-----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, Dm0x0gDyby8inrfrR66knDKk/0rbIfU9oauLsWwaX+uwsubpKOxWzBLVfxC/CicL Hz+ZsgBtD8PUpqppczh6Fg== 0001047469-98-041908.txt : 19981123 0001047469-98-041908.hdr.sgml : 19981123 ACCESSION NUMBER: 0001047469-98-041908 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY INC/DE CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09319 FILM NUMBER: 98756315 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: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09320 FILM NUMBER: 98756316 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148631000 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 6001 CITY: DALLAS STATE: TX ZIP: 75207 FORMER COMPANY: FORMER CONFORMED NAME: PATRIOT AMERICAN HOSPITALITY OPERATING CO\DE DATE OF NAME CHANGE: 19970723 FORMER COMPANY: FORMER CONFORMED NAME: BAY MEADOWS OPERATING CO DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q (MARK ONE) /X/ JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________ COMMISSION FILE NUMBER 1-9319 COMMISSION FILE NUMBER 1-9320 PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC. - ---------------------------------------------------- ---------------------------------------------------- (Exact name of registrant as specified in its (Exact name of registrant as specified in its charter) charter)
DELAWARE 94-0358820 DELAWARE 94-2878485 - ------------------------- ------------------------- ------------------------- ------------------------- (State or other (I.R.S. Employer (State or other (I.R.S. Employer jurisdiction of Identification No.) jurisdiction of Identification No.) incorporation or incorporation or organization) organization) 1950 STEMMONS FREEWAY, 1950 STEMMONS FREEWAY, SUITE 6001 SUITE 6001 DALLAS, TEXAS 75207 DALLAS, TEXAS 75207 - ------------------------- ------------------------- ------------------------- ------------------------- (Address of principal (Zip Code) (Address of principal (Zip Code) executive offices) executive offices)
(214) 863-1000 (214) 863-1000 - ---------------------------------------------------- ---------------------------------------------------- (Registrant's telephone number, including area code) (Registrant's telephone number, including area code) N/A N/A - ---------------------------------------------------- ---------------------------------------------------- (Former name, former address and former fiscal year, (Former name, former address and former fiscal year, if changed since last report) if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each registrant's classes of common stock, par value $.01 per share, as of the close of business on November 20, 1998, was as follows: REGISTRANT NUMBER OF SHARES - ---------------------------------------------------- ---------------------------------------------------- Patriot American Hospitality, Inc. 179,232,121 Wyndham International, Inc. 179,232,121
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PATRIOT AMERICAN HOSPITALITY, INC. WYNDHAM INTERNATIONAL, INC. INDEX PART I--FINANCIAL INFORMATION
PAGE ----- ITEM 1. FINANCIAL STATEMENTS: COMBINED PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC.: Condensed Combined Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997............. 3 Condensed Combined Statements of Operations for the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998 and 1997 (unaudited).......................................... 4 Condensed Combined Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (unaudited)............................................................................................ 5 PATRIOT AMERICAN HOSPITALITY, INC.: Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997......... 6 Condensed Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998 and 1997 (unaudited)...................................... 7 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (unaudited)............................................................................................ 8 WYNDHAM INTERNATIONAL, INC.: Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997......... 9 Condensed Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998 and the period from July 1, 1997 (inception of operations) through September 30, 1997 (unaudited)................................................................. 10 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and the period from July 1, 1997 (inception of operations) through September 30, 1997 (unaudited).............. 11 NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 (UNAUDITED)............................... 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 40 PART II--OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 66 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: Exhibits................................................................................................. 66 Reports on Form 8-K...................................................................................... 66 SIGNATURES................................................................................................. 67
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1997 SEPTEMBER 30, ------------ 1998 ------------- (UNAUDITED) ASSETS Investment in real estate and related improvements and land held for development, net of accumulated depreciation of $198,810 in 1998 and $68,805 in 1997........... $ 5,661,769 $2,044,649 Cash and cash equivalents........................................................... 118,285 42,431 Restricted cash..................................................................... 29,112 5,005 Accounts and lease revenue receivable............................................... 210,766 57,046 Investment in unconsolidated subsidiaries........................................... 122,075 11,802 Mortgage notes and other receivables from unconsolidated subsidiaries............... 75,906 76,419 Other mortgage notes and other receivables.......................................... 39,383 12,983 Management contracts, net of accumulated amortization of $8,523 in 1998 and $1,574 in 1997........................................................................... 191,129 20,879 Leaseholds, net of accumulated amortization of $3,649 in 1998....................... 146,913 -- Trade names and franchise costs, net of accumulated amortization of $4,699 in 1998 and $122 in 1997.................................................................. 137,069 11,166 Goodwill, net of accumulated amortization of $14,562 in 1998 and $1,851 in 1997..... 537,436 126,007 Deferred expenses, net of accumulated amortization of $21,598 in 1998 and $2,097 in 1997.............................................................................. 94,041 21,417 Deferred acquisition costs.......................................................... 18,037 52,500 Inventories......................................................................... 24,553 10,450 Other assets........................................................................ 93,515 15,099 ------------- ------------ Total assets.................................................................... $ 7,499,989 $2,507,853 ------------- ------------ ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under line of credit facility, term loans, mortgage notes and capital leases............................................................................ $ 3,803,808 $1,112,709 Accounts payable and accrued expenses............................................... 383,430 78,468 Dividends and distributions payable................................................. -- 27,636 Deposits............................................................................ 23,687 12,423 Due to unconsolidated subsidiaries.................................................. 7,764 7,304 Deferred income taxes............................................................... 87,636 9,550 Minority interest in the Operating Partnerships..................................... 281,049 220,177 Minority interest in consolidated subsidiaries...................................... 232,157 49,694 Commitment and contingencies Shareholders' Equity: Preferred stock, $0.01 par value, authorized: 100,000,000 shares each; shares issued and outstanding: 8,423,230 shares in 1998................................ 85 -- 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: 155,500,032 shares in 1998 and 73,276,716 shares in 1997......................................................................... 3,110 1,466 Additional paid in capital........................................................ 2,927,752 1,070,973 Receivable from shareholders and affiliates....................................... (16,111) -- Unearned stock compensation, net of accumulated amortization of $10,756 in 1998 and $5,825 in 1997.............................................................. (13,877) (13,116) Unrealized loss on securities available for sale.................................. (1,388) -- Unrealized foreign exchange gain.................................................. 4,323 -- Distributions in excess of retained earnings...................................... (223,436) (69,431) ------------- ------------ Total shareholders' equity...................................................... 2,680,458 989,892 ------------- ------------ Total liabilities and shareholders' equity...................................... $ 7,499,989 $2,507,853 ------------- ------------ ------------- ------------
See notes to condensed financial statements. 3 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ------------------------ 1998 1997 1998 1997 ---------- ---------- ------------ ---------- Revenue: Hotel revenue................................................ $ 554,331 $ 30,271 $ 1,266,985 $ 30,271 Lease revenue................................................ 8,932 35,098 49,627 107,084 Racecourse facility revenue.................................. 9,955 10,861 34,945 10,861 Management fee and service fee income........................ 24,358 1,577 61,574 1,577 Interest and other income.................................... 6,274 3,831 12,949 4,963 ---------- ---------- ------------ ---------- Total revenue.............................................. 603,850 81,638 1,426,080 154,756 ---------- ---------- ------------ ---------- Expenses: Hotel expenses............................................... 417,814 22,360 924,471 30,009 Racecourse facility operations............................... 8,810 9,213 29,667 9,213 General and administrative................................... 26,571 6,582 64,558 11,663 Interest expense............................................. 82,739 13,933 172,191 31,261 Cost of acquiring leaseholds and license agreements.......... 3,940 43,820 61,000 43,820 Treasury lock settlement..................................... 49,225 -- 49,225 -- Depreciation and amortization................................ 68,236 13,792 155,165 31,798 ---------- ---------- ------------ ---------- Total expenses............................................. 657,335 109,700 1,456,277 157,764 ---------- ---------- ------------ ---------- Operating loss................................................. (53,485) (28,062) (30,197) (3,008) Equity in earnings of unconsolidated subsidiaries............ 1,888 1,395 7,375 4,488 ---------- ---------- ------------ ---------- Income (loss) before income tax provision, minority interests and extraordinary item....................................... (51,597) (26,667) (22,822) 1,480 Income tax provision......................................... (6,783) (94) (11,273) (94) ---------- ---------- ------------ ---------- Income (loss) before minority interests and extraordinary item......................................................... (58,380) (26,761) (34,095) 1,386 Minority interest in the Operating Partnerships.............. 4,722 3,225 6,169 (1,309) Minority interest in consolidated subsidiaries............... (4,500) (934) (7,514) (1,381) ---------- ---------- ------------ ---------- Loss before extraordinary item................................. (58,158) (24,470) (35,440) (1,304) Extraordinary loss from early extinguishment of debt, net of minority interest and income taxes......................... (1,257) (2,534) (31,817) (2,534) ---------- ---------- ------------ ---------- Net loss....................................................... $ (59,415) $ (27,004) $ (67,257) $ (3,838) ---------- ---------- ------------ ---------- ---------- ---------- ------------ ---------- Basic and Diluted earnings per common Paired Share: Loss before extraordinary item............................... $ (1.08) $ (0.40) $ (1.10) $ (0.03) Extraordinary loss........................................... $ (0.01) $ (0.04) $ (0.26) $ (0.05) ---------- ---------- ------------ ---------- Net loss per common Paired Share........................... $ (1.09) $ (0.44) $ (1.36) $ (0.08) ---------- ---------- ------------ ---------- ---------- ---------- ------------ ----------
See notes to condensed financial statements. 4 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. CONDENSED COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1998 1997 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................................................... $ (67,257) $ (3,838) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation......................................................................... 120,864 30,539 Amortization of unearned stock compensation.......................................... 4,818 3,312 Amortization of deferred loan costs.................................................. 18,075 1,342 Amortization of management contracts and trade names................................. 15,523 469 Amortization of goodwill and other assets............................................ 18,778 911 Treasury lock settlement............................................................. 49,225 -- Cost of acquiring leaseholds and license agreements.................................. 55,638 43,820 Net payments collected from unconsolidated subsidiaries.............................. 5,976 1,951 Issuance of stock for bonuses and directors' fee..................................... 880 -- Equity in earnings of unconsolidated subsidiaries.................................... (7,375) (4,488) Minority interest in income of Operating Partnerships................................ (6,169) 1,309 Minority interest in income of consolidated subsidiaries............................. 7,514 1,381 Deferred income taxes................................................................ (5,352) -- Extraordinary loss from early extinguishment of debt................................. 32,235 2,534 Changes in assets and liabilities: Accounts and lease revenue receivable and other assets............................. (25,272) (32,567) Inventories........................................................................ (1,137) -- Accounts payable and other accrued expenses........................................ 20,282 29,211 ---------- --------- Net cash provided by operating activities........................................ 237,246 75,886 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of hotel properties and related working capital assets..................... (1,349,705) (546,876) Improvements and additions to hotel properties......................................... (187,695) (53,761) Net proceeds from real estate sales.................................................... 17,734 77,226 Cash received in acquisition of hotel leases........................................... 98,312 -- Acquisition of management contracts.................................................... (32,299) -- Collections on other notes receivable.................................................. 9,563 525 Increase in restricted cash accounts................................................... (8,283) (38,196) Deferred acquisition costs............................................................. (34,780) (34,846) Investment in unconsolidated subsidiaries.............................................. (13,985) (1,574) Investment in mortgage and other notes receivable...................................... (3,688) (112,625) Other.................................................................................. (1,467) -- ---------- --------- Net cash used in investing activities............................................ (1,506,293) (710,127) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit facility, term loans, mortgage notes and capital lease obligations.......................................................................... 2,749,394 1,300,820 Repay borrowings under line of credit facility and other debt.......................... (1,524,481) (822,226) Payment of deferred loan costs......................................................... (32,729) (18,723) Proceeds from issuance of common stock................................................. 277,474 255,587 Payment of offering costs.............................................................. (3,805) (12,602) Payment of merger costs................................................................ -- (11,414) Contributions received from minority interest in consolidated subsidiaries............. 3,440 16,204 Collections on notes receivable from shareholders and affiliates....................... 2,999 -- Payments to redeem OP Units............................................................ -- (14,596) Dividends and distributions paid....................................................... (131,038) (44,017) Other.................................................................................. 3,647 119 ---------- --------- Net cash provided by financing activities........................................ 1,344,901 649,152 ---------- --------- Net increase in cash and cash equivalents................................................ 75,854 14,911 Cash and cash equivalents at beginning of period......................................... 42,431 6,604 ---------- --------- Cash and cash equivalents at end of period............................................... $ 118,285 $ 21,515 ---------- --------- ---------- ---------
See notes to condensed financial statements. 5 PATRIOT AMERICAN HOSPITALITY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1997 SEPTEMBER 30, ------------ 1998 ------------- (UNAUDITED) ASSETS Investment in real estate and related improvements and land held for development, net of accumulated depreciation of $173,105 in 1998 and $67,501 in 1997........... $ 5,052,378 $2,016,267 Cash and cash equivalents........................................................... 14,429 15,355 Restricted cash..................................................................... 24,601 5,005 Accounts and lease revenue receivable............................................... 15,636 14,458 Investment in unconsolidated subsidiaries........................................... 942,874 11,802 Mortgage notes and other receivables from unconsolidated subsidiaries............... 75,906 76,419 Subscription Notes receivable from Wyndham.......................................... 133,669 -- Notes and other amounts receivable from Wyndham..................................... 134,849 42,946 Other notes receivable.............................................................. 18,917 -- Investment in leaseholds, net of accumulated amortization of $3,310................. 128,777 -- Trade names, net of accumulated amortization of $313................................ 9,323 -- Goodwill, net of accumulated amortization of $3,348 in 1998 and $1,257 in 1997...... 94,208 87,999 Deferred expenses, net of accumulated amortization of $19,291 in 1998 and $2,097 in 1997.............................................................................. 50,186 21,417 Deferred acquisition costs.......................................................... 4,581 21,374 Other assets........................................................................ 56,092 8,063 ------------- ------------ Total assets.................................................................... $ 6,756,426 $2,321,105 ------------- ------------ ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under line of credit facility, term loans, mortgage notes and capital leases............................................................................ $ 3,543,014 $1,112,709 Subscription Notes payable to Wyndham............................................... 73,408 12,875 Notes and other amounts payable to Wyndham.......................................... 42,576 -- Accounts payable and accrued expenses............................................... 116,079 28,151 Dividends and distributions payable................................................. -- 27,185 Deferred lease revenue.............................................................. 17,890 -- Due to unconsolidated subsidiaries.................................................. 7,764 7,304 Minority interest in Patriot Partnership............................................ 227,213 174,640 Minority interest in consolidated subsidiaries...................................... 232,157 49,214 Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; authorized: 100,000,000 shares; shares issued and outstanding: 4,860,876 in 1998.............................................. 49 -- 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: 155,500,032 shares in 1998 and 73,276,716 shares in 1997........... 1,555 733 Additional paid in capital........................................................ 2,680,648 990,821 Receivable from shareholders...................................................... (15,034) -- Unearned stock compensation, net of accumulated amortization of $9,866 in 1998 and $5,825 in 1997.................................................................. (10,017) (13,116) Unrealized foreign exchange gain.................................................. 4,022 -- Distributions in excess of retained earnings...................................... (164,898) (69,411) ------------- ------------ Total shareholders' equity...................................................... 2,496,325 909,027 ------------- ------------ Total liabilities and shareholders' equity...................................... $ 6,756,426 $2,321,105 ------------- ------------ ------------- ------------
See notes to condensed financial statements. 6 PATRIOT AMERICAN HOSPITALITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Revenue: Lease revenue.................................................. $ 178,156 $ 47,107 $ 422,808 $ 119,093 Interest and other income...................................... 6,540 3,083 15,311 4,215 ---------- ---------- ---------- ---------- Total revenue................................................ 184,696 50,190 438,119 123,308 ---------- ---------- ---------- ---------- Expenses: Real estate and personal property taxes and casualty insurance.................................................... 16,799 4,253 42,023 11,219 Ground lease expense........................................... 22,128 1,310 42,296 1,993 General and administrative..................................... 5,090 2,501 15,091 7,582 Interest expense............................................... 77,266 14,649 162,294 31,977 Cost of acquiring leaseholds................................... 3,940 43,820 8,279 43,820 Treasury lock settlement....................................... 49,225 -- 49,225 -- Depreciation and amortization.................................. 50,561 12,650 112,253 30,656 ---------- ---------- ---------- ---------- Total expenses............................................... 225,009 79,183 431,461 127,247 ---------- ---------- ---------- ---------- Operating income (loss).......................................... (40,313) (28,993) 6,658 (3,939) Equity in earnings of unconsolidated subsidiaries.............. 4,764 1,395 24,011 4,488 ---------- ---------- ---------- ---------- Income (loss) before income tax provision, minority interests and extraordinary item............................................. (35,549) (27,598) 30,669 549 Income tax provision........................................... (127) -- (533) -- ---------- ---------- ---------- ---------- Income (loss) before minority interests and extraordinary item... (35,676) (27,598) 30,136 549 Minority interest in Patriot Partnership....................... 2,015 3,340 (3,253) (1,194) Minority interest in consolidated subsidiaries................. (3,775) (921) (6,203) (1,368) ---------- ---------- ---------- ---------- Income (loss) before extraordinary item.......................... (37,436) (25,179) 20,680 (2,013) Extraordinary loss from early extinguishment of debt, net of minority interest............................................ -- (2,534) (30,559) (2,534) ---------- ---------- ---------- ---------- Net loss......................................................... $ (37,436) $ (27,713) $ (9,879) $ (4,547) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and Diluted earnings per common share: Income before extraordinary item............................... $ (0.94) $ (0.41) $ (0.63) $ (0.04) Extraordinary loss............................................. -- (0.04) (0.25) (0.05) ---------- ---------- ---------- ---------- Net loss per common share...................................... $ (0.94) $ (0.45) $ (0.88) $ (0.09) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to condensed financial statements. 7 PATRIOT AMERICAN HOSPITALITY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1998 1997 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................................................ $ (9,879) $ (4,547) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................................................... 105,736 30,048 Amortization of unearned stock compensation........................................... 4,041 3,312 Amortization of deferred loan costs................................................... 16,884 1,342 Amortization of trade names........................................................... 575 -- Amortization of goodwill and other assets............................................. 5,942 730 Treasury lock settlement.............................................................. 49,225 -- Cost of acquiring leaseholds.......................................................... 3,000 43,820 Net payments collected from unconsolidated subsidiaries............................... 5,962 2,353 Issuance of stock for bonuses and directors' fee...................................... 675 -- Equity in earnings of unconsolidated subsidiaries..................................... (24,011) (4,488) Minority interest in income of Patriot Partnership.................................... 3,253 1,194 Minority interest in income of consolidated subsidiaries.............................. 6,203 1,368 Extraordinary loss from early extinguishment of debt.................................. 30,559 2,534 Changes in assets and liabilities: Accounts and lease revenue receivable and other assets................................ (57,887) (14,072) Due from Wyndham...................................................................... 21,572 -- Inventory............................................................................. 64 -- Accounts payable and other accrued expenses........................................... 16,632 7,642 ---------- --------- Net cash provided by operating activities......................................... 178,546 71,236 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of hotel properties and related working capital assets...................... (1,943,779) (541,555) Improvements and additions to hotel properties.......................................... (155,732) (53,168) Net proceeds from land sale............................................................. 17,734 77,226 Cash received upon acquisition of hotel assets.......................................... 9,932 525 Collections on other notes receivable................................................... 4,000 -- Increase in restricted cash accounts.................................................... (6,201) (38,196) Deferred acquisition costs.............................................................. (8,507) (11,014) Investment in unconsolidated subsidiaries............................................... (11,402) (1,574) Investment in mortgage and other notes receivable....................................... (1,305) (112,625) Other................................................................................... 63 -- ---------- --------- Net cash used in investing activities............................................. (2,095,197) (680,381) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit facility, term loans, mortgage notes and capital lease obligations........................................................................... 2,562,394 1,300,820 Repay borrowings under line of credit facility and other debt........................... (747,051) (822,226) Payment of deferred loan costs.......................................................... (31,273) (18,723) Principal payments on subscription notes payable to Wyndham............................. (12,875) (35,486) Proceeds from issuance of common stock.................................................. 265,117 243,521 Payment of offering costs............................................................... (3,649) (12,602) Contributions received from minority interest in consolidated subsidiaries.............. 3,440 16,204 Collections on notes receivable from shareholders....................................... 2,999 -- Payments to redeem OP Units............................................................. -- (14,596) Dividends and distributions paid........................................................ (127,184) (44,017) Other................................................................................... 3,807 (22) ---------- --------- Net cash provided by financing activities......................................... 1,915,725 612,873 ---------- --------- Net increase (decrease) in cash and cash equivalents...................................... (926) 3,728 Cash and cash equivalents at beginning of period.......................................... 15,355 6,604 ---------- --------- Cash and cash equivalents at end of period................................................ $ 14,429 $ 10,332 ---------- --------- ---------- ---------
See notes to condensed financial statements. 8 WYNDHAM INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1997 SEPTEMBER ------------ 30, 1998 ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................... $103,856 $ 27,076 Restricted cash................................. 4,511 -- Accounts receivable............................. 195,130 46,340 Notes and other receivables from Patriot........ 18,396 12,875 Inventories..................................... 24,553 9,144 Prepaid expenses and other current assets....... 32,945 5,227 ------------ ------------ Total current assets.......................... 379,391 100,662 Investment in real estate and related improvements, net of accumulated depreciation of $25,705 in 1998 and $1,304 in 1997.............. 610,377 28,382 Investments in unconsolidated subsidiaries........ 73,512 -- Subscription Notes receivable from Patriot........ 73,408 -- Notes and other receivables from Patriot.......... 24,180 -- Mortgage notes and other receivables.............. 20,466 12,983 Management contract costs, net of accumulated amortization of $8,523 in 1998 and $1,574 in 1997............................................ 191,129 20,879 Leasehold costs, net of accumulated amortization of $339......................................... 18,136 -- Trade names and franchise costs, net of accumulated amortization of $4,386 in 1998 and $122 in 1997.................................... 127,746 11,166 Deferred acquisition costs........................ 13,456 31,126 Goodwill, net of accumulated amortization of $11,214 in 1998 and $594 in 1997................ 443,228 38,008 Deferred expenses, net of accumulated amortization of $1,134....................................... 43,855 -- Other assets...................................... 4,478 8,882 ------------ ------------ Total assets.................................. $2,023,362 $252,088 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses........... $260,756 $ 50,317 Dividends and distributions payable............. -- 451 Participating lease payments payable to Patriot....................................... 61,018 9,519 Deposits........................................ 23,687 12,423 Notes and other amounts payable to Patriot...... 73,831 42,946 Current portion of mortgage notes and capital lease obligations............................. 25,050 -- ------------ ------------ Total current liabilities..................... 444,342 115,656 Subscription Notes payable to Patriot............. 133,669 -- Mortgage notes payable and capital lease obligations..................................... 235,744 -- Deferred income taxes............................. 87,636 9,550 Minority interest in Wyndham Partnership.......... 53,836 45,537 Minority interest in consolidated subsidiaries.... 894,311 480 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: 155,500,032 shares in 1998 and 73,276,716 shares in 1997................................ 1,555 733 Additional paid in capital...................... 247,104 80,152 Receivable from shareholders and affiliates..... (1,077 ) -- Unearned executive compensation, net of accumulated amortization of $777.............. (3,860 ) -- Unrealized loss on securities available for sale.......................................... (1,388 ) -- Unrealized foreign exchange gain................ 301 -- Retained earnings/(deficit)..................... (68,847 ) (20 ) ------------ ------------ Total shareholders' equity.................... 173,824 80,865 ------------ ------------ Total liabilities and shareholders' equity.... $2,023,362 $252,088 ------------ ------------ ------------ ------------
See notes to condensed financial statements. 9 WYNDHAM INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
JULY 1, 1997 (INCEPTION OF THREE MONTHS ENDED NINE MONTHS OPERATIONS) SEPTEMBER 30, ENDED THROUGH --------------------- SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ---------- --------- ------------- ------------- Revenue: Hotel revenue............................................. $ 554,331 $ 30,271 $ 1,266,985 $ 30,271 Racecourse facility revenue............................... 9,955 10,861 34,945 10,861 Management fee and service fee income..................... 24,917 1,577 62,560 1,577 Interest and other income................................. 4,477 1,475 11,755 1,475 ---------- --------- ------------- ------------- Total revenue........................................... 593,680 44,184 1,376,245 44,184 ---------- --------- ------------- ------------- Expenses: Hotel expenses............................................ 378,886 16,797 840,153 16,797 Racecourse facility operations............................ 8,810 10,536 29,667 10,536 General and administrative................................ 21,482 4,081 49,467 4,081 Interest expense.......................................... 10,216 11 24,015 11 Cost of acquiring leaseholds.............................. -- -- 52,721 -- Depreciation and amortization............................. 17,675 1,142 42,911 1,142 Lease payments............................................ 174,838 10,686 384,475 10,686 ---------- --------- ------------- ------------- Total expenses.......................................... 611,907 43,253 1,423,409 43,253 ---------- --------- ------------- ------------- Operating income (loss)..................................... (18,227) 931 (47,164) 931 Equity in earnings of unconsolidated subsidiaries......... 447 -- 2,461 -- ---------- --------- ------------- ------------- Income (loss) before income tax provision and minority interests................................................. (17,780) 931 (44,703) 931 Income tax provision...................................... (6,656) (94) (10,740) (94) ---------- --------- ------------- ------------- Income (loss) before minority interests..................... (24,436) 837 (55,443) 837 Minority interest in Wyndham Partnership.................. 2,707 (115) 9,422 (115) Minority interest in consolidated subsidiaries............ (4,048) (13) (20,408) (13) ---------- --------- ------------- ------------- Income (loss) before extraordinary item..................... (25,777) 709 (66,429) 709 Extraordinary loss from early debt, extinguishment of debt, net of income taxes............................... (1,257) -- (1,257) -- ---------- --------- ------------- ------------- Net income (loss)........................................... $ (27,034) $ 709 $ (67,686) $ 709 ---------- --------- ------------- ------------- ---------- --------- ------------- ------------- Basic and Diluted earnings per common share: Income (loss) before extraordinary item................... $ (0.19) $ 0.01 $ (0.55) $ 0.01 Extraordinary loss........................................ (0.01) -- (0.01) -- ---------- --------- ------------- ------------- Net income (loss) per common share........................ $ (0.20) $ 0.01 $ (0.56) $ 0.01 ---------- --------- ------------- ------------- ---------- --------- ------------- -------------
See notes to condensed financial statements 10 WYNDHAM INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
JULY 1, 1997 (INCEPTION OF NINE MONTHS OPERATIONS) ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................................. $ (67,686) $ 709 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation.................................................................... 15,128 491 Amortization of unearned stock compensation..................................... 777 -- Amortization of management contracts and trade names............................ 14,948 469 Amortization of goodwill and other.............................................. 14,026 181 Issuance of stock for bonuses and directors' fees............................... 205 -- Net payment from unconsolidated subsidiaries.................................... 14 -- Cost of acquiring leaseholds.................................................... 52,638 -- Deferred income taxes........................................................... (5,352) -- Equity in earnings of unconsolidated subsidiaries............................... (2,461) -- Minority interest in income of Wyndham Partnership.............................. (9,422) 115 Minority interest in income of consolidated subsidiaries........................ 20,408 13 Extraordinary loss from early extinguishment of debt............................ 1,676 -- Changes in assets and liabilities: Accounts receivable and prepaid expenses and other assets....................... (13,082) (13,857) Other receivables from Patriot.................................................. (21,572) -- Inventories..................................................................... (1,201) -- Accounts payable and other accrued expenses..................................... 14,945 14,458 Participating lease payments payable to Patriot................................. 45,697 2,071 ------------- ------------- Net cash provided by operating activities................................... 59,686 4,650 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of hotel properties and related working capital assets................ (22,194) (5,321) Improvements and additions to hotel properties.................................... (32,950) (593) Increase in restricted cash account............................................... (2,082) -- Acquisition of management contracts............................................... (32,299) -- Deferred acquisition costs........................................................ (26,273) (23,832) Cash received upon acquisition of hotel leases.................................... 88,380 -- Investment in other notes receivable.............................................. (2,383) -- Collections on other notes receivable............................................. 5,563 -- Investment in unconsolidated subsidiaries......................................... (2,583) -- Other............................................................................. (1,688) -- ------------- ------------- Net cash used in investing activities....................................... (28,509) (29,746) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit facility and term loans................................... 187,000 -- Repayment of assumed debt......................................................... (775,578) -- Payment of capital lease obligations.............................................. (1,852) 141 Proceeds from issuance of common stock............................................ 12,357 12,066 Payment of offering costs......................................................... (156) -- Payment of merger costs........................................................... -- (11,414) Payment of deferred loan costs.................................................... (1,456) -- Collections on Subscription Notes................................................. 12,875 35,486 Contributions received from minority interest in consolidated subsidiaries........ 616,268 -- Distributions paid................................................................ (3,855) -- ------------- ------------- Net cash provided by financing activities................................... 45,603 36,279 ------------- ------------- Net increase in cash and cash equivalents........................................... 76,780 11,183 Cash and cash equivalents at beginning of period.................................... 27,076 -- ------------- ------------- Cash and cash equivalents at end of period.......................................... $ 103,856 $ 11,183 ------------- ------------- ------------- -------------
See notes to condensed financial statements. 11 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION: The entity formerly known as Patriot American Hospitality, Inc. (collectively with its subsidiaries, "Old Patriot"), a Virginia corporation, was formed April 17, 1995 as a self-administered real estate investment trust ("REIT") for the purpose of acquiring equity interests in hotel properties. On October 2, 1995, Old Patriot completed an initial public offering of shares of its common stock and commenced operations. On July 1, 1997, Old Patriot merged with and into California Jockey Club ("Cal Jockey"), with Cal Jockey being the surviving legal entity (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 arrangement. 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." In January 1998, as a result of the merger of Wyndham Hotel Corporation with and into Patriot as discussed below, Patriot American Hospitality 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. Patriot and Wyndham are both Delaware corporations. The Cal Jockey Merger was accounted for as a reverse acquisition whereby Cal Jockey was considered to be the acquired company for accounting purposes. Consequently, the historical financial information of Old Patriot became 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 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. These units, consisting of one share of common stock of Patriot paired with one share of common stock of Wyndham, are referred to herein as "Paired Shares." A substantial portion of the assets of Patriot are held by Patriot American Hospitality Partnership, L.P. (the "Patriot Partnership"). Patriot contributed such assets to the Patriot Partnership in exchange for units of limited partnership interest ("OP Units") of the Patriot Partnership. In addition, a substantial portion of the assets of Wyndham are held by Wyndham International Operating Partnership, L.P. (the "Wyndham Partnership," formerly known as Patriot American Hospitality Operating Partnership, L.P.). Wyndham contributed such assets to the Wyndham Partnership in exchange for OP Units of the Wyndham Partnership. Collectively, the Wyndham Partnership and the Patriot Partnership are referred to herein as the "Operating Partnerships." 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 88.5% limited partnership interest in the Patriot Partnership as of September 30, 1998. Wyndham owns a 1.0% general partnership interest and an approximate 87.3% limited partnership interest in the Wyndham Partnership. At September 30, 1998, Patriot and Wyndham, through the Operating Partnerships and other subsidiaries, owned interests in 184 hotels with an aggregate of over 44,700 guest rooms and leased 122 hotels from third parties with over 15,700 rooms. In addition, Wyndham manages 171 hotels with over 12 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED) 42,000 guest rooms and franchises 9 hotels with over 2,500 rooms. Patriot leases 216 of its hotels to Wyndham and 14 of Patriot's hotels are leased to third party lessees (the "Lessees") who are responsible for operating the hotels. Generally, these leases provide for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Leases"). The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. Seventy-six of the Companies' hotels are owned by special purpose entities (the "Non-Controlled Subsidiaries"). Patriot owns approximately a 99% non-voting interest and Wyndham owns approximately a 1% controlling voting interest in each of the Non-Controlled Subsidiaries. Therefore, the operating results of the Non-Controlled Subsidiaries are combined with those of Wyndham for financial reporting purposes. Patriot accounts for its investment in the Non-Controlled Subsidiaries using the equity method of accounting. PRINCIPLES OF CONSOLIDATION The unaudited separate consolidated financial statements include the accounts of Patriot and Wyndham, their respective wholly owned subsidiaries and the partnerships, corporations and limited liability companies in which Patriot or Wyndham owns a controlling interest. The unaudited separate consolidated financial statements of Patriot and Wyndham have also been combined for purposes of financial statement presentation. All significant intercompany accounts and transactions have been eliminated. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in Patriot's and Wyndham's Joint Annual Report on Form 10-K for the year ended December 31, 1997. Certain prior year amounts have been reclassified to conform to current period presentation. BUSINESS SEGMENTS In June 1997, FASB issued Statement of Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures About Segments of an Enterprise and Related Information" which specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. Statement 131 is effective for fiscal years beginning after December 15, 1997, but need not be applied to interim financial statements in the initial year of its application. Management believes this statement will result in expanded disclosure for the financial statements. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, FASB issued Statement of Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years 13 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED) 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. PARTICIPATING LEASE REVENUE RECOGNITION In May 1998, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim Financial Periods ("EITF 98-9"). EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. Management has reviewed the terms of its Participating Leases and has determined that the provisions of EITF 98-9 will impact Patriot's current revenue recognition on an interim basis, but will have no impact on Patriot's annual participating rent revenue or interim cash flow from its Participating Leases. Patriot has adopted the provisions of EITF 98-9 and elected to apply the provisions of the new pronouncement on a prospective basis. Generally, Patriot's Participating Leases provide for the payment of the greater of (i) a fixed base rent or (ii) participating rent, based on the revenue of the hotels, plus certain additional charges, as applicable. The Participating Leases contain annual revenue thresholds used to calculate the various tiers of participating rent which are prorated on a monthly basis to determine monthly participating rent payments. The provisions of EITF 98-9 call for straight-line recognition of the annual base rent throughout the year and for the deferral of any additional lease amounts collected or due from the Lessees until such amounts exceed the annual revenue thresholds. This will generally result in base rent being recognized in the first and second quarters and participating rents already collected or due from the Lessees being deferred and then recognized in the third and fourth quarters due to the structure of Patriot's Participating Leases and the seasonality of the hotel operations. The effect of the change was to defer recognition of $1,789 of lease revenue during the nine months ended September 30, 1998. 2. HOTELS AND OTHER BUSINESSES ACQUIRED: HOTEL INVESTMENTS PURCHASED Through September 30, 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 revolving credit facility, the issuance of 53,989 OP Units of the Operating Partnerships 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. 14 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED) BUSINESS COMBINATIONS WYNDHAM HOTEL CORPORATION--On January 5, 1998, Wyndham Hotel Corporation ("Old Wyndham") merged with and into Patriot, with Patriot being the surviving corporation (the "Wyndham Merger"). Patriot, as a result of the Wyndham Merger, acquired ownership of ten 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 remaining 52 management and franchise contracts (excluding 16 hotels that Old Wyndham managed that are owned by Patriot), the Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management company were transferred to certain of the Non-Controlled Subsidiaries. The total purchase consideration for the Wyndham Merger of approximately $982,000 consisted of 21,594,137 Paired Shares and 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 Old Wyndham shareholders who elected to receive cash (which was financed with funds drawn on Patriot's revolving credit facility), and the assumption of approximately $59,063 in debt. In April 1998, the Companies issued an aggregate 240,437 Paired Shares valued at approximately $5,347 in settlement of certain purchase price adjustment arrangements related to Old Wyndham's acquisition of ClubHouse Hotels, Inc. WHG CASINOS & RESORTS, INC. AND RELATED TRANSACTIONS--On January 16, 1998, a subsidiary of Wyndham merged with and into WHG Casinos & Resorts Inc. ("WHG"), with WHG being the surviving corporation (the "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 (the "El Conquistador"), 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. 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 and issuance of 1,818,182 Paired Shares valued at approximately $49,227 (collectively, these transactions and the WHG Merger are referred to herein as the "WHG Transactions"). 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. 15 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED) On August 3, 1998, the Companies refinanced certain debt related to the El Conquistador and the Condado Plaza Hotel & Casino (the "Interim Financing"). 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. The loans are secured by mortgages on the properties, bear interest at a rate of LIBOR plus 2.25% and, prior to the extension described below, matured on November 3, 1998. Hurricane Georges passed through Puerto Rico on September 21 and 22, 1998. The hurricane caused approximately $60,000 of property related damage, excluding the impact of business interruption, to El Conquistador, Condado Plaza Hotel & Casino and the El San Juan Hotel & Casino properties. As a result of the damage, the three properties experienced varying periods of business interruption. All of the Companies' properties on Puerto Rico are insured with both comprehensive property damage and business interruption insurance, subject to certain deductibles. See "Note 13--Subsequent Events" for a discussion of the impact of Hurricane Georges on the Companies' properties in Puerto Rico. On October 20, 1998, the El Conquistador Partnership, L.P., which is beneficially owned 100% by the Companies (the "El Conquistador Partnership"), filed a Form S-11 with the SEC with respect to the offering (the "Bond Offering") of the undivided interests in the 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 (the "AFICA Bonds"). It is contemplated that the AFICA Bonds will be issued in the total principal amount of $100,000, will consist of serial bonds and term bonds and will be issued in register form, without coupons, in denominations which are multiples of $5. AFICA will issue the AFICA Bonds and lend the proceeds to the El Conquistador Partnership pursuant to the loan agreement (the "AFICA Loan Agreement"). The El Conquistador Partnership will use the loan proceeds to repay the Interim Financing entered into on August 3, 1998, to fund certain reserves and to pay certain costs and expenses of issuing the AFICA Bonds. The AFICA Bonds will be secured by a lien on substantially all of the assets of the El Conquistador Partnership. On November 3, 1998, the Companies entered into agreements to extend the maturity of certain debt related to the El Conquistador and the Condado Plaza Hotel & Casino from November 3, 1998 to January 29, 1999. The extension agreements required that $10,000 be deposited into an escrow account in installments beginning on the date of the extension through January 12, 1999. Upon the satisfactory completion of certain conditions, the $10,000 will be released from escrow. 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 ("Arcadian," formerly known as Arcadian International Plc) for 60 pence per share. 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 L185,900 (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 16 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED) Eastern Hotel in London, to be branded as a flagship Wyndham Hotel and operated by Wyndham once the development has been completed. Collectively, the transactions described above are referred to herein as the "Arcadian Acquisition." In connection with the Arcadian Acquisition, Patriot entered into a short-term financing agreement on April 15, 1998 with Paine Webber Real Estate Securities Inc. ("Paine Webber Real Estate") whereby Paine Webber Real Estate loaned Patriot $160,000 through April 15, 1999, at a rate equal to the borrowing rate on Patriot's Revolving Credit Facility. As described below in Note 13, the Companies currently anticipate that this $160,000 loan will be satisfied in connection with the Companies' transfer of certain assets to Paine Webber Real Estate. In addition, Patriot assumed approximately $112,600 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, (the "Interstate Merger Agreement") between Patriot, Wyndham and Interstate Hotels Company ("Interstate"), Interstate merged with and into Patriot with Patriot being the surviving company (the "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 (the "Cash Consideration"), 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 (the "Interstate Exchange Ratio"). 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 $0.429 on each share of Interstate common stock that was converted into Paired Shares, aggregating approximately $9,138. On May 27, 1998, the Companies and Interstate entered into a settlement agreement (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 on June 2, 1998. In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for three principal transactions: (i) the re-branding of ten Marriott hotels under the Wyndham name, (ii) the assumption by Marriott of the management of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and (iii) the divestiture by the Companies by January 29, 1999 (subject to extension for 60 days upon payment of certain fees by the Companies) of the 17 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED) third-party management business that was operated by Interstate (the "Spin-off"). See "Note 13-- Subsequent Events" for a discussion of recent activity regarding the Spin-off. 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. ("Summerfield") for approximately $298,915 (the "Summerfield Acquisition"). The total purchase consideration for the Summerfield Acquisition consisted of approximately 3,223,795 OP Units of the Operating Partnerships, 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 and (ii) achievement of certain performance criteria through 2001 for seven hotels that are currently under development. See "Note 13--Subsequent Events" for a discussion of recent activity regarding these price adjustment mechanisms. As a result of the Summerfield Acquisition, Patriot acquired four Summerfield Suites-Registered Trademark- hotels, leasehold and management interests in 24 Summerfield Suites-Registered Trademark-, Sierra Suites-Trademark- and Sunrise Suites hotels and management contracts and franchise interests for 12 additional Summerfield Suites-Registered Trademark- and Sierra Suites-Registered Trademark- hotels. Patriot has leased or sub-leased such hotels to Wyndham. In addition, Patriot acquired the development contracts for several additional hotels. CHC INTERNATIONAL--On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger Agreement") between Patriot, Wyndham and CHC International ("CHCI"), the hospitality-related businesses of CHCI merged with and into Wyndham with Wyndham being the surviving company (the "CHCI Merger"). 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. ("GAH"), 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 $52,723, which is reflected as a cost of acquiring leaseholds in the accompanying statements of operations of Wyndham. By operation of the CHCI Merger, all the issued and outstanding shares of common stock, par value $0.005 per share, of CHCI ("CHCI Shares") 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 (the "Wyndham Series A Preferred Stock") and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham (the "Wyndham Series B Preferred Stock"). 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. OTHER During the second quarter of 1998, Patriot re-acquired the leasehold interests for three of its hotels from two of the Lessees for an aggregate purchase price of approximately $4,339, which is reflected as a 18 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 2. HOTELS AND OTHER BUSINESSES ACQUIRED: (CONTINUED) cost of acquiring leaseholds in the accompanying statements of operations of Patriot. The Companies issued 118,112 Paired Shares valued at $3,000 and paid cash of $637 to Metro Hotels Leasing Corporation and paid cash of $702 to NorthCoast Hotels, L.L.C. in connection with the transaction. Patriot has leased the hotels to Wyndham. In connection with Patriot's acquisition of certain license agreements, Patriot recognized an expense of $3,940 related to the cost of acquiring these agreements for the third quarter of 1998. In July 1998, Wyndham acquired an approximate 50% limited partnership interest in a partnership with affiliates of Don Shula's Steakhouses, Inc. for $1,500 in cash and 156,272 preferred units of limited partnership interest of Wyndham Partnership valued at approximately $3,500. Wyndham entered into this joint venture arrangement to expand the Shula's Steak House brand as a food and beverage amenity in certain of Patriot's hotels. 3. 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 forward equity transactions, Patriot and Wyndham have issued promissory notes to fund issuance of Paired Shares and OP Units (the "Subscription Notes"). In connection with the issuance of Paired Shares in the Wyndham Merger, Patriot issued Subscription Notes payable to Wyndham in the aggregate amount of $30,535. These Subscription Notes bear interest at a rate of LIBOR plus 1% per annum and mature January 31, 2001. In connection with the issuance of Paired Shares in the WHG Merger, Wyndham issued Subscription Notes payable to Patriot in the aggregate amount of $133,669. These Subscription Notes bear interest at a rate of 8.7% per annum and mature in January 2001. In connection with the issuance of Paired Shares and OP Units of the Operating Partnerships in the Summerfield Acquisition, Patriot issued Subscription Notes payable to Wyndham in the aggregate amount of $5,816. These Subscription Notes bear interest at a rate of 8.7% per annum and mature in January 2001. In connection with the issuance of Paired Shares in the Interstate Merger, Patriot issued Subscription Notes payable to Wyndham in the aggregate amount of $34,591. These Subscription Notes bear interest at a rate of 8.7% per annum and mature in January 2001. In connection with the issuance of Paired Shares in the UBS forward equity transaction, Patriot issued a promissory note payable to Wyndham in the principal amount of $4,565. The promissory note bears interest at a rate of 8% and matures on December 31, 2000. In connection with the issuance of Paired Shares in the Nations forward equity transaction, Patriot issued a promissory note payable to Wyndham in the principal amount of $6,091. The promissory note bears interest at a rate of 8% and matures on February 28, 2001. In connection with the issuance of Paired Shares in the PaineWebber forward equity transaction, Patriot issued a promissory note payable to Wyndham in the principal amount of $6,955. The promissory note bears interest at a rate of 8% and matures on April 30, 2001. 19 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 4. REVOLVING CREDIT FACILITY, TERM LOANS AND OTHER MORTGAGE DEBT: 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 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 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 on the credit facilities are based on the Companies' leverage ratio and vary from 1.5% to 2.5% over LIBOR. Patriot incurred approximately $27,405 in loan fees and other expenses associated with this financing arrangement. As of November 12, 1998, the Companies had approximately $12,200 of available funds under the Revolving Credit Facility. Additionally, certain Term Loans have maturities of January 31, 1999 ($350,000); March 31, 1999 ($400,000); and March 31, 2000 ($450,000). The Companies also have approximately $205,000 of other debt which is currently due on or before December 31, 1998. The Companies are in current negotiations to refinance or extend the maturity of the existing indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Combined Liquidity and Capital Resources." The Companies 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, the Companies receive or make payments based on the difference between specified interest rates, 6.06%, 6.07%, and 5.625%, and the actual 10-year U.S. Treasury interest rate on a principal amount of $525,000. The Companies settled the entire $525,000 in treasury interest rate locks resulting in a $49,225 one-time charge to earnings in the third quarter of 1998. The Companies entered into a fourth interest rate swap arrangement during the first quarter of 1998 to swap floating rate LIBOR-based interest rates for a fixed rate interest amount as a hedge against $125,000 of the outstanding balance on the Companies' revolving credit facility. The interest rate swap fixes the LIBOR portion of the revolving credit facility interest rate at 5.5575% per annum through November 2002. 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. In June 1998, the Companies entered into a fifth interest rate swap arrangement as a hedge against $250,000 of the outstanding balance on the Companies' variable rate debt. The interest rate swap provides for a fixed LIBOR rate of 5.8425% per annum through June 2003. 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. Additionally, in connection with the Interstate Merger, Patriot assumed four interest rate hedge contracts: 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 6% on up to $234,750 of indebtedness through October 1998; an interest rate cap that limits LIBOR to 7% on up to $208,750 of indebtedness from 20 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 4. REVOLVING CREDIT FACILITY, TERM LOANS AND OTHER MORTGAGE DEBT: (CONTINUED) October 1996 through October 1999; and an interest rate swap that provides for a fixed LIBOR rate of 5.8% on $72,000 of indebtedness through December 2000. During the third quarter of 1998, the Companies incurred a charge for a write-off of loan costs of $1,676, net of tax benefits of $419, in connection with the Interim Financing on the El Conquistador and the Condado Plaza Hotel & Casino. 5. COMPREHENSIVE INCOME (LOSS): In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("Statement 130"), "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income (loss) and its components. The Companies have adopted Statement 130 beginning with their interim financial statements for the first quarter of 1998. Total comprehensive income (loss) for the periods is as follows: COMBINED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Net loss.............................................. $ (59,415) $ (27,004) $ (67,257) $ (3,838) Unrealized loss on securities available for sale...... (767) -- (1,388) -- Unrealized foreign exchange gain...................... 4,313 -- 4,323 -- --------- --------- --------- --------- Total comprehensive loss.............................. $ (55,869) $ (27,004) $ (64,322) $ (3,838) --------- --------- --------- --------- --------- --------- --------- ---------
PATRIOT
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Net loss............................................... $ (37,436) $ (27,713) $ (9,879) $ (4,547) Unrealized foreign exchange gain....................... 4,002 -- 4,022 -- --------- --------- --------- --------- Total comprehensive loss............................... $ (33,434) $ (27,713) $ (5,857) $ (4,547) --------- --------- --------- --------- --------- --------- --------- ---------
21 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 5. COMPREHENSIVE INCOME (LOSS): (CONTINUED) WYNDHAM
JULY 1, 1997 THREE MONTHS ENDED NINE MONTHS (INCEPTION OF ENDED OPERATIONS) SEPTEMBER 30, SEPTEMBER THROUGH -------------------- 30, SEPTEMBER 30, 1998 1997 1998 1997 --------- --------- ----------- ------------- Net income (loss).................................. $ (27,034) $ 709 $ (67,686) $ 709 Unrealized loss on securities available for sale... (767) -- (1,388) -- Unrealized foreign exchange gain................... 311 -- 301 -- --------- --------- ----------- ----- Total comprehensive income (loss).................. $ (27,490) $ 709 $ (68,773) $ 709 --------- --------- ----------- ----- --------- --------- ----------- -----
22 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 6. COMPUTATION OF EARNINGS PER SHARE: Earnings per share have been computed as follows: COMBINED BASIC AND DILUTED EARNINGS PER SHARE(1)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Loss before extraordinary item...................... $ (58,158) $ (24,470) $ (35,440) $ (1,304) Adjustment for equity forwards(2)................... (95,063) -- (95,063) -- Preferred stock dividends........................... (2,695) -- (4,250) -- --------- --------- --------- --------- Loss to common stockholders before extraordinary items............................................. (155,916) (24,470) (134,753) (1,304) Extraordinary loss.................................. (1,257) (2,534) (31,817) (2,534) --------- --------- --------- --------- Net loss to common stockholders..................... $(157,173) $ (27,004) $(166,570) $ (3,838) --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of Paired Shares outstanding....................................... 144,451 61,647 122,391 49,454 Dilutive securities: Effect of unvested stock grants................... -- -- -- -- Dilutive options to purchase Paired Shares........ -- -- -- -- Dilutive effect of price adjustment arrangements.................................... -- -- -- -- Dilutive convertible preferred shares............. -- -- -- -- --------- --------- --------- --------- 144,451 61,647 122,391 49,454 --------- --------- --------- --------- --------- --------- --------- --------- Earnings per Paired Share: Loss to common stockholders before extraordinary items........................................... $ (1.08) $ (0.40) $ (1.10) $ (0.03) Extraordinary loss................................ (0.01) (0.04) (0.26) (0.05) --------- --------- --------- --------- Net loss.......................................... $ (1.09) $ (0.44) $ (1.36) $ (0.08) --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) The combined Companies are in a loss position for both the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998 and 1997. Therefore, the presentation of basic and diluted earnings per share are identical since the securities which could have a dilutive impact on earnings per share are anti-dilutive. (2) The adjustment relates to the mark-to-market adjustment for the UBS Transaction and the Nations Transaction (described in Note 7), which can be settled in cash or stock, at the Companies' option. There is no adjustment to earnings per share for the PaineWebber Transaction since it can be settled in stock only and is accounted for by the Reverse Treasury Stock Method. 23 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 6. COMPUTATION OF EARNINGS PER SHARE: (CONTINUED) PATRIOT BASIC AND DILUTED EARNINGS PER SHARE(1)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income (loss) before extraordinary item............. $ (37,436) $ (25,179) $ 20,680 $ (2,013) Adjustment for equity forwards(2)................... (95,063) -- (95,063) -- Preferred stock dividends........................... (3,110) -- (3,110) -- --------- --------- --------- --------- Loss to common stockholders before extraordinary items............................................. (135,609) (25,179) (77,493) (2,013) Extraordinary loss.................................. -- (2,534) (30,559) (2,534) --------- --------- --------- --------- Net loss to common stockholders..................... $(135,609) $ (27,713) $(108,052) $ (4,547) --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of common shares outstanding....................................... 144,451 61,647 122,391 49,454 Dilutive securities: Effect of unvested stock grants................... -- -- -- -- Dilutive options to purchase common shares........ -- -- -- -- Dilutive effect of price adjustment arrangements.................................... -- -- -- -- Dilutive convertible preferred shares............. -- -- -- -- --------- --------- --------- --------- 144,451 61,647 122,391 49,454 --------- --------- --------- --------- --------- --------- --------- --------- Earnings per share: Loss to common stockholders before extraordinary items........................................... $ (0.94) $ (0.41) $ (0.63) $ (0.04) Extraordinary loss................................ -- (0.04 (0.25) (0.05) --------- --------- --------- --------- Net loss.......................................... $ (0.94) $ (0.45) $ (0.88) $ (0.09) --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Patriot is in a loss position for both the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998 and 1997. Therefore, the presentation of basic and diluted earnings per share are identical since the securities which could have a dilutive impact on earnings per share are anti-dilutive. (2) The adjustment relates to the mark-to-market adjustment for the UBS Transaction and the Nations Transaction (described in Note 7), which can be settled in cash or stock, at the Companies' option. There is no adjustment to earnings per share for the PaineWebber Transaction since it can be settled in stock only and is accounted for by the Reverse Treasury Stock Method. 24 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 6. COMPUTATION OF EARNINGS PER SHARE: (CONTINUED) WYNDHAM BASIC AND DILUTED EARNINGS PER SHARE
JULY 1, 1997 (INCEPTION OF THREE MONTHS ENDED NINE MONTHS OPERATIONS) SEPTEMBER 30, ENDED THROUGH -------------------- SEPTEMBER SEPTEMBER 1998(1) 1997 30, 1998(1) 30, 1997 --------- --------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income (loss) before extraordinary item......... $ (25,777) $ 709 $ (66,429) $ 709 Preferred stock dividends....................... (1,140) -- (1,140) -- --------- --------- ----------- ----------- Income (loss) to common stockholders before extraordinary items........................... (26,917) 709 (67,569) 709 Extraordinary loss.............................. (1,257) -- (1,257) -- --------- --------- ----------- ----------- Net income (loss) to common stockholders........ $ (28,174) $ 709 $ (68,826) $ 709 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Weighted average number of common shares outstanding................................... 144,451 61,647 122,391 61,647 Dilutive securities: Effect of unvested stock grants............... -- 891 -- 891 Dilutive options to purchase common shares.... -- 1,100 -- 1,100 Dilutive effect of price adjustment arrangements................................ -- -- -- -- Dilutive convertible preferred shares......... -- -- -- -- --------- --------- ----------- ----------- 144,451 63,638 122,391 63,638 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Earnings per share: Income (loss) to common stockholders before extraordinary items......................... $ (0.19) $ 0.01 $ (0.55) $ 0.01 Extraordinary loss............................ (0.01) -- (0.01) -- --------- --------- ----------- ----------- Net income (loss)............................. $ (0.20) $ 0.01 $ (0.56) $ 0.01 --------- --------- ----------- ----------- --------- --------- ----------- -----------
- ------------------------ (1) Wyndham is in a loss position for both the three months and nine months ended September 30, 1998. Therefore, the presentation of basic and diluted earnings per share are identical since the securities which could have a dilutive impact on earnings per share are anti-dilutive. 7. COMMITMENTS AND CONTINGENCIES: The Companies are parties to transactions with three counterparties involving the sale of an aggregate of 13.3 million shares of Paired Common Stock, with related Price Adjustment Mechanisms, as described below. UBS TRANSACTION. On December 31, 1997, the Companies entered into transactions with UBS Limited and Union Bank of Switzerland, London Branch (together with its successor, UBS AG, London 25 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Branch, "UBS" and, together with Warburg Dillon Read, LLC, the "UBS Parties"). Pursuant to the terms of a Purchase Agreement dated as of December 31, 1997 (the "UBS Purchase Agreement"), UBS Limited purchased 3,250,000 Paired Shares (the "Initial UBS Shares") from the Companies at a purchase price of $28.8125 per share (the last reported sale price of the Paired Shares on December 30, 1997) for approximately $91,800 in net proceeds. The net proceeds were used by the Companies to repay existing indebtedness. The Initial UBS Shares represent approximately 1.8% of the outstanding Paired Shares as of the date of this filing. UBS received from the Companies a placement fee of 2%, or approximately $1,900. In connection with the issuance of the Initial UBS Shares, the Companies entered into a Forward Stock Contract, dated as of December 31, 1997, with UBS (as amended on August 14, 1998 and September 11, 1998, the "Forward Stock Contract"). Pursuant to the Forward Stock Contract, the Companies have agreed to effect a settlement, in one or more transactions (each a "UBS Settlement"), with respect to a number of Paired Shares equal to the number of Initial UBS Shares, at a per Paired Share price equal to $28.8125 plus a forward accretion reflecting an imputed return at LIBOR plus 140 basis points, minus an adjustment to reflect distributions on the Paired Shares (the "UBS Forward Price"). The forward accretion component represents a guaranteed rate of return to UBS. The Paired Shares to be delivered to or by UBS may consist of Paired Shares acquired under the UBS Purchase Agreement or otherwise. The Companies may effect a UBS Settlement by (i) delivering to UBS Paired Shares (the "UBS Settlement Shares") equal in value (valued at the daily average closing price for the Paired Shares over a specific period of time (the "UBS Unwind Price")) to the UBS Forward Price at the time of such UBS Settlement times the number of Paired Shares subject to such UBS Settlement (the "UBS Settlement Amount") in exchange for the number of shares subject to such UBS Settlement, (ii) delivering to (or, in the event the UBS Unwind Price is greater than the UBS Forward Price, receiving from) UBS a number of Paired Shares equal to the difference between the number of the UBS Settlement Shares and the number of shares subject to such UBS Settlement, or (iii) delivering to UBS cash equal to the UBS Settlement Amount in exchange for the shares subject to such UBS Settlement. If the Companies make a UBS Settlement in Paired Shares, they must also pay to UBS (i) an unwind accretion fee (payable in cash or shares) equal to 50% of the UBS Settlement Amount times the imputed return of LIBOR plus 140 basis points over the period designated for such UBS Settlement and (ii) a placement fee equal to 0.50% of the UBS Settlement Amount. The Forward Stock Contract provides that shares may be delivered in settlement only if the Companies have on file with the SEC an effective registration statement covering the resale by UBS of the shares to be delivered. A registration statement covering up to 4,000,000 shares to be sold by UBS was declared effective (as amended) on October 15, 1998. A registration statement covering up to an additional 40,000,000 shares to be sold by PWFS, Nations and UBS was declared effective on October 15, 1998. In connection with the September 11, 1998 amendment to the Forward Stock Contract, the Companies paid down $45,628 under the Forward Stock Contract through the application of cash collateral that had previously been delivered to UBS pursuant to the Forward Stock Contract. In addition, the Companies have delivered an additional 2,474,359 Paired Shares and $8,252 to UBS as collateral pursuant to the 26 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Forward Stock Contract. The cash collateral held by UBS is subject to adjustment every two weeks such that the amount of cash collateral is equal to the number of shares subject to the Forward Stock Contract times the amount by which the UBS Forward Price exceeds the closing price for the Paired Shares on the trading day immediately preceding the adjustment date (such closing price the "UBS Reset Price" and such product the "UBS Interim Settlement Amount"). With the prior written consent of UBS, the Companies may elect to deliver to UBS a number of Paired Shares (the "UBS Interim Settlement Shares") equal in value (valued at the UBS Reset Price) to 125% of the UBS Interim Settlement Amount. The Forward Stock Contract provides that if the average closing price of the Paired Shares for any two consecutive trading days does not equal or exceed $11.00 (the "UBS Unwind Threshold"), UBS has the right to force a complete settlement under the Forward Stock Contract. As a result of the failure of the average closing price of the Paired Shares for October 2 and October 5, 1998 to equal or exceed $11.00, UBS became entitled to force a complete settlement pursuant to the terms of the Forward Stock Contract and continues to be so entitled. In addition, the Forward Stock Contract reached maturity on October 15, 1998. UBS has asserted that the Companies are in default under the terms of the Forward Stock Contract as the result of the Companies not delivering certain cash collateral and not making final settlement of the Forward Stock Contract in cash, although the Companies have disputed this assertion. See "Potential Dilution and Liquidity Effects of the Price Adjustment Mechanisms" below. UBS also has the right to force a complete settlement under the Forward Stock Contract if the Companies (i) are in default with respect to certain financial and notice covenants under the Forward Stock Contract, (ii) are in default under the Corporation's credit facility with Chase Manhattan Bank, (iii) are in default with respect to certain specified indebtedness of the Companies, (iv) declare bankruptcy or become insolvent or fail to post sufficient cash collateral, (v) effect an early settlement, unwind or liquidation of any transaction similar to the transaction with UBS or (vi) fail to settle the transaction in cash simultaneously with the sale by the Companies of certain property. A registration statement covering the sale of up to 4,000,000 shares by UBS was declared effective (as amended) on October 15, 1998. Also, a registration statement covering the sale of up to an additional 40,000,000 shares by PWFS, Nations and UBS was declared effective on October 15, 1998. However, there can be no assurance that such registration statements will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Forward Stock Contract. NATIONS TRANSACTION. On February 26, 1998, the Companies entered into transactions with a subsidiary of NationsBank Corporation (together with NationsBanc Mortgage Capital Corporation, "Nations"). Pursuant to the terms of a Purchase Agreement dated as of February 26, 1998 (the "Nations Purchase Agreement"), Nations purchased 4,900,000 Paired Shares (the "Initial Nations Shares") from the Companies at a purchase price of $24.8625 per share (which reflected a 2.5% discount from $25.50, the last reported sale price of the Paired Shares on February 25, 1998) for net proceeds of approximately $121,800. The net proceeds were used by the Companies to repay existing indebtedness. The Initial Nations Shares represent approximately 2.7% of the outstanding Paired Shares as of the date of this filing. In connection with the issuance of the Initial Nations Shares, the Companies entered into a Purchase Price Adjustment Mechanism, dated as of February 26, 1998, with Nations (as amended on August 14, 27 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) 1998, the "Nations Price Adjustment Mechanism"). Pursuant to the Nations Price Adjustment Mechanism, the Companies have agreed to effect certain purchase price adjustments on or before February 26, 1999, in one or more transactions (each a "Nations Settlement"), with respect to a number of Paired Shares equal to the number of Initial Nations Shares, by reference to a per Paired Share price equal to $25.50 plus a forward accretion representing an imputed return at LIBOR plus 150 basis points, minus an adjustment to reflect distributions on the Paired Shares (the "Nations Forward Price"). The Paired Shares to be delivered to or by Nations may consist of Paired Shares acquired under the Nations Purchase Agreement or otherwise. The Companies may effect a Nations Settlement by (i) delivering to Nations Paired Shares (the "Nations Settlement Shares") equal in value (valued at the dollar volume weighted average price for the Paired Shares (as calculated pursuant to the Nations Price Adjustment Mechanism) over a specific period of time (the "Nations Unwind Price")) to the Nations Forward Price at the time of such Nations Settlement times the number of shares subject to such Nations Settlement (the "Nations Settlement Amount") in exchange for the number of shares subject to such Nations Settlement, (ii) delivering to (or, in the event the Nations Unwind Price is greater than the Nations Forward Price, receiving from) Nations a number of Paired Shares equal to the difference between the number of Nations Settlement Shares and the number of shares subject to such Nations Settlement, or (iii) delivering to Nations cash equal to the Nations Settlement Amount in exchange for a number of Paired Shares equal to the number of shares subject to such Nations Settlement. If the Companies effect a settlement pursuant to clause (i) or (ii) above, they must also pay a placement fee equal to 2% of the Nations Settlement Amount. The Nations Price Adjustment Mechanism provides that shares may be delivered in settlement only if (i) the Companies have on file with the SEC an effective registration statement covering the sale by Nations of the shares to be delivered, (ii) for settlement at maturity, the dollar volume weighted average price of the Paired Shares (as calculated pursuant to the Nations Price Adjustment Mechanism) on the date of such settlement is greater than or equal to $20.00 and (iii) for settlement at maturity, no Mandatory Nations Unwind Event (as defined below) has occurred and is continuing. If the above conditions are not met when they apply, the Companies generally must deliver cash equal to the Nations Settlement Amount. The Nations Price Adjustment Mechanism provides that on or after October 15, 1998, if the dollar volume weighted average price of the Paired Shares for any two consecutive trading days does not equal or exceed certain amounts (the "Nations Unwind Thresholds"), Nations has the right to force a partial or complete settlement under the Nations Price Adjustment Mechanism. The Nations Unwind Thresholds are $20.00 (33% settlement), $18.75 (67%) and $17.25 (100%). As a result of failure of the price of the Paired Shares to exceed the Nations Unwind Thresholds, pursuant to the terms of the Nations Price Adjustment Mechanism, Nations became entitled to force a complete settlement under the Nations Price Adjustment Mechanism on October 16, 1998, and continues to be so entitled. Nations has not required any settlement under the Nations Price Adjustment Mechanism to date. See "Potential Dilution and Liquidity Effects of the Price Adjustment Mechanism" below. Nations also has the right to force a complete settlement under the Nations Price Adjustment Mechanism at any time upon the occurrence of any of the following (each a "Mandatory Nations Unwind 28 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Event"): (i) default of the Companies with respect to certain indebtedness, (ii) declaration by the Companies of bankruptcy or insolvency or failure to post sufficient cash collateral or (iii) the sale or refinancing by the Companies of certain properties in which the net proceeds of such sale or refinancing (up to the amount necessary to effect a complete cash settlement) are not applied to a cash settlement under the Nations Price Adjustment Mechanism. The Nations Price Adjustment Mechanism also provides that, upon the consummation of the sale or refinancing of certain properties by the Companies with a third party, the Companies must apply the net proceeds to the extent necessary to effect a complete cash settlement under the Nations Price Adjustment Mechanism. The Companies have agreed to use all commercially reasonable efforts to effect such a sale or refinancing. The Companies' planned sale of assets to Paine Webber Real Estate (as described in Note 13 below) would give rise to a Mandatory Nations Unwind Event absent a waiver by Nations. The Companies are seeking such a waiver, but no assurance can be given as to whether or on what terms it will be obtained. In addition, the Companies' bank group has indicated its belief that consent under the credit facility would be required in connection with such sale. No assurance can be given as to whether or on what terms such consent, if required, will be obtained. Under the terms of the Nations Price Adjustment Mechanism, upon the occurrence of a Mandatory Nations Unwind Event, if the Daily Average Price (as defined) of the Paired Shares does not exceed $20.00, the Companies would be deemed to have elected to settle the Nations Price Adjustment Mechanism in cash (and the Companies would not be entitled to elect to settle in stock). The Daily Average Price of the Paired Shares on November 19, 1998 was $7.46. As of the date of this filing, the Companies have delivered an aggregate of 13,886,547 Paired Shares and $179.2 to Nations as collateral to secure the Companies' obligations under the Nations Price Adjustment Mechanism. A registration statement covering the sale by PWFS, Nations and UBS of up to 40,000,000 Paired Shares in connection with the Price Adjustment Mechanisms has been declared effective; however there can be no assurance that such registration statement will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. PWFS TRANSACTION. On April 6, 1998, the Companies entered into transactions with PaineWebber Incorporated ("PaineWebber") and PaineWebber Financial Products, Inc. ("PWFS" and, together with PaineWebber, the "PaineWebber Parties"). Pursuant to the terms of a Purchase Agreement dated as of April 6, 1998 (the "PaineWebber Purchase Agreement"), PaineWebber purchased 5,150,000 Paired Shares (the "Initial PaineWebber Shares") from the Companies at a purchase price of $27.01125 per share, which reflected a 2% discount to the last reported sale price of the Paired Shares on April 3, 1998, for net proceeds of approximately $139,100. The net proceeds were used by the Companies to repay existing indebtedness. The Initial PaineWebber Shares represent approximately 2.9% of the outstanding Paired Shares as of the date of this filing. In connection with the issuance of the Initial PaineWebber Shares, the Companies entered into a Purchase Price Adjustment Mechanism Agreement, dated as of April 6, 1998, with PWFS (as amended on August 14, 1998, September 30, 1998 and October 22, 1998, the "PaineWebber Price Adjustment Agreement"). Upon any settlement under the PaineWebber Price Adjustment Agreement (a "PW Settlement"), 29 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) the purchase price of the Initial PaineWebber Shares subject to the PW Settlement is adjusted based upon the difference between (i) the proceeds (net of a negotiated resale spread or underwriting discount) received by PWFS from the sale of the Paired Shares and (ii) a reference price (the "Reference Price") equal to the closing price for a Paired Shares on April 3, 1998 plus a forward accretion reflecting an imputed return at LIBOR plus 140 basis points, minus an adjustment to reflect distributions on the Initial PaineWebber Shares prior to the date of such PW Settlement (such difference, the "PW Price Difference"). If the PW Price Difference is positive, PWFS must deliver Paired Shares or cash to the Companies equal in value to the aggregate PW Price Difference. If the PW Price Difference is negative, the Companies must deliver to PWFS additional Paired Shares equal in value (net of a negotiated resale spread or underwriting discount, as the case may be) to the aggregate PW Price Difference. The PaineWebber Price Adjustment Agreement provides that shares may be delivered in settlement only if the Companies have on file with the SEC an effective registration statement covering the resale by PWFS of the shares to be delivered. Although a registration statement covering the sale of up to 40,000,000 Paired Shares by PWFS, Nations and UBS in connection with the Price Adjustment Mechanisms has been declared effective, there can be no assurance that such registration statement will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. Pursuant to the PaineWebber Price Adjustment Agreement, the Companies have to date delivered 17,816,281 Paired Shares to PWFS as collateral ("Collateral Shares") and have paid cash dividends totaling $192.3 on the Collateral Shares, which amount is held by PWFS as collateral. Such number of shares is subject to adjustment every two weeks such that the value of the Collateral Shares plus the Initial PaineWebber Shares that have not been settled (valued at the closing price of the Paired Shares on the adjustment date) is equal to the amount by which the Reference Price times the number of shares subject to the PaineWebber Price Adjustment Agreement (i.e., the number of Initial PaineWebber Shares that have not been settled) exceeds $5,000 (such excess amount, the "Collateral Amount"). The PaineWebber Price Adjustment Agreement provides, that if the resale by PWFS of the shares to be so delivered is not covered by an effective registration statement, then the Companies, at their option, must deliver to PWFS either (i) a number of Collateral Shares equal in value to 125% of the Collateral Amount or (ii) cash collateral equal to the Collateral Amount. Although a registration statement covering the sale of up to 40,000,000 Paired Shares by PWFS, Nations and UBS in connection with the Price Adjustment Agreements has been declared effective, there can be no assurance that such registration statement will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. The PaineWebber Price Adjustment Agreement provides that if the closing price of the Paired Shares on any trading day does not equal or exceed $16.00, PWFS has the right to force a complete settlement under the PaineWebber Price Adjustment Agreement through any commercially reasonable manner of sale specified by PWFS. As a result of the failure of the closing price of the Paired Shares to equal or exceed $16.00 on August 25, 1998, pursuant to the terms of the PaineWebber Price Adjustment Agreement, PWFS became entitled to force a complete settlement under the PaineWebber Price Adjustment Agreement and continues to be so entitled. In addition, the PaineWebber Price Adjustment Agreement 30 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) reached maturity on October 15, 1998. PWFS has not required any settlement under the PaineWebber Price Adjustment Agreement to date although it has reserved its right to do so. See "Potential Dilution and Liquidity Effects of the Price Adjustment Mechanisms" below. PWFS also has the right to force a complete settlement under the PaineWebber Price Adjustment Agreement if the Companies (i) are in default with respect to certain specified indebtedness of the Companies or (ii) effect an early settlement, unwind or liquidation of any transaction similar to the transaction with PWFS. POTENTIAL DILUTION AND LIQUIDITY EFFECTS OF THE PRICE ADJUSTMENT MECHANISMS. Settlement under one or more of the Price Adjustment Mechanisms described above could have adverse effects on the Companies' liquidity or dilutive effects on the Companies' capital stock. As of the date of this filing, all three counterparties to the Price Adjustment Mechanisms were, pursuant to the terms of the Price Adjustment Mechanisms, entitled to require settlement of their transactions. If upon settlement the reset price or unwind price (in the case of the UBS and Nations transactions) or the market price (in the case of the PWFS transaction) of the Paired Shares is less than the applicable forward price or reference price, the Companies must deliver cash or additional Paired Shares to effect such settlement. Delivery of cash would adversely affect the Companies' liquidity, and delivery of shares would have dilutive effects on the Companies' capital stock. Moreover, to settle in stock under any of the Price Adjustment Mechanisms, the Companies may be required to issue Paired Shares at a depressed price, which would heighten the dilutive effects on the Companies' capital stock. The dilutive effects of a stock settlement increase significantly as the market price of the Paired Shares declines below the applicable forward price or reference price. Furthermore, under certain circumstances, the Companies may settle in Paired Shares only if a registration statement covering such shares is effective. Although to date registration statements covering the sale of up to 44,000,000 Paired Shares in connection with the Price Adjustment Mechanisms have been declared effective, there can be no assurance that such registration statements will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. The market price of the Paired Shares has dropped significantly below the applicable forward price or reference price under each of the Price Adjustment Mechanisms. As a result, the Companies have to date made cash payments (including cash dividends on collateral shares) totaling $54,252 (including a partial settlement of $45,628 in cash under the UBS Forward Stock Contract) and delivered an aggregate of 34,177,187 additional Paired Shares as collateral pursuant to the Price Adjustment Mechanisms. If the Companies settled all three transactions in cash on November 12, 1998, they would be obligated to deliver to the counterparties a total of approximately $314,369 (assuming application of the cash currently held as collateral by the counterparties) and would receive from the counterparties a total of 13.3 million Paired Shares plus all Paired Shares then held as collateral by them. The terms of the Price Adjustment Mechanisms provide that all three counterparties currently have the right to require the Companies to settle their transactions. Moreover, UBS has asserted that the Companies are in default under the terms of the Forward Stock Contract as the result of the Companies 31 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) not delivering certain cash collateral and not making final settlement of the Forward Stock Contract in cash, although the Companies have disputed this assertion. The Companies are currently in discussions regarding possible resolutions of the Price Adjustment Mechanisms to provide the Companies with the opportunity to resolve the Price Adjustment Mechanisms through payments of cash or other forms of consideration, and thus to avoid the need to settle in shares. There can be no assurance that such discussions will be successful. Moreover, any such resolutions may require the consent of the lenders under the Companies' credit facility. No assurances can be given that any such consent, if required and sought, would be obtained, or that the Companies would be able to meet their obligations under any such settlement arrangement. 8. RELATED PARTY TRANSACTIONS: 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 $3,980. 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. 9. INCOME TAXES: As a result of the Wyndham Merger, the WHG Merger and the Interstate Merger, Wyndham recorded a deferred tax liability totaling $108,221. The deferred tax liability represents the tax effects of differences between the fair values and the tax bases of identifiable assets acquired and liabilities assumed in connection with the transactions. The income tax provision for Wyndham is affected by certain expenses which are deductible in determining net income for GAAP purposes, but are non-deductible for federal income tax purposes. The income tax provision is also affected by Wyndham's ownership of certain subsidiaries which are not consolidated for federal income tax purposes. 32 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 10. CASH DIVIDENDS DECLARED; 1998 DIVIDENDS
DIVIDEND PER SHARE(1) ----------- 1997: First quarter...................................................................................... $ 0.2625 Second quarter..................................................................................... $ 0.3225(2) Third quarter...................................................................................... $ 0.2625 1998: First quarter...................................................................................... $ 0.3200(3) Second quarter..................................................................................... $ 0.3200(4)
- ------------------------ (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 International Common Stock. (2) Dividends paid for second quarter of 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 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 May 4, 1998, Patriot declared a dividend of $0.32 per share for the first quarter of 1998. The dividend was paid on May 29, 1998 to shareholders of record on May 20, 1998. (4) On July 28, 1998, Patriot declared a dividend of $0.32 per share for the second quarter of 1998. The dividend was paid on August 20, 1998 to shareholders of record on August 10, 1998. Patriot is currently reviewing its liquidity and financial condition. Accordingly, Patriot has decided not to declare a dividend with respect to the third quarter at this time. Instead, prior to December 31, 1998, Patriot intends to declare a dividend, payable in cash or securities in January, 1999, which will be at least sufficient to satisfy the federal income tax requirements with respect to dividends in order for Patriot to continue to qualify as a REIT. 11. PRO FORMA FINANCIAL INFORMATION: The following unaudited separate and combined pro forma results of operations of Patriot and Wyndham are presented as if the 487 hotels owned, leased, managed or franchised by the Companies as of September 30, 1998, had been acquired on January 1, 1997. Such acquisition transactions include: (i) the Cal Jockey Merger, the Wyndham Merger, the Interstate Merger and the CHCI Merger and the related transactions; (ii) the closing on the commitment for the Revolving Credit Facility and Term Loans; (iii) the acquisition of Grand Heritage Hotels, Inc. and other Grand Heritage subisidiaries; (iv) the Arcadian Acquisition and the Summerfield Acquisition; (v) the WHG Transactions; and (vi) the private placements of equity securities and public offering of the Companies' common stock which occurred during the first nine months of 1998 and during 1997. The following unaudited pro forma financial information is not 33 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 11. PRO FORMA FINANCIAL INFORMATION: (CONTINUED) 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
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue..................................................... $ 1,929,924 $ 1,794,741 ------------ ------------ ------------ ------------ Net loss(1)....................................................... $ (86,513) $ (45,931) Adjustment for equity forwards(2)................................. (95,063) -- Preferred stock dividends......................................... (4,250) -- ------------ ------------ Net loss to common stockholders................................. $ (185,826) $ (45,931) ------------ ------------ ------------ ------------ Earnings per share-- Basic loss per Paired Share....................................... $ (1.33) $ (0.33) ------------ ------------ ------------ ------------ Diluted loss per Paired Share..................................... $ (1.33) $ (0.33) ------------ ------------ ------------ ------------ Weighted average number of Paired Shares and Paired Share equivalents outstanding: Basic........................................................... 139,820 139,820 ------------ ------------ ------------ ------------ Diluted......................................................... 139,820 139,820 ------------ ------------ ------------ ------------
- ------------------------ (1) Combined pro forma net loss for the nine months ended September 30, 1998 includes costs to acquire leaseholds and treasury lock settlement costs, non-recurring expenses, in the amount of $61,000 and $49,225, respectively. Combined pro forma net loss for the nine months ended September 30, 1997 includes costs to acquired leaseholds, a non-recurring expense, in the amount of $43,820 that was reported by the Companies. (2) The adjustment relates to the mark-to-market adjustment for the UBS Transaction and the Nations Transaction (described in Note 7), which can be settled in cash or stock, at the Companies' option. There is no adjustment to earnings per share for the PaineWebber Transaction since it can be settled in stock only and is accounted for by the Reverse Treasury Stock Method. 34 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 11. PRO FORMA FINANCIAL INFORMATION: (CONTINUED) PATRIOT CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue..................................................... $ 565,944 $ 545,601 ------------ ------------ ------------ ------------ Net income (loss)(1).............................................. $ 17,263 $ (42,754) Adjustment for equity forwards(2)................................. (95,063) -- Preferred stock dividends......................................... (3,110) -- ------------ ------------ Net loss to common stockholders................................. $ (80,910) $ (42,754) ------------ ------------ ------------ ------------ Earnings per share-- Basic earnings (loss) per share................................... $ (0.58) $ (0.31) ------------ ------------ ------------ ------------ Diluted earnings (loss) per share................................. $ (0.58) $ (0.31) ------------ ------------ ------------ ------------ Weighted average number of common shares and common share equivalents outstanding: Basic........................................................... 139,820 139,820 ------------ ------------ ------------ ------------ Diluted......................................................... 139,820 139,820 ------------ ------------ ------------ ------------
- ------------------------ (1) Consolidated pro forma net loss for the nine months ended September 30, 1998 includes costs to acquire leaseholds and treasury lock settlement costs, non-recurring expenses, in the amount of $8,279 and $49,225, respectively, that were reported by Patriot. Consolidated pro forma net loss for the nine months ended September 30, 1997 includes costs to acquired leaseholds, a non-recurring expense, in the amount of $43,820 that was reported by Patriot. (2) The adjustment relates to the mark-to-market adjustment for the UBS Transaction and the Nations Transaction (described in Note 7), which can be settled in cash or stock, at the Companies' option. There is no adjustment to earnings per share for the PaineWebber Transaction since it can be settled in stock only and is accounted for by the Reverse Treasury Stock Method. 35 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 11. PRO FORMA FINANCIAL INFORMATION: (CONTINUED) WYNDHAM CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue..................................................... $ 1,901,245 $ 1,760,812 ------------ ------------ ------------ ------------ Net loss(1)....................................................... $ (114,085) $ (3,177) Preferred stock dividends......................................... (1,140) -- ------------ ------------ Net loss to common stockholders................................. $ (115,225) $ (3,177) ------------ ------------ ------------ ------------ Earnings per share Basic loss per share.............................................. $ (0.82) $ (0.02) ------------ ------------ ------------ ------------ Diluted loss per share............................................ $ (0.82) $ (0.02) ------------ ------------ ------------ ------------ Weighted average number of common shares and common share equivalents outstanding: Basic........................................................... 139,820 139,820 ------------ ------------ ------------ ------------ Diluted......................................................... 139,820 139,820 ------------ ------------ ------------ ------------
- ------------------------ (1) Consolidated pro forma net loss for the nine months ended September 30, 1998 includes costs to acquire leaseholds, a non-recurring expense, in the amount of $52,721 that was reported by Wyndham. 12. LIQUIDITY: The Companies are evaluating possible means of meeting near-term debt service requirements and improving liquidity through refinancing or extending the maturity of existing indebtedness, issuing additional equity securities, and divesting certain non-core, non-proprietarily branded hotel assets. The Companies have also re-strategized capital expenditures (currently estimated at $100,000 for 1999) and development programs, are improving operating efficiencies, and are in discussions to seek possible amendments to the Revolving Credit Facility. No assurances can be made regarding the availability or terms of additional sources of capital for the Companies in the future and no assurances can be given regarding the Companies' ability to successfully refinance or extend the maturity of existing indebtedness. A default by the Companies under current existing indebtedness may cause a cross-default under other existing indebtedness, including, without limitation, the Revolving Credit Facility. No assurances can be given regarding the Companies' success in securing any amendments to the Revolving Credit Facility. Additionally, in the absence of such amendments, no assurances can be given that the Companies will meet the reduced EBITDA coverage ratio 36 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 12. LIQUIDITY: (CONTINUED) requirements which go into effect in December under the Revolving Credit Facility. If the Companies are unable to secure additional sources of financing in the future, are unable to successfully refinance existing indebtedness, or are unable to obtain amendments to existing convenants under the Revolving Credit Facility, no assurance can be made that the Companies will be able to meet their financial obligations as they come due without substantial dilution of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations or similar actions. Additionally, no assurances can be given that the lack of future financing sources would not have a material adverse effect on the Companies' financial condition and results of operations. 13. SUBSEQUENT EVENTS: In September 1998, Hurricane Georges hit the island of Puerto Rico and the Gulf coast of the United States, including Florida and Louisiana. Patriot owns three properties on Puerto Rico, the El Conquistador Resort and Country Club, the El San Juan Hotel and Casino and the Condado Plaza Hotel. The hurricane caused approximately $60,000 of property related damage, excluding the impact of business interruption, to the El Conquistador, Condado Plaza Hotel & Casino and the El San Juan Hotel & Casino properties. As a result of the damage, the three properties experienced varying periods of business interruption. In addition to these properties, Wyndham manages two properties on the island, the Old San Juan Hotel and Casino and the Wyndham Palmas del Mar. The Companies' damage assessment teams, working with the underwriters for the Companies' insurance providers, have inspected each of the Companies' owned or managed properties on Puerto Rico and while none of the properties were destroyed, each sustained damages requiring repair and construction. Furthermore, each of the Companies' owned or managed properties sustained damages to the surrounding grounds and landscaping which are in the process of being repaired. To date, the El San Juan, the Old San Juan, the El Conquistador and the Palmas del Mar have re-opened for business. It is currently anticipated that the remainder of the closed rooms at the Condado Plaza, the stand alone ballroom at the Palmas del Mar and the suites at Las Casitas and certain other ancillary facilities at the El Conquistador will re-open in late November. In addition, the grand opening of the Golden Door Spa at the El Conquistador which was scheduled for mid-October will be delayed until mid-December. The Companies' estimated re-opening dates are subject to the availability of construction materials and labor. No assurance can be given that the Companies' owned or manage properties in Puerto Rico will be operating at full capacity by these estimated dates. All of the Companies' owned or managed properties on Puerto Rico are insured with both comprehensive property damage and business interruption insurance, subject to certain deductibles. The Companies have hired a consultant to assess their business interruption claims and are currently negotiating with their insurance carriers regarding coverage for the losses sustained at the Puerto Rico properties. While the Companies currently believe that substantially all of the damages sustained at their Puerto Rico properties will be covered by insurance, no assurances can be made regarding the timing or amount of the actual payments that will ultimately be received by the Companies under these policies. 37 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 13. SUBSEQUENT EVENTS: (CONTINUED) On October 20, 1998, the El Conquistador Partnership, L.P. (the "El Conquistador Partnership"), which is beneficially owned 100% by the Companies, filed a Form S-11 with the SEC with respect to the offering (the "Bond Offering") of the undivided interests in the 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 (the "AFICA Bonds"). It is contemplated that the AFICA Bonds will be issued in the total principal amount of $100,000, will consist of serial bonds and term bonds and will be issued in register form, without coupons, in denominations which are multiples of $5. AFICA will issue the AFICA Bonds and lend the proceeds to the El Conquistador Partnership pursuant to the loan agreement (the "AFICA Loan Agreement"). The El Conquistador Partnership will use the loan proceeds to repay the Interim Financing entered into on August 3, 1998, to fund certain reserves and to pay certain costs and expenses of issuing the AFICA Bonds. The AFICA Bonds will be secured by a lien on substantially all the assets of the El Conquistador Partnership. On October 23, 1998, Patriot notified the Summerfield Partners' Representative of Patriot's intention to deliver the additional consideration due under the Summerfield Acquisition agreement based on the market price of the Paired Shares through the end of 1998 in the form of OP Units. Patriot currently estimates the additional consideration due under the Summerfield Acquisition agreement at approximately $10,500. On November 3, 1998, the Companies entered into agreements to extend the maturity of certain debt related to the El Conquistador and the Condado Plaza Hotel & Casino from November 3, 1998 to January 29, 1999. The extension agreements required that $10,000 be deposited into an escrow account in installments beginning on the date of the extension through January 12, 1999. Upon the satisfactory completion of certain conditions, the $10,000 will be released from escrow. On November 8, 1998, the Companies announced two asset disposition transactions which, in aggregate, are expected to total approximately $206,500. The first transaction, currently under a letter of intent, is to transfer seven hotels representing approximately 1,982 guest rooms, as well as a controlling interest in Interstate Hotel Management, Inc., to affiliates of Paine Webber Real Estate for aggregate consideration of approximately $165,000, including the satisfaction of $160,000 in debt owed by the Companies to Paine Webber Real Estate in connection with the Arcadian Acquisition. This consideration may be subject to an additional earn-out if the hotels meet certain return targets. This transaction is expected to close on or before December 23, 1998 subject to the satisfactory completion of PaineWebber's due diligence and customary closing conditions. This acquisition, if consummated, would be in lieu of the Spin-off contemplated under the Marriott Settlement Agreement. This transaction is subject to third-party consents and conditions. There can be no assurance that a definitive contract will be entered into, that the consents and conditions will be satisfied, or that the transaction will ultimately be consummated. The second transaction, which is expected to close by November 20, 1998, includes the sale of a 100% interest in two hotel properties and a 50% equity interest in two other hotel properties to Mr. Milton Fine, a director of Patriot, for an aggregate purchase price of $41,500. 38 PATRIOT AMERICAN HOSPITALITY, INC. AND WYNDHAM INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (UNAUDITED) 13. SUBSEQUENT EVENTS: (CONTINUED) On November 12, 1998, the Companies announced they had retained Morgan Stanley Dean Witter & Co. and Chase Securities Inc. as co-advisors to explore alternatives responding to issues relating to debt maturities and the forward equity contracts. The Companies are exploring a broad range of alternatives to address these matters, including, without limitation, a sale of equity and/or debt securities, a business combination or a sale of certain assets. No assurances can be given as to whether or when (or on what terms) any transaction would be consummated. On November 16, 1998, the Companies announced they will offer a stock option exchange program for its employees who were awarded options since the Companies acquired the paired-share structure. Certain senior executives and directors will not participate in the exchange. The Companies will utilize the Black Schole's Option Pricing Model, one of two valuation models recognized by the SEC, to compute the appropriate exchange of the formerly issued options. The share price on the to-be-exchanged options will be determined by the higher of the average price of the Companies paired shares over a five-day trading period that commenced on Tuesday, November 10, 1998, or the closing price of the Companies paired shares on the fifth trading day. The result of the exchange will be the award of fewer options in aggregate, but at a calculated amount of $8.10 per share, to ensure that the option program continues as a valuable vehicle through which to incent and retain valuable employees. Certain lenders on the debt assumed in the Arcadian Acquisition have rights to consent to the roll-over of certain short-term leases which are subject to renewal in December 1998. Certain lenders have asserted that they intend not to consent to the roll-over of these leases. As a result, the Companies would be required to refinance such debt if such consents could not be obtained. The Companies are in discussions regarding the sale of certain hotels currently leased to NorthCoast Hotels. No definitive agreement has been reached regarding this sale and no assurances can be given that the transaction will be consummated. As previously disclosed, the Companies are currently reviewing the characterization and recognition in the fourth quarter of 1998 of approximately $16,000 of income relating to the cancellation of certain rights. 39 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Companies' Joint Annual Report on Form 10-K for the year ended December 31, 1997. 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-Q constitute "forward-looking statements" as that term is defined under Section21E 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 and to note that they speak only as of the date hereof. Although forward-looking statements reflect management's good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievement of the Companies to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Companies undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Certain factors that might cause a difference include, but are not limited to, risks associated with the availability of equity or debt financing at terms and conditions favorable to the Companies, the willingness of the Companies' existing lenders to refinance, extend or amend the terms of existing indebtedness, the willingness of the counterparties to the Companies' forward equity contracts to enter into settlements regarding those agreements; the Companies' ability to effect sales of assets on favorable terms and conditions; risks associated with the hotel industry and real estate markets in general; and risks associated with debt financing. THE COMPANIES At September 30, 1998, Patriot and Wyndham, directly or through the Operating Partnerships and other subsidiaries, owned interests in 184 hotels totaling over 44,700 rooms and leased 122 hotels from third parties totaling over 15,700 rooms. In addition, Wyndham managed 171 hotels with over 42,000 rooms for third party owners and franchised nine hotels under the Wyndham, Summerfield or ClubHouse brands. The hotels are diversified by franchise or brand affiliation and serve primarily major U.S. business centers. In addition to hotels catering primarily to business travelers, the Companies' portfolio includes world-class resort hotels and prominent hotels in major tourist destinations. Patriot leases 216 of its owned or leased hotels to Wyndham and 14 of Patriot's hotels are leased to third party lessees (the "Lessees") who are responsible for operating the hotels. Generally, these leases provide for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Leases"). The Lessees, in turn, have entered into separate agreements with hotel management entities (the "Operators") to manage the hotels. Seventy-six of the Companies' hotels are owned or leased by special purpose entities (the "Non-Controlled Subsidiaries"). Patriot owns an approximate 99% non-voting interest and Wyndham owns an approximate 1% controlling voting interest in each of the Non-Controlled Subsidiaries. Therefore, the operating results of the Non-Controlled Subsidiaries are combined with those of Wyndham for financial reporting purposes. Patriot accounts for its investment in the Non-Controlled Subsidiaries using the equity method of accounting. 40 In addition to leasing and managing hotels, Wyndham is also engaged in the business of conducting and offering pari-mutuel wagering on thoroughbred horse racing at the Bay Meadows Racecourse (the "Racecourse"). On November 12, 1998, the Companies announced that they had retained Morgan Stanley Dean Witter & Co. and Chase Securities Inc. as co-advisors to explore alternatives responding to issues relating to debt maturities and the forward equity contracts. The Companies are exploring a broad range of alternatives to address these matters, including, without limitation, a sale of equity and/or debt securities, a business combination or a sale of certain assets. No assurances can be given as to whether or when (or on what terms) any transaction would be consummated. HOTELS AND OTHER BUSINESSES ACQUIRED WYNDHAM HOTEL CORPORATION On January 5, 1998, pursuant to the Agreement and Plan of Merger dated as of April 14, 1997, as thereafter amended, (the "Wyndham Merger Agreement") between Patriot, Wyndham and Wyndham Hotel Corporation ("Old Wyndham"), Old Wyndham merged with and into Patriot, with Patriot being the surviving corporation (the "Wyndham Merger"). Patriot, as a result of the Wyndham Merger, acquired ownership of ten Wyndham hotels and 14 Clubhouse hotels and leased such hotels to Wyndham. In addition, Patriot assumed 14 hotel leases, 13 of which were sub-leased to Wyndham. Old Wyndham's remaining 52 management and franchise contracts (excluding 16 hotels that Old Wyndham managed that are owned by Patriot), the Wyndham and ClubHouse proprietary brand names, and the Wyndham hotel management company were transferred to corporate subsidiaries of Patriot (collectively, the "Non-Controlled Subsidiaries"). Patriot owns a 99% non-voting interest and Wyndham owns the 1% controlling voting interest in each of the Non-Controlled Subsidiaries. Therefore, the operating results of the Non-Controlled Subsidiaries have been combined with those of Wyndham for financial reporting purposes. Patriot accounts for its investment in the Non-Controlled Subsidiaries using the equity method of accounting. The total purchase consideration for the Wyndham Merger of approximately $982 million consisted of 21,594,137 Paired Shares and 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 million to repay debt and pay Old Wyndham shareholders who elected to receive cash (which was financed with funds drawn on the Companies' revolving credit facility (the "Revolving Credit Facility")), and the assumption of approximately $59 million in debt. WHG CASINOS & RESORTS, INC. AND RELATED TRANSACTIONS On January 16, 1998, pursuant to the Agreement and Plan of Merger dated as of September 30, 1997 (the "WHG Merger Agreement") between Patriot, Wyndham and WHG Casinos & Resorts Inc. ("WHG"), a subsidiary of Wyndham merged with and into WHG, with WHG being the surviving corporation (the "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 (the "El Conquistador"), 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 41 Shares valued at approximately $49.2 million (collectively, these transactions and the WHG Merger are referred to herein as the "WHG Transactions"). 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. On August 3, 1998, the Companies refinanced certain debt related to the El Conquistador and the Condado Plaza Hotel & Casino. Proceeds of $145.0 million from the refinancing were used to repay outstanding indebtedness of approximately $139.3 million, to pay legal and closing costs and to establish certain reserves, including interest reserves, required by the loan agreements. The loans are secured by mortgages on the properties, bear interest at a rate of LIBOR plus 2.25% and, prior to the extension described below, matured on November 3, 1998. In September 1998, Hurricane Georges hit the island of Puerto Rico and the Gulf coast of the United States, including Florida and Louisiana. Patriot owns three properties on Puerto Rico, the El Conquistador Resort and Country Club, the El San Juan Hotel and Casino and the Condado Plaza Hotel. The hurricane caused approximately $60 million of property related damage, excluding the impact of business interruption, to the El Conquistador, Condado Plaza Hotel & Casino and the El San Juan Hotel & Casino properties. As a result of the damage, the three properties experienced varying periods of business interruption. In addition to these properties, Wyndham manages two properties on the island, the Old San Juan Hotel and Casino and the Wyndham Palmas del Mar. The Companies' damage assessment teams, working with the underwriters for the Companies' insurance providers, have inspected each of the Companies' owned or managed properties on Puerto Rico and while none of the properties were destroyed, each sustained damages requiring repair and construction. Furthermore, each of the Companies' owned or managed properties sustained damages to the surrounding grounds and landscaping which are in the process of being repaired. To date, the El San Juan, the Old San Juan, the El Conquistador and the Palmas del Mar have re-opened for business. It is currently anticipated that the remainder of the closed rooms at the Condado Plaza, the stand alone ballroom at the Palmas del Mar and the suites at Las Casitas and certain other ancillary facilities at the El Conquistador will re-open in late November. In addition, the grand opening of the Golden Door Spa at the El Conquistador which was scheduled for mid-October will be delayed until mid-December. The Companies' estimated re-opening dates are subject to the availability of construction materials and labor. No assurance can be given that the Companies' owned or manage properties in Puerto Rico will be operating at full capacity by these estimated dates. All of the Companies' owned or managed properties on Puerto Rico are insured with both comprehensive property damage and business interruption insurance, subject to certain deductibles. The Companies have hired a consultant to assess their business interruption claims and are currently negotiating with their insurance carriers regarding coverage for the losses sustained at the Puerto Rico properties. While the Companies currently believe that substantially all of the damages sustained at their Puerto Rico properties will be covered by insurance, no assurances can be made regarding the timing or amount of the actual payments that will ultimately be received by the Companies under these policies. On November 3, 1998, the Companies entered into agreements to extend the maturity of certain debt related to the El Conquistador and the Condado Plaza Hotel & Casino from November 3, 1998 to January 29, 1999. The extension agreements required that $10 million be deposited into an escrow account in installments beginning on the date of the extension through January 12, 1999. Upon the satisfactory completion of certain conditions, the $10 million will be released from escrow. 42 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 ("Arcadian," formerly known as Arcadian International Plc) for 60 pence per share. 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 L185.9 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. Collectively, the transactions described above are referred to herein as the "Arcadian Acquisition." In connection with the Arcadian Acquisition, Patriot entered into a short-term financing agreement on April 15, 1998 with Paine Webber Real Estate Securities Inc. ("Paine Webber Real Estate") whereby Paine Webber Real Estate loaned Patriot $160 million through April 15, 1999, at a rate equal to the borrowing rate on Patriot's Revolving Credit Facility. The Companies currently anticipate that this $160 million debt will be satisfied in connection with the sale of certain hotel and other assets to Paine Webber Real Estate described in Note 13 to the financial statements. 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, (the "Interstate Merger Agreement") between Patriot, Wyndham and Interstate Hotels Company ("Interstate"), Interstate merged with and into Patriot with Patriot being the surviving company (the "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 (the "Cash Consideration"), 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 (the "Interstate Exchange Ratio"). 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 $2.1 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 $0.429 on each share of Interstate common stock that was converted into Paired Shares, aggregating approximately $9.1 million. In connection with the Interstate Merger, the Patriot Companies closed on the commitment from The Chase Manhattan Bank and Chase Securities, Inc. and Paine Webber Real Estate to increase Patriot's existing credit facilities to an aggregate of $2.7 billion (an increase of $1.45 billion from the prior $1.25 billion credit package). The increased credit facilities include the $900 million Revolving 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. In addition, the increased credit facilities will be used to fund future acquisitions and for general working capital purposes. Interest rates will be based on the Patriot Companies' leverage ratio and may vary from 1.5% to 2.5% over LIBOR. 43 Patriot incurred approximately $27.4 million in loan fees and other expenses associated with this financing arrangement. On May 27, 1998, the Companies and Interstate entered into a settlement agreement (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 on June 2, 1998. In addition to dismissal of the Marriott litigation, the Settlement Agreement provides for three principal transactions: (i) rebranding of ten Marriott hotels under the Wyndham name, (ii) the assumption by Marriott of the management of ten Marriott hotels formerly managed by Interstate for the remaining term of the Marriott franchise agreement, and (iii) the Spin-off. On November 8, 1998, the Companies entered into a letter of intent pursuant to which the Companies will sell seven hotels, representing approximately 1,982 guest rooms, as well as a controlling interest in Interstate Hotel Management, Inc., to affiliates of Paine Webber Real Estate Securities Inc. This transaction, if consummated, would be in lieu of the Spin-off. 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. ("Summerfield") for approximately $298.9 million (the "Summerfield Acquisition"). The total purchase consideration for the Summerfield Acquisition consisted of approximately 3,223,795 OP Units of the Operating Partnerships, 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 and (ii) achievement of certain performance criteria through 2001 for seven hotels that are currently under development. As a result of the Summerfield Acquisition, Patriot acquired four Summerfield Suites-Registered Trademark- hotels, leasehold and management interests in 24 Summerfield Suites-Registered Trademark-, Sierra Suites-Registered Trademark- and Sunrise Suites hotels and management contracts and franchise interests for 12 additional Summerfield Suites-Registered Trademark- and Sierra Suites-Registered Trademark-hotels. Patriot has leased or sub-leased such hotels to Wyndham. In addition, Patriot acquired the development contracts for several additional hotels. On October 23, 1998, Patriot notified the Summerfield Partners' Representative of Patriot's intention to deliver the additional consideration due under the Summerfield Acquisition agreement based on the market price of the Paired Shares through the end of 1998 in the form of OP Units. Patriot currently estimates the additional consideration due under the Summerfield Acquisition agreement at approximately $10,500,000. CHC INTERNATIONAL On June 30, 1998, pursuant to an Agreement and Plan of Merger dated as of September 30, 1997 (the "CHCI Merger Agreement") between Patriot, Wyndham and CHC International ("CHCI"), the hospitality-related businesses of CHCI merged with and into Wyndham with Wyndham being the surviving company (the "CHCI Merger"). 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. ("GAH"), 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. By operation of the CHCI Merger, all the issued and outstanding shares of common stock, par value $0.005 per share, of CHCI ("CHCI Shares") 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 44 share of Wyndham (the "Wyndham Series A Preferred Stock") and 1,781,181 shares of Series B Redeemable Convertible Preferred Stock, par value $0.01 per share, of Wyndham (the "Wyndham Series B Preferred Stock"). 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 specified assets. OTHER ACQUISITIONS In addition, during the nine months ended September 30, 1998, Patriot acquired investments in four hotels and the Golden Door Spa for approximately $234.1 million. These acquisitions were financed primarily with funds drawn on the Companies' revolving credit facility, the issuance of 53,989 OP Units of the Operating Partnerships valued at approximately $1.5 million, the issuance of 390,335 Paired Shares valued at approximately $10 million, and the assumption of other 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. In July 1998, Wyndham acquired an approximate 50% limited partnership interest in a partnership with affiliates of Don Shula's Steakhouses, Inc. for $1.5 million in cash and 156,272 preferred units of limited partnership interest of Wyndham Partnership. Wyndham entered into this joint venture arrangement to expand the Shula's Steakhouse Brand as a food and beverage amenity in certain of Patriot's hotels. 1998 DIVIDENDS Patriot is currently reviewing its liquidity and financial condition. Accordingly, Patriot has decided not to declare a dividend with respect to the third quarter at this time. Instead, prior to December 31, 1998, Patriot intends to declare a dividend, payable in cash or securities in January, 1999, which will be at least sufficient to satisfy the federal income tax requirements with respect to dividends in order for Patriot to continue to qualify as a REIT. SALES OF PAIRED COMMON STOCK WITH PRICE ADJUSTMENT MECHANISMS The Companies are parties to transactions with three counterparties involving the sale of an aggregate of 13.3 million shares of Paired Common Stock, with related Price Adjustment Mechanisms, as described below. UBS TRANSACTION. On December 31, 1997, the Companies entered into transactions with UBS Limited and Union Bank of Switzerland, London Branch (together with its successor, UBS AG, London Branch, "UBS" and, together with Warburg Dillon Read, LLC, the "UBS Parties"). Pursuant to the terms of a Purchase Agreement dated as of December 31, 1997 (the "UBS Purchase Agreement"), UBS Limited purchased 3,250,000 Paired Shares (the "Initial UBS Shares") from the Companies at a purchase price of $28.8125 per share (the last reported sale price of the Paired Shares on December 30, 1997) for approximately $91.8 million in net proceeds. The net proceeds were used by the Companies to repay existing indebtedness. The Initial UBS Shares represent approximately 1.8% of the outstanding Paired Shares as of the date of this filing. UBS received from the Companies a placement fee of 2%, or approximately $1.9 million. In connection with the issuance of the Initial UBS Shares, the Companies entered into a Forward Stock Contract, dated as of December 31, 1997, with UBS (as amended on August 14, 1998 and September 11, 1998, the "Forward Stock Contract"). Pursuant to the Forward Stock Contract, the Companies have agreed to effect a settlement, in one or more transactions (each a "UBS Settlement"), with respect to a number of Paired Shares equal to the number of Initial UBS Shares, at a per Paired Share 45 price equal to $28.8125 plus a forward accretion reflecting an imputed return at LIBOR plus 140 basis points, minus an adjustment to reflect distributions on the Paired Shares (the "UBS Forward Price"). The forward accretion component represents a guaranteed rate of return to UBS. The Paired Shares to be delivered to or by UBS may consist of Paired Shares acquired under the UBS Purchase Agreement or otherwise. The Companies may effect a UBS Settlement by (i) delivering to UBS Paired Shares (the "UBS Settlement Shares") equal in value (valued at the daily average closing price for the Paired Shares over a specific period of time (the "UBS Unwind Price")) to the UBS Forward Price at the time of such UBS Settlement times the number of Paired Shares subject to such UBS Settlement (the "UBS Settlement Amount") in exchange for the number of shares subject to such UBS Settlement, (ii) delivering to (or, in the event the UBS Unwind Price is greater than the UBS Forward Price, receiving from) UBS a number of Paired Shares equal to the difference between the number of the UBS Settlement Shares and the number of shares subject to such UBS Settlement, or (iii) delivering to UBS cash equal to the UBS Settlement Amount in exchange for the shares subject to such UBS Settlement. If the Companies make a UBS Settlement in Paired Shares, they must also pay to UBS (i) an unwind accretion fee (payable in cash or shares) equal to 50% of the UBS Settlement Amount times the imputed return of LIBOR plus 140 basis points over the period designated for such UBS Settlement and (ii) a placement fee equal to 0.50% of the UBS Settlement Amount. The Forward Stock Contract provides that shares may be delivered in settlement only if the Companies have on file with the SEC an effective registration statement covering the resale by UBS of the shares to be delivered. A registration statement covering up to 4,000,000 shares to be sold by UBS was declared effective (as amended) on October 15, 1998. A registration statement covering up to an additional 40,000,000 shares to be sold by PWFS, Nations and UBS was declared effective on October 15, 1998. In connection with the September 11 amendment to the Forward Stock Contract, the Companies paid down $45,627,725 under the Forward Stock Contract through the application of cash collateral that had previously been delivered to UBS pursuant to the Forward Stock Contract. In addition, the Companies have delivered an additional 2,474,359 Paired Shares and $8,252,274 to UBS as collateral pursuant to the Forward Stock Contract. The cash collateral held by UBS is subject to adjustment every two weeks such that the amount of cash collateral is equal to the number of shares subject to the Forward Stock Contract times the amount by which the UBS Forward Price exceeds the closing price of the Paired Shares on the trading day immediately preceding the adjustment date (such closing price the "UBS Reset Price" and such product the "UBS Interim Settlement Amount"). With the prior written consent of UBS, the Companies may elect to deliver to UBS a number of Paired Shares (the "UBS Interim Settlement Shares") equal in value (valued at the UBS Reset Price) to 125% of the UBS Interim Settlement Amount. The Forward Stock Contract provides that if the average closing price of the Paired Common Stock for any two consecutive trading days does not equal or exceed $11.00 (the "UBS Unwind Threshold"), UBS has the right to force a complete settlement under the Forward Stock Contract. As a result of the failure of the average closing price of the Paired Common Stock for October 2 and October 5, 1998 to equal or exceed $11.00, UBS became entitled to force a complete settlement pursuant to the terms of the Forward Stock Contract and continues to be so entitled. In addition, the Forward Stock Contract reached maturity on October 15, 1998. UBS has asserted that the Companies are in default under the terms of the Forward Stock Contract as the result of the Companies not delivering certain cash collateral and not making final settlement of the Forward Stock Contract in cash, although the Companies have disputed this assertion. See "Potential Dilution and Liquidity Effects of the Price Adjustment Mechanisms" below. UBS also has the right to force a complete settlement under the Forward Stock Contract if the Companies (i) are in default with respect to certain financial and notice covenants under the Forward Stock Contract, (ii) are in default under the Corporation's credit facility with Chase Manhattan Bank, (iii) are in default with respect to certain specified indebtedness of the Companies, (iv) declare bankruptcy or become insolvent or fail to post sufficient cash collateral, (v) effect an early settlement, unwind or 46 liquidation of any transaction similar to the transaction with UBS or (vi) fail to settle the transaction in cash simultaneously with the sale by the Companies of certain property. A registration statement covering the sale of up to 4,000,000 shares by UBS was declared effective (as amended) on October 15, 1998. Also, a registration statement covering the sale of up to an additional 40,000,000 shares by PWFS, Nations and UBS was declared effective on October 15, 1998. However, there can be no assurance that such registration statements will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Forward Stock Contract. NATIONS TRANSACTION. On February 26, 1998, the Companies entered into transactions with a subsidiary of NationsBank Corporation (together with NationsBanc Mortgage Capital Corporation, "Nations"). Pursuant to the terms of a Purchase Agreement dated as of February 26, 1998 (the "Nations Purchase Agreement"), Nations purchased 4,900,000 Paired Shares (the "Initial Nations Shares") from the Companies at a purchase price of $24.8625 per share (which reflected a 2.5% discount from $25.50, the last reported sale price of the Paired Shares on February 25, 1998) for net proceeds of approximately $121.8 million. The net proceeds were used by the Companies to repay existing indebtedness. The Initial Nations Shares represent approximately 2.7% of the outstanding Paired Shares as of the date of this filing. In connection with the issuance of the Initial Nations Shares, the Companies entered into a Purchase Price Adjustment Mechanism, dated as of February 26, 1998, with Nations (as amended on August 14, 1998, the "Nations Price Adjustment Mechanism"). Pursuant to the Nations Price Adjustment Mechanism, the Companies have agreed to effect certain purchase price adjustments on or before February 26, 1999, in one or more transactions (each a "Nations Settlement"), with respect to a number of Paired Shares equal to the number of Initial Nations Shares, by reference to a per Paired Share price equal to $25.50 plus a forward accretion representing an imputed return at LIBOR plus 150 basis points, minus an adjustment to reflect distributions on the Paired Shares (the "Nations Forward Price"). The Paired Shares to be delivered to or by Nations may consist of Paired Shares acquired under the Nations Purchase Agreement or otherwise. The Companies may effect a Nations Settlement by (i) delivering to Nations Paired Shares (the "Nations Settlement Shares") equal in value (valued at the dollar volume weighted average price for the Paired Shares (as calculated pursuant to the Nations Price Adjustment Mechanism) over a specific period of time (the "Nations Unwind Price")) to the Nations Forward Price at the time of such Nations Settlement times the number of shares subject to such Nations Settlement (the "Nations Settlement Amount") in exchange for the number of shares subject to such Nations Settlement, (ii) delivering to (or, in the event the Nations Unwind Price is greater than the Nations Forward Price, receiving from) Nations a number of Paired Shares equal to the difference between the number of Nations Settlement Shares and the number of shares subject to such Nations Settlement, or (iii) delivering to Nations cash equal to the Nations Settlement Amount in exchange for a number of Paired Shares equal to the number of shares subject to such Nations Settlement. If the Companies effect a settlement pursuant to clause (i) or (ii) above, they must also pay a placement fee equal to 2% of the Nations Settlement Amount. The Nations Price Adjustment Mechanism provides that shares may be delivered in settlement only if (i) the Companies have on file with the SEC an effective registration statement covering the sale by Nations of the shares to be delivered, (ii) for settlement at maturity, the dollar volume weighted average price of the Paired Shares (as calculated pursuant to the Nations Price Adjustment Mechanism) on the date of such settlement is greater than or equal to $20.00 and (iii) for settlement at maturity, no Mandatory Nations Unwind Event (as defined below) has occurred and is continuing. If the above conditions are not met when they apply, the Companies generally must deliver cash equal to the Nations Settlement Amount. The Nations Price Adjustment Mechanism provides that on or after October 15, 1998, if the dollar volume weighted average price of the Paired Shares for any two consecutive trading days does not equal or exceed certain amounts (the "Nations Unwind Thresholds"), Nations has the right to force a partial or complete settlement under the Nations Price Adjustment Mechanism. The Nations Unwind Thresholds are $20.00 (33% settlement), $18.75 (67%) and $17.25 (100%). As a result of failure of the price of the 47 Paired Shares to exceed the Nations Unwind Thresholds, pursuant to the terms of the Nations Price Adjustment Mechanisms, Nations became entitled to force a complete settlement under the Nations Price Adjustment Mechanism on October 16, 1998, and continues to be so entitled. Nations has not required any settlement under the Nations Price Adjustment Mechanism to date. See "Potential Dilution and Liquidity Effects of the Price Adjustment Mechanisms" below. Nations also has the right to force a complete settlement under the Nations Price Adjustment Mechanism at any time upon the occurrence of any of the following (each a "Mandatory Nations Unwind Event"): (i) default of the Companies with respect to certain indebtedness, (ii) declaration by the Companies of bankruptcy or insolvency or failure to post sufficient cash collateral or (iii) the sale or refinancing by the Companies of certain properties in which the net proceeds of such sale or refinancing (up to the amount necessary to effect a complete cash settlement) are not applied to a cash settlement under the Nations Price Adjustment Mechanism. The Nations Price Adjustment Mechanism also provides that, upon the consummation of the sale or refinancing of certain properties by the Companies with a third party, the Companies must apply the net proceeds to the extent necessary to effect a complete cash settlement under the Nations Price Adjustment Mechanism. The Companies have agreed to use all commercially reasonable efforts to effect such a sale or refinancing. The Companies' planned sale of assets to Paine Webber Real Estate (as described in Note 13 to the financial statements) would give rise to a Mandatory Nations Unwind Event absent a waiver by Nations. The Companies are seeking such a waiver, but no assurance can be given as to whether or on what terms it will be obtained. In addition, the Companies' bank group has indicated its belief that consent under the credit facility would be required in connection with such sale. No assurance can be given as to whether or on what terms such consent, if required, will be obtained. Under the terms of the Nations Price Adjustment Mechanism, upon the occurrence of a Mandatory Nations Unwind Event, if the Daily Average Price (as defined) of the Paired Shares does not exceed $20.00, the Companies would be deemed to have elected to settle the Nations Price Adjustment Mechanism in cash (and the Companies are not entitled to elect to settle in stock). The Daily Average Price of the Paired Shares on November 19, 1998 was $7.46. As of the date of this filing, the Companies have delivered an aggregate of 13,886,547 Paired Shares and $179,208 to Nations as collateral to secure the Companies' obligations under the Nations Price Adjustment Mechanism. A registration statement covering the sale by PWFS, Nations and UBS of up to 40,000,000 Paired Shares in connection with the Price Adjustment Mechanisms has been declared effective; however, there can be no assurance that such registration statement will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. PWFS TRANSACTION. On April 6, 1998, the Companies entered into transactions with PaineWebber Incorporated ("PaineWebber") and PaineWebber Financial Products, Inc. ("PWFS" and, together with PaineWebber, the "PaineWebber Parties"). Pursuant to the terms of a Purchase Agreement dated as of April 6, 1998 (the "PaineWebber Purchase Agreement"), PaineWebber purchased 5,150,000 Paired Shares (the "Initial PaineWebber Shares") from the Companies at a purchase price of $27.01125 per share, which reflected a 2% discount to the last reported sale price of the Paired Shares on April 3, 1998, for net proceeds of approximately $139.1 million. The net proceeds were used by the Companies to repay existing indebtedness. The Initial PaineWebber Shares represent approximately 2.9% of the outstanding Paired Shares as of the date of this filing. In connection with the issuance of the Initial PaineWebber Shares, the Companies entered into a Purchase Price Adjustment Mechanism Agreement, dated as of April 6, 1998, with PWFS (as amended on August 14, 1998, September 30, 1998 and October 22, 1998, the "PaineWebber Price Adjustment Agreement"). Upon any settlement under the PaineWebber Price Adjustment Agreement (a "PW Settlement"), the purchase price of the Initial PaineWebber Shares subject to the PW Settlement is adjusted based upon the difference between (i) the proceeds (net of a negotiated resale spread or underwriting discount) received by PWFS from the sale of Paired Shares and (ii) a reference price (the "Reference Price") equal 48 to the closing price for a Paired Share on April 3, 1998 plus a forward accretion reflecting an imputed return at LIBOR plus 140 basis points, minus an adjustment to reflect distributions on the Initial PaineWebber Shares prior to the date of such PW Settlement (such difference, the "PW Price Difference"). If the PW Price Difference is positive, PWFS must deliver Paired Shares or cash to the Companies equal in value to the aggregate PW Price Difference. If the PW Price Difference is negative, the Companies must deliver to PWFS additional Paired Shares equal in value (net of a negotiated resale spread or underwriting discount, as the case may be) to the aggregate PW Price Difference. The PaineWebber Price Adjustment Agreement provides that shares may be delivered in settlement only if the Companies have on file with the SEC an effective registration statement covering the resale by PWFS of the shares to be delivered. Although a registration statement covering the sale of up to 40,000,000 Paired Shares by PWFS, Nations and UBS in connection with the Price Adjustment Mechanisms has been declared effective, there can be no assurance that such registration statement will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. Pursuant to the PaineWebber Price Adjustment Agreement, the Companies have to date delivered 17,816,281 Paired Shares to PWFS as collateral ("Collateral Shares") and have paid cash dividends totaling $192,305 on the Collateral Shares, which amount is held by PWFS as collateral. Such number of shares is subject to adjustment every two weeks such that the value of the Collateral Shares plus the Initial PaineWebber Shares that have not been settled (valued at the closing price of the Paired Shares on the adjustment date) is equal to the amount by which the Reference Price times the number of shares subject to the PaineWebber Price Adjustment Agreement exceeds (i.e., the number of Initial PaineWebber Shares that have not been settled) $5,000,000 (such excess amount, the "Collateral Amount"). The PaineWebber Price Adjustment Agreement provides, that if the resale by PWFS of the shares to be so delivered is not covered by an effective registration statement, then the Companies, at their option, must deliver to PWFS either (i) a number of Collateral Shares equal in value to 125% of the Collateral Amount or (ii) cash collateral equal to the Collateral Amount. Although a registration statement covering the sale of up to 40,000,000 Paired Shares by PWFS, Nations and UBS in connection with the Price Adjustment Agreements has been declared effective, there can be no assurance that such registration statement will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. The PaineWebber Price Adjustment Agreement provides that if the closing price of the Paired Shares on any trading day does not equal or exceed $16.00, PWFS has the right to force a complete settlement under the PaineWebber Price Adjustment Agreement through any commercially reasonable manner of sale specified by PWFS. As a result of the failure of the closing price of the Paired Shares to equal or exceed $16.00 on August 25, 1998, pursuant to the terms of the PaineWebber Price Adjustment Agreement, PWFS became entitled to force a complete settlement under the PaineWebber Price Adjustment Agreement and continues to be so entitled. In addition, the PaineWebber Price Adjustment Agreement reached maturity on October 15, 1998. PWFS has not required any settlement under the PaineWebber Price Adjustment Agreement to date although it has reserved the right to do so. See "Potential Dilution and Liquidity Effects of the Price Adjustment Mechanisms" below. PWFS also has the right to force a complete settlement under the PaineWebber Price Adjustment Agreement if the Companies (i) are in default with respect to certain specified indebtedness of the Companies or (ii) effect an early settlement, unwind or liquidation of any transaction similar to the transaction with PWFS. POTENTIAL DILUTION AND LIQUIDITY EFFECTS OF THE PRICE ADJUSTMENT MECHANISMS. Settlement under one or more of the Price Adjustment Mechanisms described above could have adverse effects on the Companies' liquidity or dilutive effects on the Companies' capital stock. As of the date of this filing, all three counterparties to the Price Adjustment Mechanisms were, pursuant to the terms of the Price Adjustment Mechanisms, entitled to require settlement of their transactions. If upon settlement the reset price or 49 unwind price (in the case of the UBS and Nations transactions) or the market price (in the case of the PWFS transaction) of the Paired Shares is less than the applicable forward price or reference price, the Companies must deliver cash or additional Paired Shares to effect such settlement. Delivery of cash would adversely affect the Companies' liquidity, and delivery of shares would have dilutive effects on the Companies' capital stock. Moreover, to settle in stock under any of the Price Adjustment Mechanisms, the Companies may be required to issue Paired Shares at a depressed price, which would heighten the dilutive effects on the Companies' capital stock. The dilutive effects of a stock settlement increase significantly as the market price of the Paired Shares declines below the applicable forward price or reference price. Furthermore, under certain circumstances, the Companies may settle in Paired Shares only if a registration statement covering such shares is effective. Although to date registration statements covering the sale of up to 44,000,000 Paired Shares in connection with the Price Adjustment Mechanisms have been declared effective, there can be no assurance that such registration statements will remain effective or that the Companies will not be required to register more Paired Shares in connection with the Price Adjustment Mechanisms. The market price of the Paired Shares has dropped significantly below the applicable forward price or reference price under each of the Price Adjustment Mechanisms. As a result, the Companies have to date made cash payments (including cash dividends on collateral shares) totaling $54,251,513 (including a partial settlement of $45,627,725 in cash under the UBS Forward Stock Contract) and delivered an aggregate of 34,177,187 additional Paired Shares as collateral pursuant to the Price Adjustment Mechanisms. All such collateral shares are deemed to be outstanding for purposes of the Companies' per share calculations. If the Companies settled all three transactions in cash on November 12, 1998, they would be obligated to deliver to the counterparties a total of approximately $314.4 million (assuming application of the cash currently held as collateral by the counterparties) and would receive from the counterparties a total of 13.3 million Paired Shares plus all Paired Shares then held as collateral by them. The terms of the Price Adjustment Mechanisms provide that all three counterparties currently have the right to require the Companies to settle their transactions. Moreover, UBS has asserted that the Companies are in default under the terms of the Forward Stock Contract as the result of the Companies not delivering certain cash collateral and not making final settlement of the Forward Stock Contract in cash, although the Companies have disputed this assertion. The Companies are currently in discussions regarding possible resolutions of the Price Adjustment Mechanisms to provide the Companies with the opportunity to resolve the Price Adjustment Mechanisms through payments of cash or other forms of consideration, and thus to avoid the need to settle in shares. There can be no assurance that such discussions will be successful. Moreover, any such resolutions may require the consent of the lenders under the Companies' credit facility. No assurances can be given that any such consent, if required and sought, would be obtained, or that the Companies would be able to meet their obligations under any such settlement arrangement. PARTICIPATING LEASE REVENUE RECOGNITION In May 1998, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim Financial Periods ("EITF 98-9"). EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. Management has reviewed the terms of its Participating Leases and has determined that the provisions of EITF 98-9 will impact Patriot's current revenue recognition on an interim basis, but will have no impact on Patriot's annual participating rent revenue or interim cash flow from its Participating Leases. Patriot has adopted the provisions of EITF 98-9 and elected to apply the provisions of the new pronouncement on a prospective basis. 50 PATRIOT AMERICAN HOSPITALITY, INC. RESULTS OF OPERATIONS: QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997 Patriot's lease revenue from the Lessees (including Wyndham) for the quarter ended September 30, 1998, increased 278% from $47,107,000 in 1997 to $178,156,000 in 1998. This increase is primarily due to the acquisition of 174 hotel properties during the past twelve months. Patriot owned or leased 306 hotel properties as of September 30, 1998. Interest and other income increased from $3,083,000 in 1997 to $6,540,000 in 1998 which is primarily attributable to additional investments in Subscription Notes and other notes receivable from Wyndham and interest and dividend income earned on cash investments. Interest and other income for the three months ended September 30, 1998 includes $3,667,000 of interest income related to notes receivable from Wyndham. Generally, Patriot's Participating Leases provide for the payment of the greater of (i) a fixed base rent or (ii) participating rent, based on the revenue of the hotels, plus certain additional charges, as applicable. The Participating Leases contain annual revenue thresholds used to calculate the various tiers of participating rent which are prorated on a monthly basis to determine monthly participating rent payments. The provisions of EITF 98-9 call for straight-line recognition of the annual base rent throughout the year and for the deferral of any additional lease amounts collected or due from the Lessees until such amounts exceed the annual revenue thresholds. This will generally result in base rent being recognized in the first and second quarters and participating rents already collected or due from the Lessees being deferred and then recognized in the third and fourth quarters due to the structure of Patriot's Participating Leases and the seasonality of the hotel operations. The effect of the change was to defer recognition of $1,789,000 of lease revenue during the quarter ended September 30, 1998. For the three months ended September 30, 1998 as compared to the same period for 1997, Patriot experienced significant increases in expenses as a result of the acquisition of hotels discussed above. Real estate and personal property taxes and casualty insurance were $16,799,000 for the three months ended September 30, 1998, compared to $4,253,000 for the three months ended September 30, 1997. Ground lease expense increased from $1,310,000 to $22,128,000 for the three months ended September 30, 1997 compared to the same period in 1998 as a result of acquisition of properties subject to existing ground leases, including $1,318,000 related to the Racecourse land lease with an affiliate of PaineWebber, Inc. General and administrative expenses were $5,090,000 for the three months ended September 30, 1998, compared to $2,501,000 for 1997. This increase is primarily attributable to Patriot's tremendous growth over the past year through mergers and acquisitions. General and administrative expenses include the amortization of unearned stock compensation of $1,381,000 for 1998 and $1,385,000 for 1997. Interest expense for the three months ended September 30, 1998 was $77,266,000 compared to $14,649,000 in 1997. Patriot's outstanding debt obligations as of September 30, 1998 and 1997 were approximately $3.6 billion and $727.2 million, respectively. The primary components of interest expense for the three months ended September 30, 1998 are $54,303,000 of interest related to the revolving credit facility and term loans, $11,311,000 of interest on mortgage notes, $8,007,000 of amortization of deferred financing costs and $7,264,000 of other interest related to other miscellaneous notes, capital lease obligations and commitments payable. Interest expense for the three months ended September 30, 1997 consists primarily of $12,372,000 of interest on Patriot's Revolving Credit Facility, the Old Line of Credit and mortgage note balances outstanding, $2,461,000, of other interest related to Subscription Notes, other miscellaneous notes, capital leases and commitments payable and $567,000 of amortization of deferred financing costs. Additionally, Patriot capitalized interest totaling $3,619,000 and $751,000 for the three months ended September 30, 1998 and 1997, respectively, associated with major renovations of certain hotel properties. 51 In connection with Patriot's acquisition of certain license agreements Patriot recognized an expense of $3,940,000 related to the cost of acquiring these agreements for the third quarter of 1998. The Companies previously entered into three treasury interest rate lock agreements to protect the Companies against the possibility of rising interest rates in connection with an anticipated $850 million corporate bond offering originally scheduled for the fourth quarter of 1998. However, given current conditions in the debt capital markets, the Companies have decided to delay this debt issuance indefinitely. Under the treasury interest rate lock agreements, the Companies receive or make payment 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 notional principal amount of $525 million. The Companies have settled the entire $525 million in treasury interest rate locks at rates between 4.58% and 4.67% resulting in a $49,225,000 one-time charge to earnings in the third quarter of 1998. Depreciation and amortization expense was $50,561,000 for the three months ended September 30, 1998 compared to $12,650,000 for the same period in 1997. Patriot's share of income from unconsolidated subsidiaries was $4,764,000 for the third quarter of 1998 compared to $1,395,000 for the third quarter of 1997. The increase is primarily attributable to Patriot's investment in the Non-Controlled Subsidiaries. Minority interest share of income in the Patriot Partnership was $2,015,000 and $3,340,000 for the three months ended September 30, 1998 and 1997, respectively. Minority interest share of income in Patriot's other consolidated subsidiaries was $3,775,000 for the third quarter of 1998 and $921,000 for the third quarter of 1997. As a result, the net loss was $37,436,000 for the three months ended September 30, 1998 and $27,713,000 for the three months ended September 30, 1997. RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997 Patriot's lease revenue from the Lessees (including Wyndham) for the nine months ended September 30, 1998, increased 255% from $119,093,000 in 1997 to $422,808,000 in 1998. This increase is primarily due to the acquisition of 174 hotel properties during the past twelve months. Interest and other income increased from $4,215,000 in 1997 to $15,311,000 in 1998 which is primarily attributable to investments in Subscription Notes and other notes receivable from Wyndham and interest and dividend income earned on cash investments. Interest and other income for the nine months ended September 30, 1998 includes $9,695,000 of interest income related to notes receivable from Wyndham. As discussed above, Patriot elected to adopt the provisions of EITF 98-9 (which provides new guidance for accounting procedures to be applied when accounting for participating lease income) beginning in May 1998. The effect of the change was to defer recognition of $7,470,000 of lease revenue during the nine months ended September 30, 1998. The provisions of EITF 98-9 call for straight-line recognition of the annual base rent throughout the year and for the deferral of any additional lease amounts collected or due from the Lessees until such amounts exceed the annual revenue thresholds. This will generally result in base rent being recognized in the first and second quarters and participating rents already collected or due from the Lessees being deferred and then recognized in the third and fourth quarters due to the structure of Patriot's Participating Leases and the seasonality of the hotel operations. For the nine months ended September 30, 1998 as compared to the same period for 1997, Patriot experienced significant increases in expenses as a result of the acquisition of hotels discussed above. Real estate and personal property taxes and casualty insurance were $42,023,000 for the nine months ended September 30, 1998, compared to $11,219,000 for the nine months ended September 30, 1997. Ground lease expense increased from $1,993,000 to $42,296,000 for the nine months ended September 30, 1997 compared to the same period in 1998 as a result of acquisition of properties subject to existing ground leases, including $3,915,000 related to the Racecourse land lease with an affiliate of PaineWebber, Inc. 52 General and administrative expenses were $15,091,000 for the nine months ended September 30, 1998, compared to $7,582,000 for 1997. This increase is primarily attributable to Patriot's tremendous growth over the past year through mergers and acquisitions. General and administrative expenses include the amortization of unearned stock compensation of $4,041,000 for 1998 and $3,312,000 for 1997. Interest expense for the nine months ended September 30, 1998 was $162,294,000 compared to $31,977,000 in 1997. Patriot's outstanding debt obligations as of September 30, 1998 and 1997 were approximately $3.5 billion and $727.2 million, respectively. The primary components of interest expense for the nine months ended September 30, 1998 are $109,290,000 of interest related to the revolving credit facility and term loans, $25,627,000 of interest on mortgage notes, $16,884,000 of amortization of deferred financing costs and $18,723,000 of other interest related to other miscellaneous notes, capital lease obligations and commitments payable. Interest expense for the nine months ended September 30, 1997 consists primarily of $29,867,000 of interest on the Revolving Credit Facility, the Old Line of Credit and mortgage note balances outstanding, $2,461,000 of other interest related to Subscription Notes, other miscellaneous notes, capital leases and commitments payable, and $1,331,000 of amortization of deferred financing costs. Additionally, Patriot capitalized interest totaling $8,230,000 and $1,682,000 for the nine months ended September 30, 1998 and 1997, respectively, associated with major renovations of certain hotel properties. In connection with Patriot's acquisition of three leasehold interests for hotels that Patriot owns and leased to certain of the Lessees and the acquisition of certain license agreements, Patriot recognized expense of $8,279,000 related to the cost of acquiring these leaseholds and license agreements. The Companies previously entered into three treasury interest rate lock agreements to protect the Companies against the possibility of rising interest rates in connection with an anticipated $850 million corporate bond offering originally scheduled for the fourth quarter of 1998. However, given current conditions in the debt capital markets, the Companies have decided to delay this debt issuance indefinitely. Under the rate lock agreements, the Companies receive or make payment 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 notional principal amount of $525 million. The Companies have settled the entire $525 million in treasury interest rate locks at rates between 4.58% and 4.67% resulting in a $49,225,000 one-time charge to earnings in the third quarter of 1998. Depreciation and amortization expense was $112,253,000 for the nine months ended September 30, 1998 compared to $30,656,000 for the same period in 1997. Patriot's share of income from unconsolidated subsidiaries was $24,011,000 for the nine months ended September 30, 1998 compared to $4,488,000 for 1997. The increase is primarily attributable to Patriot's investments in the Non-Controlled Subsidiaries. Minority interest share of loss in the Patriot Partnership was $3,253,000 and $1,194,000 for the nine months ended September 30, 1998 and 1997, respectively. Minority interest share of income in Patriot's other consolidated subsidiaries was $6,203,000 for the first half of 1998 and $1,368,000 for 1997. Patriot repaid certain debt obligations of Old Wyndham, Interstate and Summerfield in connection with the Wyndham Merger, the Interstate Merger and the Summerfield Acquisition. As a result, Patriot incurred certain prepayment penalties and wrote off the remaining balance of unamortized deferred financing costs associated with such debt in the aggregate amount of $30,559,000. As a result, the net loss was $9,879,000 for the nine months ended September 30, 1998 and $4,547,000 for the nine months ended September 30, 1997. 53 WYNDHAM INTERNATIONAL, INC. As of September 30, 1998, Wyndham leased 216 hotels from Patriot, managing 202 of those hotels, and managed 171 hotels for third parties. In addition, Wyndham operated the Bay Meadows Racecourse. Subsequent to the Cal Jockey Merger in July 1997, the major portion of the revenues of Wyndham and Patriot have been derived from the leasing and operation of hotels. RESULTS OF OPERATIONS: QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997 For the three months ended September 30, 1998, Wyndham (including its consolidated subsidiaries) had hotel revenues of $554,331,000 from the 290 hotels it operated during the period as compared to $30,271,000 in hotel revenues from the 29 hotels operated during the three months ended September 30, 1997. In addition, Wyndham reported management fee and service fee income of $24,917,000 and $1,577,000 for the three months ended September 30, 1998 and 1997, respectively. Interest and other income for the three month period ended September 30, 1998 increased from $1,475,000 in 1997 to $4,477,000 mainly due to the interest income related to the Subscription Notes and other notes receivable from Patriot. Total revenues from the Racecourse facility operations were $9,955,000 for the quarter ended September 30, 1998 compared to $10,861,000 for the same quarter last year. Total costs and expenses associated with the Racecourse operations were $8,810,000 for the quarter ended September 30, 1998 compared to $10,536,000 for the same quarter last year. These decreases were primarily attributable to fewer racing days in the third quarter of 1998 compared to 1997. Hotel expenses increased from $16,797,000 to $378,886,000 for the quarter ended September 30, 1998 as a result of the increased number of hotels operated by Wyndham quarter over quarter. Lease payments paid to Patriot pursuant to the Participating Leases, other hotel sub-leases and the Racecourse facility lease increased from $10,686,000 to $174,838,000 for the for the third quarter of 1998. General and administrative expenses were $21,482,000 for the period compared to $4,081,000 for the same period last year. General and administrative expenses consist primarily of salaries and wages of personnel. Interest expense for the three months ended September 30, 1998 was $10,216,000 compared to $11,000 for the same period last year. The increase is primarily attributable to debt obligations related to the three hotels acquired in the WHG Merger. The amount also includes $3,667,000 of interest expense related to the Subscription Notes and other notes payable to Patriot for the three months ended September 30, 1998. Depreciation and amortization increased from $1,142,000 to $17,675,000 for the three months ended September 30, 1998. The increase in depreciation is attributable to the three hotels acquired in the WHG Merger and assets acquired in the Interstate Merger. Wyndham's share of income from unconsolidated subsidiaries was $447,000 for the three months ended September 30, 1998. Minority interest's share of income associated with the Wyndham Partnership was a loss of $2,707,000 for the three months ended September 30, 1998 as compared to income of $115,000 for the same quarter last year. Minority interest's share of income in Wyndham's other consolidated subsidiaries was $4,048,000 in 1998 and $13,000 in 1997. The extraordinary loss of $1,257,000 for the three months ended September 30, 1998 was a result of costs associated with a debt refinancing. As a result, the net loss was $27,034,000 for the three months ended September 30, 1998 and the net income was $709,000 for the three months ended September 30, 1997. 54 RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 1998 The results for the nine months ended September 30, 1998 are not being compared to the prior period since the prior period only represents July 1, 1997 (inception of operations) through September 30, 1997. For the nine months ended September 30, 1998, Wyndham (including its consolidated subsidiaries) had hotel revenues of $1,266,985,000 from the 290 hotels it operated during the period. In addition, Wyndham reported management fee and service fee income of $62,560,000 for the nine months ended September 30, 1998. Interest and other income for the period included $11,755,000 of interest income related to the Subscription Notes and other notes receivable from Patriot. Total revenues from the Racecourse facility operations were $34,945,000 for the nine months ended September 30, 1998. Total costs and expenses associated with the Racecourse operations were $29,667,000 for the nine months ended September 30, 1998. Lease payments paid to Patriot pursuant to the Participating Leases, other hotel sub-leases and the Racecourse facility lease were $384,475,000 for the nine months ended September 30, 1998. General and administrative expenses were $49,467,000 for the period and consist primarily of salaries and wages of personnel. Interest expense of $24,015,000 for the nine months ended September 30, 1998 is primarily attributable to debt obligations related to the three hotels acquired in the WHG Merger. The amount also includes $9,695,000 of interest expense related to the Subscription Notes and other notes payable to Patriot. In connection with the CHCI Merger, Wyndham acquired 17 leasehold interests for hotels that Patriot owns. As a result, Wyndham recognized expense of $52,721,000 related to the cost of acquiring these leaseholds. Wyndham's share of income from unconsolidated subsidiaries was $2,461,000 for the nine months ended September 30, 1998. Minority interest's share of losses associated with the Wyndham Partnership was $9,422,000 for the nine months ended September 30, 1998. Minority interest's share of income in Wyndham's other consolidated subsidiaries was $20,408,000 in 1998. The extraordinary loss of $1,257,000 for the three months ended September 30, 1998 was a result of a charge for the write-off of deferred loan costs associated with a debt refinancing. As a result, the net loss was $67,686,000 for the nine months ended September 30, 1998. STATISTICAL INFORMATION Third quarter 1998 operating performance across the Companies' owned portfolio improved over the third quarter of 1997, as reflected in a 5.1% increase in revenue per available room ("RevPAR"), a 6.6% increase in average daily rate ("ADR"), and a slight decrease in occupancy of 1.5%. Similarly, third quarter 1998 operating performance across Wyndham's comparable branded portfolio of owned and managed hotels (hotels in the portfolio for one full common fiscal quarter in both periods presented) improved over the 1997 third quarter, as reflected in a 4.8% increase in RevPAR, a 7.2% increase in ADR, and a decrease in occupancy of 2.2%. The Wyndham-branded comparable portfolio was led by strong growth in the Resort division, which posted a 22.9% increase in RevPAR, as several recently renovated properties contributed to the improved performance against weak 1997 results. The Garden division also experienced strong performance, with a 6.7% RevPAR increase driven by improved results at hotels added in the past 18 months. During the third 55 quarter of 1998, Patriot converted four hotels, representing approximately 1,600 rooms, to the Wyndham brand; two of these properties were former Sheratons and two properties were former Westins.
THREE MONTHS ENDED SEPTEMBER 30 ---------------------------------------------------------------- OCCUPANCY ADR REVPAR -------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- --------- --------- The Companies' owned hotels.................... 73.8% 74.9% $ 103.92 $ 97.49 $ 76.71 $ 72.98 Wyndham-brand comparable portfolio............. 72.0% 73.6% $ 100.83 $ 94.08 $ 72.58 $ 69.26
For the nine months ended September 30, 1998, the Companies' owned portfolio also improved over the comparable period in 1997, as reflected in an 6.9% increase in RevPAR, a 6.3% increase in ADR, and an improvement of 0.6% in occupancy. Similarly, operating performance across Wyndham's comparable branded portfolio of owned and managed hotels for the nine-month period improved over last year, as reflected in a 9.1% increase in RevPAR, a 7.8% increase in ADR, and an improvement of 1.2% in occupancy.
NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------------------------------------- OCCUPANCY ADR REVPAR -------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- --------- --------- The Companies' owned hotels................... 73.7% 73.3% $ 108.36 $ 101.98 $ 79.84 $ 74.71 Wyndham-brand comparable portfolio............ 71.8% 71.0% $ 106.49 $ 98.76 $ 76.48 $ 70.08
COMBINED LIQUIDITY AND CAPITAL RESOURCES CASH FLOW PROVIDED BY OPERATING ACTIVITIES The Companies' principal source of cash to fund operating expenses and distributions to stockholders is cash flow provided by operating activities. Patriot's principal source of revenue is rent payments from the Lessees and Wyndham under the Participating Leases. Wyndham's principal source of cash flow is from the operation of the hotels that it leases and/or manages. The Lessees' and 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 and cash equivalents as of September 30, 1998 were $147.4 million, including capital improvement reserves of $29.1 million. Combined cash flows from operating activities of the Companies were $237.2 million for the first nine months of 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. Combined cash and cash equivalents as of September 30, 1997 were $59.7 million, including capital improvement reserves of $38.2 million. Combined cash flows from operating activities of Patriot were $75.9 million for the first nine months of 1997, which primarily represent the collection of rents under Participating Leases. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Through September 30, 1998, the Companies experienced a period of rapid growth, acquiring an aggregate of $4.5 billion of hotel properties and management companies. These transactions included the Wyndham Merger, the WHG Merger, the Arcadian Acquisition, the Interstate Merger, the Summerfield Acquisition, the CHCI Merger, and the acquisition of four additional hotel properties and the Golden Door Spa. These transactions were funded with a combination of an aggregate of approximately $1.4 billion in cash (primarily drawn from the Companies' Revolving Credit Facility and Term Loans), issuance 56 of and assumption of other debt aggregating approximately $1.4 billion in debt and the issuance of an aggregate of approximately $1.7 billion of equity securities. Combined cash flows used in investing activities of the Companies were $1.5 billion for the nine months ended September 30, 1998, resulting primarily from the acquisition of hotel properties and management companies, renovation expenditures at certain hotels, as well as cash deposited on collateral under one of the Price Adjustment Mechanisms. Combined cash flows from financing activities of $1.3 billion for the nine months ended September 30, 1998 were primarily related to borrowings on the Revolving Credit Facility and mortgage notes, and net proceeds from private placements of equity securities, net of payments of dividends and distributions. Combined cash flows used in investing activities were $710.1 million for the nine months ended September 30, 1997, resulting primarily from the acquisition of hotel properties. Combined cash flows from financing activities of $649.2 million for the nine months ended September 30, 1997 were primarily related to borrowings on Patriot's previous line of credit facility, net of payments of dividends and distributions. As of September 30, 1998, Patriot had approximately $887.8 million outstanding under its Revolving Credit Facility and $1.8 billion outstanding on its Term Loans. The Term Loans have maturities of January 31, 1999 ($350 million); March 31, 1999 ($400 million); and March 31, 2000 ($450 million). As of September 30, 1998, the Companies also had over $1.2 billion of mortgage and other debt outstanding (approximately $205 million of which is due on or before December 31, 1998), resulting in total indebtedness of approximately $3.8 billion. Additionally, under the terms of certain put arrangements, the Companies could be obligated to purchase a partial interest in a hotel property for approximately $11 million in January 1999. As of September 30, 1998, the Companies had approximately $12.2 million of availability under the Revolving Credit Facility in addition to cash on hand. The Companies are evaluating possible means of meeting near-term debt service requirements and improving liquidity through refinancing or extending the maturity of existing indebtedness, issuing additional equity securities, and divesting certain non-core, non-proprietarily branded hotel assets. The Companies have also re-strategized capital expenditures (currently estimated at approximately $100 million for 1999) and development programs, are improving operating efficiencies, and are in discussions to seek possible amendments to the Revolving Credit Facility. In addition, Patriot has decided not to declare a dividend with respect to the third quarter at this time. Instead, prior to December 31, 1998, Patriot intends to declare a dividend, payable in cash or securities in January, 1999, which will be at least sufficient to satisfy the federal income tax requirements with respect to dividends in order for Patriot to continue to qualify as a REIT. See "The Companies--1998 Dividends." No assurances can be made regarding the availability or terms of additional sources of capital for the Companies in the future and no assurances can be given regarding the Companies' ability to successfully refinance or extend the maturity of existing indebtedness. A default by the Companies under current existing indebtedness may cause a cross-default under other existing indebtedness, including, without limitation, the Revolving Credit Facility. No assurances can be given regarding the Companies' success in securing any amendments to the Revolving Credit Facility. Additionally, in the absence of such amendments, no assurances can be given that the Companies will meet the reduced EBITDA coverage ratio requirements which go into effect in December under the Revolving Credit Facility. If the Companies are unable to secure additional sources of financing in the future, are unable to successfully refinance existing indebtedness, or are unable to obtain amendments to existing covenants under the Revolving Credit Facility, no assurance can be made that the Companies will be able to meet their financial obligations as they come due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations or similar actions. Additionally, no assurances can be given that the lack of future financing sources would not have a material adverse effect on the Companies' financial condition and results of operations. 57 As noted above, the Companies are parties to forward equity transactions with three counterparties involving the sale of an aggregate of 13.3 million Paired Shares (the "Initial Shares") of the Companies with related Price Adjustment Mechanisms. The Price Adjustment Mechanisms require the Companies from time to time to issue additional Paired Shares or pay cash based upon the difference between the respective forward prices and the market price of the Companies' Paired Shares. The Companies' aggregate exposure under the Purchase Price Mechanisms as of November 12, 1998 was approximately $323 million (assuming the forward equity transactions are settled in cash and without giving effect to the cash collateral currently held by the counterparties). The Companies have registered the sale of up to 44 million Paired Shares in connection with the forward equity transactions; however, to date no sales have been made under such registration statements. There can be no assurance that such registration statements will remain effective or that the Companies will not be required to register additional Paired Shares for delivery under the forward equity transactions. See "--Sales of Paired Common Stock with Price Adjustment Mechanisms." Settlement under one or more of the forward equity transactions could have adverse effects on the Companies' liquidity or dilutive effects on the Companies' capital stock. Moreover, settlement (whether by reason of a drop in the market price of the paired shares or otherwise) may force the Companies to issue paired shares at a depressed price, which would heighten the dilutive effects on the Companies' capital stock. The dilutive effects of a stock settlement increase significantly as the market price of the paired shares declines below the applicable forward price or reference price. The market price of the Paired Shares has dropped significantly below the respective forward prices under the forward equity contracts. As a result, the Companies to date have made cash payments totaling approximately $54.3 million and have delivered an aggregate of 34.1 million additional Paired Shares as collateral to the counterparties. The Companies' forward equity transactions with PaineWebber and UBS, representing a total obligation of approximately $195 million (without applying approximately $8.2 million previously delivered to UBS as collateral), reached maturity on October 15, 1998 without final settlement by the Companies. UBS has asserted that the Companies are in default under the terms of its forward contract as the result of the Companies not delivering certain cash collateral and not making a final settlement of the contract in cash, although the Companies dispute this assertion. In addition, because the market price of the paired common stock is below applicable unwind thresholds under the forward equity transaction with Nations (which represents an obligation of approximately $128 million), Nations has the right to require a complete settlement of its transaction. The Companies are currently in discussions regarding possible resolutions of the forward equity transactions to provide the Companies with the opportunity to resolve the transactions through payments of cash or other forms of consideration, and thus to avoid the need to settle in shares. There can be no assurance that such discussions will be successful. Moreover, and such resolutions may require the consent of the lenders under the Companies' Revolving Credit Facility. No assurances can be given that any such consent, if required and sought, would be obtained, or that the Companies would be able to meet their obligations under any such settlement arrangement. TREASURY RATE LOCK AGREEMENTS. The Companies previously entered into three treasury interest rate lock agreements to protect the Companies against the possibility of rising interest rates in connection with an anticipated $850 million corporate bond offering originally scheduled for the fourth quarter of 1998. However, given current conditions in the debt capital markets, the Companies have decided to delay this debt issuance indefinitely. Under the rate lock agreements, the Companies receive or make payments based on the differential between specified interest rates, 6.06%, 6.07% and 5.62%, respectively, and the actual 10-year U.S. Treasury interest rate on a notional principal amount of $525 million. The Companies have settled the entire $525 million in treasury interest rate locks at rates between 4.59% and 4.67% resulting in a $49.2 million one-time charge to earnings recorded in the third quarter of 1998. 58 The $49.2 million charge for the treasury locks was paid by a unsecured promissory note with Chase Manhattan Bank; bears interest at LIBOR plus 225 basis points and matures in November, 1999. OTHER DEBT REFINANCINGS AND EXTENSIONS. On October 16, 1998, the Companies refinanced two mortgage loans with Credit Suisse First Boston which encumber the Embassy Suites Chicago and the Wyndham Greenspoint. The refinanced debt of approximately $82.1 million bears a fixed interest rate of 8.25% and matures in 10 years with a 25-year principal amortization schedule. On October 23, 1998, the Companies refinanced a mortgage loan with Credit Suisse First Boston which encumbers the Wyndham Peachtree Conference Center. The refinanced debt of approximately $38 million bears an variable interest rate at LIBOR plus 350 basis points and matures in three years with a 25-year amortization. On November 3, 1998, the Companies entered into agreements to extend the maturity of certain debt related to the El Conquistador and the Condado Plaza Hotel & Casino from November 3, 1998 to January 29, 1999. The extension agreements required that $10 million be deposited into an escrow account in installments beginning on the date of the extension through January 12, 1999. Upon the satisfactory completion of certain conditions, the $10 million will be released from escrow. RENOVATIONS AND CAPITAL IMPROVEMENTS During the first nine months of 1998, the Companies invested approximately $187.7 million to renovate or re-brand hotels. Pursuant to certain of the Participating Leases, Patriot is obligated to establish a reserve for each such hotel for capital improvements, including the periodic replacement or refurbishment of furniture, fixtures and equipment ("FF&E"). The aggregate amount of such reserves averages 4.0% of total revenue, with the amount of such reserve with respect to each hotel based upon projected capital requirements of such hotel. Management believes such amounts are sufficient to fund recurring capital expenditures for the hotels. Capital expenditures, exclusive of renovations, may exceed these reserves in a single year. The Companies attempt to schedule renovations and improvements during traditionally lower occupancy periods in an effort to minimize disruption to the hotel's operations. Therefore, management does not believe such renovations and capital improvements will have a material effect on the results of operations of the hotels. Capital expenditures will be financed through capital expenditure reserves. See "Combined Liquidity and Capital Resources." 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 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 Reform 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 59 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 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). On September 16, 1998, the Companies announced that after a thorough review of numerous restructuring alternatives and current market conditions, they elected to maintain the paired-share structure. Because Patriot and Wyndham have retained the paired structure, Patriot will remain subject to the IRS Reform Act for 1998. 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 CHI Merger; provided that none of Patriot's leases to Wyndham entered into or renewed after March 26, 1998 (which includes a substantial portion of the Companies' leases) provides for rent in excess of an arm's-length rate. In that regard, Patriot believes that none of its leases provides for above-market rent, but Patriot has not obtained independent appraisals, and the IRS could disagree with its analysis. The legislation also limits Patriot's ability to make improvements to existing properties that do not fall within the grandfathering rules described above. In addition, with respect to the new acquisitions, the legislation requires Patriot to modify its method of operations, and Patriot generally intends to acquire new assets through taxable subsidiaries pursuant to the exception noted above, subject to the limitations of the REIT asset and income tests. ISSUES REGARDING REIT STATUS In general, if Patriot ceases or fails to quality 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. In such case, Patriot would no longer be required to make distributions to stockholders, and the amount of its distributions might be reduced. The failure to qualify as a REIT would also constitute a default under certain debt obligations of Patriot. Notwithstanding the Companies' decision to retain their paired structure, Patriot will not qualify as a REIT for 1998 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 60 further complicated by the additional requirements of the IRS Reform Act of 1998, and could be impacted by future legislation. Patriot faces a greater risk than most REITs of failing one or more of the requirements for REIT qualification. First, the Companies could, in the future, pursue, or be forced to adopt, business strategies that are inconsistent with one or more of the REIT requirements. For example, management's most recent valuation of Patriot's assets concluded that slightly more than 75% of the value of its assets is represented by "real estate assets" within the meaning of the Code. Sufficient variations in the value of its assets or sufficient sales of hotels could cause Patriot to fail the REIT asset tests. Second, as discussed above under "Legislation Affecting the Paired Share Structure," a determination that Patriot's leases to Wyndham entered into or renewed after March 26, 1998 (which includes a substantial portion of the Companies' leases) provide for rent in excess of an arm's length rate could cause Patriot to fail the requirements for REIT qualification. Finally, Patriot is currently negotiating the renewal of a number of recently expired leases with Wyndham. The ability of payments under any such renewed lease to qualify as "rents from real property" under the Code will depend on the terms of each such renewal. In view of the foregoing uncertainties, no assurance can be given that Patriot will quality as a REIT for the current year or subsequent years. 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 31, 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 various assumptions and was conditioned upon certain representations made by Patriot on 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. INFLATION Operators of hotels in general possess the ability to adjust room rates quickly. However, competitive pressures may limit Wyndham's and the Lessees' ability to raise room rates in the face of inflation. SEASONALITY The hotel industry is seasonal in nature. Revenues for certain of Patriot's hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in the Companies' revenues. YEAR 2000 COMPLIANCE Many computer systems were not designed to interpret any dates beyond 1999, which could lead to business disruptions in the United States and internationally (the "Year 2000 issue"). The Companies recognize the 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 61 - other electronic assets (such as, but not limited to, automated time clocks, point-of-sale, non-information technology systems, including embedded technologies that operate fire-life safety systems, phone systems, energy management systems and other similar systems) - 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 inventory and assessment phases have been completed with respect to the Companies' corporate information technology infrastructure and reservation systems. The inventory and assessment phases have also been completed with respect to the Companies' information technology and other electronic assets that are located in the Companies' Hotels, other than the Hotels acquired in the Arcadian Acquisition (the "Arcadian Hotels") and the Interstate Merger (the "Interstate Hotels"), and 81 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"). During the fourth quarter of 1998, the Companies expect that the inventory and assessment phases will be completed with respect to the systems used in the operation of the Arcadian Hotels and the Interstate Hotels, other than the Interstate Hotels whose owners have undertaken their own compliance programs. Based on those completed assessments, the Companies, working with their consultants, have determined which systems are not Year 2000 compliant and the scope of the non-compliance. As previously disclosed, the Companies have been informed by the appropriate owners or managers/ operators of the Third Party Compliance Hotels that they intend to effect their own compliance programs. The Companies continuing to monitor the status of the compliance programs being implemented by those parties. The Companies are also surveying the Year 2000 compliance of the owners of the hotels that are franchised under the Wyndham brand but not managed by Wyndham. However, as those systems 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 phases of those parties' compliance programs at the Third Party Compliance Hotels or those franchised hotels. The Companies are now preparing the necessary work plans to remediate the systems for which the assessment phase has been completed, including the Companies' corporate information technology infrastructure and reservations systems. The Companies have 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. The Companies are also negotiating with hardware vendors to obtain the necessary hardware components and other equipment, and software vendors to obtain the requisite modifications, upgrades or new software to implement the Companies' remediation plan. The Companies presently expect to expend approximately $40 million in connection with Year 2000 issues. To date, the Companies have expended $1.25 million in connection with the inventory and assessment phases of their compliance program and $500,000 to remediate their systems. However, the Companies' anticipated expenditures may increase as the Companies complete the inventory and assessment phases in respect of the Arcadian and Interstate Hotels and the remediation plans are effected. In addition, these amounts may increase if the Companies' remediation efforts do not remain on schedule. As part of the settlement of litigation arising out of the Interstate Merger, the Companies agreed to contribute to a new company management of many of the Interstate Hotels, and then dispose of 62 substantially all of that new company's stock by means of a spin-off to the Companies' stockholders or otherwise. While the disposition is expected to occur after the Companies complete the inventory and assessment of the Interstate Hotels, the disposition is expected to occur before any remediation is effected. As the majority of the Interstate Hotels 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 Interstate Hotels. The Companies are also surveying their vendors and service providers that are critical to the Companies' businesses to determine whether they are Year 2000 compliant. The Companies now expect to complete their vendor surveys in the first quarter of 1999, but cannot guarantee that all vendors or service providers will comply with the Companies' surveys. 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 will not be able to ensure the Year 2000 compliance of those vendors or service providers. During the first quarter of 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 June 30, 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. 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. 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. Because of the importance of addressing the Year 2000 problem, the Companies expect to develop contingency plans if they determine that the remediation phase of their compliance plan will not be fully implemented by June 30, 1999. FUNDS FROM OPERATIONS Combined Funds from Operations of the Companies (as defined and computed below) was $58.1 million for the three months ended September 30, 1998 and $30.1 million for the three months ended September 30, 1997. Combined Funds from Operations was $221.9 million for the nine months ended September 30, 1998 and $78.1 million for the nine months ended September 30, 1997. Management considers Funds from Operations to be a key measure of REIT performance. Funds from Operations represents net income (loss) (computed in accordance with generally accepted accounting 63 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. Funds from Operations should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. Funds from Operations does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. The following reconciliation of net loss to Funds from Operations illustrates the difference between the two measures of operating performance for the three months ended September 30, 1998 and 1997:
THREE MONTHS ENDED SEPTEMBER 30, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) Net loss.............................................................. $ (59,415) $ (27,004) Add: Extraordinary loss from extinguishment of debt...................... 1,257 2,534 Minority interest in the Operating Partnerships..................... (4,722) (3,225) Depreciation of buildings and improvements and furniture, fixtures and equipment..................................................... 48,762 12,592 Amortization of goodwill and other assets........................... 9,573 716 Amortization of management contracts and trade names................ 7,295 491 Amortization of capitalized lease costs............................. 2,144 30 Cost of acquiring leaseholds........................................ 3,938 43,820 Treasury lock settlement............................................ 49,225 -- Other............................................................... 2,382 -- Adjustment for Funds from Operations of unconsolidated subsidiaries: Equity in earnings of unconsolidated subsidiaries................... (1,888) (1,395) Funds from Operations of unconsolidated subsidiaries................ 2,875 2,121 Adjustment for minority interest share of Funds from Operations of other consolidated subsidiaries: Minority interest in earnings of consolidated subsidiaries.......... 4,500 934 Minority interest in Funds from Operations of consolidated subsidiaries...................................................... (7,863) (934) ---------- ---------- Funds from Operations................................................. $ 58,063 $ 30,680 ---------- ---------- ---------- ---------- Weighted average shares and OP Units outstanding: Basic............................................................... 160,005 72,091 ---------- ---------- ---------- ---------- Diluted............................................................. 172,700 72,082 ---------- ---------- ---------- ----------
64 The following reconciliation of net loss to Funds from Operations illustrates the difference between the two measures of operating performance for the nine months ended September 30, 1998 and 1997:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1998 1997 ---------- --------- (IN THOUSANDS) Net loss............................................................... $ (67,257) $ (3,838) Add: Extraordinary loss from extinguishment of debt....................... 31,817 2,534 Minority interest in the Operating Partnerships...................... (6,169) 1,309 Depreciation of buildings and improvements and furniture, fixtures and equipment...................................................... 115,723 30,539 Amortization of goodwill and other assets............................ 18,754 716 Amortization of management contracts and trade names................. 15,523 535 Amortization of capitalized lease costs.............................. 3,649 102 Cost of acquiring leaseholds......................................... 61,000 43,820 Treasury lock settlement............................................. 49,225 -- Other................................................................ 2,382 -- Adjustment for Funds from Operations of unconsolidated subsidiaries: Equity in earnings of unconsolidated subsidiaries.................... (7,375) (4,488) Funds from Operations of unconsolidated subsidiaries................. 10,537 6,883 Adjustment for minority interest share of Funds from Operations of other consolidated subsidiaries: Minority interest in earnings of consolidated subsidiaries........... 7,514 1,381 Minority interest in Funds from Operations of consolidated subsidiaries....................................................... (13,396) (1,381) ---------- --------- Funds from Operations.................................................. $ 221,927 $ 78,112 ---------- --------- ---------- --------- Weighted average shares and OP Units outstanding: Basic................................................................ 136,199 57,980 ---------- --------- ---------- --------- Diluted.............................................................. 145,766 59,616 ---------- --------- ---------- ---------
65 PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES Recent Sales of Unregistered Securities Since June 30, 1998, the Companies have issued equity securities in private placements in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, in the amounts and for the consideration set forth below. In July 1998, in connection with the acquisition of an approximate 50% limited partnership interest in a partnership with affiliates of Don Shula's Steakhouses, Inc., the Companies issued 156,272 preferred units of limited partnership interest in the Wyndham Partnership. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
ITEM NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------------------- 10.1 Purchase Agreement, dated as of April 6, 1998, by and among Patriot American Hospitality, Inc., Wyndham International, Inc., PaineWebber Incorporated and PaineWebber Financial Products, Inc. 10.2 Letter Agreement, dated July 30, 1998, by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and PaineWebber Financial Products, Inc. 10.3 Letter Agreement, dated September 11, 1998, by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and UBS AG, London Branch. 10.4 Letter, dated September 15, 1998, from PaineWebber Financial Products, Inc. to Patriot American Hospitality, Inc. and Wyndham International, Inc. 10.5 Letter Agreement, dated September 30, 1998, by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and PaineWebber Financial Products, Inc. 10.6 Letter Agreement, dated October 22, 1998, by and among Patriot American Hospitality, Inc., Wyndham International, Inc. and PaineWebber Financial Products, Inc. 99.1 Debt Maturity Schedule of the Companies as of November 5, 1998. ITEM NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule--Patriot (filed herewith). 27.2 Financial Data Schedule--Wyndham (filed herewith).
(b) Reports on Form 8-K: (i) Joint Current Report on Form 8-K of Patriot American Hospitality, Inc. and Wyndham International, Inc. dated June 2, 1998 (Nos. 001-09319 and 001-09320 filed June 17, 1998), as amended August 6, 1998, reporting under Item 2 the Interstate Merger and the Summerfield Acquisition. (ii) 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. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. DATED: November 20, 1998 PATRIOT AMERICAN HOSPITALITY, INC. /s/ LAWRENCE S. JONES ----------------------------------------------- Lawrence S. Jones EXECUTIVE VICE PRESIDENT AND TREASURER (AUTHORIZED OFFICER AND PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER) WYNDHAM INTERNATIONAL, INC. /s/ LAWRENCE S. JONES ----------------------------------------------- Lawrence S. Jones EXECUTIVE VICE PRESIDENT AND TREASURER (AUTHORIZED OFFICER AND PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
67 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT is made as of the 6th day of April, 1998, by and among Patriot American Hospitality, Inc. (the "REIT"), a Delaware corporation, Wyndham International, Inc., a Delaware Corporation (the "OPCO") (the REIT and the OPCO, each a "Company" and together the "Companies"), PaineWebber Incorporated ("PaineWebber"), and PaineWebber Financial Products Inc., as agent acting for the account of PaineWebber ("PaineWebber Agent" and, collectively with PaineWebber, the "PaineWebber Parties"). IN CONSIDERATION of the mutual covenants contained in this Purchase Agreement, the Companies and the PaineWebber Parties hereby agree as follows: SECTION 1. Authorization of Sale of the Shares. Subject to the terms and conditions of this Purchase Agreement, the REIT has authorized the sale to PaineWebber of 5,150,000 shares of common stock, $.01 par value per share, of the REIT (the "REIT Shares") and the OPCO has authorized the sale to PaineWebber of 5,150,000 shares of common stock, $.01 par value per share, of the OPCO (the "OPCO Shares"), which REIT Shares and OPCO Shares are paired and traded as a unit consisting of one (1) REIT Share and one (1) OPCO Share (hereinafter each such paired unit is referred to as a "Paired Share" and the Paired Shares referred to in this sentence are herein called the "Purchase Shares")). In addition, the REIT and the OPCO may issue to PaineWebber additional Paired Shares in settlement of certain of their obligations under that certain Purchase Price Adjustment Mechanism Agreement (the "Adjustment Agreement"), dated as of April 6, 1998, between the REIT, the OPCO and PaineWebber (the "Additional Shares"). The Companies and the PaineWebber Parties agree, to the extent relevant to their respective business and commercial activities and in the absence of an administrative determination or judicial ruling to the contrary, to treat for United States federal income tax and financial accounting purposes payments and deliveries made under the Adjustment Agreement as adjustments to the purchase price paid for the Purchase Shares pursuant to Section 2 hereof. The Purchase Shares and the Additional Shares are hereinafter collectively called the "Shares." SECTION 2. Agreement to Sell and Purchase the Purchase Shares. Subject to the terms and conditions of this Purchase Agreement, on the Closing Date (as defined in Section 3 hereof), the Companies will sell to PaineWebber the Purchase Shares for a per Paired Share purchase price equal to 98.00% of the Closing Price. The "Closing Price" shall equal the closing price reported on the New York Stock Exchange for a Paired Share on April 3, 1998. SECTION 3. Delivery of the Purchase Shares at the Closing. 3.1 Closing. The completion of the purchase and sale of the Purchase Shares (the "Closing") shall occur as soon as practicable on or after the date hereof on a business day to be agreed upon by the Companies and the PaineWebber Parties, but in no event later than five business days after the execution of this Purchase Agreement (hereinafter, the "Closing Date"). 3.2 Conditions. At Closing, the Companies shall deliver to the PaineWebber Parties one or more stock certificates registered in the name of PaineWebber representing the number of Purchase Shares set forth in Section 1 above. The obligation of the Companies to complete the purchase and sale of the Purchase Shares and deliver such stock certificate(s) to the PaineWebber Parties at the Closing shall be subject to the following conditions, any one or more of which may be waived by both of the Companies acting together: (i) receipt by the Companies of immediately available funds (or other mutually agreed upon form of payment) in the full amount of the purchase price specified in Section 2 for the Purchase Shares being purchased hereunder, (ii) the accuracy in all material respects as of the Closing Date, of the representations and warranties made by the PaineWebber Parties herein and the fulfillment, in all material respects, of those undertakings of the PaineWebber Parties to be fulfilled prior to the Closing, (iii) execution and delivery of the Adjustment Agreement, (iv) receipt by the Companies of a cross-receipt with respect to the Purchase Shares executed by PaineWebber Agent on behalf of PaineWebber and (v) receipt by the Companies of a certificate by an officer or authorized representative of PaineWebber Agent to the effect that the representations and warranties of the PaineWebber Parties set forth in Section 5 hereof are true and correct as of the date of this Agreement and as of the Closing Date. The obligation of PaineWebber to accept delivery of such stock certificate(s) and to pay for the Purchase Shares evidenced thereby shall be subject to the following conditions, any one or more of which may be waived by the PaineWebber Parties: (i) the accuracy in all material respects, as of the Closing Date, of the representations and warranties made by the Companies herein and the fulfillment, in all material respects, of those undertakings of the Companies to be fulfilled prior to the Closing, (ii) receipt by the PaineWebber Parties of all opinions, letters and certificates to be delivered by the Companies pursuant to this Purchase Agreement, (iii) execution and delivery of the Adjustment Agreement, and (iv) receipt by the PaineWebber Parties of a cross-receipt with respect to the purchase price for the Purchase Shares executed by the Companies. SECTION 4. Representations, Warranties and Covenants of the Companies. Except as disclosed in the Companies' SEC Filings (as defined below), the REIT and the OPCO, jointly and severally, hereby represent and warrant to the PaineWebber Parties, and covenant with the PaineWebber Parties, as follows: 4.1 Organization and Qualification of the Companies. The REIT has been duly organized and is validly existing as a corporation in good standing under the laws of Delaware with power and authority to own and lease its properties and to conduct its business as currently conducted. The REIT is duly qualified as a corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing or managing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the condition, financial or 2 otherwise, or the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries (as defined below) of the Companies considered as one enterprise. The REIT's existence has not been suspended or terminated nor have any dissolution, revocation or forfeiture proceedings regarding the REIT been commenced. The OPCO has been duly organized and is validly existing as a corporation in good standing under the laws of Delaware with corporate power and authority to own and lease its properties and to conduct its business as currently conducted. The OPCO is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing or managing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise. The OPCO's existence has not been suspended or terminated nor have any dissolution, revocation or forfeiture proceedings regarding the OPCO been commenced. Entities in which the Companies directly or indirectly have at least a 50% ownership interest are herein referred to as the "Subsidiaries," and each individually, as a "Subsidiary." 4.2 Organization and Qualification of Subsidiaries. Each of the Subsidiaries has been duly organized and is validly existing as a corporation, limited partnership, or limited liability company, as the case may be, in good standing under the laws of its respective jurisdiction of organization, with full power and authority to own, lease and operate its properties and to conduct the business in which it currently is engaged. Each of the Subsidiaries is duly qualified as a foreign corporation, limited partnership, or limited liability company, as the case may be, to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise. All of the issued and outstanding shares of capital stock of each of the corporate Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable. The ownership by the Companies or the Subsidiaries of the shares of capital stock or limited partnership or equity interests, as the case may be, of each of the Subsidiaries is as described in the Companies' SEC Filings. 4.3 Authorized Capital Stock. The REIT has 1.5 billion authorized shares as of February 9, 1998, consisting of 650 million REIT Shares, par value $0.01 per share, 750 million shares of excess stock, par value $0.01 per share, and 100 million shares of preferred stock, par value $0.01 per share ("Patriot Preferred Stock"). The OPCO has authorized capital stock as of February 9, 1998 of 1.5 billion shares, consisting of 650 million OPCO Shares, par value $0.01 per share, 750 million shares of excess stock, par value $0.01 per share and 100 million shares of preferred stock, par value $0.01 per share. As of February 9, 1998, there were 99,878,341 Paired Shares outstanding, 7,190,091 Paired Shares were reserved for issuance pursuant to equity plans filed pursuant to the Companies' SEC Filings (as defined below), and 12,701,170 Paired Shares were reserved for issuance upon the election by the Companies to 3 acquire, in exchange for Paired Shares, units of limited partnership interest in Patriot American Hospitality Partnership, L.P. and Patriot American Hospitality Operating Partnership, L.P. tendered by redeeming unit holders. As of February 9, 1998, there were 4,860,876 shares of Patriot Preferred Stock outstanding and no preferred shares of the OPCO were currently outstanding. The issued and outstanding Paired Shares of the Companies have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform to the description thereof in the Companies' SEC Filings. Other than as described in the Companies' SEC Filings, the REIT does not have outstanding any options to purchase, or other rights to subscribe for or purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the REIT's stock, stock bonus and other stock plans or arrangements and the options or other rights granted and exercised thereunder in the Companies' SEC Filings accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. 4.4 Issuance, Sale and Delivery of the Shares. The Purchase Shares to be sold by the Companies have been duly authorized for issuance and, when issued, delivered and paid for in the manner set forth in this Purchase Agreement, will be validly issued, fully paid and non-assessable. The Additional Shares have been duly authorized and, if and when issued pursuant to the Adjustment Agreement, will be validly issued, fully paid and non-assessable, Upon payment of the purchase price and delivery of the Shares in accordance with this Agreement, PaineWebber will receive good, valid and marketable title to the Shares, free and clear of all security interests, mortgages, pledges, liens, encumbrances and claims. No approval of or authorization by the respective shareholders or boards of directors of the Companies will be required for the issuance and/or sale of the Shares to be sold by the Companies as contemplated herein or in the Adjustment Agreement, except such as shall have been obtained on or before the Closing Date. The issuance and/or sale of the Shares to the PaineWebber Parties by the Companies pursuant to this Purchase Agreement or the Adjustment Agreement (as the case may be), the compliance by the Companies with the other provisions of this Purchase Agreement or the Adjustment Agreement and the consummation of the other transactions contemplated hereby or thereby do not require the consent, approval, authorization, registration or qualification of or with any court, governmental authority or agency, except such as shall have been obtained on or before the Closing Date or in connection with any Resale Registration Statement filed with respect to any of the Shares. The Companies meet and will continue to meet the requirements for use of Form S-3 under the Securities Act, and the rules and regulations of the U.S. Securities and Exchange Commission (the "Commission") under the Securities Act (the "1933 Act Regulations"). The Companies have filed and will file all documents which they are required to file under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations promulgated thereunder (the "1934 Act Regulations") within the time periods prescribed by the Exchange Act and the 1934 Act Regulations and all such documents (collectively, together with the Companies' registration statements filed under the Securities Act which have been declared 4 effective since January 1, 1997 and have not been withdrawn, the "Companies' SEC Filings") comply and will comply in all material respects with the requirements of the Exchange Act and the 1934 Act Regulations, as applicable, and none of such documents, when so filed, contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No Resale Registration Statement filed in respect of any of the Shares, when so filed, contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.5 Due Execution, Delivery and Performance by the Company. Each of the Companies has full right, power and authority to enter into this Purchase Agreement and the Adjustment Agreement and perform the transactions contemplated hereby and thereby. This Purchase Agreement and the Adjustment Agreement have been duly authorized, executed and delivered by the Companies and, upon the execution and delivery hereof, each of this Agreement and the Adjustment Agreement will constitute the valid and binding obligation of each Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceedings in equity or at law) and except as the enforceability of the indemnification agreements of the Companies in Section 7.5 hereof may be limited by public policy. The execution and delivery of this Purchase Agreement and the Adjustment Agreement by the Companies and the consummation of the transactions and the performance of the obligations herein and therein contemplated will not violate any provision of the certificate of incorporation, bylaws, or other organizational documents of the Companies, and will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, credit agreement, lease, franchise, license, indenture, note, permit or other instrument to which either Company is a party or by which either Company or its respective properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to either Company or any of its respective properties other than violations, conflicts, breaches or defaults that individually or in the aggregate would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Purchase Agreement, the Adjustment Agreement or the consummation of the transactions contemplated hereby or thereby, except in connection with the filing of any Resale Registration Statements pursuant to Section 7 below or for compliance with the blue sky laws applicable to the offering of the Shares. 5 4.6 Accountants. The Companies' independent certified public accountants, who have expressed their opinion with respect to the Most Recent Financial Statements (as defined below) are independent accountants as required by the Securities Act and the 1933 Act Regulations. 4.7 No Defaults. Except as to defaults, violations and breaches which individually or in the aggregate would not have a material adverse effect on the condition, financial or otherwise, on the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise, none of the Companies or any Subsidiary is in violation or default of any provision of its declaration of trust, charter or bylaws, or other organizational documents, and none of the aforementioned parties is in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, credit agreement, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties are bound. 4.8 No Actions. There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Companies, threatened against or affecting either Company or any Subsidiary, any real property or improvements thereon owned or leased by any of either Company or the Subsidiaries, including any property underlying indebtedness held by the Companies (each, individually, a "Property" and collectively, the "Properties"), or any officer of either Company or any of the Subsidiaries that, if determined adversely to either Company or any Subsidiary, any Property, including any property underlying indebtedness held by either Company and any of the Subsidiaries, or any such officer or trust manager, would reasonably be expected to (A) result in any material adverse change in the condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise or (B) materially and adversely affect the consummation of the transactions contemplated by this Agreement or the Adjustment Agreement. There is no pending legal or governmental proceeding to which either Company or any Subsidiary is a party or of which any of their respective properties or assets or any property, including any property underlying indebtedness held by either Company or any of the Subsidiaries, is the subject, including ordinary routine litigation incidental to the business, that is, considered in the aggregate, material to the condition, financial or otherwise, or the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise. 4.9 Properties. (A) Each Company and the Subsidiaries, as the case may be, has good and marketable title to all the properties and assets reflected as owned by such entities in the Most Recent Financial Statements, and good and marketable title to the improvements, if any, thereon and all other assets that are required for the effective operation of such real property in the manner in which they currently are operated; subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in the Most Recent Financial Statement, or (ii) those which would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or 6 business prospects of or with respect to the Companies and the Subsidiaries considered as one enterprise, (B) the leases of any real property and buildings held under lease by either Company or any Subsidiary are in full force and effect, and such entity is not in default in respect of any of the terms or provisions of such leases and such entity has not received notice of the assertion of any claim by anyone adverse to such entity's rights as lessee under such leases, or affecting or questioning such entity's right to the continued possession or use of the real property and buildings held under such leases or of a default under such leases, in each case with such exceptions as would not have a material adverse impact on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of or with respect to the Companies and the Subsidiaries considered as one enterprise; (C) none of the Companies or any of the Subsidiaries or any tenant of any of the Properties is in default under any of the leases pursuant to which any of the Companies or the Subsidiaries, as lessor, leases its Property (and neither of the Companies knows of any event which, but for the passage of time or the giving of notice, or both, would constitute a default under any of such leases) other than such defaults that would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of or with respect to the Companies and the Subsidiaries considered as one enterprise; (D) no person has an option or right of first refusal to purchase all or part of any Property or any interest therein, other than such options or rights of first refusal which would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of or with respect to the Companies and the Subsidiaries, considered as one enterprise; (E) each of the Properties complies with all applicable codes, laws and regulations (including, without limitation, building and zoning codes, laws and regulations and laws relating to access to the Properties), except for such failures to comply that would not individually or in the, aggregate have a material adverse impact on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise; and (F) none of the Companies has knowledge of any pending or threatened condemnation proceedings, zoning change, or other proceeding or action that will in any manner affect the size of, use of, improvements on, construction on or access to the Properties, including any property underlying indebtedness held by either Company or any of the Subsidiaries, except such proceedings or actions that would not have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries considered as one enterprise. 4.10 REIT Qualification. The REIT qualified as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the Code"), with respect to its taxable years ended December 31, 1995, December 31, 1996 and December 31, 1997, and is organized in conformity with the requirements for qualification as a real estate investment trust, and its manner of operation has enabled it to meet the requirements for qualification as a real estate investment trust as of the date hereof, and its proposed manner of operation will enable it to meet the requirements for qualification as a real estate investment trust in the future. 7 4.11 No Material Change. Since the date of the Most Recent Financial Statements, and except as otherwise disclosed in the Companies' SEC Filings as of the Closing Date, (i) neither Company has incurred any liabilities or obligations, indirect or contingent, which will have a Material Adverse Effect or entered into any material verbal or written agreement or other material transaction which is not in the ordinary course of business (it being agreed that for purposes of this sentence the REIT's ordinary course of business shall include the acquisition or disposition, directly or indirectly, of real estate properties or businesses of a type that may be owned by a "real estate investment trust" (as defined under the Internal Revenue Code) and the OPCO's ordinary course of business shall include the acquisition or disposition, directly or indirectly, of assets or businesses related to or engaged in the hospitality industry) or which could reasonably be expected to result in a material reduction in the future earnings of the Companies; (ii) no material casualty loss or material condemnation or other material adverse event with respect to any Property or any of the Subsidiaries, has occurred that is material to the Companies and the Subsidiaries considered as one enterprise; (iii) none of the Companies, or the Subsidiaries is in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock of either Company or the Subsidiaries (other than the sale of the Purchase Shares hereunder or those reserved for issuance pursuant to the Adjustment Agreement, issuances pursuant to the incentive compensation plans of the Companies), or any increase in the indebtedness of either Company or the Subsidiaries that is material to such entities, considered as one enterprise; (v) and except for regular quarterly dividends or distributions on the REIT Shares or the OPCO Shares, there has been no dividend or distribution of any kind declared, paid or made by either Company; and (vi) there has not been any material adverse change in the condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business. 4.12 Intellectual Property. None of the Companies or the Subsidiaries is required to own or possess trademarks, trade names, patent rights, copyrights, licenses, approvals and governmental authorizations, which it does not already own or possess to conduct its businesses as now conducted; and neither Company has knowledge of any material infringement by it of trademark, trade name rights, patent rights, copyrights, licenses, trade secrets or other similar rights of others, and has not received any notice that any claim has been made against the Companies regarding trademark, trade name, patent, copyright, license, trade secrets or other infringement. 4.13 Compliance. Neither Company has been advised, or has reason to believe, that either Company or any Subsidiary is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state and Federal environmental laws and regulations, except where failure to be so in compliance would not materially adversely affect the condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries, considered as one enterprise. 8 4.14 Taxes. The Companies and the Subsidiaries have filed all material federal, state and foreign income and franchise tax returns which have been required to be filed and have paid or accrued all taxes shown as due thereon (except for those taxes which are being contested in good faith through appropriate proceeding, for which adequate reserves have been established and as to which the PaineWebber Parties have been notified in writing by the Companies), and the Companies have no knowledge of any tax deficiency which has been or might be asserted or threatened against the Companies or the Subsidiaries which could materially adversely affect the business condition, financial or otherwise, or in the earnings, assets, business affairs or business prospects of the Companies and the Subsidiaries, considered as one enterprise. 4.15 Transfer Taxes. On the Closing Date, all stock transfer or other taxes, if any (other than income taxes) which are required to be paid in connection with the sale and transfer of the Purchase Shares to be sold to PaineWebber hereunder will be, or will have been, fully paid or provided for by the Companies and all laws imposing such taxes will be or will have been fully complied with. 4.16 Investment Company. None of the Companies or any Subsidiary is required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. 4.17 Additional Information. The Companies represent and warrant that the information contained in the following documents, which the Companies have furnished to the PaineWebber Parties, or will furnish or make available upon request prior to the Closing, is true and correct in all material respects as of their respective filing dates: (a) Joint Annual Report on Form 10-K for the year ended December 31, 1997, which Joint Annual Report includes the Companies' most recently available audited financial statements together with the report thereon of the independent certified public accountants (the "Most Recent Financial Statements"), (b) Joint Quarterly Reports on Form 10-Q, as amended if applicable, for the quarters ended Much 31, 1997, June 30, 1997 and September 30, 1997; (c) the Companies' proxy statements on Form 14A relating to (i) the most recent Annual Meetings of the REIT's Shareholders and the OPCO's Shareholders and (ii) any Special Meetings of the REIT's Shareholders and the OPCO's Shareholders which occurred during the 12 month period prior to the date hereof or for which a meeting date has been fixed and a proxy statement distributed; (d) all other documents, if any, filed by or with respect to the REIT and the OPCO with the Commission since January 1, 1997 pursuant to Section 13, 15(d) or 16(a) of the Exchange Act; and 9 (e) a covenant compliance certification stating that none of the REIT, the OPCO or the Subsidiaries are in default under any of their respective credit agreements or other financing arrangements. 4.18 Legal Opinion. At or prior to the Closing, counsel to the Companies will deliver their legal opinions dated the Closing Date to the PaineWebber Parties in substantially the form of Exhibit A hereto. 4.19 ERISA. The Companies and the Subsidiaries are in compliance with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended and the rules and regulations promulgated thereunder ("ERISA"), except for such failures to comply as would not singly or in the aggregate have a material adverse effect on the condition, financial or otherwise, or on the earnings, assets, business affairs or business prospects of or with respect to the Companies and the Subsidiaries, considered as one enterprise. Neither a Reportable Event (as defined under ERISA) nor a Prohibited Transaction (as defined under ERISA) has occurred with respect to any Plan (as defined below) of the Companies and/or their respective affiliates; no notice of intent to terminate a Plan has been filed nor has any Plan been terminated within the past five years; to the Companies' knowledge, no circumstance exists which constitutes grounds under Section 402 of ERISA entitling the Pension Benefit Guaranty Corporation ("PBGC") to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings; the Companies and their affiliates have not completely or partially withdrawn under Section 4201 or 4202 of ERISA from any Multiemployer Plan (as defined therein); the Companies and their affiliates have met the minimum funding requirements of Section 412 of the Code and Section 302 of ERISA with respect to each Plan and there is no unfunded current liability (as defined below) with respect to any Plan; the Companies and their affiliates have not incurred any liability to the PBGC under ERISA (other than for the payment of premiums under Section 4007 of ERISA); no part of the funds to be used by the Companies in satisfaction of their obligations under this Purchase Agreement or the Adjustment Agreement constitute "plan assets" of any "employee benefit plan" within the meaning of ERISA or of any "plan" within the meaning of Section 4957(e)(I) of the Code, as interpreted by the Internal Revenue Service and the U.S. Department of Labor in rules, regulations, releases and bulletins or as interpreted under applicable case law. As used below, "Plan" means an "employee benefit plan" or "plan" as described in Section 3(3) of ERISA; and "unfunded current liability" has the meaning provided in Section 302(d)(8)(A) of ERISA. 4.20 Environmental Protection. To the knowledge of the Companies, except as disclosed in the Companies' SEC Filings, none of the Companies or their affiliates' properties contain any Hazardous Materials that, under any Environmental Law, (i) would impose liability on the Companies or any affiliate that is likely to have a material adverse effect on the condition (financial or other), business, results of operations, or prospects, of the Companies or (ii) is likely to result in the imposition of a lien on any material asset owned, directly or indirectly, by the Companies. To the knowledge of the Companies, neither of the Companies nor any of their affiliates is subject to any existing, pending or threatened 10 investigation or proceeding by any governmental agency or authority with respect or pursuant to any Environmental Law, except any which, if adversely determined, would not have a Material Adverse Effect. As used herein, "Environmental Laws" mean all federal, state, local and foreign environmental, health and safety laws, codes and ordinances and all rules and regulations promulgated thereunder, including, without limitation laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or industrial, solid, toxic or hazardous substances or wastes; and "Hazardous Material" includes, without limitation, (i) all substances which are designated pursuant to Section 311(b)(2)(A) of the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. Section 1251 et seq.; (ii) any element, compound, mixture, solution, or substance which is designated pursuant to Section 102 of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq.; (iii) any hazardous waste having the characteristics which are identified under or listed pursuant to Section 3001 of the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq.; (iv) any toxic pollutant listed under Section 307(a) of the FWPCA; (v) any hazardous air pollutant which is listed under Section 112 of the Clean Air Act, 42 U.S.C. Section 7401 et seq.; (vi) any imminently hazardous chemical substance or mixture with respect to which action has been taken pursuant to Section 7 of the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; and (vii) petroleum, petroleum products, petroleum by-products, petroleum decomposition by-products, and waste oil. 4.21 Solvency. Immediately following (i) the execution of this Purchase Agreement and the Adjustment Agreement, (ii) the purchase of the Purchase Shares pursuant hereto and (iii) the completion of any other transaction contemplated by this Purchase Agreement and the Adjustment Agreement, each of the Companies will be solvent and able to pay its debts as they mature, will have capital sufficient to carry on its business and all businesses in which it is to engage, and will have assets which will have a present fair market valuation greater than the amount of all of its liabilities. This Purchase Agreement and the Adjustment Agreement have been executed and delivered by the Companies in good faith and in exchange for reasonably equivalent value. Neither of the Companies intends to incur debts beyond its ability to pay them as they become due. Each of the Companies' assets and capital are now, and are expected in the future to be, sufficient to pay the Companies' ongoing expenses as they are incurred and to discharge all of the Companies' liabilities in the event that the business of the Companies is required to be liquidated. The Companies have not entered into this Purchase Agreement or the Adjustment Agreement or any transaction contemplated hereby or thereby with an intent to hinder, delay or defraud creditors of any persons or entity. 4.22 Certificate. A certificate of each Company executed by an executive officer of such Company, to be dated the Closing Date in form and substance satisfactory to the PaineWebber Parties to the effect that the representations and warranties of the Companies set forth in this Section 4 are true and correct as of the date of this Agreement and as of the 11 Closing Date, and such Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied on or prior to such Closing Date. 4.23 Financial Statements. The Most Recent Financial Statements (including the notes thereto) present fairly in all material respects the financial position of the respective entity or entities presented therein at the respective dates indicated and the results of their operations for the respective periods specified, and except as otherwise stated in the Most Recent Financial Statements, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The supporting schedules included in the Companies' SEC Filings fairly present in all material respects the information required to be stated therein. The financial information and data included in the Companies' SEC Filings present fairly in all material respects the information included therein and have been prepared on a basis consistent with that of the financial statements included in the Companies' SEC Filings and the books and records of the respective entities presented therein. The pro forma financial information included in the Companies' SEC Filings has been prepared in accordance with the applicable requirements of Rules 11-01 and 11-02 of Regulation S-X under the Securities Act and other 1933 Act Regulations and American Institute of Certified Public Accountants ("AICPA") guidelines with respect to pro forma financial information and includes all adjustments necessary to present fairly in all material respects the pro forma financial position of the respective entity or entities presented therein at the respective dates indicated and the results of their operations for the respective periods specified. Other than the historical and pro forma financial statements (and schedule) included therein, no other historical or pro forma financial statements (or schedules) are required to be included in the Companies' SEC Filings. Except as reflected or disclosed in the financial statements included in the Companies' SEC Filings, none of the Companies or any of the Subsidiaries is subject to any material indebtedness, obligation, or liability, contingent or otherwise. 4.24 Labor Disputes. No labor dispute with the employees of the Companies or any Subsidiary exists or, to the knowledge of the Companies is imminent. 4.25 Regulation M. None of the Companies, the Subsidiaries or, to the Companies' knowledge, any of their trust managers, directors, officers or controlling persons, has taken or will take, directly or indirectly, any action resulting in a material violation of Regulation M under the Exchange Act, or designed to cause or result under the Exchange Act or otherwise in, or which has constituted or which reasonably might be expected to constitute, the unlawful stabilization or manipulation of the price of any security of either Company or facilitation of the sale or resale of the Shares. 4.26 Regulation U. The Companies represent that the proceeds of the Purchase Shares will not be used by the Companies, whether immediate, incidental or ultimate, to buy or carry margin stock as such terms are defined in Regulation U by the Board of Governors of the Federal Reserve System. 12 SECTION 5. Representations, Warranties and Covenants of PaineWebber Agent or PaineWebber. 5.1 Investment. The PaineWebber Parties represent and warrant to, and covenant with, the Companies that: (i) the PaineWebber Parties, taking into account the personnel and resources it can practically bring to bear on the purchase of the Purchase Shares contemplated hereby, are knowledgeable, sophisticated and experienced in making, and are qualified to make, decisions with respect to investments in shares presenting an investment decision like that involved in the purchase of the Purchase Shares, including investments in securities issued by the Companies; (ii) PaineWebber is acquiring the number of Purchase Shares set forth in Section 2 above in the ordinary course of its business and for its own account for investment (as defined for purposes of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations thereunder) only and with no present intention of distributing any of such Purchase Shares or any arrangement or understanding with any other persons regarding the distribution of such Purchase Shares except pursuant to a registration statement effective under, or an exemption from the registration requirements of, the Securities Act (this representation and warranty does not limit the right of the PaineWebber Parties to sell Shares pursuant to the terms of the Adjustment Agreement); (iii) neither PaineWebber Party will directly or indirectly, sell or otherwise dispose of (or solicit any offers to purchase or otherwise acquire) any of the Purchase Shares except in compliance with the Securities Act and any applicable state securities or blue sky laws; (iv) each PaineWebber Party has completed or caused to be completed the Registration Statement Questionnaire and the Stock Certificate Questionnaire, both attached hereto as Appendix I, for use in preparation of the Registration Statement and the answers thereto are true and correct to the best knowledge of PaineWebber as of the date hereof and will be true and correct to the best knowledge of PaineWebber as of the effective date of the Resale Registration Statement; (v) PaineWebber has, in connection with its decision to purchase the number of Purchase Shares set forth in Section 2 above, relied solely upon the documents identified in Section 4.17, the information referred to in Section 7.6 and the representations, warranties and agreements of the Companies contained herein; (vi) PaineWebber has had access to such additional information, if any, concerning the Companies as it has considered necessary in connection with their investment decision to acquire the Purchase Shares; (vii) each of the PaineWebber Parties is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D promulgated under the Securities Act; and (viii) the PaineWebber Parties understand that until the appropriate Resale Registration Statement has been declared effective by the Commission, the Shares will contain a legend to the following effect: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF THE COMPANIES' 13 COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. 5.2 Resale. The PaineWebber Parties acknowledge and agree that in connection with any transfer of any Shares they will provide to the transfer agent prompt notice of any Shares sold Pursuant to a Resale Registration Statement or otherwise transferred in compliance with applicable federal and state securities laws. 5.3 Due Execution, Delivery and Performance of this Agreement. The PaineWebber Parties further represent and warrant to, and covenant with, the Companies that (i) each PaineWebber Party has full right, power, authority and capacity to enter into this Agreement and to perform its obligations hereunder and consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and (ii) upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of the PaineWebber Parties enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except that the enforcement of the indemnification agreements in Section 7.5 hereof may be limited by public policy. 5.4 Residence of PaineWebber Agent. PaineWebber Agent is organized in the State of Delaware and has its principal place of business in the State of New York. SECTION 6. Survival of Representations, Warranties and Agreements. Notwithstanding any investigation made by any party to this Purchase Agreement, all covenants, agreements, representations and warranties made by the Companies and the PaineWebber Parties herein and the certificates for the Shares delivered pursuant hereto shall survive the execution of this Purchase Agreement, the Adjustment Agreement, the delivery to PaineWebber Agent of the Purchased Shares being purchased and the payment therefor and the consummation of any other transactions contemplated hereby or thereby. SECTION 7. Registration of the Shares; Compliance with the Securities Act. 7.1 Registration Procedures and Expenses. The Companies shall: (a) within 60 days after a written request from the PaineWebber Parties, which request shall not be made within 30 days of the Closing Date, prepare and file with the Commission a Resale Registration Statement (as defined below) covering the resale by the PaineWebber Parties, from time to time, of the Shares (not to exceed a number of Paired Shares equal to 130% of the number of Purchase Shares) in any of the manners specified in the Adjustment Agreement (the "Initial Resale Registration Statement"), use all best efforts to obtain effectiveness of the Initial Resale 14 Registration Statement and use all reasonable best efforts to obtain effectiveness of the Initial Registration Statement within 60 days of filing. If the total number of Shares exceeds the number of Shares covered by the Initial Resale Registration Statement, then the Companies shall promptly prepare and file with the Commission such additional Resale Registration Statement or Statements as shall be necessary to cover the resale by the PaineWebber Parties of such excess Shares in the same manner as contemplated by the Initial Registration Statement for the Shares covered thereby (each, an "Additional Resale Registration Statement"); provided that prior to issuing any such excess Shares to the PaineWebber Parties, the Companies shall cause such Resale Registration Statement to have become effective. For purposes of this Purchase Agreement, "Resale Registration Statement" means the Initial Resale Registration Statement, any Additional Resale Registration Statement or any other registration statement under the Securities Act on Form S-3 covering the resale by the PaineWebber Parties of up to a specified number of Shares, filed and maintained continuously effective by the Companies pursuant to the provisions of this Section 7, including the prospectus contained therein (the "Resale Prospectus"), any amendments and supplements to such registration statement, including all post-effective amendments thereto, and all exhibits and all material incorporated by reference into such registration statement; (b) use all reasonable best efforts to prevent the issuance of any order suspending the effectiveness of such Resale Registration Statement or Resale Prospectus or suspending the qualification (or exemption from qualification) of any of the Shares in any jurisdiction; (c) prepare and file with the Commission such amendments and supplements to each Resale Registration Statement and the Resale Prospectus as may be reasonably requested by the PaineWebber Parties in order to accomplish the public resale or other disposition of any Shares in accordance with the terms of the Adjustment Agreement, or as may be necessary to keep such Resale Registration Statement effective until the date on which either (i) the Shares covered thereby have been sold by or on behalf of the PaineWebber Parties or (ii) the PaineWebber Parties have advised the Companies that they no longer require that such Resale Registration Statement remain effective; (d) furnish to the PaineWebber Parties with respect to the Shares registered under any Resale Registration Statement such reasonable number of copies of Resale Prospectuses, including any supplements and amendments thereto, in order to facilitate the public sale or other disposition of all or any of the Shares by the PaineWebber Parties; (e) in order to facilitate the public sale or other disposition of all or any of the Shares by the PaineWebber Parties, furnish to the PaineWebber Parties with respect to the Shares registered under any Resale Registration Statement, in connection with any such public sale or other disposition, an opinion of counsel to the Companies 15 covering the matters set forth on Exhibit B hereto and such other documents as the PaineWebber Parties may reasonably request (including a comfort letter from the Companies' independent certified public accountants and a certificate of bring down of representations and warranties in connection with sale of Shares under the Resale Registration Statement) (collectively, the "Resale Closing Documents") (i) upon the effectiveness of the Initial Resale Registration Statement, (ii) quarterly beginning promptly after the Companies' filing of the Joint Annual Report on Form 10-K for the fiscal year ended December 31, 1997 in the case of any continuous offering of Shares under any Resale Registration Statement, and (iii) in the event the public sale or other disposition of the Shares is effected through an underwritten offering or a block trade, as of the date of the closing of any sale of such Shares or date of pricing with respect to the sale of such Shares, as applicable upon prior notice from the PaineWebber Parties to the Companies as to which date applies; provided, however, that the Companies shall not be required to deliver any Resale Closing Documents in the event that the aggregate offering price of any Shares offered in an underwritten offering or a block trade is less than $10,000,000, unless as of the date of any such underwritten offering or block sale, the Companies have not made any previous delivery of Resale Closing Documents to the PaineWebber Parties in connection with any other public sale or other disposition of the Shares; (f) use all reasonable best efforts to prevent the happening of any event that would cause any such Resale Registration Statement to contain a material misstatement or omission or to be not effective and continuously useable for resale of the Shares during the period that such Resale Registration Statement is required to be effective and useable; provided that this paragraph (f) shall in no way limit the Companies' right to suspend the right of the PaineWebber Parties to effect sales under the Resale Registration Statement during any Black-out Period as specified at Section 7.2(g) below; (g) file documents required of the Companies for normal blue sky clearance in states specified in writing by the PaineWebber Parties, provided, however, that the Companies shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (h) bear all expenses in connection with the procedures in paragraphs (a) through (h) of this Section 7.1 and Section 7.2(a) and the registration of the Shares pursuant to each Resale Registration Statement, which expenses shall not include brokerage or underwriting commissions and taxes of any kind (including without limitations, transfer bonuses) with respect to any disposition, sale or transfer of Shares sold by the PaineWebber Parties and for any legal, accounting and other expenses incurred by the PaineWebber Parties which expenses shall be borne by the PaineWebber Parties; and 16 (i) promptly file any necessary listing applications or amendments to existing listing applications to cause any Shares registered under any Resale Registration Statement to be listed or admitted to trading, on or prior to the effectiveness of any Resale Registration Statement, on the New York Stock Exchange or any national stock exchange or automated quotation system on which the Paired Shares are then listed or traded. 7.2 Covenants in Connection With Registration. (a) The Companies hereby covenant with the PaineWebber Parties that (i) the Companies shall not file any Resale Registration Statement or Resale Prospectus or any amendment or supplement thereto, unless a copy thereof shall have been first submitted to the PaineWebber Parties and their counsel and the PaineWebber Parties and their counsel did not object thereto in good faith (provided that if there is no objection by either the PaineWebber Parties or their counsel within two business days of receiving any such material, there shall be deemed to have been no objection thereto); (ii) the Companies shall immediately notify the PaineWebber Parties of the issuance by the Commission of any stop order suspending the effectiveness of such Resale Registration Statement or the initiation of any proceedings for such purpose; (iii) the Companies shall make all reasonable best efforts to promptly obtain the withdrawal of any order suspending the effectiveness of such Resale Registration Statement at the earliest possible moment; (iv) the Companies shall immediately notify the PaineWebber Parties of the receipt of any notification with respect to the suspension of the qualification of the Shares for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose; and (v) the Companies shall immediately notify the PaineWebber Parties in writing of the happening of any event or the failure of any event to occur or the existence of any fact or otherwise which results in any Resale Registration Statement, any amendment or post-effective amendment thereto, the Resale Prospectus, any prospectus supplement, or any document incorporated therein by reference containing an untrue statement of a material fact or omitting to state a material fact required to be, stated therein or necessary to make the statements therein not misleading and promptly shall prepare, file with the Commission and promptly furnish to the PaineWebber Parties a reasonable number of copies of a supplement or post-effective amendment to such Resale Registration Statement or the Resale Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Shares, the Resale Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. (b) The PaineWebber Parties shall cooperate with the Companies in connection with the preparation of the Resale Registration Statement and shall furnish to the Companies, in a timely manner, all information in their possession or reasonably obtainable by them, but otherwise not reasonably obtainable by the Companies, and necessary for inclusion in the Resale Registration Statement (including, without limitation, information relating to the ownership by each of them of Paired Shares and the plan of distribution). 17 (c) The PaineWebber Parties shall notify the Companies at least two business days prior to the earlier of the date on which they intend to commence effecting any resales of Shares under a Resale Registration Statement or the date of pricing with respect to the public sale or other disposition of any Shares under a Resale Registration Statement effected through an underwritten offering or block trade and if the Companies do not, within such two day period, advise the PaineWebber Parties of the existence of any facts of the type referred to in Section 7.2(a) above, then the Companies shall be deemed to have certified and represented to the PaineWebber Parties that no such facts then exist and the PaineWebber Parties may rely on such certificate and representations in making such sales. The preceding sentence shall in no way limit the Companies' obligations under Section 7.2(a) above. (d) the Companies shall cooperate with the PaineWebber Parties to facilitate the timely preparation and delivery of certificates representing the Shares to be sold under the Resale Registration Statements and not bearing any restrictive legends and in such denominations and registered in such names as the PaineWebber Parties may reasonably request at least one Business Day prior to the closing of any sale of the Shares. (e) If the method of settlement pursuant to the Adjustment Agreement is an underwritten offering or block trade of Shares, (i) the PaineWebber Parties shall have the right to select the managing underwriters or the executing dealer, as the case may be, who shall be subject to the approval of the Companies, which approval shall not be unreasonably withheld (it being understood that PaineWebber Agent is, in any event, reasonably acceptable to the Companies for this purpose) and (ii) the Companies shall (A) enter into written agreements (including underwriting agreements) as are customary in underwritten offerings or block trades, as the case may be; (B) obtain an opinion of counsel to the Companies and other entities reasonably requested by the underwriters or the executing dealer, as the case may be, and updates thereof (which may be in the form of a reliance letter) in form and substance reasonably satisfactory to the managing underwriters or the executing dealer, as the case may be, and the PaineWebber Parties addressed to the underwriters or the executing dealer, as the case may be, and the PaineWebber Parties covering the matters customarily covered in opinions requested in underwritten offerings or block trades, as the case may be, and such other matters as may be reasonably requested by such underwriters or the executing dealer, as the case may be, and the PaineWebber Parties (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions); (C) obtain "cold comfort" letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters or the executing dealer, as the case may be, and the PaineWebber Parties from the independent certified public accountants of the Companies (and, if necessary, other independent certified public accountants of any affiliate or Subsidiary of either of the Companies or of any business acquired by the Companies for which financial statements and financial data are, or are required to be, included in the Resale Registration Statement) addressed to each of the underwriters or the executing dealer, as the case may be, and, if permitted by applicable accounting rules and statements, the PaineWebber Parties, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings or block trades, as the case may be, and such other matters as may be reasonably requested by such underwriters or the executing dealer, as the case may be, in accordance with 18 Statement on Auditing Standards No. 72; (D) ensure that any underwriting agreement contains indemnification provisions and procedures not less favorable than that included herein (or such other provisions and procedures acceptable to the PaineWebber Parties and the underwriters) with respect to all parties to be indemnified pursuant to said section (including, without limitation, the underwriters and the PaineWebber Parties); and (E) deliver such other documents as are customarily delivered in connection with closing of underwritten offerings or block trades, as the case may be. (f) The Companies will make reasonably available for inspection by the PaineWebber Parties, any underwriter, agent or broker-dealer participating in any disposition of Shares such information and corporate documents as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities for the purposes of applicable law, and cause the officers of the Companies and their "significant subsidiaries" (as that term is defined in Regulation S-X) to be available, upon request at least two business days in advance, to respond to questions relevant to such due diligence inquiries. (g) The parties hereby acknowledge and agree that the Companies may suspend the right of the PaineWebber Parties to effect sales of the Paired Shares through use of the prospectus forming a part of a Resale Registration Statement (except as may further be limited in the Adjustment Agreement) for a period of no more than 90 days (or fewer if the PaineWebber Parties are notified to that effect by the Companies) in connection with a public offering or a sale pursuant to Rule 144A under the Securities Act (an "Offering") of Paired Shares (or shares of capital stock convertible into Paired Shares) by the Companies (a "Blackout Period"); provided that (i) there shall be no more than three Blackout Periods during any 12-month period, and (ii) the total number of days of all Blackout Periods during any 12-month period shall not exceed 120. The PaineWebber Parties hereby covenant that they will not sell any Paired Shares pursuant to said prospectus during a Blackout Period which shall commence at the time the Companies give the PaineWebber Parties written notice of such Blackout Period; provided further, that no Blackout Period shall be applicable or in any way restrict the PaineWebber Parties after the Maturity Date, or after the occurrence of a Cross Default or a Price Decline Termination Event (as defined in the Adjustment Agreement). 7.3 Extension of Required Effectiveness. In the event that the Companies shall give any notice required by Section 7.2(a)(v) hereof, the period during which the Companies are required to keep such Resale Registration Statement effective and useable shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when the PaineWebber Parties are advised in writing by the Companies that the use of the Resale Prospectus may be resumed. 7.4 Transfer of Shares After Registration. The PaineWebber Parties agree that they will not effect any disposition of the Shares and PaineWebber agrees that it will not effect any disposition of its right to purchase the Shares that would constitute a sale within the meaning of the Securities Act or pursuant to any applicable state securities or blue sky laws expect as contemplated in each Resale Registration Statement referred to in Section 7.1 or 19 except pursuant to any exemption from the registration requirements of the Securities Act (including, without limitation, Rule 144 promulgated thereunder and any successor thereto) and that it will promptly notify the Companies of any changes in the information set forth in any such Resale Registration Statement regarding the PaineWebber Parties or its plan of distribution. 7.5 Indemnification. For the purpose of this Section 7.5 only, the term "Resale Registration Statement" shall include any final prospectus, exhibit, supplement or amendment included in or relating to any Resale Registration Statement referred to in Section 7.1. (a) Indemnification by the Companies. Each of the Companies agrees, jointly and severally, to indemnify and hold harmless the PaineWebber Parties and each person, if any, who controls the PaineWebber Parties within the meaning of Section 15 of the Securities Act, and any director, officer, employee or affiliate thereof, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Resale Registration Statement (or any amendment thereto), including the information deemed to be part of any Resale Registration Statement pursuant to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any related Resale Prospectus or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Companies shall not be required under this subsection (i) to indemnify the PaineWebber Parties with respect to any loss, liability, claim, damage or expense to the extent such loss, liability, claim, damage or expense arises out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Companies by the PaineWebber Parties specifically for inclusion in any Resale Registration Statement or any related Resale Prospectus; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation or of any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever for which indemnification is provided under subsection (i) above, if such settlement is effective with the written consent of the Companies; and (iii) against any and all expense whatsoever (including, without limitation, the fees and other charges of counsel chosen by PaineWebber) reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceedings by any governmental agency or body, commenced or 20 threatened, or any claim whatsoever for which indemnification is provided under subsection (i) above, to the extent that any such expense is not paid under subsection (i) or (ii) above. (b) Indemnification by the PaineWebber Parties. The PaineWebber Parties agree to indemnify and hold harmless the Companies, and each person, if any, who controls the Companies within the meaning of Section 15 of the Securities Act, and any trust manager, director, officer, employee or affiliate thereof, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section 7.5, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in any Resale Registration Statement (or any amendment thereto) or any related Resale Prospectus (or any amendment or supplement thereto) in reasonable reliance upon and in conformity with written information furnished to the Companies by the PaineWebber Parties specifically for inclusion in any Resale Registration Statement or any related Resale Prospectus. (c) Proceedings. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relive it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. If it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that the named parties to any such action (including any impleaded parties) include both such indemnified parties and an indemnifying party, and such indemnified parties reasonably believe that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 7.5 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not 21 include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 7.5(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (d) Contribution. If the indemnification provided for in this Section 7.5 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under paragraph (a), (b) or (c) of this Section 7.5 in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein, (i) in such proportion as is appropriate to reflect the relative benefits received by the Companies and the PaineWebber Parties from the purchase and sale of the Shares or (ii) if the allocation provided in clause (i) is not permitted by applicable law, in such proportion or as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Companies and the PaineWebber Parties in connection with the statements or omissions or inaccuracies in the representations and warranties in this Agreement which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Companies on the one hand and the PaineWebber Parties on the other shall be deemed to be in the same proportion as the amount paid by the PaineWebber Parties to the Companies pursuant to this Agreement and the Adjustment Agreement and the net proceeds retained by the PaineWebber Parties from the transactions contemplated by this Agreement and the Adjustment Agreement. The relative fault of the Companies and the PaineWebber Parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or the alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Companies or by the PaineWebber Parties and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in paragraph (c) of this Section 7.5 any reasonable legal or other fees or expenses incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in paragraph (c) of this Section 7.5 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this paragraph (d) provided, however, that no additional notice shall be required with respect to any action for which notice has been given under paragraph (c) for purposes of indemnification. The Companies and the 22 PaineWebber Parties agree that it would not be just and equitable if contribution pursuant to this Section 7.5 were determined solely by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph (d). Notwithstanding the provisions of this Section 7.5, the PaineWebber Parties shall not be required to contribute any amount in excess of the amount by which the aggregate net proceeds retained by the PaineWebber Parties from the transactions contemplated hereby and by the Adjustment Agreement exceeds the amount of any damages that the PaineWebber Parties has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Relationship Between the REIT and OPCO. The obligations set forth in this Section 7.5 shall in no way limit the ability of the Companies to allocate liability between themselves. 7.6 Information Available. So long as any Resale Registration Statement covering the resale of any shares owned by the PaineWebber Parties is effective, the Companies will furnish to the PaineWebber Parties: (a) as soon as practicable after available, one copy of (i) their Joint Annual Report to Shareholders, (ii) their Joint Annual Report on Form 10-K, (iii) their joint Quarterly Reports to Shareholders, (iv) their joint quarterly reports on Form 10-Q, (v) a full copy of the particular Resale Registration Statement covering the Shares (the foregoing, in each case, excluding exhibits) and (iv) upon request, any or all other filings made with the Commission by the Companies; and (b) upon the reasonable request of the PaineWebber Parties, a reasonable number of copies of the Resale Prospectuses to supply to any other party requiring such Resale Prospectuses; and the Companies, upon the reasonable request of the PaineWebber Parties, will meet with the PaineWebber Parties or a representative thereof at the Companies' headquarters to discuss all information relevant for disclosure in such Resale Registration Statement covering the Shares, subject to appropriate confidentiality limitations. 7.7 Remedies. The Companies and the PaineWebber Parties acknowledge that there would be no adequate remedy at law if the Companies fail to perform any of their obligations under this Section 7, and accordingly agree that the PaineWebber Parties, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of the Companies under this Section 7, and the Companies hereby waive the defense that a remedy at law would be adequate. 7.8 Notice Requirement. The REIT and the OPCO each covenants and agrees that it will notify the PaineWebber Parties at any time it becomes aware that as a 23 result of a change in the REIT's and the OPCO's capital stock the PaineWebber Parties beneficially hold more than 4.9% of the REIT's and the OPCO's Paired Shares. 7.9 Registration Exemptions. For so long as the Companies are subject to the reporting requirements of Section 13 or 15 of the Exchange Act, the Companies covenant that they will timely file all reporting required to be filed by it under the Securities Act and Exchange Act and the rules and regulations adopted by the Commission thereunder. SECTION 8. Fees and Expenses. 8.1 Broker's Fees. Other than any fees payable under or in connection with the Adjustment Agreement, each of the parties hereto represents that, on the basis of any actions and agreements by it, there are no brokers or finders entitled to compensation in connection with the sale or issuance of the Shares to PaineWebber. 8.2 Additional Shares. The Companies will pay to the PaineWebber Parties an amount equal to $.02 per Additional Share as reimbursement for all expenses incurred by the PaineWebber Parties in connection with the delivery of Additional Shares under this Agreement or the Adjustment Agreement. SECTION 9. Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified mail, by telegram or telecopy or sent by nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed or for telecopies, when transmitted and receipt confirmed, and shall be delivered as addressed as follows: (a) if to the Companies, to: Patriot American Hospitality, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attention: John P. Bohlmann, Esq. Wyndham International, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attention: Carla S. Moreland, Esq. with copies so mailed to: Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 Attention: Gilbert G. Menna, P.C. 24 or to such other person at such other place as the Companies shall designate to PaineWebber Parties in writing; and (b) if to PaineWebber Agent or PaineWebber, to: PaineWebber PaineWebber Financial Products Inc. 1285 Avenue of the Americas, 19th Floor New York, NY 10019 Attention: Terrence E. Fancher Telecopier: (212) 713-7949 with a copy so mailed to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Attention: Daniel P. Cunningham, Esq. Telecopier: (212) 474-3700 SECTION 10. Changes. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Companies and the PaineWebber Parties. SECTION 11. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. SECTION 12. Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. SECTION 13. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon (i) the successors of the PaineWebber Parties and (ii) any assignee or transferee of rights and obligations of the PaineWebber Parties pursuant to the Adjustment Agreement or this Agreement. A transferee of the PaineWebber Parties pursuant to the Adjustment Agreement or this Agreement, and any successor, assignee, or transferee, shall be held subject to all of the terms of this Agreement. Except as set forth in this Section 13, neither the Companies nor the PaineWebber Parties may assign any of their respective rights, or delegate any of their respective duties under this Agreement. SECTION 14. Governing Law; Jurisdiction. 25 14.1 This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. 14.2 Each of the Companies (i) hereby irrevocably submits to the jurisdiction of, and agrees that any suit shall be brought in, the state and federal courts located in the City and County of New York for the purposes of any suit, action or other proceedings arising out of or based upon this Agreement of the transactions contemplated hereby and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way or motions, as a defense or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is brought in an inconvenient forum, that the venue of any such proceedings brought in one of the above-named courts is improper, or that this Agreement, or the transactions contemplated hereby, may not be enforced in or by such court. SECTION 15. Transfer to Affiliate. Notwithstanding anything herein to the contrary, PaineWebber may transfer any Paired Shares delivered pursuant to this Agreement and the Adjustment Agreement to any affiliate of PaineWebber, together with all of PaineWebber's rights hereunder, provided that (i) such affiliate shall be an "accredited investor" within the meaning of Rule 501 (a)(1), (2), (3) or (7) of Regulation D promulgated under the Securities Act, and (ii) such transfer shall be consistent with the investment representations set forth at Section 5.1 hereto. In the event of such an assignment such affiliate shall in all respects be substituted for PaineWebber as a party hereto. SECTION 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. SECTION 17. Waiver of Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO JURY TRIAL IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. PATRIOT AMERICAN HOSPITALITY, INC. By: /s/ William W. Evans III ---------------------------------- Name: William W. Evans III Title: President and Chief Operating Officer WYNDHAM INTERNATIONAL, INC. By: /s/ William W. Evans III ---------------------------------- Name: William W. Evans III Title: Executive Vice President PAINEWEBBER INCORPORATED By: /s/ Terrence E. Fancher ---------------------------------- Name: Terrence E. Fancher Title: Managing Director PAINEWEBBER FINANCIAL PRODUCTS INC. By: /s/ Terrence E. Fancher ---------------------------------- Name: Terrence E. Fancher Title: Vice President EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 EXECUTION COPY LETTER AGREEMENT (this "Letter Agreement") made on this 30th day of July, 1998, by and among PATRIOT AMERICAN HOSPITALITY, INC., a Delaware corporation (the "REIT"), WYNDHAM INTERNATIONAL, INC., a Delaware corporation (the "OPCO", and together with the REIT, jointly and severally, the "Companies" and each a "Company"), and PAINEWEBBER FINANCIAL PRODUCTS INC. ("PaineWebber"). The purpose of this Letter Agreement is to confirm the satisfaction of certain obligations under the Purchase Price Adjustment Mechanism Agreement among REIT, OPCO and PaineWebber dated April 6, 1998 (the "PPAM Agreement"). NOW, THEREFORE, in consideration of the representations, warranties and covenants herein contained, and on the terms and subject to the conditions herein set forth, the Companies and PaineWebber hereby agree as follows: Section 1.01. DEFINITIONS. All capitalized terms used but not defined herein shall have the meanings given them in the PPAM Agreement. Section 1.02. REPRESENTATIONS. The representations, warranties and covenants of the Companies in Section 4 of the Purchase Agreement, dated as of April 6, 1998 (the "Purchase Agreement"), among the Companies and PaineWebber are hereby incorporated by reference herein, and the Companies hereby so represent, warrant and covenant to PaineWebber. The provisions of Section 6 of the Purchase Agreement shall also be applicable to any Paired Shares delivered to PaineWebber under this Agreement. Section 1.03. INTERIM SETTLEMENT. The Companies agree to deliver to PaineWebber Interim Settlement Shares for the Reset Date that occurred on June 30, 1998, PROVIDED, HOWEVER, that such Interim Settlement Shares need not be delivered pursuant to an effective registration statement covering any sale of such Interim Settlement Shares by PaineWebber, PROVIDED FURTHER that if such Interim Settlement Shares are not the subject of an effective registration statement covering all sales of such Interim Settlement Shares by PaineWebber by August 28, 1998, the Companies shall deliver cash collateral to PaineWebber on such date in an amount equal to the Interim Settlement Amount for the Reset Date that occurred on June 30, 1998. Any cash collateral delivered by the Companies to PaineWebber pursuant to this Section shall be subject to the provisions of Section 5.1 of the PPAM Agreement. PaineWebber acknowledges that the Companies' obligations to deliver Interim Settlement Shares to PaineWebber under Section 5.1 of the PPAM Agreement with respect to the Reset Date occurring on June 30, 1998, shall be satisfied upon the full performance by the Companies of all their respective obligations under this Letter Agreement. For the avoidance of doubt, such satisfaction is only with respect to the obligations of the Companies arising with respect to the Reset Date occurring on June 30, 1998, and in no way affects the obligations of the Companies with respect to future Reset Dates. Section 1.04. MISCELLANEOUS PROVISIONS. The representations, warranties and covenants of the Companies contained in Section 6 and Section 7 of the PPAM Agreement are hereby incorporated by reference herein, and the Companies hereby so represent, warrant and covenant to PaineWebber. Section 1.05. GOVERNING LAW AND JURISDICTION. This Letter Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. With respect to any suit, action or proceeding relating to this Letter Agreement ("Proceedings"), each party irrevocably submits to the exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City and waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. IN WITNESS WHEREOF, PaineWebber and the Companies have caused this Letter Agreement to be duly executed and delivered, as of the date first written above. PATRIOT AMERICAN HOSPITALITY, INC., by /s/ -------------------------- WYNDHAM INTERNATIONAL, INC., by /s/ -------------------------- PAINEWEBBER FINANCIAL PRODUCTS, INC., by /s/ -------------------------- EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 UBS AG London Branch 100 Liverpool Street London EC2M 2 RH September 11, 1998 Patriot American Hospitality, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attn: William W. Evans III Wyndham International, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attn: Leslie Ng Ladies and Gentlemen: Reference is made to that certain Forward Stock Contract, dated December 31, 1997 (the "Forward Agreement") between Patriot American Hospitality, Inc. (the "REIT") and Patriot American Hospitality Operating Company (the "OPCO") and Union Bank of Switzerland, London Branch ("UBS"), as such Forward Agreement may have been amended through the date hereof (including the letter agreement dated August 14, 1998, between the REIT and Wyndham International, Inc. (as successor to the OPCO, each a "Company" and collectively, the "Companies") and Union Bank AG, London Branch ("UB-LB"), as successor to UBS acting through its agent Warburg Dillon Read, LLC. This letter agreement between the Companies and UB-LB modifies and amends, in part, certain of the terms and conditions in the Forward Agreement. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them under the Forward Agreement, as amended. As of August 26, 1998, the average closing price of the Paired Shares for two consecutive Exchange Trading Days was equal to or below the Mandatory Unwind Threshold and UB-LB in providing notice to the Companies that a Mandatory Unwind Event has occurred. However, the amendments to the Forward Agreement contained herein amend the Mandatory Unwind Threshold retroactively. Notwithstanding the terms and conditions of the Forward Agreement, the Companies and UB- LB agree as follows: 1. In the definition of "Mandatory Unwind Thresholds" that is contained within Section II of the Forward Agreement, the term "$16.00" shall be replaced by the term "$11.00". No Mandatory Unwind Event under clause (i) of the definition of Mandatory Unwind Event shall 1 be deemed to have occurred or be continuing under the Forward Agreement, as hereby amended. 2. The cash collateral currently held by UB-LB in the amount of $45,627,725 will be used on the date hereof to "buy down" the Forward Price. Accordingly, the Forward Price will be reduced on the date hereof by $14.0393 ($45,627,725 divided by 3,250,000, the number of Underlying Shares), and the cash collateral of $45,627,725 will be applied to fund the buy down on the date hereof. 3. The Companies covenant that they will give telephone notice (confirmed in writing) at least fifteen (15) business days prior to the consummation of any transaction (including without limitation an open market repurchase of Paired Shares) that would result in UB-LB or any of its affiliates owning in excess of 5% of the Paired Shares (any such ownership interest an "Ownership Interest"). UB-LB agrees that such notice requirement shall be deemed to have been satisfied by the public announcement of a transaction by the Companies, but only if a copy of such announcement is delivered to UB-LB. UB-LB represents on the date hereof that the Ownership Interest consists of 3,250,000 Paired Shares owned by UB-LB. UB-LB covenants that it will notify the Companies in writing within two (2) business days after the occurrence of any increase in the Ownership Interest, except with respect to any increase arising from the operating of the Forward Agreement (including without limitation, the delivery of Interim Settlement Shares or Cash Collateral Shares). Failure to comply with this covenant shall constitute a Mandatory Unwind Event under clause (ii) of "Mandatory Unwind Event" in Section VI of the Forward Agreement. In making calculations under this paragraph, the Companies shall be entitled to rely on share information provided by UB-LB under this paragraph and will not be in breach of this covenant if any share information so provided by UB-LB is inaccurate or incomplete. 4. The Companies covenant and agree that simultaneously with the consummation of the sale of certain property interests as set forth on Exhibit A hereto (the "Assets"), the Companies will effect a Physical Settlement under the Forward Contract with respect to 100% of the Underlying Shares. The Companies represent that they have granted no lien, pledge or security interest in the proceeds of the sale of the Assets. Failure to comply with this covenant shall constitute a Mandatory Unwind Event under clause (ii) of "Mandatory Unwind Event" in Section VI of the Forward Agreement. 5. The Companies represent on the date hereof that no early settlement of any Other Transaction has occurred or is being contemplated, and that no Financial Covenant Default or other Event of Default has occurred, all within the meaning and for the purposes of clause (ii) of "Mandatory Unwind Event" in Section VI of the Forward Agreement. For the avoidance of doubt, the failure of the Companies to deliver to UB-LB on or before September 30, 1998, an effective registration statement as contemplated by Section III.A.4. of the Forward Agreement shall constitute a Mandatory Unwind Event (regardless of when the Companies may have filed such a registration statement with the SEC), and nothing in this letter agreement shall be construed to the contrary. 2 Sincerely, UBS AG, London Branch By: /s/ ----------------------------------------- Name: Title: Date: AGREED TO AND ACCEPTED Patriot American Hospitality, Inc. By: /s/ ----------------------------------------- Name: Title: Date: Wyndham International, Inc. By: /s/ ----------------------------------------- Name: Title: Date: 3 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 PaineWebber Financial Products Inc. 1285 6th Avenue New York NY 10019 September 15, 1998 Patriot American Hospitality, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Wyndham International, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Re: Purchase Price Adjustment Mechanism Agreement, dated as of April 6, 1998, as amended on July 30, 1998 and August 14, 1998 (the "PaineWebber Agreement") Gentlemen: We understand that you wish to settle an amount not in excess of $45,627,725 of your obligation under the Forward Stock Contract between you and Union Bank of Switzerland, London Branch, dated December 31, 1998, as amended on August 14, 1998 and September 11, 1998, solely by means of applying cash collateral previously delivered under such Forward Stock Contract (together with any interest earned thereon) (the "Partial UBS Settlement"). We hereby agree and confirm that (i) the Partial UBS Settlement will not give rise to a Cross- Default under Section 4.3 of the PaineWebber Agreement, and (ii) we will not require you to settle all or part of your obligation under the PaineWebber Agreement in connection with the Partial UBS Settlement. In all other respects, the PaineWebber Agreement, and any right of PaineWebber arising in the past or in the future to settle under the PaineWebber Agreement, either due to a cross-default described in Section 4.3 of the PaineWebber Agreement or arising or having arisen under any other provision of the PaineWebber Agreement, shall remain in full force and effect. Very truly yours, PAINEWEBBER FINANCIAL PRODUCTS, INC. By:/s/ ---------------------------------- Title: EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 September 29, 1998 Patriot American Hospitality, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attn: William W. Evans III Wyndham International, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attn: Leslie Ng Ladies and Gentlemen: This letter agreement among Patriot American Hospitality, Inc. (the "REIT"), Wyndham International, Inc. (the "OPCO") (each a "Company" and collectively, the "Companies") and PaineWebber Financial Products Inc. ("PaineWebber") modifies and amends, in part, certain of the terms and conditions of that certain Purchase Price Adjustment Mechanism Agreement, dated April 6, 1998 (the "Agreement") between the Companies and PaineWebber, as amended by the letter agreement dated August 14, 1998. Defined terms not otherwise defined herein shall have the meanings ascribed to them under the Agreement. Notwithstanding the terms and conditions of the Agreement, the Companies and PaineWebber agree as follows: 1. REPRESENTATIONS AND WARRANTIES. The representations, warranties and covenants of the Companies in Section 4 of the Purchase Agreement, dated as of April 6, 1998 (the "Purchase Agreement"), among the Companies and PaineWebber are hereby incorporated by reference herein, and the Companies hereby so represent, warrant and covenant to PaineWebber. The provisions of Section 6 of the Purchase Agreement shall also be applicable to any Paired Shares delivered to PaineWebber under this Agreement. Patriot American Hospitality, Inc. Wyndham International, Inc. September 30, 1998 Page 2 2. FILING OF REGISTRATION STATEMENT. The Companies agree to use all best efforts to file and have declared effective, before October 15, 1998, a registration statement covering the sale of any Paired Shares issued to PaineWebber pursuant to the Purchase Agreement or the Agreement; provided, however, that at PaineWebber's request at any time prior to that date, the Companies will use all best efforts to file and have declared effective such registration statement as soon as possible thereafter. PaineWebber agrees that such filing will satisfy the requirements of Section 7.1(a) of the Purchase Agreement with respect to Resale Registration Statements. 3. EFFECTIVE DATE. Paragraph 7 of the letter agreement among the parties hereto dated August 14, 1998 is amended by replacing "September 30, 1998" with "October 15, 1998." 4. EFFECT. Notwithstanding this letter agreement all other provisions as amended remain in full force and effect. Sincerely, PaineWebber Financial Products Inc. By: /s/ Terrence E. Fancher -------------------------------- Name: Terrence E. Fancher Title: Managing Director AGREED TO AND ACCEPTED Patriot American Hospitality, Inc. Wyndham International, Inc. By: /s/ William W. Evans III By: /s/ William W. Evans III ---------------------------- ---------------------------- Name: William W. Evans III Name: William W. Evans III Title: Title: EX-10.6 7 EXHIBIT 10.6 EXHIBIT 10.6 October 22, 1998 Patriot American Hospitality, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attn.: William W. Evans III Wyndham International, Inc. 1950 Stemmons Freeway, Suite 6001 Dallas, Texas 75207 Attn.: Leslie Ng Ladies and Gentlemen: This letter agreement among Patriot American Hospitality, Inc. (the "REIT"), Wyndham International, Inc. (the "OPCO") (each a "Company" and collectively, the "Companies") and PaineWebber Financial Products Inc. ("PaineWebber") confirms, modifies and amends, in part, certain of the terms and conditions of that certain Purchase Price Adjustment Mechanism Agreement, dated April 6, 1998 (the "Agreement") between the Companies and PaineWebber, as amended by letter agreements dated August 14, 1998, and September 30, 1998. Defined terms not otherwise defined herein shall have the meanings ascribed to them under the Agreement. Notwithstanding the terms and conditions of the Agreement, the Companies and PaineWebber agree as follows: 1. REPRESENTATIONS AND WARRANTIES. The representations, warranties and covenants of the Companies in Section 4 of the Purchase Agreement, dated as of April 6, 1998 (the "Purchase Agreement"), among the Companies and PaineWebber are hereby incorporated by reference herein, and the Companies hereby so represent, warrant and covenant to PaineWebber. The provisions of Section 6 of the Purchase Agreement shall also be applicable to any Paired Shares delivered to PaineWebber under the Agreement. Patriot American Hospitality, Inc. Wyndham International, Inc. October 22, 1998 Page 2 2. CONFIRMATION OF COLLATERAL SHARES. A. The Companies hereby confirm that there has heretofore been irrevocably and unconditionally pledged, granted, assigned, hypothecated and transferred to PaineWebber a first and prior pledge and security interest in the 12,574,780 Paired Shares previously delivered to PaineWebber as collateral and all shares hereafter delivered as collateral, and all proceeds thereof, and any increase in profits received therefrom and, to the extent provided in Section 2C below, Distributions (as defined in the Agreement), and all security entitlements in respect of the foregoing (such Paired Shares are in addition to the Adjustment Shares and are hereinafter referred to as the "Collateral Shares"). Blank stock powers for all collateral shares held by PaineWebber, duly endorsed with signatures guaranteed, are being delivered herewith. This Section 2 creates a security interest in the Collateral Shares to secure the payment and performance of any and all obligations now or hereafter existing of the Companies under the Purchase Agreement and the Agreement, as the same has been and may be amended from time to time (collectively "Obligations"). Upon the occurrence of a Default (as defined below), in addition to any and all other rights and remedies which PaineWebber may have hereunder, under applicable laws or otherwise, PaineWebber at its option may, subject to any limitation or restriction imposed by any applicable laws, (i) foreclose or otherwise enforce its security interest in all or any part of the Collateral Shares by any available judicial procedure; (ii) sell or otherwise dispose of, at the office of PaineWebber, all or any part of the Collateral Shares, and any such sale or other disposition shall be in accordance with applicable laws, and may be as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral Shares shall not exhaust PaineWebber's power of sale, but sales may be made from time to time until all of the Collateral Shares have been sold or until the Obligations have been performed and paid in full), and at any such sale it shall not be necessary to exhibit the Collateral Shares; (iii) at its discretion, retain the Collateral Shares in satisfaction of the Obligations whenever the circumstances are such that PaineWebber is entitled to do so under applicable laws; (iv) apply any appropriate judicial proceedings for consent to any appointment; (v) buy the Collateral Shares at any public sale; and (iv) buy the Collateral Shares at any private sale, subject to any restrictions imposed by applicable laws. The Companies agree that, if notice is required to be given by applicable laws, two days' advance written notice shall constitute reasonable notice. PaineWebber shall apply the proceeds of any collection, sale, disposition or other realization upon any Collateral Shares as follows: FIRST, to the payment of the reasonable costs and expenses of such collection, sale, disposition or other realization, including reasonable out-of-pocket costs and Patriot American Hospitality, Inc. Wyndham International, Inc. October 22, 1998 Page 3 expenses of PaineWebber and the reasonable fees and expenses of its agents and counsel; NEXT, to the satisfaction and payment of the Obligations; and FINALLY, to the payment to the Companies, or their respective successors or assigns, or as a court of competent jurisdiction may direct, of any surplus them remaining. If the proceeds of collection, sale, disposition , or other realization are insufficient to cover the costs and expenses of such realization and the payment in full of the Obligations, the Companies shall remain liable for such deficiency. B. The Companies recognize that if a Default occurs prior to a registration statement covering all shares to be sold by PaineWebber under the Agreement (a "Valid Registration") becoming effective, PaineWebber may be unable to effect a public sale of any or all of the Collateral Shares by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities laws, and may be compelled to resort to one or more private sales thereof. The Companies acknowledge and agree that PaineWebber shall have the right to sell the Collateral Shares at a private sale and any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale. PaineWebber shall be under no obligation to delay a sale of any of the Collateral Shares until a Valid Registration is in effect. The Companies hereby agree (i) that in the event PaineWebber shall, upon any Default, sell the Collateral Shares or any portion thereof, at a private sale or sales, PaineWebber shall have the right to rely upon the advice and opinion of a member of a nationally recognized investment banking firm acceptable to PaineWebber (which may be an affiliate of PaineWebber), as to the best price reasonably obtainable upon such a private sale thereof, and (ii) in the absence of fraud, willful misconduct and gross negligence, that such reliance shall be conclusive evidence that PaineWebber handled such matter in a commercially reasonable manner under the Uniform Commercial Code. C. All Distributions in respect of the Collateral Shares shall be deposited in the collateral account at PaineWebber or a custodian or depositary designated by PaineWebber and treated in accordance with the letter agreement between the parties dated August 14, 1998. D. For purposes of the Agreement and this letter agreement, a "Default" shall mean failure by the Company to deliver sufficient Additional Shares (as defined in the Patriot American Hospitality, Inc. Wyndham International, Inc. October 22, 1998 Page 4 Agreement) pursuant to Section 3.2(b) of the Agreement. 3. EFFECT. Notwithstanding this letter agreement, all other provisions of the Agreement as amended remain in full force and effect. Nothing in this letter agreement diminishes any rights of either party under the Purchase Agreement and the Agreement. Sincerely, PaineWebber Financial Products, Inc. By:/s/ -------------------------------- Name: Title: AGREED TO AND ACCEPTED Patriot American Hospitality, Inc. Wyndham International, Inc. By:/s/ By:/s/ -------------------------------- ------------------------------ Name: Name: Title: Title: EX-99.1 8 EXHIBIT 99.1 EXHIBIT 99.1 DEBT SCHEDULE 11/5/98
BALANCE DEBT 05-NOV MATURITY RATE - ---- ------ -------- ---- NationsBank 12,875,000 11/18/98 Libor + 2.75 CHC Loans 103,000,000 12/15/98 Libor + 2.25 Emerald Plaza 35,000,000 12/31/98 Libor + 1.9 Casa Marina 30,566,000 12/31/98 Libor + 2.0 Harrisburg 19,838,875 12/31/98 Libor + 2.25 Arcadian Feb 98 Facility 850,000 12/31/98 SLibor(3) + 1.75 Arcadian Overdraft Facility 3,400,000 Reviewed Annually UK Base + 1.25 - ---------------------------------------------------------------------------------- Condado 55,000,000 1/29/99 Libor + 2.25 El Conquistador 90,000,000 1/29/99 Libor + 2.25 Tranche I 350,000,000 1/31/99 Libor + 2.25 Arcadian Feb 98 Facility 5,950,000 2/31/99 SLibor + 1.75 Tranche II 400,000,000 3/31/99 Libor + 2.25 Unsecured Recourse Loan 160,000,000 4/15/99 Libor + 2.25 Golden Door Spa 2,000,000 6/1/99 AFR Chase Promissory Note 49,255,000 11/5/99 Libor + 2.25 Syracuse 9,774,066 12/1/99 8.0% - ---------------------------------------------------------------------------------- Tranche III 450,000,000 3/31/00 Libor + 2.25 Golden Door Spa 2,000,000 6/1/00 AFR Revolver(1) 887,758,199 7/18/00 Libor + 2.25 Arcadian Additional Loan 6,800,000 7/31/00 SLibor + 1.75 Santa Maria 4,000,000 8/27/00 Libor + .5 - ---------------------------------------------------------------------------------- Golden Door Spa 2,000,000 6/1/01 AFR Reach 9,347,583 7/1/01 8.0% Wyndham PeachTree 38,000,000 10/23/01 Libor + 3.50 Arcadian Term Loan 29,750,000 11/01/01 Libor + 1.25 Arcadian Revolving Credit Facility 30,600,000 11/01/01 Libor + 1.25 - ---------------------------------------------------------------------------------- St. Louis 8,276,404 5/1/02 9.6% Pittsburgh 14,462,744 6/1/02 9.0% Meadows Del Mar 1,172,016 6/1/02 Libor + 3.56 - ---------------------------------------------------------------------------------- Tranche B 599,500,000 3/31/03 Libor + 2.5 El San Juan 42,100,000 8/31/03 Libor + 2.0 Malmaison Senior Debt 25,956,300 12/1/03 Libor + 2.5 Leeds Site Debt 2,260,710 12/1/03 Libor + 2.5 Bourbon Orleans 13,500,000 1/1/04 Libor + 2.0 Ventana Canyon 28,488,769 3/1/05 6.50% Radisson Beachwood 5,064,553 5/31/05 9.75% Clubhouse 22,826,894 10/1/05 8.7% Reach 14,990,400 10/1/05 9.1% El Conquistador 25,000,000 2/7/06 Libor + .9 Wyndham Senior Sub(2) 1,510,000 5/15/06 10.5% Gressy Term Loan 2,448,000 4/1/07 TBB + 2.5 Met Life Portfolio 84,058,200 10/1/07 8.08% Embassy Suites Chicago 41,671,000 10/16/08 8.25% Greenspoint 41,372,000 10/16/08 8.25% Great Eastern Tranche A 25,500,000 10/15/10 9.00% Great Eastern Tranche B 13,600,000 10/15/10 Libor + 1.75 Saletta Term Loan 8,639,000 7/1/14 Ribor + 1.75 Buena Vista 47,223,119 12/1/15 9.11% Vinings 9,675,000 2/1/23 6.15% Summerfield 338,200 On Demand Prime Capital Leases 31,450,256 ------------- TOTAL 3,898,848,288
(1) LOCs of Approximately $24M exist which count against credit availability (2) Unable to locate payee in order to tender notes (3) SLibor - Sterling Libor EX-27.1 9 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 OF PATRIOT AMERICAN HOSPITALITY, INC. 0000016343 PATRIOT AMERICAN HOSPITALITY 1,000 9-MOS 9-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 SEP-30-1998 SEP-30-1997 39,030 20,360 0 0 15,636 14,458 0 0 0 0 0 0 5,225,483 2,083,768 173,105 67,501 6,756,426 2,321,105 0 0 0 0 0 0 49 0 1,555 733 2,494,721 908,294 6,756,426 2,321,105 0 0 438,119 123,308 0 0 0 0 269,167 95,270 0 0 162,294 31,977 30,669 549 533 0 0 0 0 0 30,559 2,534 0 0 (9,879) (4,547) (0.88) (0.09) (0.88) (0.09)
EX-27.2 10 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF WYNDHAM INTERNATIONAL, INC. 0000715273 WYNDHAM INTERNATIONAL, INC. 1,000 9-MOS 9-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 SEP-30-1998 SEP-30-1997 108,367 27,076 0 0 195,130 46,340 0 0 24,553 9,144 379,391 100,662 636,082 29,686 25,705 1,304 2,023,362 252,088 444,342 115,656 0 0 0 0 36 0 1,555 733 172,233 80,132 2,023,362 252,088 1,266,985 30,271 1,376,245 44,184 0 0 869,820 27,333 529,674 15,909 0 0 24,015 11 (44,703) 931 10,740 94 0 0 0 0 1,257 0 0 0 (67,686) 709 (0.56) 0.01 (0.56) 0.01
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