanny Parsippanny, New Jersey.......... 1981 1998 Hilton Melbourne Airport Melbourne, Florida......... 1986 1997 Holiday Inn Sebring, Florida......... 1983 1995 Holiday Inn San Angelo, Texas........... 1984 1995 Holiday Inn--YO Ranch Kerrville, Texas........... 1984 1997
F-66 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ------------------- ----------------- ------------------------------------ Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ----- ------------- ---- ------------ --------- --------------- ---------- ------------------- Full Service Hotels: Holiday Inn Aristocrat Dallas, Texas... -- 144 7,806 2 244 146 8,050 8,196 734 Holiday Inn Beachwood Beachwood, Ohio............ -- 307 13,519 -- 315 307 13,834 14,141 375 Holiday Inn Crockett San Antonio, Texas (d) ...... -- 1,936 12,130 21 1,224 1,957 13,354 15,311 1,212 Holiday Inn Lenox Atlanta, Georgia......... -- -- 10,090 -- 318 -- 10,408 10,408 832 Holiday Inn Northwest Houston, Texas.. -- 333 2,324 4 378 337 2,702 3,039 234 Holiday Inn Northwest Plaza Austin, Texas... -- 1,424 9,323 15 181 1,439 9,504 10,943 876 Holiday Inn Select - Farmers Branch Farmers Branch (Dallas), Texas........... -- 3,045 15,786 33 1,830 3,078 17,616 20,694 1,548 Holiday Inn Westlake Beachwood, Ohio............ -- 2,843 14,218 -- 798 2,843 15,016 17,859 617 Holiday Inn Brentwood Brentwood, Tennessee....... -- 1,080 22,342 -- 4 1,080 22,346 23,425 346 Holiday Inn San Francisco, California...... -- -- 18,807 -- 54 -- 18,861 18,861 762 Redmont Hotel Birmingham, Alabama -- 227 2,151 2 78 229 2,229 2,458 115 Omni Inner Harbour Hotel Baltimore, Maryland........ -- 1,129 49,491 -- 453 1,129 49,944 51,073 2,082 Radisson Burlington Burlington, Vermont......... -- 935 28,453 -- 4 935 28,457 29,392 440 Radisson Hotel & Suites Dallas, Texas... -- 1,011 8,276 10 302 1,021 8,578 9,599 781 Radisson Englewood Englewood, New Jersey.......... -- -- 26,320 -- -- -- 26,320 26,320 407 Radisson Suite Hotel Kansas City, Kansas.......... -- 914 10,341 -- 318 914 10,659 11,573 395 Radisson Hotel Lisle, Illinois........ -- 1,995 24,726 -- -- 1,995 24,726 26,721 383 Radisson New Orleans Hotel New Orleans, Louisiana....... -- 2,463 23,630 43 987 2,506 24,617 27,123 2,198 Year Date of Description Built Acquisition ----------- ----- ----------- Full Service Hotels: Holiday Inn Aristocrat Dallas, Texas... 1925 1995 Holiday Inn Beachwood Beachwood, Ohio............ 1974 1998 Holiday Inn Crockett San Antonio, Texas (d) ...... 1909 1995 Holiday Inn Lenox Atlanta, Georgia......... 1987 1996 Holiday Inn Northwest Houston, Texas.. 1982 1995 Holiday Inn Northwest Plaza Austin, Texas... 1984 1995 Holiday Inn Select - Farmers Branch Farmers Branch (Dallas), Texas........... 1979 1995 Holiday Inn Westlake Beachwood, Ohio............ 1980 1997 Holiday Inn Brentwood Brentwood, Tennessee....... 1989 1998 Holiday Inn San Francisco, California...... 1964 1997 Redmont Hotel Birmingham, Alabama 1925 1997 Omni Inner Harbour Hotel Baltimore, Maryland........ 1968 1997 Radisson Burlington Burlington, Vermont......... 1975 1998 Radisson Hotel & Suites Dallas, Texas... 1986 1995 Radisson Englewood Englewood, New Jersey.......... 1989 1998 Radisson Suite Hotel Kansas City, Kansas.......... 1931 1995 Radisson Hotel Lisle, Illinois........ 1987 1998 Radisson New Orleans Hotel New Orleans, Louisiana....... 1924 1997
F-67 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ------------------- ------------------ ------------------------------------ Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ ----- ------------- ---- ------------ --------- --------------- ---------- ------------------- Radisson Northbrook Northbrook, Illinois........ -- 1,437 10,968 16 305 1,453 11,273 12,726 626 Radisson Overland Park Overland Park, Kansas.......... -- 1,296 5,377 14 578 1,310 5,955 7,265 312 Radisson Riverwalk Jacksonville, Florida......... -- 2,400 16,965 (388) 486 2,012 17,451 19,463 661 Radisson Plaza Hotel San Jose Airport San Jose, California...... -- 1,438 40,474 -- -- 1,438 40,474 41,912 626 Radisson Suites Town & Country Houston, Texas.. -- 655 9,725 7 195 662 9,920 10,582 917 Radisson Hotel Beachwood, Ohio............ 5,593 2,226 11,129 -- 313 2,226 11,442 13,668 477 Radisson Hotel Akron, Ohio..... -- 1,136 5,678 -- 131 1,136 5,809 6,945 244 Ramada Hotel San Francisco, California...... -- -- 15,853 -- 146 -- 15,999 15,999 646 Sheraton Four Points Blacksburg, Virginia........ -- 470 16,651 -- 10 470 16,661 17,131 258 Sheraton Four Points Saginaw, Michigan........ -- 773 6,451 8 310 781 6,761 7,542 617 WestCoast Hotel & Marina Long Beach, California...... -- -- 3,145 -- 1,544 -- 4,689 4,689 332 WestCoast Valley River Inn Eugene, Oregon.. -- 1,754 15,839 19 1,055 1,773 16,894 18,667 1,097 Fort Magruder Inn and Conference Center Williamsburg, Virginia........ -- 2,192 22,499 -- 4 2,192 22,503 24,695 348 Pickwick Hotel San Francisco, California...... -- 2,000 11,922 22 5,314 2,022 17,236 19,258 824 Park Shore Honolulu Honolulu, Hawaii.......... -- -- 24,339 -- 560 -- 24,899 24,899 941 Limited Service Hotels: Hampton Inn Canton, Ohio.... -- 350 4,315 3 351 353 4,666 5,019 422 Hampton Inn Rochester, New York............ -- 104 7,829 2 340 106 8,169 8,275 743 Year Date of Description Built Acquisition ----------- ----- ----------- Radisson Northbrook Northbrook, Illinois........ 1976 1995 Radisson Overland Park Overland Park, Kansas.......... 1974 1997 Radisson Riverwalk Jacksonville, Florida......... 1979 1997 Radisson Plaza Hotel San Jose Airport San Jose, California...... 1985 1998 Radisson Suites Town & Country Houston, Texas.. 1986 1995 Radisson Hotel Beachwood, Ohio............ 1968 1997 Radisson Hotel Akron, Ohio..... 1989 1997 Ramada Hotel San Francisco, California...... 1962 1997 Sheraton Four Points Blacksburg, Virginia........ 1971 1998 Sheraton Four Points Saginaw, Michigan........ 1984 1995 WestCoast Hotel & Marina Long Beach, California...... 1978 1996 WestCoast Valley River Inn Eugene, Oregon.. 1973 1996 Fort Magruder Inn and Conference Center Williamsburg, Virginia........ 1975 1998 Pickwick Hotel San Francisco, California...... 1928 1996 Park Shore Honolulu Honolulu, Hawaii.......... 1968 1997 Limited Service Hotels: Hampton Inn Canton, Ohio.... 1985 1995 Hampton Inn Rochester, New York............ 1986 1995
F-68 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued) As of December 31, 1998
Cost Capitalized Subsequent Gross Amounts at Which Carried Initial Cost to Acquisition at Close of Period (a) ---------------------- -------------------- --------------------------------- Buildings and Buildings and Accumulated Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation (b)(c) ----------- ------------ -------- ------------- ------- ------------ -------- ------------- ---------- ------------------- Hampton Inn Cleveland Airport North Olmsted, Ohio............ -- 236 5,483 2 412 238 5,895 6,133 531 Hampton Inn Jacksonville Airport Jacksonville, Florida......... -- 285 4,355 4 159 289 4,514 4,803 415 Arcadian Hotels: Arcadian-- Brandschatch Brandschatch- Place, United Kingdom......... (j) 830 6,907 2 56 832 6,963 7,795 165 Arcadian-- Chilston Park Chilston Park, United Kingdom.. (j) 581 7,701 1 135 582 7,836 8,418 184 Arcadian-- Ettington Park Ettington Park, United Kingdom.. (j) 1,411 10,782 3 41 1,414 10,823 12,237 256 Arcadian-- Haycock Haycock, United Kingdom......... (j) 1,660 9,937 4 86 1,664 10,023 11,687 237 Arcadian-- L'Horizon L'Horizon, United Kingdom.. (j) 3,320 18,678 7 47 3,327 18,725 22,052 443 Arcadian-- Mollington Banastre Mollington Banastre, United Kingdom......... (j) 1,245 9,504 3 113 1,248 9,617 10,865 227 Arcadian-- Nutfield Priory Nutfield Priory, United Kingdom.. (j) 2,075 18,900 5 125 2,080 19,025 21,105 450 Arcadian--Priest House Priest House, United Kingdom.. (j) 664 6,559 1 23 665 6,582 7,247 156 Arcadian-- Rookery Hall Rookery Hall, United Kingdom.. (j) 830 4,777 2 30 832 4,807 5,639 114 Arcadian--Wood Hall Wood Hall, United Kingdom.. (j) 747 4,364 2 10 749 4,374 5,123 103 Arcadian-- Woodlands Park Woodlands Park, United Kingdom.. (j) 2,075 11,437 5 91 2,080 11,528 13,608 272 Other: Bay Meadows Racecourse San Mateo California (g).. -- -- 15,052 2,340 6,813 2,340 21,865 24,205 3,497 Golden Door Spa Escondido, California...... 6,000 5,800 3,000 -- -- 5,800 3,000 8,800 46 -------- -------- ---------- ------- -------- -------- ---------- ---------- -------- $609,048 $375,209 $3,961,539 $ 3,925 $124,073 $379,134 $4,085,612 $4,464,746 $130,211 ======== ======== ========== ======= ======== ======== ========== ========== ======== Year Date of Description Built Acquisition ----------- -------- ----------- Hampton Inn Cleveland Airport North Olmsted, Ohio............ 1986 1995 Hampton Inn Jacksonville Airport Jacksonville, Florida......... 1985 1995 Arcadian Hotels: Arcadian-- Brandschatch Brandschatch- Place, United Kingdom......... 1980 (f) 1998 Arcadian-- Chilston Park Chilston Park, United Kingdom.. 1985 (f) 1998 Arcadian-- Ettington Park Ettington Park, United Kingdom.. 1984 (f) 1998 Arcadian-- Haycock Haycock, United Kingdom......... 1632 (f) 1998 Arcadian-- L'Horizon L'Horizon, United Kingdom.. 1954 (f) 1998 Arcadian-- Mollington Banastre Mollington Banastre, United Kingdom......... 1953 (f) 1998 Arcadian-- Nutfield Priory Nutfield Priory, United Kingdom.. 1988 (f) 1998 Arcadian--Priest House Priest House, United Kingdom.. (f) 1998 Arcadian-- Rookery Hall Rookery Hall, United Kingdom.. 1960 (f) 1998 Arcadian--Wood Hall Wood Hall, United Kingdom.. 1988 (f) 1998 Arcadian-- Woodlands Park Woodlands Park, United Kingdom.. 1988 (f) 1998 Other: Bay Meadows Racecourse San Mateo California (g).. 1934 1997 Golden Door Spa Escondido, California...... 1954 1998
F-69 PATRIOT AMERICAN HOSPITALITY, INC. NOTES TO SCHEDULE III (in thousands)
Period October 2, Year Ended Year Ended Year Ended 1995 through December 31, December 31, December 31, December 31, 1998 1997 1997 1995 ------------ ------------ ------------ ------------ (a) Reconciliation of Real Estate Balance at beginning of period................. $1,863,568 $ 597,494 $242,132 $ -- Additions during this period: Acquisitions.......... 2,473,180 1,209,052 342,557 242,132 Improvements.......... 127,998 57,022 12,805 -- ---------- ---------- -------- -------- Balance at end of period................. $4,464,746 $1,863,568 $597,494 $242,132 ========== ========== ======== ======== (b)Reconciliation of Accumulated Depreciation: Balance at beginning of period................. $ 41,041 $ 12,048 $ 1,508 $ -- Depreciation for period............... 89,170 28,993 10,540 1,508 ---------- ---------- -------- -------- Balance at end of period................. $ 130,211 $ 41,041 $ 12,048 $ 1,508 ========== ========== ======== ========
(c) Depreciation is computed on buildings and improvements based upon a useful life of 35 years. (d) Hotel sold in March 1999. (e) Hotel under development expected to open in 1999. (f) Year built represents first date operated as a hotel. (g) Racetrack sold February 1999. (h) Hotel is encumbered by a capital lease obligation of $4,531. (i) Hotels encumbered by debt obligations of $27,037 which is secured by 4 hotels and one under development. (j) Hotels encumbered by obligations totaling $97,140 which is secured by 11 hotels an one under development. F-70 PATRIOT AMERICAN HOSPITALITY, INC. SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE As of December 31, 1998 (in thousands)
Principal Amount of Loans Subject to Face Carrying Delinquent Interest Periodic Payment Prior Amount of Amount of Principal or Description Rate Maturity Date Terms Liens Mortgages Mortgages (a) Interest ----------- -------- --------------- ------------------------ ------- --------- ------------- ------------ Promissory note, collateralized by a 10.25% January 1, 2000 Monthly payments of None $36,000 $36,000 None first lien deed of trust interest only are on the Crown Plaza required. Principal Ravinia Hotel........... payable in full at maturity Promissory note, collateralized by a second lien deed of 12.5% January 1, 2000 Monthly payments of $36,000 4,500 4,500 None trust on the Crowne interest only are Plaza Ravinia Hotel..... required. Principal payable in full at maturity Promissory note, collateralized by a 9.0% August 31, 1999 Monthly payments of None 31,400 31,102 None first lien deed of trust interest only are on the Wyndham Wind required. Principal Watch Hotel............. payable in full at maturity ------- ------- $71,900 $71,602 ======= =======
- ---- (a)Reconciliation of Mortgage Loans on Real Estate:
Period October 2, 1995 Year Ended Year Ended Year Ended Through December 31, December 31, December 31, December 31, 1998 1997 1996 1995 ------------ ------------ ------------ --------------- Balance at beginning of period.................. $71,602 $71,602 $40,500 $ -- New mortgage loans...... -- -- 31,400 40,500 Principal payments re- ceived.................. -- -- (298) -- ------- ------- ------- ------- Balance at end of peri- od...................... $71,602 $71,602 $71,602 $40,500 ======= ======= ======= =======
For federal income tax purposes, the aggregate cost of investments in mortgage loans on real estate is the carrying amount as disclosed in the schedule. F-71 EX-12.1 2 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. (in thousands)
Year Year Year Inception Ended Ended Ended Through 12/31/98 12/31/97 12/31/96 12/31/95 --------- -------- -------- --------- Earnings: (Loss) income before minority interest.............................. $(112,508) $ 4,142 $44,813 $7,064 Add back: fixed charges................ 272,215 53,093 7,471 89 --------- ------- ------- ------ $ 159,707 $57,235 $52,284 $7,153 ========= ======= ======= ====== Fixed Charges: Interest expense, including amortization of deferred loan costs... $ 260,103 $50,531 $ 7,380 $ 89 Capitalized interest................... 12,112 2,562 91 -- --------- ------- ------- ------ $ 272,215 $53,093 $ 7,471 $ 89 ========= ======= ======= ====== Ratio: 0.59 1.08 7.00 80.37 ========= ======= ======= ======
EX-21.1 3 SUBSIDIARIES OF PATRIOT AND WYNDHAM EXHIBIT 21.1
Subsidiaries of Patriot American Hospitality, Inc. 1500 Canal Street Investors II, L.P. DE Al Jarafe Golf SA Spain Albuquerque C.I. Associates, L.P. KS Ambassador Hotels, Ltd. England & Wales Arcadian Group/Services, Ltd. England & Wales Arcadian (UK) Developments Ltd. England & Wales Arcadian Hotels (Italy) Limited England & Wales Arcadian Hotels (UK) Limited England & Wales Arcadian International Limited England & Wales Arcadian International Resorts, Ltd. England & Wales Atlanta C. I. Associates II, L.P. KS Boulders Joint Venture AZ Bourbon Orleans Investors II, L.P. DE C.I. General, L.L.C. KS C.I. Holding, L.L.C. KS C.I. Wichita General, L.L.C. KS Cambridge Hotel Associates PA Casa Marina Realty Corporation DE Casa Marina Realty Partnership, L.P. DE Chicago-ES Holding Corp. DE Chicago-ES, LLC DE Chicago-ES Member Corp. DE Chilston Park Hotel Limited England & Wales CHMB, Inc. TX CHR Consulting Company, L.L.C. DE CHR Services Company, L.L.C. DE Clipper Hotels, Ltd. England & Wales Clubhouse Inns of America, Inc. KS Colony de Mexico, S.A. de C.V. Mexico Colony Hotels and Resorts Company DE Colony International Management Company, L.L.C. DE Continental Design & Supplies Company, L.L.C. DE Crossroads Development Company DE Crossroads Future Company, L.L.C. DE Crossroads Hospitality Company, L.L.C. DE Crossroads Hospitality Tenant Company, L.L.C. DE Crossroads/Memphis Company, L.L.C. DE Crossroads/Memphis Financing Company, L.L.C. DE Crossroads/Memphis Financing Corporation DE Crossroads/Memphis Partnership, L.P. DE CV Ranch L.P. DE DFW/H&R, Inc. TX Don CeSar Holdings, LLC DE Equity Bluefield, Inc. WV Ettington Park Group Ltd. England & Wales Ettington Park Ltd England & Wales European New Timeshare Limited England & Wales Fattoria Villa Saletta Srl. Italy
GHALP GP, Inc. DE GHMB, Inc. TX Glenview Hospitality, L.P. DE Hilltop Equipment Leasing Company, L.P. DE HMG Beverage, Inc. TX Host/Interstate Partnership, L.P. DE Hotel Del Coronado Management Corporation DE Hotel L'Horison Limited Jersey IHC/Capital Corporation DE IHC/Chaz Corporation DE IHC/Conshohocken Partnership, L.P. DE IHC/Denver Partnership, L.P. DE IHC II, LLC DE IHC/Jacksonville Corporation DE IHC/Maryville Hotel Corporation DE IHC Member Corporation DE IHC/Miami Beach Corporation DE IHC Miami Mortgage Corporation DE IHC/Moscow Corporation DE IHC/Park West Corporation DE IHC/Pittsburgh Partnership, L.P. DE IHC/Reach Corporation DE IHC Realty Corporation DE IHC Realty Partnership, L.P. DE IHC/Santa Maria Corporation DE IHC Services Company, L.L.C. DE IHC/Texas Corporation DE IHP/Class B Partnership, L.P. DE IHP Investment Company, L.L.C. DE Interstate Hotels, LLC DE Interstate Hotels Management, Inc. MD INTMB, Inc. DE Kansas City Hospitality, L.P. DE Knoxville C.I. Associates, L.P. TN Malmaison (ELL) Limited Scotland Malmaison Brand Ltd. Scotland Malmaison Limited England & Wales Malmaison Management Ltd. England & Wales Marina Hospitality, L.P. DE Marquis Hotel Associates (joint venture) PA Maryville Centre CBM Joint Venture MO MBAH, Inc. TX Melbourne Hospitality, L.P. DE Mentomore Golf & Country Club Plc England & Wales Mollington Banastre Hotel Limited England & Wales Northridge Holdings, Inc. DE Northridge Insurance Company Cayman Islands O-H Acquisition, Inc. DE Oak Hill Catering Company, Inc. WV Omaha C.I. Associates, L.P. KS Orange Hotel Development Limited Partnership DE
Overland Park C.I. Associates, L.P. KS PA Hunt Valley Investors, L.P. VA PA Troy Hospitality Investors, L.P. DE Pagle Limited England & Wales PAH Acquisition Corporation DE PAH Allen Operating Corporation DE PAH Batterymarch Realty Company, LLC DE PAH Deuce GP, LLC DE PAH GP, Inc. DE PAH LP, Inc. DE PAH River House, L.P. DE PAH Ventana Canyon, L.P. DE PAH-Buttes L.L.C. DE PAH-BV Holding Corp. DE PAH-BV Palace Corp. DE PAH-BV Palace, L.P. DE PAH-Carefree, L.P. DE PAH-CI Holding, LLC DE PAH-Columbus Holding, Inc. DE PAH-Crossroads Holdings, Inc. DE PAH-DT Chicago O'Hare Partners, L.P. DE PAH-Franchise Holding, Inc. DE PAH FF&E Holding, Inc. DE PAHG FF&E Holding, Inc. DE PAH-GBM, LLC DE PAH-GP Allen Partners, L.P. DE PAH-Grand Bay Miami, L.P. DE PAH-HVP General Partner Corp. DE PAH-HVP Holding Corp. DE PAH-Interest Holding, Inc. DE PAH-Interstate Holdings, Inc. DE PAH-Interstate Member, Inc. DE PAH-IP Holding, Inc. DE PAHP FF&E Holding, Inc. DE PAH-Pittsburgh CI Holding, Inc. DE PAH-Real Estate Member, Inc. DE PAH-RH, LLC DE PAH-Summerfield Holding Corp. DE PAH-T, LLC DE PAH-Tampa, L.P. DE PAH-Westmont CI Holding, Inc. DE PAH-WMC Holding, Inc. DE PAH-Xerxes Holding, Inc. DE Patriot American UK Limited England & Wales Patriot Bougainvillea, LLC DE Patriot Land Holding LLC DE Patriot Miami Note Holder, L.P. DE Patriot Racetrack Land LLC DE Pittsburgh C.I., Inc. KS PSMB, Inc. CA PW Land Associates Limited Partnership PA
Resorts Limited Partnership DE Resorts Limited Partnership II DE Richardson C.I. Associates, L.P. TX Rose Hall Associates Limited Partnership TX Santa Maria Joint Venture DE Savannah C.I. Associates, L.P. GA St. Louis C.I. Associates, L.P. MO State College BBQ/Concord Joint Venture DE Summerfield Hotel Leasing Corporation KS Syracuse Associates Corporation DE Telluride Resort and Spa L.P. DE The Malmaison Company (Edinburgh) Ltd. England & Wales The Malmaison Hotel (Glasgow) Ltd Scotland The Malmaison Hotel (Leeds) Ltd. England & Wales The Malmaison Hotel (Manchester) Ltd. England & Wales The Malmaison Hotel (Newcastle) Ltd. England & Wales Tillian Limited England & Wales Toledo Hotel Investors, L.P. DE Topeka C. I. Associates, L.P. KS W-Greenspoint Holding Corp. DE W-Greenspoint, L.P. DE W-Greenspoint Member Corp. DE W&C Estates Ltd. England & Wales Water Street Hotel, Ltd. DE Waterfront Management Corporation DE WG Member, LLC DE WH Garden Albuquerque Inc. TX WH Interest, Inc. TX WHC Atlanta GP, LLC DE WHC Caribbean, Ltd. Jamaica WHC Chicago, LLC DE WHC Columbus Corporation DE WHC Finance, L.P. DE WHC Franchise Corporation DE WHCMB, Inc. DE WHCMB Overland Park, Inc. KS WHCMB Toronto, Inc. Canada WHCMB Utah Private Club Corporation (Utah non-profit corporation) UT Wichita C.I. Associates III, L.P. KS Wyndham Hotels & Resorts (Aruba) N.V. Aruba Wyndham Hotels & Resorts Management, Ltd. Bermuda Wyndham HPT Lessee, L.P. DE Wyndham HPT Lessee LLC DE Wyndham IP Corporation DE Wyndham Management Corporation DE Wyndham Peachtree Holding Corp. DE Wyndham Peachtree LLC DE Wyndham Peachtree Member Corp. DE Wyndham Peachtree Member, LLC DE Xerxes Limited Jamaica YO Hotel Investors, L.P. DE
PAH-Crossroads Lessee, Inc. DE W& CP (Exeter) Limited England & Wales
Subsidiaries of Wyndham International, Inc.
Arcadian Groups Services Limited England & Wales Arcadian Hotels Limited England & Wales Bay Meadows Catering, Inc. CA Bay Meadows Operating Company LLC DE BJV Realty, Inc. AZ Boulders Carefree Sewer Corporation AZ Burrllen Enterprises of Maryland MD CFMB, Inc. DE C.I. Albuquerque Lessee GP, LLC DE C.I. Albuquerque Lessee, L.P. DE C.I. Atlanta Lessee, L.P. DE C.I. Knoxville Lessee, L.P. DE C.I. Lessee GP, Inc. DE C.I. Omaha Lessee, L.P. DE C.I. Overland Park Lessee, L.P. DE C.I. Wichita Lessee, L.P. DE Carefree Management LLC DE Carnicon Holdings Corp. FL Carnicon Puerto La Cruz Venezuela Carnicon Venezuela Hotel Consultants LC Venezuela Centralized Operations, Inc. AZ CHC Biscayne Blvd. Inc. FL CHC Hotels & Resorts Corp. FL CHC Lease Partners FL CHC REIT Lessee Corp. FL Conquistador Holding, Inc. DE Criterion Hotel Management Corp. FL Criterion NY Inc. FL CSMC Kalamazoo, Inc. MI Deuce Management Company LLC TX El Conquistador Ferryboat, Inc. Puerto Rico El Conquistador Partnership L.P. DE El San Juan Holding, Inc. DE ESC Greenspoint Holding Corp. DE ESC Greenspoint Lessee, L.P. DE ESC Greenspoint Member Corp. DE ESC Greenspoint Member, LLC DE ESJ Hotel Corporation DE Family Suites Corporation DE Family Suites Limited Partnership DE Family Suites Management Corporation DE Family Suites Management Partnership, L.P. DE FS Development Corporation DE GAH-II Corporation DE GAH-II, L.P. DE GB Hotel Management de Mexico S. de RL de C.V. Mexico
GH (Cayman) Limited Cayman Islands GH-Atlanta, LLC MD GH-Chicago, Inc. IL GH-Detroit, Inc. MI GH-Greeneville, Inc. TN GH-Providence, Inc. RI GH Trademarks LLC MD GH-Wichita, Inc. KS GH-San Diego, Inc. DE GHALP Operating GP, Inc. DE GHALP Operating Partnership, L.P. DE GHV-Colorado, Inc. CO GHV-Galveston, Inc. TX Grand Bay Management Company FL Grand Heritage Hotels (Europe) Limited United Kingdom Grand Heritage Hotels, Inc. MD Grand Heritage Leasing, LLC MD Grand Heritage Real Estate Group LLC MD Grand Management Services, Inc. FL IHC/Burlington Corporation VT IHC/FS Development Corporation DE IHC/Houston Partnership, L.P. DE IHC/Interstone Partnership II, L.P. DE IHC/Jamaica Corporation DE IHC Title Agency Corporation DE Interstone Three Partners I L.P. DE Interstone Three Partners II L.P. DE Interstone Three Partners III L.P. DE Interstone Three Partners IV L.P. DE Isla Verde Tourism Parking Corporation Puerto Rico Malmaison Hotels Limited England & Wales Malmaison Resources Limited England & Wales P.H.G., LLC MD PAH Batterymarch Operating Company, LLC DE PAH GAH Holdings, LLC DE PAH GAH Holdings, L.P. DE PAH Leasing LLC DE PAH Stanly Ranch LLC DE PAH Stanly Holding LLC DE PAH-Cambridge Holdings, LLC DE PAH-Hilltop GP, LLC DE PAH-Interstone, LLC DE PAH-Management Corporation DE PAH-Member, Inc. DE PAH-Pittsburgh, LLC DE PAH-Summerfield Leasing, Inc. DE PAH-Summerfield LLC DE PAHMB, Inc. TX Patriot Bougainvillea Development Company, LLC DE Patriot Grand Heritage, LLC DE Patriot Holding LLC DE
` Posadas de Puerto Rico Associates, Incorporated DE Posadas de Regency, Inc. DE Posadas de San Juan Associates (New York joint venture) NY Posadas Finance Corporation DE PWMB, Inc. DE PWMB of Maryland, Inc. MD Salt Lake City Operating GP, Inc. DE Salt Lake City Operating Partnership, L.P. DE SFMB, Inc. DE Sierra Suites Marketing Association KS Summerfield Hotel Corporation DE Summerfield Hotel Leasing Company, L.P. KS Summerfield HPT Lease Company, L.L.C. DE Summerfield HPT Lease Company, L.P. KS Summerfield Suites Marketing Association DE TCC Maturin, C.A. Venezuela TCC Venezuela, L.C. Venezuela The Reserve Collection Boulders LLC DE The Reserve Collection Peaks LLC DE W-SSH, LLC DE WHG El Con Corp. DE WHG Resorts & Casinos Inc. DE Williams Hospitality Group Inc. DE WKA Development S.E. Puerto Rico WKA El Con Associates NY WMC II, LLC DE Wyndham Management II, LLC DE Wyndham Peachtree Lessee Holding Corp. DE Wyndham Peachtree Lessee LLC DE Wyndham Peachtree Lessee Member, LLC DE Wyndham Peachtree Lessee Member Corp. DE Wyndham SN Lessee Corp. DE Wyndham SN Lessee, L.P. DE Wyndham Summerfield Lessee, L.P. DE Wyndham Summerfield Lessee, LLC DE Clipper Inns Limited England & Wales CHC REIT Management Corp. FL
EX-23.1 4 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the (a) Joint Registration Statement on Form S-4 (File No. 333-39875 and No. 333-39875-01) of Patriot American Hospitality, Inc. and Wyndham International, Inc. (formerly Patriot American Hospitality Operating Company), (b) Joint Registration Statement on Form S-4 (File No. 333-40041 and No. 333-40041-01) of Patriot American Hospitality, Inc. and Wyndham International Inc. (formerly Patriot American Hospitality Operating Company), (c) Joint Registration Statement on Form S-3 (File No. 333-46353 and No. 333-46353-01) and related Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc. (formerly Patriot American Hospitality Operating Company), (d) Joint Registration Statement on Form S-3 (File No. 333-51289 and No. 333-51289-01) and related Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc., (e) Joint Registration Statement on Form S-3 (File No. 333-51779 and No. 333-51779-01) and related Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc., (f) Joint Registration Statement on Form S-8 (File No. 333-56315 and No. 333-56315-01) of Patriot American Hospitality, Inc. and Wyndham International, Inc., (g) Joint Registration Statement on Form S-3 (File No. 333-58705 and No. 333-58705-01) and related Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc., (h) Joint Registration Statement on Form S-3 (File No. 333-64357 and No. 333-64357-01) and related Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc., and (i) Joint Registration Statement on Form S-3 (File No. 333-65339 and No. 333-65339-01) and related Prospectus of Patriot American Hospitality, Inc. and Wyndham International, Inc. of our report dated March 1, 1999, with respect to the financial statements and schedules of Patriot American Hospitality, Inc. and Wyndham International, Inc. included in this Form 10-K/A for the year ended December 31, 1998. /s/ Ernst & Young LLP Dallas, Texas May 6, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE OF PATRIOT
5 1,000 0000016343 PATRIOT AMERICAN HOSPITALITY, INC. YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 89,885 20,360 0 0 8,589 14,458 0 0 0 1,306 0 0 5,176,977 2,083,768 216,548 67,501 6,749,206 2,321,105 0 0 0 0 0 0 54 0 2,135 733 2,466,670 908,294 6,749,206 2,321,105 0 0 595,410 185,554 0 0 0 0 390,335 136,800 0 0 245,205 51,000 (3,404) 3,769 (2,742) 0 0 0 0 0 (30,560) (2,534) 0 0 (44,888) (2,152) (.52) (.03) (1.73) (.03)
EX-27.2 6 FINANCIAL DATA SCHEDULE OF WYNDHAM
5 1,000 0000715273 Wyndham International, Inc. YEAR 6-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JUL-01-1997 DEC-31-1998 DEC-31-1997 69,069 27,076 0 0 185,994 46,340 0 0 23,583 9,144 325,950 100,662 662,135 29,686 36,032 1,304 2,006,821 252,088 602,494 115,656 0 0 0 0 36 0 2,135 733 132,923 80,132 2,006,821 252,088 1,842,682 167,727 2,002,227 204,134 0 0 1,294,746 142,562 752,751 60,266 0 0 35,690 933 77,826 373 (14,381) (481) 0 0 0 0 (1,257) 0 0 0 (112,419) (20) (.84) 0 (.84) 0
EX-99.4 7 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 99.4 EXECUTIVE EMPLOYMENT AGREEMENT This EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made as of the 11th day of December, 1998, between Wyndham International, Inc., a Delaware corporation (the "Company"), and Carla Moreland ("Executive"). WHEREAS, Executive has previously had a valued association with Wyndham Hotel Corporation, a Delaware corporation ("Previous Employer"); WHEREAS, the outstanding common stock of the Company is paired and transferable only as a single unit with the outstanding common stock ("Paired Shares") of Patriot American Hospitality, Inc. ("Affiliated Company"); WHEREAS, as an additional inducement to Executive to enter into this Agreement, the Company has granted a one-time stock-based award (as set forth on Schedule I attached hereto and made a part hereof by this reference) to Executive, and the Company shall, on the Commencement Date (as hereinafter defined), enter into a separate Indemnification Agreement with Executive of even date in the form attached hereto as Exhibit A (the "Indemnification Agreement"); and WHEREAS, Executive is desirous of committing to serve the Company on the terms herein provided. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Employment. The term of this Agreement shall extend from January 5, 1998 (the "Commencement Date") until the third anniversary of the Commencement Date. On or before the date that is six (6) months prior to the scheduled expiration of this Agreement, the term of this Agreement shall (i) be formally extended from the originally scheduled expiration date for an additional one (1) year by the mutual agreement of the Company and Executive; or (ii) shall continue in effect without extension for the balance of the term and expire in accordance with its terms. The term of this Agreement shall be subject to termination as provided in Paragraph 6 and may be referred to herein as the "Period of Employment." 2. Position and Duties. During the Period of Employment, Executive shall serve in the position described on Schedule I, shall report to the person designated on Schedule I, shall have supervision and control over and responsibility for the day-to-day business and affairs of those functions and operations of the Company described on Schedule I and shall have such other powers and duties as may from time to time be prescribed by the Chairman of the Board of the Company (the "Chairman"), provided that such duties are consistent with Executive's position or other positions that she may hold from time to time. Executive shall devote her full working time and efforts to the business and affairs of the Company. Notwithstanding the foregoing, Executive may serve on other boards of directors or engage in religious, charitable or other community activities as long as such services and activities are disclosed to the Chairman and do not materially interfere with Executive's performance of her duties to the Company as provided in this Agreement. 3. Compensation and Related Matters. (a) Base Salary and Incentive Compensation. Executive's initial annual base salary ("Base Salary") and incentive compensation range shall be set forth on Schedule I. Executive's Base Salary shall be redetermined at least thirty (30) days before each annual compensation determination date established by the Company during the Period of Employment in an amount to be fixed by the Chairman. The Base Salary, as redetermined, may be referred to herein as "Adjusted Base Salary." The Base Salary or Adjusted Base Salary shall be payable in substantially equal bi-weekly installments and shall in no way limit or reduce the obligations of the Company hereunder. Executive's cash incentive compensation shall be in an amount determined by the Chairman based on individual performance, performance by the Company and total return to shareholders. Executive will also participate in such incentive compensation plans as the Board of Directors of the Company (the "Board") or its Compensation Committee shall determine from time to time for employees of the same status within the hierarchy of the Company. (b) Expenses. Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by her (in accordance with the policies and procedures then in effect and established by the Company for its executive employees) in performing services hereunder during the Period of Employment, provided that Executive properly accounts therefor in accordance with Company policy. (c) Other Benefits. During the Period of Employment, Executive shall be entitled to continue to participate in or receive benefits under all of the Company's Employee Benefit Plans in effect on the date hereof, or under plans or arrangements that provide Executive with at least substantially equivalent benefits to those provided under such Employee Benefit Plans. As used herein, "Employee Benefit Plans" include, without limitation, each pension and retirement plan; supplemental pension, retirement and deferred compensation plan; savings and profit-sharing plan; stock ownership plan; stock purchase plan; stock option plan; life insurance plan; medical insurance plan; disability plan; and health and accident plan or arrangement established and maintained by the Company on the date hereof for employees of the same status within the hierarchy of the Company. To the extent that the scope or nature of benefits described in this section are determined under the policies of the Company based in whole or in part on the seniority or tenure of an employee's service, Executive shall be deemed to have a tenure with the Company equal to the actual time of Executive's service with Company plus the actual service by Executive to the Previous Employer. During the Period of Employment, Executive shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement which may, in the future, be made available by the Company to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plan or arrangement. Any 2 payments or benefits payable to Executive under a plan or arrangement referred to in this Subparagraph 3(c) in respect of any calendar year during which Executive is employed by the Company for less than the whole of such year shall, unless otherwise provided in the applicable plan or arrangement, be prorated in accordance with the number of days in such calendar year during which she is so employed. Should any such payments or benefits accrue on a fiscal (rather than calendar) year, then the proration in the preceding sentence shall be on the basis of a fiscal year rather than calendar year. (d) Vacations. Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for executives at the same level as Executive. Executive shall also be entitled to all paid holidays given by the Company to its executives. To the extent that the scope or nature of benefits described in this section are determined under the policies of the Company based in whole or in part on the seniority or tenure of an employee's service, Executive shall be deemed to have a tenure with the Company equal to the actual time of Executive's service with Company plus the actual service by Executive to the Previous Employer. 4. Unauthorized Disclosure. 3 (a) Confidential Information. Executive acknowledges that in the course of her employment with the Company, she has been allowed to become, and will continue to be allowed to become, acquainted with the Company's and Affiliated Company's business affairs, strategies, methods of operation, information, trade secrets, and other matters which are of a proprietary or confidential nature, including but not limited to the Company's and Affiliated Company's and their respective predecessors' operations, business opportunities, price and cost information, finance, customer information, business plans, various sales techniques, manuals, letters, notebooks, procedures, reports, products, processes, services, and other confidential information and knowledge (collectively the "Confidential Information") concerning the Company's, Affiliated Company's and their respective predecessors' business. The Company agrees to provide on an ongoing basis such Confidential Information as the Company deems necessary or desirable to aid Executive in the performance of her duties. Executive understands and acknowledges that such Confidential Information is confidential, and she agrees not to disclose such Confidential Information to anyone outside the Company or the Affiliated Company except to the extent that (i) Executive deems such disclosure or use reasonably necessary or appropriate in connection with performing her duties on behalf of the Company, (ii) Executive is required by order of a court of competent jurisdiction (by subpoena or similar process) to disclose or discuss any Confidential Information, provided that in such case, Executive shall promptly inform the Company of such event, shall cooperate with the Company in attempting to obtain a protective order or to otherwise restrict such disclosure, and shall only disclose Confidential Information to the minimum extent necessary to comply with any such court order; (iii) such Confidential Information becomes generally known to and available for use by the hotel and hospitality industry (the "Hotel Industry"), other than as a result of any action or inaction by Executive; or (iv) such information has been rightfully received by a member of the Hotel Industry or has been published in a form generally available to the Hotel Industry prior to the date Executive proposes to disclose or use such information. At such time as Executive shall cease to be employed by the Company, she will immediately turn over to the Company all Confidential Information, including papers, documents, writings, electronically stored information, other property, and all copies of them provided to or created by her during the course of her employment with the Company. (b) Heirs, successors, and legal representatives. The foregoing provisions of this Paragraph 4 shall be binding upon Executive's heirs, successors, and legal representatives. The provisions of this Paragraph 4 shall survive the termination of this Agreement for any reason. 5. Confidentiality and Related Obligations. (a) Executive is a licensed attorney and recognizes she is bound by the ethical principles governing the legal profession including duties to preserve confidential client information as defined and presently codified in Rule 1.05 of the Texas Disciplinary Rules of Professional Conduct and further to honor and preserve the attorney client privilege. Executive recognizes and agrees that these obligations are permanent and survive the period of Executive's employment by the Company and survive the period of time she remains a licensed attorney. 4 (b) Executive recognizes that if she were to attempt to perform as an employee of or an attorney for a competitor of the Company, there would be a genuine and inevitable threat that Executive would use or disclose privileged or confidential client information, and Executive agrees that during Executive's employment with the Company and for a period of six (6) months thereafter, Executive will not perform as an employee of or an attorney for a competitor of the Company. Executive agrees that the Company's remedy against Executive for money damages for a breach of her duties of confidentiality to the Company would be inadequate, and Executive agrees that an injunction against her for any such threatened breach is an appropriate remedy. Notwithstanding anything to the contrary contained herein, Executive's acceptance of a position with the Trammell Crow Family or its subsidiaries or affiliates ("Crow Family Interests") after her termination of employment shall not be deemed to be a violation of the foregoing non-compete provisions subject to the condition that Crow Family Interests does not, during the period of Executive's employment and the period of non-competition described in the first sentence of this section, directly or indirectly form a hospitality operating company (as opposed to making individual investments in hospitality properties). (c) Executive also agrees that during the term of Executive's employment with the Company and for a period of two (2) years thereafter, Executive will not, directly or indirectly, either for herself or for any other business, operation, corporation, partnership, association, agency, or other person or entity, call upon, compete for, solicit, divert, or take away, or attempt to divert or take away any of the customers (including, without limitation, any hotel owner, lessor or lessee, asset manager, trustee, consumer with whom the Company or Affiliated Company, from time to time (i) has an existing agreement or business relationship; or (ii) has included as a prospect in its applicable pipeline) or vendors of the Company or Affiliated Company in any of the areas or territories in which the Company or Affiliated Company conducts operations if such action has the intent or effect of interfering with the Company's or Affiliated Company's relationship with the vendor or customer. (d) Further, Executive agrees that during the term of Executive's employment with the Company and for a period of two (2) years thereafter, Executive will not directly or indirectly solicit or induce any present or future employee of the Company or Affiliated Company to accept employment with Executive or with any business, operation, corporation, partnership, association, agency, or other person or entity with which Executive may be associated, and Executive will not employ or cause any business, operation, corporation, partnership, association, agency, or other person or entity with which Executive may be associated to employ any present or future employee of the Company or Affiliated Company without providing the Company or Affiliated Company with ten (10) days' prior written notice of such proposed employment. 6. Termination. Executive's employment hereunder may be terminated without any breach of this Agreement under the following circumstances: 5 (a) Death. Executive's employment hereunder shall terminate upon her death. (b) Disability. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been absent from her duties hereunder on a full-time basis for one hundred eighty (180) calendar days in the aggregate in any twelve (12) month period, the Company may terminate Executive's employment hereunder. (c) Termination by Company For Cause. At any time during the Period of Employment, the Company may terminate Executive's employment hereunder for Cause. For purposes of this Agreement "Cause" shall mean: (A) conduct by Executive constituting a material act of willful misconduct in connection with the performance of her duties, including, without limitation, misappropriation of funds or property of the Company or any of its affiliates other than the occasional, customary and de minimis use of Company property for personal purposes; (B) criminal or civil conviction or conduct by Executive that would reasonably be expected to result in material injury to the reputation of the Company if she were retained in her position with the Company, including, without limitation, conviction of a felony involving moral turpitude; (C) continued, willful and deliberate non-performance by Executive of her duties hereunder (other than by reason of Executive's physical or mental illness, incapacity or disability) and such non-performance has continued for more than thirty (30) days following written notice of such non-performance from the Chairman; or (D) a breach by Executive of any of the provisions contained in Paragraphs 4 and 5 of this Agreement. (d) Termination by Company for Performance Reasons. At any time during the Period of Employment, the Company may terminate Executive's employment if Executive has materially failed to perform her duties hereunder or has violated, in material respects, the policies and procedures of the Company and such failure or violation has continued for more than ninety (90) days following written notice of such violation from the Chairman. (e) Termination Without Cause. At any time during the Period of Employment, the Company may terminate Executive's employment hereunder without Cause if such termination is approved by the Chairman. Any termination by the Company of Executive's employment under this Agreement which does not constitute a termination for Cause under Subparagraph 6(c), or termination for performance under Subparagraph 6(d), or result from the death or disability of the Executive under Subparagraph 6(a) or (b) or result from the expiration of the Period of Employment without extension, shall be deemed a termination without Cause. (f) Termination by Executive. At any time during the Period of Employment, Executive may terminate her employment hereunder for any reason, including but not limited to Good Reason. For purposes of this Agreement, "Good Reason" shall mean that Executive has complied with the "Good Reason Process" (hereinafter defined) following the occurrence of any of the following events: (A) a substantial diminution or other substantive adverse change, not consented to by Executive, in the nature or scope of Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions 6 or duties described in Paragraph 2; (B) except in connection with a termination of Executive's employment, any removal, during the Period of Employment, of Executive from or, any failure by management to nominate, or, if nominated, any failure by the Board to re-elect, Executive to Senior Vice President (or comparable) officer level of the Company; (C) an involuntary reduction in Executive's Base Salary or Adjusted Base Salary or involuntary reduction in cash incentive compensation plan (but not reduction in incentive compensation appropriate for level of performance) except for across-the-board salary reductions similarly affecting all or substantially all management employees; (D) a breach by the Company of any of its other material obligations under this Agreement and the failure of the Company to cure such breach within thirty (30) days after written notice thereof by Executive; (E) the relocation of the Company's offices at which Executive is principally employed or the involuntary relocation of the offices of Executive's primary workgroup to a location more than thirty (30) miles from such offices, or the requirement by the Company for Executive to be based anywhere other than the Company's offices at such location on an extended basis, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations; or (F) the refusal of the Company to follow legal advice rendered on an issue of material risk for the Company and/or its officers and directors. "Good Reason Process" shall mean that (i) the Executive reasonably determines in good faith that a "Good Reason" event has occurred; (ii) Executive notifies the Company in writing of the occurrence of the Good Reason event; (iii) Executive cooperates in good faith with the Company's efforts, for a period not less than ninety (90) days following such notice, to modify Executive's employment situation in a manner acceptable to Executive and Company; and (iv) notwithstanding such efforts, one or more of the Good Reason events continues to exist and has not been modified in a manner acceptable to Executive. (g) Notice of Termination. Except for termination as specified in Subparagraph 6(a), any termination of Executive's employment by the Company or any such termination by Executive shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (h) Date of Termination. "Date of Termination" shall mean: (A) if Executive's employment is terminated by her death, the date of her death; (B) if Executive's employment is terminated on account of disability under Subparagraph 6(b) or by the Company for Cause under Subparagraph 6(c), the date on which Notice of Termination is given; (C) if Executive's employment is terminated by the Company under Subparagraph 6(d), fourteen (14) days after the date on which a Notice of Termination is given; (D) if Executive's employment is terminated by the Company under Subparagraph 6(e), sixty (60) days after the date on which a Notice of Termination is given; and (E) if Executive's employment is terminated by Executive under Subparagraph 6(f), thirty (30) days after the date on which a Notice of Termination is given. 7. Compensation Upon Termination or During Disability. 7 (a) If Executive's employment terminates by reason of her death, the Company shall, within ninety (90) days of death, pay in a lump sum amount to such person as Executive shall designate in a notice filed with the Company or, if no such person is designated, to Executive's estate, Executive's accrued and unpaid Base Salary or, if applicable, her Adjusted Base Salary, to the date of her death, plus her accrued and unpaid incentive compensation under Subparagraph 3(a). All unvested stock options and stock-based grants shall immediately vest in Executive's estate or other legal representatives and become exercisable, and Executive's estate or other legal representatives shall have one (1) year from the Date of Termination, or remaining option term, if earlier, to exercise the stock options. For a period of one (1) year following the Date of Termination, the Company shall pay such health insurance premiums as may be necessary to allow Executive's spouse and dependents to receive health insurance coverage substantially similar to coverage they received prior to the Date of Termination. In addition to the foregoing, any payments to which Executive's spouse, beneficiaries, or estate may be entitled under any employee benefit plan shall also be paid in accordance with the terms of such plan or arrangement. Such payments, in the aggregate, shall fully discharge the Company's obligations hereunder. (b) During any period that Executive fails to perform her duties hereunder as a result of incapacity due to physical or mental illness, Executive shall continue to receive her accrued and unpaid Base Salary or, if applicable, her Adjusted Base Salary and accrued and unpaid incentive compensation payments under Subparagraph 3(a), until Executive's employment is terminated due to disability in accordance with Subparagraph 6(b) or until Executive terminates her employment in accordance with Subparagraph 6(f), whichever first occurs. All unvested stock options and stock-based grants shall immediately vest and become exercisable and Executive shall have one (1) year from the Date of Termination, or remaining option term, if earlier, to exercise the stock options. For a period of one (1) year following the Date of Termination, the Company shall pay such health insurance premiums as may be necessary to allow Executive, Executive's spouse and dependents to receive health insurance coverage substantially similar to coverage they received prior to the Date of Termination. Upon termination due to death prior to the termination first to occur as specified in the preceding sentence, Subparagraph 7(a) shall apply. (c) If Executive's employment is terminated by Executive other than for Good Reason as provided in Subparagraph 6(f), then the Company shall, through the Date of Termination, pay Executive her accrued and unpaid Base Salary or, if applicable, her Adjusted Base Salary at the rate in effect at the time Notice of Termination is given. Thereafter, the Company shall have no further obligations to Executive except as otherwise expressly provided under this Agreement, provided any such termination shall not adversely affect or alter Executive's rights under any employee benefit plan of the Company in which Executive, at the Date of Termination, has a vested interest, unless otherwise provided in such employee benefit plan or any agreement or other instrument attendant thereto. (d) If Executive terminates her employment for Good Reason as provided in Subparagraph 6(f) or if Executive's employment is terminated by the Company without Cause 8 as provided in Subparagraph 6(e), then the Company shall, through the Date of Termination, pay Executive her accrued and unpaid Base Salary or, if applicable, her Adjusted Base Salary at the rate in effect at the time Notice of Termination is given and her accrued and unpaid incentive compensation under Subparagraph 3(a), pro-rated for any partial year employment. In addition, subject to signing by Executive of a general release of claims in a form and manner satisfactory to the Company, (i) the Company shall provide payments to Executive in an amount equal to the sum of (A) 50 percent of the sum of Executive's Base Salary or, if applicable, her Adjusted Base Salary and her Average Incentive Compensation and (B) the amount provided by the Company's then current severance policy (the "Severance Amount"). The Severance Amount shall be paid out in substantially equal quarterly installments, in advance, over a period equal to the sum of six months plus the salary continuation period provided by the Company's then current severance policy; provided, however, that in the event Executive commences any employment during such period, the Company shall be entitled to set-off against the remaining Severance Amount the amount of any cash compensation received by Executive from the new employer. The amount payable in each quarter will not be subject to any set-off so long as Executive certifies in writing prior to each quarterly payment that she has not accepted employment with a new employer (including, without limitation, contract and consulting agreements). For purposes of this Agreement, "Average Incentive Compensation" shall mean the average of the annual incentive compensation under Subparagraph 3(a) received by Executive for the three (3) immediately preceding fiscal years or such fewer number of complete fiscal years as Executive may have been employed by the Company and the Previous Employer. Notwithstanding the foregoing, if the Executive breaches any of the provisions contained in Paragraphs 4 and 5 of this Agreement, all payments of the Severance Amount shall immediately cease. Notwithstanding the foregoing, in the event Executive terminates her employment for Good Reason as provided in Subparagraph 6(f), she shall be entitled to the Severance Amount only if she provides the Notice of Termination provided for in Subparagraph 6(g) within thirty (30) days after the occurrence of the event or events which constitute such Good Reason as specified in clauses (A), (B), (C), (D), (E) and (F) of Subparagraph 6(f); (ii) in addition to any other benefits to which Executive may be entitled in accordance with the Company's then existing severance policies, the Company shall, for a period of six (6) months commencing on the Date of Termination or through the date Executive secures new employment, if earlier, pay for the cost of executive outplacement services selected by Executive for use in connection with obtaining alternate employment; and (iii) Executive shall receive all the rights and benefits granted or in effect with respect to Executive under the Company's employee stock option or incentive plans and agreements with Executive pursuant thereto. In addition to the foregoing, all 9 stock options and other stock-based awards in which Executive otherwise would have vested if she would have remained employed for a period of twelve (12) months commencing on the Date of Termination shall immediately accelerate and become exercisable or nonforfeitable as of the Date of Termination. (e) If Executive's employment is terminated by the Company for Cause as provided in Subparagraph 6(c) or for performance as provided in Subparagraph 6(d), then the Company shall, through the Date of Termination, pay Executive her accrued and unpaid Base Salary or, if applicable, her Adjusted Base Salary at the rate in effect at the time Notice of Termination is given and in the case of termination for performance as provided by Subparagraph 6(d), her accrued and unpaid incentive compensation under Subparagraph 3(a) and any severance pay provided under the Company's then current severance policy. Thereafter, the Company shall have no further obligations to Executive except as otherwise expressly provided under this Agreement, provided any such termination shall not adversely affect or alter Executive's rights under any employee benefit plan of the Company in which Executive, at the Date of Termination, has a vested interest, unless otherwise provided in such employee benefit plan or any agreement or other instrument attendant thereto. Notwithstanding the foregoing and in addition to whatever other rights or remedies the Company may have at law or in equity, all stock options held by Executive shall immediately expire on the Date of Termination if Executive's employment is terminated by the Company for Cause as provided by Subparagraph 6(c). (f) If Executive's employment is terminated by the Company solely by reason of the expiration of the Period of Employment without extension, then the Company shall, through the date of termination, pay Executive her accrued and unpaid Base Salary or, if applicable, her Adjusted Base Salary at the rate in effect at such time, her accrued and unpaid incentive compensation under Subparagraph 3(b) and the amount provided under the Company's then current severance policy. Executive shall receive all the rights and benefits granted or in effect with respect to Executive under the Company's employee stock option or incentive plans and agreements with Executive pursuant thereto. In addition to the foregoing, all options and other stock-based awards in which Executive would otherwise have vested if she would have remained employed for the period of severance shall immediately accelerate and become exercisable or nonforfeitable as of the date of termination. Thereafter, the Company shall have no further obligations to Executive except as otherwise expressly provided under this Agreement, provided any such termination shall not adversely affect or alter Executive's rights under any employee benefit plan of the Company in which Executive, at the date of termination, has a vested interest, unless otherwise provided in such employee benefit plan or any agreement or other instrument attendant thereto. (g) Nothing contained in the foregoing Subparagraphs 7(a) through 7(f) shall be construed so as to affect Executive's rights or the Company's obligations relating to agreements or benefits which are unrelated to termination of employment. 10 8. Parachute Payment. The provisions of this Paragraph 8 set forth certain terms of an agreement reached between Executive and the Company regarding Executive's rights and obligations upon the occurrence of a Change in Control of the Company. These provisions are intended to assure and encourage in advance Executive's continued attention and dedication to her assigned duties and her objectivity during the pendency and after the occurrence of any such event. These provisions shall apply in lieu of, and expressly supersede, the provisions of Subparagraph 7(d)(i) regarding severance pay upon a termination of employment, if such termination of employment occurs within twelve (12) months after the occurrence of the first event constituting a Change of Control; provided that such first event occurs during the Period of Employment. These provisions shall terminate and be of no further force or effect beginning twelve (12) months after the occurrence of a Change of Control. (a) Escrow. Within fifteen (15) days after the occurrence of the first event constituting a Change of Control, the Company shall place funds in an amount equal to the estimated Parachute Amount in escrow, pursuant to arrangements that are mutually acceptable to the Company and Executive providing for the payment of the Parachute Amount in the event Executive becomes entitled thereto pursuant to Subparagraph 8(b)(i) (the "Escrow Arrangement"). The Escrow Arrangement shall be maintained until the earlier of (A) twelve (12) months after the occurrence of the first event constituting a Change of Control or (B) the payment to Executive of the Parachute Amount pursuant to the provisions of Subparagraph 8(b)(i). (b) Change in Control. (i) If within twelve (12) months after the occurrence of the first event constituting a Change in Control, Executive's employment terminates for any reason other than (A) death, (B) her inability, due to illness, accident, or other physical or mental incapacity, to perform her duties for more than one hundred eighty (180) days during any twelve-month period, (C) for Cause or (D) her Voluntary Resignation ("Termination"), then the Company shall pay Executive in a lump sum an amount equal to the applicable Parachute Amount on the tenth (10th) day following Executive's Termination; and (ii) Notwithstanding anything to the contrary in any applicable option agreement or stock-based award agreement, upon the effective date of the Change in Control, all stock options and other stock-based awards granted to Executive by the Company shall immediately accelerate and become exercisable or non-forfeitable as of the date of Change in Control, and Executive shall be entitled to any other rights and benefits with respect to stock-related awards, to the extent and upon the terms provided in the employee stock option or incentive plan or any agreement or other instrument attendant thereto pursuant to which such options or awards were granted. 11 (c) Gross Up Payment. (i) Excess Parachute Payment. If Executive incurs the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") on "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code, the Company will pay to Executive an amount (the "Gross Up Payment") such that the net amount retained by Executive, after deduction of any Excise Tax on the excess parachute payment and any federal, state and local taxes (together with penalties and interest) and Excise Tax upon the payment provided for by this Subparagraph 8(c)(i), will be equal to the Parachute Amount. (ii) Applicable Rates. For purposes of determining the amount of the Gross Up Payment, Executive will be deemed to pay federal income taxes at the highest marginal rate of federal taxation in the calendar year in which the Gross Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of Executive's residence on the date of Executive's Termination, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes. (iii) Determination of Gross Up Payment Amount. The determination of whether the Excise Tax is payable and the amount thereof will be based upon the opinion of tax counsel selected by Executive and approved by the Company, which approval will not be unreasonably withheld. The costs of obtaining the opinion of tax counsel shall be borne by the Company. If such opinion is not finally accepted by the Internal Revenue Service (or state and local taxing authorities), then appropriate adjustments to the Excise Tax will be computed and additional Gross Up Payments will be made in the manner provided by this Subparagraph (c). (iv) Time For Payment. The Company will pay the estimated amount of the Gross Up Payment in cash to Executive concurrent with Employee's Termination. Executive and the Company agree to reasonably cooperate in the determination of the actual amount of the Gross Up Payment. Further, Executive and the Company agree to make such adjustments to the estimated amount of the Gross Up Payment as may be necessary to equal the actual amount of the Gross Up Payment, which in the case of Executive will refer to refunds of prior overpayments and in the case of the Company will refer to makeup of prior underpayments. (d) Definitions. For purposes of this Paragraph 8, the following terms shall have the following meanings: "Change in Control" shall mean an event which shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of 12 the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or (ii) individuals who at the Commencement Date constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (i) or (iii) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least eighty percent (80%) of the directors then still in office who either were directors at the Commencement Date or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with or into any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. "Company" shall mean not only Wyndham International, Inc., but also its successors by merger or otherwise. "Parachute Amount" shall mean an amount equal to the Severance Amount provided for in Subparagraph 7(d)(i). In the event an enhanced severance plan is adopted by the Company, Executive shall be entitled to receive the same level of severance benefits as the Executive Vice Presidents. "Voluntary Resignation" shall mean any termination of Executive's employment by her own act, unless such termination is for Good Reason. 9. Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Executive: At her home address as shown in the Company's personnel records; 13 if to the Company: Wyndham International, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, TX 75207 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 10. Miscellaneous. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by Executive and such officer of the Company as may be specifically designated by the Board. No waiver by either party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Texas (without regard to principles of conflicts of laws). 11. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The invalid portion of this Agreement, if any, shall be modified by any court having jurisdiction to the extent necessary to render such portion enforceable. 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Arbitration; Other Disputes. In the event of any dispute or controversy arising under or in connection with this Agreement, the parties shall first promptly try in good faith to settle such dispute or controversy by mediation under the Commercial Mediation Rules of the American Arbitration Association before resorting to arbitration. In the event such dispute or controversy remains unresolved in whole or in part for a period of thirty (30) days after it arises, the parties will settle any remaining dispute or controversy exclusively by arbitration in Dallas, Texas, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding the above, the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of Paragraph 4 or 5 hereof. Furthermore, should a dispute occur concerning Executive's mental or physical capacity as described in Subparagraph 6(b), 6(c) or 7(b), a doctor selected by 14 Executive and a doctor selected by the Company shall be entitled to examine Executive. If the opinion of the Company's doctor and Executive's doctor conflict, the Company's doctor and Executive's doctor shall together agree upon a third doctor, whose opinion shall be binding. Any amount to which Executive is entitled under this Agreement (including any disputed amount), which is not paid when due, shall bear interest at a rate equal to the lesser of eighteen percent (18%) per annum or the maximum lawful rate. 14. Third-Party Agreements and Rights. Executive represents to the Company that Executive's execution of this Agreement, Executive's employment with the Company and the performance of Executive's proposed duties for the Company will not violate any obligations Executive may have to any employer or other party, and Executive will not bring to the premises of the Company any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. 15. Litigation and Regulatory Cooperation. During and after Executive's employment, Executive shall reasonably cooperate with the Company in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Company which relate to events or occurrences that transpired while Executive was employed by the Company; provided, however, that such cooperation shall not materially and adversely affect Executive or expose Executive to an increased probability of civil or criminal litigation. Executive's cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Company at mutually convenient times. During and after Executive's employment, Executive also shall cooperate fully with the Company in connection with any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or occurrences that transpired while Executive was employed by the Company. The Company shall also provide Executive with compensation on an hourly basis calculated at her final base compensation rate for requested litigation and regulatory cooperation that occurs after her termination of employment, and reimburse Executive for all costs and expenses incurred in connection with her performance under this Paragraph 15, including, but not limited to, reasonable attorneys' fees and costs. 15 IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. WYNDHAM INTERNATIONAL, INC. By: /s/ James D. Carreker ------------------------------------ Its: Chairman and Chief Executive Officer /s/ Carla Moreland ------------------------------------ Carla Moreland 16 EX-99.5 8 LETTER DATED APRIL 1, 1998 - WYNDHAM INTERNATIONAL EXHIBIT 99.5 TO 10/K-A April 1, 1998 Mr. Rex E. Stewart 322 Shady Hill Richardson, TX 75080 Dear Rex: This letter agreement (the "Agreement") confirms the agreement that we have reached regarding your separation from your regular, full-time employment and resignation from all offices with Wyndham International, Inc. ("Wyndham"). The purpose of this Agreement is to establish mutually agreeable arrangements for amicably ending your relationship with Wyndham and its related and affiliated entities, including Patriot American Hospitality, Inc. ("Patriot") and its related and affiliated entities, (collectively, the "Companies"), and to provide for an appropriate release of any claims by you against the Companies. It is important that this Agreement be entered into with several understandings between you and Wyndham. You are entering into this Agreement voluntarily. You understand that you are giving up your right to bring all possible legal claims against the Companies, among others, including claims relating to your employment and resignation from employment, but not any claims against the Companies for a breach of the Companies' obligations under this Agreement. You further understand that certain of your obligations under this Agreement properly run in favor of Wyndham as well as Patriot due to the unique relationship between those entities and your employment history with both. Neither Wyndham nor you want your employment relationship to end with a legal dispute. You understand that by entering into this Agreement, Wyndham is not admitting in any way that it violated any legal obligation that it owed to you or to any other person. To the contrary, Wyndham's willingness to enter into this Agreement demonstrates that it is continuing to deal with you fairly and in good faith. With those understandings and in exchange for the promises set forth below, you and Wyndham agree as follows: Mr. Rex E. Stewart April 1, 1998 Page 2 1. Resignation You hereby resign your regular, full-time employment with Wyndham effective March 31, 1998 (the "Resignation Date"). You also hereby resign from your office of Executive Vice President and Chief Financial Officer of Wyndham and any and all employment, offices and board of directors seats that you may hold with any of the other Companies as of the Resignation Date. Said resignations are hereby accepted by Wyndham and on behalf of the Companies. You acknowledge and agree that your employment relationship and offices with all of the Companies will cease as of March 31, 1998. 2. Transition Period/Continuation Of Certain Services After The Resignation Date (a) You agree to provide full time consulting services to Wyndham for a period of sixty (60) days after the Resignation Date (the "Transition Period"). During the Transition Period, you will be assigned to perform the tasks listed on Exhibit A hereto and such other related tasks as may be requested by the President of Wyndham. During the period from the end of the Transition Period through October 2, 1998 (the "Termination Date"), you agree to be reasonably available by telephone to discuss business affairs of the Companies with officers or outside advisors to the Companies. (b) During the Transition Period, you agree to cooperate in transitioning your ongoing duties and obligations to such individual or individuals as Wyndham may designate. In connection therewith, you agree to fully and accurately disclose to the General Counsel of Wyndham any matters or issues, whether completed or pending, about which you have knowledge or information, that require action or attention by or on behalf of the any of the Companies to avoid or address any possible violation of any statute, regulation or other legal requirement applicable to the Companies. 3. Compensation and Benefits Through the Termination Date (a) Salary Continuation/Vesting. Through the Termination Date, Wyndham shall continue payment of your base salary, at the rate in effect on the Resignation Date and on the same periodic payment dates as payment would have been made to you otherwise. On the Termination Date, all your outstanding options from the Companies shall vest and become fully exercisable and the period in which you may exercise those options shall continue for twenty-four (24) months from the Termination Date. The vesting of your outstanding restricted paired shares from the Companies will continue in accordance with its original vesting schedule and will not be forfeited as a result of your termination. The payments made Mr. Rex E. Stewart April 1, 1998 Page 3 and vesting provided under this Section 3(a) are in lieu of all other severance or consulting payments from any of the Companies. (b) Life Insurance. Wyndham shall continue to reimburse you for premium costs incurred through the Termination Date for your individual term life insurance policy ($750,000 death benefit). (c) Other Benefits. Wyndham's contributions on your behalf to its employee benefit plans and programs shall cease as of the Resignation Date. Your eligibility to participate in Wyndham's employee benefit plans and programs ceases on or after the Resignation Date in accordance with the terms and conditions of each of those benefit plans and programs, subject to your rights, if any, to continue certain benefits in accordance with and subject to the law known as COBRA. You will be notified of your rights, if any, under COBRA within thirty days after the Resignation Date. In the event you elect continuation of certain benefits under COBRA, Wyndham will continue, until the Termination Date, to contribute the same amount toward premiums as it did while you were employed. Your rights to benefits under any of the employee benefit plans and programs, if any, are governed by the terms and conditions of each of those employee benefit plans and programs. You also will be allowed to continue to use the laptop computer issued to you by Wyndham through the Termination Date. (d) Tax Treatment. All payments and other consideration provided to you pursuant to this Agreement shall be subject to any deductions, withholding or tax reporting that Wyndham reasonably determines to be required for tax purposes. 4. Release of Claims (a) Release by Mr. Stewart. You voluntarily and irrevocably release and discharge the Companies, their related or affiliated entities, and their respective predecessors, successors, and assigns, and the current and former officers, directors, shareholders, employees, and agents of each of the foregoing (any and all of which are referred to as "Releasees") generally from all charges, complaints, claims, promises, agreements, causes of action, damages, and debts that relate in any manner to your employment with or services for the Companies, known or unknown ("Claims"), which you have, claim to have, ever had, or ever claimed to have had against any of the Releasees through the date on which you execute this Agreement. This general release of Claims includes, without implication of limitation, all Claims related to the compensation provided to you by the Companies, your resignation from your employment with Wyndham, your resignation from all offices and other positions with Mr. Rex E. Stewart April 1, 1998 Page 4 the Companies, or your activities on behalf of the Companies, including, without implication of limitation, any Claims of wrongful or constructive discharge, breach of contract, breach of an implied covenant of good faith and fair dealing, tortious interference with advantageous relations, intentional or negligent misrepresentation, and unlawful discrimination under the common law or any statute (including, without implication of limitation, the Employee Retirement Income Security Act, Title VII of the Civil Rights Act of 1964, the American with Disabilities Act, the Age Discrimination in Employment Act, Tex. Lab. Code (S)(S) 21.001, et seq., and Tex. Hum. Res. Code (S)(S) 121.001, et seq.). You also waive any Claim for reinstatement, severance pay, attorney's fees, or costs. You agree that you will not hereafter pursue any Claim against any Releasee, by filing a lawsuit in any local, state or federal court for or on account of anything which has occurred up to the present time as a result of your previous employment, and you shall not seek reinstatement with, or damages of any nature, severance pay, attorney's fees, or costs from, Wyndham, the Companies or any of the other Releasees; provided, however, that nothing in this general release shall be construed to bar or limit your rights, if any, to indemnification subject to and in accordance with the terms of the By-Laws of Wyndham or to enforce your rights under this Agreement. (b) Release by the Companies. The Companies voluntarily and irrevocably release and discharge you and your successors, assigns, heirs and survivors from any and all charges, complaints, claims, promises, agreements, causes of action, damages and debts, (including attorney's fees and costs actually incurred) which relate to good faith acts or omissions by you during the course of your employment undertaken or not undertaken in the reasonable belief that such acts or omissions were in the best interests of the Companies. The Companies further represent that they do not have any knowledge at this time of any acts or omissions by you that would give rise claims not otherwise released in the previous paragraph. 5. Confidential Information You acknowledge and agree that in the performance of your duties for Wyndham, you were brought into frequent contact with, had or may have had access to, or became informed of confidential or proprietary information of the Companies or information which is a trade secret of any of the Companies (collectively, "Confidential Information"). You acknowledge and agree that to the extent that performance of your duties brought you into contact with, provided you with access to, or permitted you to become informed of Confidential Information Mr. Rex E. Stewart April 1, 1998 Page 5 of the Companies, you were and remain under an obligation to maintain the confidentiality of such Confidential Information. You acknowledge and agree that Confidential Information includes all information, whether reduced to writing (or in a form from which information can be obtained, translated, or derived into reasonably usable form), or maintained in your mind or memory, which derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, including without limitation, revenue, sales, or earnings information and projections, business relationships (prospective or otherwise), acquisition, merger, partnership or joint venture plans, other financing, business plans, and sales and marketing plans. You hereby acknowledge and agree that all such Confidential Information to which you had access was developed by or for the respective Companies through substantial expenditure of time, effort and money and constitutes valuable and unique property of the Companies. You further acknowledge and agree that reasonable efforts have been put forth by the Companies to maintain the confidentiality of such Confidential Information, that such Confidential Information is and shall remain the sole property of the Companies, and that any retention, use or disclosure of Confidential Information during or after the termination of your employment constitutes a misappropriation of Confidential Information. You shall at all times keep in confidence and trust all Confidential Information and shall not, directly or indirectly, use or reveal Confidential Information without the express prior written consent of the President of Wyndham. Your obligations with respect to Confidential Information shall continue until Confidential Information shall have become, through no fault of yours, generally known to the public or you are required by law (after providing the Companies with prior notice and an opportunity to contest such requirement) to make disclosure. Your obligations to the Companies under this Section 5 are in addition to, but not in limitation of preemption of, any other obligations of confidentiality which you may have to the Companies under general legal, fiduciary or equitable principles. 6. Return of Property All documents, records, material and all copies of any of the foregoing pertaining to Confidential Information, and all software, equipment, and other supplies, whether or not pertaining to Confidential Information, that have come into your possession or been produced by you in connection with your employment ("Property") have been and remain the sole property of the Companies. You confirm that you have returned all Property to the Mr. Rex E. Stewart April 1, 1998 Page 6 Companies, except to the extent such Property is reasonably necessary for you to perform your services during the Transition Period. All Property shall be returned to the Companies promptly upon termination of the Transition Period, except for your laptop computer, which you may retain until the Termination Date. In no event should this provision be construed to require you to return to the Company any document or other materials concerning your remuneration and benefits during your employment with the Companies. 7. Litigation Cooperation You agree to continue to serve the Companies as a litigation consultant and, in connection therewith, to cooperate fully with the Companies in (i) the defense or prosecution of any claims or actions which already have been brought or which may be brought in the future against or on behalf of the Companies and (ii) responding to, cooperating with, or contesting any governmental audit, inspection, inquiry, proceeding or investigation, which relate to events or occurrences that transpired during your employment with any of the Companies. Your full cooperation in connection with such claims or actions shall include, without implication of limitation: promptly notifying the Companies in writing of any subpoena, interview, investigation, request for information, or other contact concerning events or occurrences that transpired during your employment with any of the Companies; being available to meet with counsel for any of the Companies to prepare for discovery or trial; to testify truthfully as a witness when reasonably requested and at reasonable times designated by the Companies; and to meet with counsel or other designated representative of the Companies; to prepare responses to and to cooperate with any Company's processing of governmental audits, inspections, inquiries, proceedings or investigations. The Companies agree to reimburse you for any reasonable out-of-pocket expenses that you incur in connection with such cooperation, subject to reasonable documentation. The Companies shall compensate you at the rate of _____ per hour for time that you reasonably spend complying with your obligations as a litigation consultant under this Section, except that the Companies shall not, under any circumstances, compensate you for time spent testifying under oath or responding to questions from governmental investigators in a capacity as a fact witness. The Companies will try, in good faith, to exercise their rights under this Section so as not to unreasonably interfere with your personal schedule or ability to engage in gainful employment. In furtherance of your obligations under this Agreement, you agree that you shall not disclose, provide or reveal, directly or indirectly, any information concerning the Companies, including without implication of limitation, their respective operations, plans, strategies or administration, to any other person or entity unless compelled to do so pursuant to (a) a valid subpoena or (b) as otherwise required by law, but in either case only after providing Mr. Rex E. Stewart April 1, 1998 Page 7 Wyndham, through the Office of its General Counsel, with prior written notice and opportunity to contest such subpoena or other requirement. Written notice shall be provided to the Office of Wyndham's General Counsel as soon as practicable, but in no event not less than five (5) business days before any such disclosure is compelled. 8. Nondisparagement You agree not to take any action or make any statement, written or oral, which disparages or criticizes the Companies or their respective officers, directors, agents, or management and business practices, or which disrupts or impairs the Companies' normal operations. 9. Withdrawal from Partnerships As soon after the Resignation Date as practicable, you shall withdraw from your partnership interests in PAH Ravinia Partners and PAH Windwatch Partners. At the time of withdrawal, PAH Ravinia Partners and PAH Windwatch Partners each shall repurchase from you your respective partnership interests. The repurchase price for each partnership interest shall be at the fair market value of such partnership interest, as determined by PAH Ravinia Partners and PAH Windwatch Partners, respectively. You will execute all documents reasonably necessary or appropriate for these purposes. 10. Exclusivity This Agreement sets forth all the consideration to which you are entitled by reason of your resignations and your provision of consulting services. 11. Notices, Acknowledgments and Other Terms You are advised to consult with an attorney before signing this Agreement. You acknowledge and agree that Wyndham's promises in this Agreement, including providing you with the opportunity to receive the payments and vesting provided in Section 3(a), constitute consideration in addition to anything of value to which you are otherwise entitled. This Agreement is the entire agreement between you and the Companies, and all previous agreements, or promises between you and the Companies relating to the subject Mr. Rex E. Stewart April 1, 1998 Page 8 matter of this Agreement, including without limitation, the Employment Agreement, dated as of October 2, 1995, between you and Patriot American Hospitality, Inc., are superseded, null, and void. You acknowledge that you have been given the opportunity, if you so desired, to consider this Agreement for twenty-one (21) days before executing it. If not signed by you and returned to the General Counsel of Wyndham so that it is received by close of business on the twenty-second (22nd) day after your receipt of the Agreement, this Agreement will not be valid. In addition, if you breach any of the conditions of the Agreement within the twenty-one (21) day period, the offer of this Agreement will be withdrawn and your execution of the Agreement will not be valid. In the event that you execute and return this Agreement within twenty-one (21) days or less of the date of its delivery to you, you acknowledge that such decision was entirely voluntary and that you had the opportunity to consider this letter agreement for the entire twenty-one (21) day period. The Companies acknowledge that for a period of seven (7) days from the date of the execution of this Agreement, you shall retain the right to revoke this Agreement by written notice delivered to the General Counsel of Wyndham before the end of such period, and that this Agreement shall not become effective or enforceable until the expiration of such revocation period. By signing this Agreement, you acknowledge that you are doing so voluntarily and knowingly, fully intending to be bound by this Agreement. You also acknowledge that you are not relying on any representations by me or any other representative of the Companies concerning the meaning of any aspect of this Agreement. You understand that this Agreement shall not in any way be construed as an admission by the Companies of any liability or any act of wrongdoing whatsoever by the Companies against you and that the Companies specifically disclaim any liability or wrongdoing whatsoever against you on the part of themselves and their respective officers, directors, shareholders, employees and agents. You understand that if you do not to enter into this Agreement and bring any claims against the Companies, the Companies will dispute the merits of those claims and contend that they acted lawfully and for good business reasons with respect to you. In the event of any dispute, this Agreement will be construed as a whole, will be interpreted in accordance with its fair meaning, and will not be construed strictly for or against either you or the Companies. You understand that Wyndham may terminate your continued eligibility for salary and benefit continuation and immediately recover all amounts previously paid to you pursuant to this Agreement (other than base salary paid for services rendered) if you breach your obligations under this Agreement. The law of the State of Texas will govern any dispute about this Agreement, including any interpretation or enforcement of this Mr. Rex E. Stewart April 1, 1998 Page 9 Agreement. In the event that any provision or portion of a provision of this Agreement shall be determined to be illegal, invalid or unenforceable, the remainder of this Agreement shall be enforced to the fullest extent possible and the illegal, invalid or unenforceable provision or portion of a provision will be amended by a court of competent jurisdiction to reflect the parties' intent if possible. If such amendment is not possible, the illegal, invalid or unenforceable provision or portion of a provision will be severed from the remainder of this Agreement and the remainder of this Agreement shall be enforced to the fullest extent possible as if such illegal, invalid or unenforceable provision or portion of a provision was not included. This Agreement may be modified only by a written agreement signed by you and an authorized representative of Wyndham. This Agreement shall be binding upon each of the parties and upon their respective heirs, administrators, representatives, executors, successors and assigns, and shall inure to the benefit of each party and to their heirs, administrators, representatives, executors, successors, and assigns. If you agree to these terms, please sign and date below and return this Agreement to the General Counsel of Wyndham by April 22, 1998. Sincerely, WYNDHAM INTERNATIONAL, INC. By: /s/ James D. Carreker ------------------------------------------- James D. Carreker Chairman and Chief Executive Officer Accepted and agreed to: /s/ Rex E. Stewart /s/ April 13, 1998 - ------------------------ ---------------------------------------------- Rex E. Stewart Date -----END PRIVACY-ENHANCED MESSAGE-----