SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
JULY 1, 1997
PATRIOT AMERICAN HOSPITALITY, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 01-13127 94-0358820
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
3030 LBJ FREEWAY, SUITE 1500, DALLAS, TX 75234
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(972) 888-8000
PATRIOT AMERICAN HOSPITALITY OPERATING COMPANY
(Exact Name of Registrant as specified in its charter)
DELAWARE 01-13127-01 94-2872485
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
3030 LBJ FREEWAY, SUITE 1500, DALLAS, TX 75234
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(972) 888-8000
Item 2. Acquisition or Disposition of Assets
- ------- ------------------------------------
On July 1, 1997, pursuant to an Agreement and Plan of Merger, dated as of
February 24, 1997, as amended and restated as of May 28, 1997 (the "Merger
Agreement") by and among Patriot American Hospitality, Inc., a Virginia
corporation ("Patriot"), Patriot American Hospitality Partnership, L.P., a
Virginia limited partnership (the "Realty Partnership"), California Jockey Club,
a Delaware corporation ("Cal Jockey") and Bay Meadows Operating Company, a
Delaware corporation ("Bay Meadows"), Patriot was merged with and into Cal
Jockey (the "Merger") with Cal Jockey as the surviving corporation in the
Merger. The Merger and the Merger Agreement were approved by the stockholders
of Patriot, Cal Jockey and Bay Meadows at their respective Special Meetings of
Stockholders held on July 1, 1997. In connection with the Merger, Cal Jockey's
name was changed to "Patriot American Hospitality, Inc." (hereinafter, "New
Patriot REIT") and Bay Meadows' name was changed to "Patriot American
Hospitality Operating Company" (hereinafter, "New Patriot Operating Company").
Pursuant to the Merger Agreement, each issued and outstanding share of
common stock, no par value, of Patriot (the "Patriot Common Stock"), was
converted, at the effective time, into 0.51895 shares of common stock, $.01 par
value, of New Patriot REIT (the "New Patriot REIT Common Stock") and 0.51895
shares of common stock, $.01 par value, of New Patriot Operating Company (the
"New Patriot Operating Company Common Stock"), which shares are paired and
transferable only as a single unit (as so paired, the "Paired Shares"). In lieu
of issuing fractional Paired Shares, the Merger Agreement provided that a holder
of Patriot Common Stock otherwise entitled to such fractional Paired Shares
became entitled to receive an amount in cash (without interest), rounded to the
nearest cent. As a result of the exchange, Patriot stockholders received
approximately 22,964,173 Paired Shares in connection with the Merger.
The Merger will be accounted for as a reverse acquisition in accordance
with Accounting Principles Board Opinion No. 16. Although Cal Jockey and Bay
Meadows have issued their Paired Shares to Patriot stockholders and are the
surviving legal companies following the Merger, Cal Jockey and Bay Meadows are
considered the acquired companies for accounting purposes because the Patriot
stockholders became the majority stockholders of New Patriot REIT and New
Patriot Operating Company. Therefore, assets and liabilities of the acquired
companies (i.e., Cal Jockey and Bay Meadows for such purposes) are revalued to
their respective fair market values at the date of the Merger. The financial
statements of Patriot American Hospitality, Inc. included in Item 7 will be the
historical financial statements of New Patriot REIT in all future filings under
the Exchange Act.
There was no material relationship between Patriot or its stockholders and
either New Patriot REIT, New Patriot Operating Company or any of their
respective affiliates, directors or officers, or any associate of a director or
officer of Patriot, except as described under the captions "SUMMARY--Interests
of Certain Officers and Directors," "RISK FACTORS--Benefits to Certain Directors
and Officers of Cal Jockey and Bay Meadows," "THE MERGER AND SUBSCRIPTION--
Interests of Certain Officers and Directors," and "THE MERGER AGREEMENT--
Indemnification" in Cal Jockey's and Bay Meadow's Registration Statement on Form
S-4 (File No. 333-28085) effective May 30, 1997 (the "Registration Statement").
Patriot was a self-administered real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code") which owned interests
in 60 hotels in 22 states, with an aggregate of 14,060 guest rooms as of July 1,
1997. Upon effectiveness of the Merger, New Patriot REIT succeeded to Patriot's
1% general partnership interest and approximately 82.7% limited partnership
interest in the Realty Partnership, and thereby
2
effectively acquired Patriot's hospitality assets described in the Registration
Statement. New Patriot REIT intends to continue to use the acquired assets in
the same manner and to conduct the same type of business as Patriot did prior to
the Merger.
Item 7. Financial Statements and Exhibits
- ------- ---------------------------------
(a) Financial Statements of Business Acquired:
The index to the financial information for Patriot American Hospitality,
Inc., CHC Lease Partners, NorthCoast Hotels, L.L.C., and PAH RSI, L.L.C. is
included on page F-1 of this report.
(b) Pro Forma Financial Information:
The index to the pro forma financial information for New Patriot REIT,
New Patriot Operating Company, the Combined Lessees and Patriot (Pre-Merger) is
included on page F-1 of this report.
3
(c) Exhibits:
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of February 24, 1997, as
amended as restated as of May 28, 1997, by and among Patriot
American Hospitality, Inc., Patriot American Hospitality
Partnership, L.P., California Jockey Club and Bay Meadows
Operating Company (the "Merger Agreement"), attached as annex A
to the Joint Proxy Statement/Prospectus contained in the
Registration Statement on Form S-4 (No. 333-28085) dated May 30,
1997 filed by California Jockey Club and Bay Meadows Operating
Company and incorporated herein by reference.
4.1* Amended and Restated Certificate of Incorporation of Patriot
American Hospitality, Inc.
4.2* Amended and Restated Bylaws of Patriot American Hospitality, Inc.
4.3* Amended and Restated Certificate of Incorporation of Patriot
American Hospitality Operating Company
4.4* Amended and Restated Bylaws of Patriot American Hospitality
Operating Company
99.1* Press release announcing the consummation of the merger of
Patriot American Hospitality, Inc. and California Jockey Club.
99.2 The material contained under the captions "SUMMARY--Interests of
Certain Officers and Directors," "RISK FACTORS--Benefits to
Certain Directors and Officers of Cal Jockey and Bay Meadows,"
"THE MERGER AND SUBSCRIPTION--Interests of Certain Officers and
Directors," and "THE MERGER AGREEMENT--Indemnification,"
incorporated herein by reference to Cal Jockey's and Bay Meadow's
Registration Statement on Form S-4 (File No. 333-28085) dated May
30, 1997.
*Filed herewith.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
Dated: July 11, 1997 PATRIOT AMERICAN HOSPITALITY, INC.
/s/ Rex E. Stewart
____________________________________
By: Rex E. Stewart
Its: Chief Financial Officer
Dated: July 11, 1997 PATRIOT AMERICAN HOSPITALITY
OPERATING COMPANY
/s/ Rex E. Stewart
_____________________________________
By: Rex E. Stewart
Its: Chief Financial Officer
5
PATRIOT AMERICAN HOSPITALITY, INC.
INDEX TO FINANCIAL INFORMATION
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
Page
----
Patriot American Hospitality, Inc.:
Report of Independent Auditors - Ernst & Young LLP................... F-2
Consolidated Balance Sheets as of December 1, 1996 and 1995.......... F-3
Consolidated Statements of Operations for the year ended
December 31, 1996 and the period October 2, 1995 (inception
of operations) through December 31, 1995........................... F-4
Consolidated Statements of Shareholders' Equity for the year
ended December 31, 1996 and the period October 2, 1995
(inception of operations) through December 31, 1995................ F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1996 and the period October 2, 1995
(inception of operations) through December 31, 1995................ F-6
Notes to Consolidated Financial Statements........................... F-8
Consolidated Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996.............................................. F-27
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 (unaudited)................................ F-28
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited)................................ F-29
Notes to Consolidated Financial Statements (unaudited)............... F-30
FINANCIAL STATEMENTS OF LESSEES WITH PROPERTIES SUBJECT TO A NET LEASE:
CHC Lease Partners:
Report of Independent Certified Public Accountants -
Price Waterhouse LLP .............................................. F-39
Balance Sheets as of December 31, 1996 and 1995...................... F-40
Statements of Operations for the twelve months ended
December 31, 1996 and for the period inception
(October 2, 1995) to December 31, 1995............................. F-41
Statements of Partners' Capital for the twelve months ended
December 31, 1996 and for the period inception (October 2, 1995)
to December 31, 1995............................................... F-42
Statements of Cash Flows for the twelve months ended
December 31, 1996 and for the period inception
(October 2, 1995) to December 31, 1995............................. F-43
Notes to Financial Statements........................................ F-45
Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996.................................................. F-49
Statements of Operations for the three months ended March 31, 1997
and 1996 (unaudited).............................................. F-50
Statements of Cash Flows for the three months ended March 31, 1997
and 1996 (unaudited).............................................. F-51
Notes to Financial Statements (unaudited)............................ F-52
NorthCoast Hotels, L.L.C.:
Report of Independent Auditors - Ernst & Young LLP................... F-54
Balance Sheet as of December 31, 1996................................ F-55
Statement of Operations for the period April 2, 1996
(inception of operations) through December 31, 1996................ F-56
Statement of Members' Equity for the period April 2, 1996
(inception of operations) through December 31, 1996................ F-57
Statement of Cash Flows for the period April 2, 1996
(inception of operations) through December 31, 1996................ F-58
Notes to Financial Statements........................................ F-59
Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996.................................................. F-64
Statement of Operations for the three months ended March 31, 1997
(unaudited)........................................................ F-65
Statement of Cash Flows for the three months ended March 31, 1997
(unaudited)........................................................ F-66
Notes to Financial Statements (unaudited)............................ F-67
PAH RSI, L.L.C.:
Consolidated Balance Sheet as of March 31, 1997 (unaudited).......... F-70
Consolidated Statement of Operations for the period
January 16, 1997 (inception of operations) through March 31,
1997 (unaudited)................................................... F-71
Consolidated Statement of Members' Equity for the period
January 16, 1997 (inception of operations) through March 31,
1997 (unaudited)................................................... F-72
Consolidated Statement of Cash Flows for the period
January 16, 1997 (inception of operations) through March 31,
1997 (unaudited)................................................... F-73
Notes to Consolidated Financial Statements (unaudited)............... F-74
PRO FORMA FINANCIAL INFORMATION:
New Patriot REIT and New Patriot Operating Company:
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1996 (unaudited)........................... F-81
Pro Forma Condensed Combined Statement Operations for the
three months ended March 31, 1997 (unaudited)...................... F-83
Pro Forma Condensed Combined Balance Sheet as of March 31, 1997
(unaudited)........................................................ F-86
New Patriot REIT:
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1996 (unaudited)........................... F-88
Pro Forma Condensed Consolidated Statement of Operations for the
three months ended March 31, 1997 (unaudited)...................... F-89
New Patriot Operating Company:
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1996 (unaudited)........................... F-90
Pro Forma Condensed Consolidated Statement of Operations for the
three months ended March 31, 1997 (unaudited)...................... F-92
Combined Lessees:
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1996 (unaudited)........................... F-95
Pro Forma Condensed Combined Statement of Operations for the
three months ended March 31, 1997 (unaudited)...................... F-96
Patriot (Pre-Merger):
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1996 (unaudited)........................... F-99
Pro Forma Condensed Consolidated Statement of Operations for the
three months ended March 31, 1997 (unaudited)...................... F-101
Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1997 (unaudited)......................................... F-103
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Patriot American Hospitality, Inc.
We have audited the accompanying consolidated balance sheets of Patriot
American Hospitality, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1996 and the period October 2, 1995 (inception of
operations) through December 31, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Patriot American
Hospitality, Inc. as of December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for the year ended December 31, 1996 and
the period October 2, 1995 (inception of operations) through December 31, 1995,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
January 31, 1997, except for
Note 14, as to which the date
is March 18, 1997
F-2
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1996 1995
------------- ----------
ASSETS
Investment in hotel properties, net $641,825 $265,759
Cash and cash equivalents, including
capital improvement reserves of
$2,458 in 1996 and $1,091 in 1995 6,604 4,769
Lease revenue receivable 5,351 2,260
Receivables from selling entities 1,478 1,765
Investment in unconsolidated
subsidiaries 11,291 4,263
Mortgage notes and other receivables
from unconsolidated subsidiaries 72,209 40,855
Inventory 1,648 1,035
Deferred expenses, net of accumulated
amortization of $750 in 1996
and $88 in 1995 3,063 1,852
Prepaid expenses and other assets 17,462 1,666
-------- --------
Total assets $760,931 $324,224
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit and
mortgage note $214,339 $ 9,500
Dividends and distributions payable 13,129 8,154
Accounts payable and accrued expenses 10,117 3,179
Due to unconsolidated subsidiaries 6,034 91
Minority interest in Patriot Partnership 68,562 41,522
Minority interest in other partnerships 11,711 --
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value,
20,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value, 200,000,000
shares authorized;
shares issued and outstanding were
43,613,496 in 1996
and 29,331,870 in 1995 (1) -- --
Paid-in capital 442,540 264,808
Unearned stock compensation, net of
accumulated amortization
of $1,139 in 1996 and $71 in 1995 (5,427) (1,351)
Retained earnings (distributions in
excess of retained earnings) (74) (1,679)
-------- --------
Total shareholders' equity 437,039 261,778
-------- --------
Total liabilities and shareholders'
equity $760,931 $324,224
======== ========
- --------------
(1) After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to
shareholders of record on March 7, 1997.
See accompanying notes.
F-3
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD
OCTOBER 2, 1995
(INCEPTION OF OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ------------------------
Revenue:
Participating lease revenue $ 75,893 $ 10,582
Interest and other income 600 513
----------- -----------
Total revenue 76,493 11,095
----------- -----------
Expenses:
Real estate and personal property
taxes and casualty insurance 7,150 901
Ground lease expense 1,075 --
General and administrative 4,500 607
Interest expense 7,380 89
Depreciation and amortization 17,420 2,590
----------- -----------
Total expenses 37,525 4,187
----------- -----------
Income before equity in earnings of
unconsolidated subsidiaries,
minority interests and extraordinary
item 38,968 6,908
Equity in earnings of unconsolidated
subsidiaries 5,845 156
----------- -----------
Income before minority interests and
extraordinary item 44,813 7,064
Minority interest in Realty Partnership (6,767) (968)
Minority interest in other partnerships (55) --
----------- -----------
Income before extraordinary item 37,991 6,096
Extraordinary loss from early
extinguishment of debt,
net of minority interest -- (737)
----------- -----------
Net income applicable to common
shareholders $ 37,991 $ 5,359
=========== ===========
Net income per common share (1):
Income before extraordinary item $ 1.06 $ 0.21
Extraordinary item -- (0.03)
----------- -----------
Net income applicable to common
shareholders $ 1.06 $ 0.18
=========== ===========
Weighted average number of common
shares and common share
equivalents outstanding (1) 35,938 29,350
=========== ===========
- ---------------
(1) After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to
shareholders of record on March 7, 1997.
See accompanying notes.
F-4
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
UNEARNED
STOCK RETAINED
NUMBER OF SHARES (1) PAID-IN CAPITAL COMPENSATION EARNINGS TOTAL
-------------------- --------------- ------------- --------- ----------
Issuance of common stock,
net of offering expenses 29,210,000 $313,170 $ -- $ -- $313,170
Acquisition of interests
from affiliates -- (19,357) -- -- (19,357)
Predecessor basis of
interests acquired
from affiliates -- 1,840 -- -- 1,840
Issuance of OP Units
to non-affiliates -- 9,363 -- -- 9,363
Minority interest at closing
of Initial Offering -- (41,670) -- -- (41,670)
Issuance of shares to
executive officers 118,750 1,425 (1,422) -- 3
Issuance of shares to
directors 3,120 37 -- -- 37
Net income -- -- -- 5,359 5,359
Amortization of unearned
stock compensation -- -- 71 -- 71
Common stock dividend
declared, $0.24 per share (1) -- -- -- (7,038) (7,038)
---------- -------- ------- -------- --------
BALANCE,
DECEMBER 31, 1995 29,331,870 $264,808 $(1,351) $ (1,679) $261,778
Issuance of common stock,
net of offering expenses 1,622,786 21,549 -- -- 21,549
Issuance of common stock,
net of offering expenses 12,293,400 159,843 -- -- 159,843
Issuance of shares to
executive officers 314,800 4,427 (4,427) -- --
Issuance of shares to
directors 50,640 754 (717) -- 37
Redemption price of OP
Units in excess of
book value -- (8,841) -- -- (8,841)
Net income -- -- -- 37,991 37,991
Amortization of unearned
stock compensation -- -- 1,068 -- 1,068
Common stock dividends
declared (1):
$0.24 per share -- -- -- (24,937) (24,937)
$0.26 per share -- -- -- (11,449) (11,449)
---------- -------- ------- -------- --------
BALANCE,
DECEMBER 31, 1996 43,613,496 $442,540 $(5,427) $ (74) $437,039
========== ======== ======= ======== ========
- ---------------
(1) After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to
shareholders of record on March 7, 1997.
See accompanying notes.
F-5
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD
OCTOBER 2, 1995
(INCEPTION OF
OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,991 $ 5,359
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 17,302 2,529
Amortization of unearned stock
compensation 1,068 71
Amortization of deferred loan costs 431 27
Amortization of lease inducement
costs 116 23
Other amortization 118 61
Payment of interest on notes
receivable from
unconsolidated subsidiaries 4,833 --
Issue common stock to directors 37 --
Equity in earnings of unconsolidated
subsidiaries (5,845) (156)
Minority interest in income of
Realty Partnership 6,767 968
Minority interest in income of other
partnerships 55 --
Extraordinary item -- 737
Changes in assets and liabilities:
Lease revenue receivable (3,091) (2,260)
Deferred expenses -- (292)
Prepaid expenses and other assets (1,003) (589)
Accounts payable and other accrued
expenses 2,741 1,140
Due to unconsolidated subsidiaries (324) --
--------- ---------
Net cash provided by operating
activities 61,196 7,618
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and
related working capital assets (353,217) (260,665)
Improvements and additions to hotel
properties (21,889) (609)
Collection of receivables from selling
entities 1,219 --
Prepaid acquisition costs (14,797) (598)
Investment in mortgage notes
receivable from
unconsolidated subsidiaries (31,400) (40,500)
Principal payments received on
mortgage note receivable 298 --
Advances to unconsolidated subsidiary -- (87)
Investment in unconsolidated subsidiary -- (4,238)
Investment in other note receivable -- (101)
Principal payment received on other
note receivable 101 --
Payment of organization costs -- (150)
--------- ---------
Net cash used in investing
activities (419,685) (306,948)
--------- ---------
See accompanying notes.
F-6
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
PERIOD
OCTOBER 2, 1995
(INCEPTION OF
OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 396,302 9,500
Repay borrowings under line of credit (191,463) --
Payments to acquire interests of
affiliates in the Initial Hotels -- (18,879)
Payment of deferred loan costs (1,189) (361)
Prepayment penalties on assumed
mortgage loans -- (174)
Net proceeds from sale of common stock -- 314,013
Net proceeds of Follow-on Offering 160,305 --
Net proceeds of Private Placement 39,418 --
Payment of initial public offering
costs (462) --
Contribution received from minority
interest in other partnerships 11,656 --
Payments to redeem OP Units (16,584) --
Dividends and distributions paid (37,659) --
--------- --------
Net cash provided by financing
activities 360,324 304,099
--------- --------
Net increase in cash and cash
equivalents 1,835 4,769
--------- --------
Cash and cash equivalents at beginning
of period 4,769 --
--------- --------
Cash and cash equivalents at end of
period $ 6,604 $ 4,769
========= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 6,938 $ --
========= ========
See accompanying notes.
F-7
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Patriot American Hospitality, Inc. (collectively with its subsidiaries,
"Patriot"), a Virginia corporation, was formed April 17, 1995 as a self-
administered real estate investment trust ("REIT") for the purpose of acquiring
equity interests in hotel properties. On October 2, 1995, Patriot completed an
initial public offering (the "Initial Offering") of 29,210,000 shares of its
common stock and commenced operations.
Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole
general partner and the holder of a 1.0% general partnership interest in Patriot
American Hospitality Partnership, L.P. (the "Realty Partnership"). In
addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an
approximate 86.3% limited partnership interest in the Realty Partnership, as of
December 31, 1996.
The Realty Partnership, either directly or through its subsidiaries, acquires
and holds the ownership interests in hotel properties, including the 20 hotels
purchased upon closing of the Initial Offering (the "Initial Hotels"). In
connection with the Initial Offering, Patriot closed on a revolving credit
facility (the "Line of Credit") with PaineWebber Real Estate Securities, Inc.
("PaineWebber Real Estate") to be utilized primarily for the acquisition of
additional hotels, renovation of certain hotels and for working capital. In
consideration for the sale of certain of the hotels acquired by Patriot, certain
owners, including certain affiliates of Patriot, elected to receive limited
partnership units in the Realty Partnership ("OP Units"). The OP Units
received by such owners represent an approximate 12.7% minority equity interest
in the Realty Partnership at December 31, 1996.
At December 31, 1996, Patriot, through the Realty Partnership and other
subsidiaries, owned interests in 46 hotels in 18 states with an aggregate of
11,340 guest rooms.
As of December 31, 1996, the Realty Partnership leases each of its hotels,
except the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel, which
are separately owned through special purpose corporations, to lessees who are
responsible for operating the hotels (the "Lessees"). Patriot leases 24 of its
hotel investments to CHC Lease Partners for staggered terms of ten to twelve
years pursuant to separate participating leases providing for the payment of the
greater of base or participating rent, plus certain additional charges, as
applicable (the "Participating Leases"). Nine of the hotels are leased to
NorthCoast Hotels, L.L.C. ("NorthCoast Lessee") under similar Participating
Lease agreements. DTR North Canton, Inc. (the "Doubletree Lessee"), a subsidiary
of Doubletree Hotels Corporation, leases six hotels and Crow Hotel Lessee, Inc.
(the "Wyndham Lessee") leases two hotels under similar Participating Lease
agreements. Metro Hotels Leasing Corporation ("Metro Lease Partners") leases one
hotel and Grand Heritage Leasing, L.L.C. (the "Grand Heritage Lessee") leases
two hotels under similar Participating Lease agreements. The Lessees, in turn,
have entered into separate agreements with hotel management entities (the
"Operators") to manage the hotels. The Crowne Plaza Ravinia Hotel and the
Marriott WindWatch Hotel acquisitions were structured without lessees and are
managed directly by Holiday Inns, Inc. and Marriott International, Inc.,
respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Patriot, its
wholly-owned subsidiaries, PAH GP, Inc. and PAH LP, Inc., the Realty
Partnership and other partnerships in which Patriot owns at least a 50%
controlling interest. All significant intercompany accounts and transactions
have been eliminated.
Investment in Hotel Properties
The hotel properties are stated at cost. Depreciation is computed using the
straight-line method based upon estimated useful lives of the assets of 35 years
for the buildings and improvements and 5 to 7 years for furniture, fixtures and
equipment.
F-8
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The acquisition of affiliated interests in the Initial Hotels has been
recorded at predecessor cost. In connection with the Initial Offering, cash
payments to acquire the interests of predecessor owners who were deemed to be
affiliates of Patriot have been reflected as a reduction of shareholders' equity
in the accompanying financial statements in 1995.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Patriot would record impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. No such impairment
losses have been recognized to date.
Repairs and maintenance of hotel properties owned by Patriot are paid by the
Lessees. Major renewals and betterments are capitalized. Interest associated
with borrowings used to finance substantial hotel renovations is capitalized and
amortized over the estimated useful life of the assets. Interest of $91 was
capitalized in 1996.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three months
or less when purchased are considered to be cash equivalents.
Investment in Unconsolidated Subsidiaries
Patriot's investments in PAH Ravinia, Inc. ("PAH Ravinia"), the entity which
owns the Crowne Plaza Ravinia Hotel, and PAH Windwatch, L.L.C. ("PAH
Windwatch"), the entity which owns the Marriott WindWatch Hotel, are accounted
for using the equity method of accounting. Patriot owns an approximate 99% non-
voting interest in each of these entities. The voting interests of PAH Ravinia
and PAH Windwatch are owned by partnerships in which Patriot has a 4% interest.
Patriot's share of the net income of PAH Ravinia and PAH Windwatch is included
in Patriot's statement of operations.
Inventory
Inventory consists of food, beverages, china, linen, glassware and silverware
and is stated at cost (see Note 6).
Deferred Expenses
Deferred expenses consist of the following:
December 31,
1996 1995
------ ------
Deferred loan costs $1,550 $ 361
Leasing costs 1,684 1,000
Franchise fees 429 429
Organization costs 150 150
------ ------
3,813 1,940
Less: accumulated amortization (750) (88)
------ ------
$3,063 $1,852
====== ======
Loan costs related to the Line of Credit are amortized to interest expense on
a straight-line basis over the three-year term of the loan. Leasing costs are
amortized to participating lease revenue over the lives of the leases. Franchise
costs are amortized using the straight-line method over the terms of the related
franchise agreements. Amortization of organization costs is computed using the
straight-line method over five years.
F-9
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of prepaid insurance, property taxes
and deposits and pre-acquisition costs associated with hotels under purchase
consideration. At December 31, 1996, other assets include a $10,000 escrow
deposit related to the acquisition of Resorts Limited Partnership and Carefree
Resorts Corporation and their assets (see Note 14). Additionally, other assets
include a note receivable from California Jockey Club in the amount of $2,900
which relates to the Agreement and Plan of Merger with California Jockey Club
and Bay Meadows Operating Company (see Note 14).
Revenue Recognition
The Realty Partnership leases its hotel properties to the Lessees pursuant to
separate Participating Leases. Lease income is recognized when earned from the
Lessees under the Participating Leases.
Stock Split
On January 30, 1997, the Board of Directors declared a 2-for-1 stock split on
Patriot's common stock effected in the form of a stock dividend distributed on
March 18, 1997 to shareholders of record on March 7, 1997. All references in
the consolidated financial statements to the number of shares, per share
amounts, and market prices of Patriot's common stock and options to purchase
common stock have been restated to reflect the impact of the stock split.
The number of OP Units currently outstanding will remain unchanged after the
2-for-1 stock split. However, the OP Unit conversion factor will be changed as a
result of the stock split such that each OP Unit subject to redemption will now
be redeemed for cash equal to the value of two shares of Patriot's common stock
(or, at Patriot's election, Patriot may purchase each OP Unit offered for
redemption for two shares of common stock).
Earnings per Share
Earnings per share is computed based upon the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the period presented. The per share computations include options to purchase
common stock which were outstanding during the period. The number of shares
outstanding related to the options has been calculated by application of the
"treasury stock" method.
Dividends
Patriot intends to pay regular quarterly dividends in order to maintain its
REIT status under the Internal Revenue Code. Payment of such dividends is
dependent upon receipt of distributions from the Realty Partnership.
Stock Compensation
Patriot accounts for its stock compensation arrangements under the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and intends to continue to do so. See Note 10 for a
discussion of Patriot's stock compensation arrangements and pro forma disclosure
of the effect on income from operations and earnings per share of such
arrangements pursuant to the requirements of Financial Accounting Standards
Board Statement 123, "Accounting for Stock-Based Compensation" ("Statement
123").
Income Taxes
Patriot intends to continue to qualify to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code. Under the Internal Revenue Code,
if certain requirements are met in a tax year, a corporation that is treated as
a REIT will generally not be subject to federal income tax with respect to
income which it distributes to its
F-10
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
shareholders. Patriot has declared dividends in excess of its taxable income for
1996 and 1995. Accordingly, no provision for income taxes has been reflected in
the statement of operations. For federal income tax purposes, 1996 dividends
amounted to $0.98 per share, none of which is considered return of capital and
1995 dividends amounted to $0.24 per share, of which 26% was considered a return
of capital.
Earnings and profits, which determine the taxability of dividends to
shareholders, differ from net income reported for financial reporting purposes
due to differences for federal tax purposes in the estimated useful lives used
to compute depreciation and the carrying value (basis) of the investment in
hotel properties. Additionally, certain costs associated with the Initial
Offering are treated differently for federal tax purposes than for financial
reporting purposes.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Concentrations
Patriot currently invests exclusively in hotel properties. The hotel industry
is highly competitive and Patriot's hotel investments are subject to competition
from other hotels for guests. Each of Patriot's hotels competes for guests
primarily with other similar hotels in its immediate vicinity and other similar
hotels in its geographic market. Patriot believes that brand recognition,
location, the quality of the hotel and services provided, and price are the
principal competitive factors affecting its hotel investments.
In 1996 and 1995, Patriot earned rents under the Participating Leases of
$75,893 and $10,582, respectively (net of leasing cost amortization of $116 and
$23, respectively), of which $54,186 and $10,432 was earned from the
Participating Leases with CHC Lease Partners in 1996 and 1995, respectively. In
addition, 55% of future minimum rent amounts due under leases outstanding at
December 31, 1996 relate to the Participating Leases with CHC Lease Partners.
Patriot must rely on the Lessees to generate sufficient cash flow from operation
of the hotels to enable the Lessees to meet rent obligations under the
Participating Leases.
Seasonality
The hotel industry is seasonal in nature. Revenues at certain hotels are
greater in the first and second quarters of a calendar year and at other hotels
in the second and third quarters of a calendar year. Seasonal variations in
revenues at Patriot's hotels may cause quarterly fluctuations in Patriot's lease
revenues.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-11
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INVESTMENT IN HOTEL PROPERTIES:
On October 2, 1995, Patriot, through the Realty Partnership, used
approximately $263,600 of the net proceeds of the Initial Offering and $47,685
in OP Units (including $38,322 in OP Units paid to affiliates) to acquire the 20
initial hotels (including certain working capital assets) from various entities
(the "Selling Entities") and repay existing mortgage and other indebtedness of
these hotels. In connection with the assumption and repayment of mortgage
indebtedness on certain of these properties, Patriot assumed $680 in unamortized
deferred financing costs which were written off upon repayment of the debt, and
paid $174 in mortgage prepayment penalties. These amounts have been reported as
an extraordinary item in the accompanying financial statements. At December 31,
1996 and 1995 Patriot had aggregate receivables of $559 and $1,765,
respectively, from the Selling Entities which represents amounts due to Patriot
relating to the final proration of current assets acquired in connection with
the acquisition of the 20 initial hotels.
On November 15, 1995, Patriot, through the Realty Partnership, completed the
acquisition of the Embassy Suites Hotel in Hunt Valley, Maryland for cash
(including closing costs) of approximately $15,951. The purchase was paid for
with a portion of the remaining net proceeds from the Initial Offering.
During the first quarter of 1996, Patriot acquired three hotels located in
Massachusetts, Georgia and California with an aggregate of 830 guest rooms. The
aggregate purchase price of the properties (including acquisition-related
expenses) was approximately $38,587 plus 167,012 OP Units (valued at
approximately $4,000 based upon the market price of Patriot's common stock on
the contract settlement date). One of the hotels is subject to a 73-year ground
lease. The cash portion of the purchase was financed primarily with funds drawn
on the Line of Credit.
During the second quarter of 1996, Patriot acquired eight hotels located in
Washington, California, Kentucky and Colorado with an aggregate of 1,784 guest
rooms. The aggregate purchase price of the properties (including acquisition-
related expenses) was approximately $102,470 plus 331,577 OP Units, valued at
approximately $8,800 at the closing of the acquisition. The cash portion of the
purchase was financed primarily with funds drawn on the Line of Credit. The
payment of a portion of the purchase price related to the acquisition of six of
the hotels, in the amount of $2,000, is payable in April 1998. This amount is
included in accounts payable and accrued expenses at December 31, 1996.
During the third quarter of 1996, Patriot acquired five hotels located in
Texas, Georgia, Florida, Oregon and Missouri with an aggregate of 1,596 guest
rooms. The aggregate purchase price of the properties (including acquisition-
related expenses and approximately $3,456 relating to the assumption of
operating liabilities and acquisition costs) was approximately $108,761 plus
17,036 OP Units valued at approximately $500 at the time of the acquisition. The
cash portion of the purchase was financed primarily with funds drawn on the Line
of Credit. In addition, Patriot may be obligated to pay up to $3,000 of
additional consideration upon acheivement of certain future operating results of
two of the hotels, which management considers unlikely.
Patriot, through certain of its consolidated partnerships (see Note 9),
acquired a 244-room hotel in Tallahassee, Florida for approximately $11,186; a
242-room hotel in Des Plaines, Illinios for approximately $8,539; and a 264-room
hotel in Miami, Florida for approximately $12,513. The acquisitions of the
hotels were financed through a combination of cash and funds drawn on the Line
of Credit.
During the fourth quarter of 1996, Patriot, through certain of its
consolidated partnerships (see Note 9), acquired the 341-room Doubletree Hotel
at Allen Center in Houston, Texas for approximately $28,700 and the 417-room
Doubletree Hotel in Tulsa, Oklahoma for approximately $22,400. The acquisitions
of the hotels were financed through a combination of cash and funds drawn on the
Line of Credit.
In addition, Patriot, through the Realty Partnership, acquired two additional
hotels located in Alabama and California with an aggregate of 336 guest rooms.
The aggregate purchase price of the properties (including acquisition-related
expenses) was approximately $22,600 plus 85,078 OP Units valued at approximately
$3,091 at the time of the acquisition. The cash portion of the purchase was
financed primarily with funds drawn on the Line of Credit.
F-12
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
As of December 31, 1996, Patriot, through the Realty Partnership and certain
other consolidated and unconsolidated subsidiaries, owns interests in 46 hotel
properties aggregating 11,340 guest rooms in 18 states. (As of December 31,
1995, Patriot owned 22 hotel properties aggregating 4,924 guest rooms.) One
hotel is located in Alabama (147 rooms), four hotels are in California (1,036
rooms), one in Colorado (180 rooms), five properties are located in Florida
(1,261 rooms), four in Georgia (1,233 rooms), one in Illinois (242 rooms), one
in Kentucky (365 rooms), two in Louisiana (970 rooms), one in Maryland (223
rooms), one in Massachusetts (288 rooms), two in Michigan (506 rooms), one in
Missouri (184 rooms), two in New York (475 rooms), three in Ohio (412 rooms),
one in Oklahoma (417 rooms), one in Oregon (257 rooms), eleven in Texas (2,507
rooms), and four in Washington (637 rooms).
Investment in hotel properties consists of the following:
December 31,
1996 1995
-------- --------
Land............................... $ 56,739 $ 23,893
Building and improvements.......... 540,755 218,239
Furniture, fixtures and equipment.. 64,146 26,156
-------- --------
661,640 268,288
Less: accumulated depreciation..... (19,815) (2,529)
-------- --------
$641,825 $265,759
======== ========
4. INVESTMENT IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED
SUBSIDIARIES:
In December 1995, Patriot, through the Realty Partnership, acquired an
approximate 99% non-voting ownership interest in PAH Ravinia, a Virginia
corporation, for $4,458. PAH Ravinia acquired the 495-room Crowne Plaza Ravinia
Hotel in Atlanta, Georgia.
As part of the financing for the acquisition of the Crowne Plaza Ravinia
Hotel, Patriot, through the Realty Partnership, advanced $40,500 to PAH
Ravinia, which is evidenced by two mortgage notes consisting of a $36,000 first
mortgage note and a $4,500 second mortgage note. The principal amount of both
notes is due on November 28, 1998. Interest at an annual rate equal to 10.25%
and 12.5% on the first and second mortgage notes, respectively, is payable
monthly. All amounts owing under the mortgage notes will become due upon a sale
of the hotel to a third party purchaser. The mortgage notes are collateralized
by deeds of trust on the Crowne Plaza Ravinia Hotel.
The Crowne Plaza Ravinia Hotel is not operated by a lessee. The hotel is
being managed by Holiday Inns, Inc. for a period of ten years expiring in 2005
(with two renewal terms of five years each) pursuant to a management agreement
between PAH Ravinia and Holiday Inns, Inc. Under the terms of the management
agreement, Holiday Inns, Inc. receives base management fees equal to 4% of gross
room revenue, a portion of which is subordinated to the payment of a return on
PAH Ravinia's invested capital, as defined, of 10.5% per annum. The management
agreement also provides for payment of an incentive management fee to Holiday
Inns, Inc., subject to PAH Ravinia's receipt of an aggregate 12.5% per annum
return on invested capital. Under the terms of the management agreement, PAH
Ravinia is required to maintain capital improvement reserves equal to 4.0% of
total revenues.
F-13
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summarizes certain financial information for PAH Ravinia.
As of December 31,
1996 1995
---- ----
Financial Position:
Total assets $ 48,273 $ 46,739
======== ========
Total liabilities $ 43,111 $ 42,424
======== ========
Total equity $ 5,162 $ 4,315
======== ========
December 1,
1995
(inception)
Year Ended through
December 31, December 31,
1996 1995
------ ------
Summary Operations:
Total revenues $ 24,377 $ 1,737
======== =======
Gross profit $ 14,389 $ 829
======== =======
Net income/(loss) (a) $ 847 $ (194)
======== =======
Cash flow from operations $ 4,061 $ 315
======== =======
- ---------------
(a) For the year ended December 31, 1996, Patriot reported net income from
this unconsolidated subsidiary of $5,118 after elimination of $4,280
of interest expense related to the mortgage notes payable to Patriot.
For the period December 1, 1995 (inception) through December 31, 1995,
Patriot reported net income from this unconsolidated subsidiary of
$156 after elimination of $351 of interest expense related to the
mortgage notes payable to Patriot.
In September 1996, Patriot, through the Realty Partnership, acquired an
approximate 99% non-voting ownership interest in PAH Windwatch, a Delaware
limited liability corporation. Patriot's investment in PAH Windwatch of
approximately $6,217 is evidenced by a promissory note. PAH Windwatch acquired
the 362-room Marriott WindWatch Hotel in Hauppauge (Long Island), New York for
approximately $31,102.
As part of the financing for the acquisition of the Marriott WindWatch Hotel,
Patriot, through the Realty Parnership, advanced PAH Windwatch $31,400, which
is evidenced by a first lien mortgage note. The principal amount of the note is
due on August 31, 1999. Interest at an annual rate equal to 9% is payable
monthly. All amounts owed under the mortgage note will become due upon the sale
of the hotel to a third party purchaser. The mortgage note is collateralized by
a deed of trust on the Marriott WindWatch Hotel.
The Marriott WindWatch Hotel is not operated by a lessee but is managed by
Marriott International, Inc. ("Marriott"). Pursuant to the Purchase and Sale
agreement dated March 15, 1996, the existing management agreement has been
terminated and Patriot is currently negotiating the terms of a new agreement.
Until such time a new agreement is reached, Marriot will continue to manage the
Marriott WindWatch Hotel under the terms of the prior agreement. Pursuant to
this agreement, Marriott receives an annual base management fee equal to 5% of
gross receipts. In addition, in any year the hotel generates a profit, as
defined in the agreement, Marriott will receive an amount equal to the excess of
15% of the profit over the base management fee.
5. LINE OF CREDIT AND MORTGAGE NOTE:
In connection with the Initial Offering, Patriot, through the Realty
Partnership, obtained the Line of Credit, a revolving credit facility of up to
$165,000 to fund the acquisition of additional hotels, renovations and capital
improvements to hotels and for general working capital purposes. In May 1996,
the maximum amount available under the Line of Credit was increased to $250,000
and certain other modifications were made, thereby increasing Patriot's
F-14
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS,, EXCEPT PER SHARE DATA)
ability to borrow under the Line of Credit. The Line of Credit is collateralized
by a first mortgage lien on certain of the hotels. As of December 31, 1996,
Patriot had $192,339 outstanding on its Line of Credit. The Line of Credit,
which expires October 1, 1998, bears interest on the outstanding balance at a
rate per annum equal to the 30-day LIBOR rate, plus 1.90%. LIBOR was 5.56% at
December 31, 1996 and 5.69% at December 31, 1995. The weighted average interest
rate incurred by Patriot during 1996 and 1995 under this borrowing was 7.38% and
7.71%, respectively. No prepayment penalties are required under the Line of
Credit.
In connection with the acquisition of the Wyndham Greenspoint Hotel during the
third quarter of 1996, Patriot has agreed to maintain at least $22,000 of debt
on this property until 1999. PaineWebber Real Estate has extended a single
asset mortgage loan of $22,000 on this hotel (the "Greenspoint Loan") on
economic terms substantially similar to the Line of Credit. While the
Greenspoint Loan is outstanding, the maximum amount Patriot may draw on the Line
of Credit has been reduced to $228,000. The Line of Credit and the Greenspoint
Loan are cross defaulted. No prepayment penalties are required under the
Greeenspoint Loan.
The Line of Credit requires Patriot to maintain certain financial ratios with
respect to liquidity, loan to value and net worth and imposes certain
limitations on acquisitions. Patriot is in compliance with such covenants at
December 31, 1996. The unused commitment under the Line of Credit at December
31, 1996, is $35,661, subject to certain restrictions and provisions of the Line
of Credit Agreement (see Note 14).
6. PARTICIPATING LEASES:
The Realty Partnership has leased the hotels under the Participating Leases
to the Lessees through 2008. Minimum future rental income under these
noncancelable operating leases for the next five years and thereafter is as
follows:
YEAR RENT AMOUNT
- ---- -----------
1997................. $ 81,409
1998................. 82,405
1999................. 82,787
2000................. 83,167
2001................. 83,542
2002 and thereafter.. 422,814
--------
$836,124
========
The Participating Leases obligate Patriot to establish a reserve for
capital improvements for the replacement and refurbishment of furniture,
fixtures and equipment and other capital expenditures. Patriot and the Lessees
agree on the use of funds in these reserves, and Patriot has the right to
approve the Lessees' annual and long-term capital expenditures budgets. The
amount of such reserves are to average 4.0% of total revenues for the hotels.
At December 31, 1996 and 1995, $2,458 and $1,091, respectively, of cash is
reserved for capital improvements, net of capital improvements made to date.
Patriot is responsible for payment of (i) real estate and personal property
taxes on its hotel investments (except to the extent that personal property
associated with the hotels is owned by the Lessees), (ii) casualty insurance on
the hotels and (iii) business interruption insurance on the hotels. The Lessees
are required to pay for all liability insurance on Patriot's hotels, with
extended coverage, including comprehensive general public liability, workers'
compensation and other insurance appropriate and customary for properties
similar to Patriot's hotels with Patriot as an additional named insured.
Upon acquisition of the Initial Hotels, Patriot acquired the hotel
inventories with an estimated fair value of $2,035, which were transferred to
CHC Lease Partners for its use in the operation of the hotels. Under the
Participating Lease Agreements, CHC Lease Partners is obligated to return an
equivalent inventory to Patriot at the end of the
F-15
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
respective lease terms, less $1,000. The $1,000 is considered a lease inducement
and has been recorded as a reduction in inventory and an increase in deferred
expenses and is being amortized to Participating Lease revenue on a straight-
line basis over the lives of the leases. In connection with the acquisition of a
resort property in 1996, Patriot recorded an additional lease inducement of $685
which is being amortized to Participating Lease revenue on a straight-line basis
over the 12 year lease term.
7. COMMITMENTS AND CONTINGENCIES:
Office Lease
Patriot has entered into an agreement with an affiliate to provide Patriot
with office space and limited support personnel for Patriot's headquarters for
an annual fee of approximately $141 through February 1998 and $144 thereafter.
The term of the agreement is through February 1999.
Employment Agreements
In connection with the Initial Offering, Patriot entered into employment
agreements with each of Messrs. Nussbaum, Lattin and Stewart, three of the
Executive Officers of Patriot, for a term of three years expiring in 1998. The
agreements provide for annual base compensation with any increases approved by
the Compensation Committee of the Board of Directors. Upon termination of
employment other than for cause, the employment agreements provide for severance
benefits in an amount to be determined by the Compensation Committee.
Business Combination
On October 31, 1996, Patriot, California Jockey Club, a Delaware
corporation ("Cal Jockey") and Bay Meadows Operating Company, a Delaware
corporation ("Bay Meadows") entered into a binding acquisition agreement (the
"October 31, 1996 Agreement") pursuant to which the parties agreed, subject to
stockholder approval and other conditions, to engage in a business combination
transaction.
Cal Jockey operates as a REIT under the Internal Revenue Code and is the
owner of approximately 175 acres of land in San Mateo, California on which the
Bay Meadows Racecourse is situated. Cal Jockey leases the racecourse facility
to Bay Meadows. Bay Meadows is a gaming and entertainment company engaged
primarily in the business of conducting and offering pari-mutuel wagering
(meaning that individuals wager against each other and not against the operator
of the facility) on Thoroughbred horse racing at the racecourse. In addition,
Bay Meadows generates revenues from commissions on simulcast and off-track pari-
mutuel wagering, admissions, parking, program sales and food and beverage
concessions at the racecourse. Since 1983, Cal Jockey's shares of common stock
have been paired and trade together with the shares of common stock of Bay
Meadows as a single unit on the American Stock Exchange pursuant to a stock
pairing arrangement (referred to herein as a "paired share" ownership
structure). See Note 14.
Contingencies
Patriot currently is not subject to any material legal proceedings or
claims nor, to management's knowledge, are any material legal proceedings or
claims currently threatened.
8. RELATED PARTY TRANSACTIONS:
As described in Note 4, Patriot, through the Realty Partnership, loaned
$40,500 in the form of mortgage notes to PAH Ravinia as part of the financing
for PAH Ravinia's acquisition of the Crowne Plaza Ravinia Hotel. Patriot
recognized $43 and $3 of interest income in 1996 and 1995, respectively, related
to such mortgage notes (excluding $4,280 and $351 of such interest eliminated
for financial reporting purposes in 1996 and 1995, respectively). In addition,
Patriot has a receivable of $40,866 due from PAH Ravinia as of December 31,
1996.
F-16
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Patriot, through the Realty Partnership, also loaned $31,400 in the form
of mortgage notes to PAH Windwatch (see Note 4), as part of the financing for
PAH Windwatch's acquisition of the Marriott WindWatch Hotel. Patriot recognized
$8 of interest income in 1996 related to such mortgage notes (excluding $754 of
such interest eliminated for financial reporting purposes). In addition,
Patriot has a receivable of $31,343 due from PAH Windwatch as of December 31,
1996.
In December 1996, Patriot funded advances to one of the executive officers
totaling $123 which have been included in prepaid expenses and other assets in
the accompanying financial statements. The advances were repaid in March 1997.
9. MINORITY INTERESTS
Minority Interest in Realty Partnership
The Realty Partnership has 2,517,808 OP Units and 662,391 Preferred OP
Units outstanding as of December 31, 1996 (excluding OP Units held by Patriot).
Pursuant to the Realty Partnership's limited partnership agreement, the limited
partners of the Realty Partnership, including certain affiliates of Patriot,
received rights (the "Redemption Rights") that enable them to cause the Realty
Partnership to redeem each OP Unit in exchange for cash equal to the value of a
share of common stock (or, at Patriot's election, Patriot may purchase each OP
Unit offered for redemption for one share of common stock). The Redemption
Rights generally may be exercised at any time after one year following the
issuance of the OP Units. However, certain holders of OP Units, including
directors and officers of Patriot, are restricted from exercising their
Redemption Rights for 18 to 24 months from the closing of the Initial Offering.
The number of shares of common stock issuable upon exercise of the Redemption
Rights will be adjusted for share splits, mergers, consolidations or similar pro
rata transactions, which would have the effect of diluting the ownership
interests of the limited partners of the Realty Partnership or the shareholders
of Patriot. Coincident with the stock split in March 1997, the conversion factor
is now 2-for-1 (see Note 14).
During the fourth quarter of 1996, certain partners elected to redeem a
total of 407,207 OP Units for a total of $16,584 in cash (based upon the current
market price of Patriot's common stock on the effective date of the redemptions)
in accordance with their Redemption Rights, including 395,746 OP Units redeemed
by a principal of Patriot American Group for a total price of $16,196. Patriot
recognized an adjustment to shareholders' equity in the amount of $8,841 in
connection with the transaction, which represents the excess of the redemption
price paid over the recorded book value of the OP Units redeemed.
Minority Interest in Other Partnerships
During September 1996, Patriot entered into three partnership agreements in
which the Realty Partnership owns a 90% general partnership interest and DTR
PAH Holding, Inc. ("DTR"), an affiliate of Doubletree Hotels Corporation, owns
a 10% limited partnership interest. The three partnerships, formed for the
purpose of acquiring certain hotel properties, are PAH-DT Tallahassee Partners,
L.P., PAH-DT Chicago O'Hare Partners, L.P. and PAH-DT Miami Airport Partners,
L.P. During the fourth quarter of 1996, Patriot entered into two additional
partnership agreements in which the Realty Partnership owns an 85% general
partnership interest and DTR owns a 15% limited partnership interest. The two
partnerships, formed for the purpose of acquiring certain hotel properties, are
PAH-DT Allen Partners, L.P. and PAH-DT Tulsa Partners, L.P. Each partnership is
a Delaware limited partnership. The financial position and results of
operations of each partnership is included in the consolidated financial
statements of Patriot. DTR's interest in the partnerships is reflected as
minority interest in other partnerships in the accompanying consolidated
financial statements.
F-17
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. SHAREHOLDERS' EQUITY:
Capital Stock
Patriot's Board of Directors has authorized the issuance of up to 20,000,000
shares of preferred stock in one or more series. The number of shares in each
series and the designation, powers, preferences and rights of each such series
and the qualifications, limitations or restrictions thereof have not been
established. As of December 31, 1996, no preferred stock was issued.
Patriot was initially capitalized through the issuance of 2,850 shares of no
par value common stock to three of Patriot's executive officers for which the
executive officers paid nominal consideration. In connection with the Initial
Offering, Patriot declared an approximate 41-to-1 stock split of its outstanding
common shares, resulting in the issuance of an additional 115,900 shares of
common stock to such executive officers. The aggregate value of $1,425 (based
upon the initial public offering price of $12.00 per share), less cash received
of $3, has been recorded as unearned stock compensation and was initially being
amortized over the five-year vesting period.
In response to an independent consultant review of executive compensation, the
Board of Directors elected to accelerate the vesting period for the shares of
common stock described above which were recorded as unearned stock compensation.
During the first quarter of 1996, the vesting period was reduced from five years
to three years and the amortization period of the unearned stock compensation
was revised accordingly.
On October 2, 1995, Patriot completed the Initial Offering of 29,210,000
shares of its common stock (including 3,810,000 shares of common stock issued
upon exercise of the underwriters' over-allotment option). The offering price
of all shares sold was $12.00 per share, resulting in net proceeds (less the
underwriters' discount and Initial Offering expenses) of approximately $313,170.
During the third quarter of 1996, Patriot completed a second public offering
(the "Follow-on Offering") of 12,293,400 shares of its common stock (including
1,293,400 shares of common stock issued upon exercise of the underwriters' over-
allotment option). The offering price of all shares sold in the Follow-on
Offering was $14.125 per share, resulting in net proceeds (less the
underwriters' discount and offering expenses) of approximately $160,222, of
which approximately $151,963 was used to reduce amounts outstanding under the
Line of Credit.
Patriot's Board of Directors declared quarterly distributions of $0.24 per
common share for the fourth quarter of 1995 (Patriot's first quarter of
operations) and for each of the first, second and third quarters of 1996. On
October 25, 1996, Patriot's Board of Directors declared a quarterly distribution
of $0.26 per common share for the fourth quarter of 1996 which was paid on
January 30, 1997 to shareholders of record on December 30, 1996. For dividends
related to 1996 and 1995, concurrent with each of the distribution declarations,
the Realty Partnership authorized distributions in the same amount.
Stock Incentive Plans
Patriot adopted the 1995 Incentive Plan (the "1995 Plan") and the Non-
Employee Directors' Incentive Plan (the "Directors' Plan") for the purpose of
(i) attracting and retaining employees, directors and others, (ii) providing
incentives to those deemed important to the success of Patriot, and (iii)
associating the interests of these individuals with the interests of Patriot and
its shareholders through opportunities for increased stock ownership.
The 1995 Plan. Under the 1995 Plan, employees of Patriot are eligible to
receive stock options, stock awards or performance shares, subject to certain
restrictions. All awards under the 1995 Plan are determined by the Compensation
Committee of the Board of Directors and a maximum of 2,000,000 shares of common
stock may be issued under the 1995 Plan. Subject to shareholder approval, the
maximum limit has been increased to 5,000,000 shares of common stock.
F-18
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Directors' Plan. The Directors' Plan provides for the award of stock
options and stock awards to each eligible non-employee director of Patriot.
Each eligible director will receive nonqualified options to purchase 15,000
shares of common stock upon their election to the Board. On the date of each
annual meeting of Patriot's shareholders, each non-employee director then in
office receives an additional grant of nonqualified options to purchase 5,000
shares of common stock, with the maximum aggregate number of shares subject to
options to be granted to each non-employee director being 35,000. The exercise
price of options will be 100% of the fair market value of the common stock on
the date of grant. The exercise price may be paid in cash, cash equivalents
acceptable to the Compensation Committee, common stock or a combination thereof.
Options granted under the Directors' Plan are exercisable for ten years from the
date of grant.
The Directors' Plan also provides for the annual award of common stock to each
eligible director in payment of one-half of the annual retainer of $13 payable
to each such director. The number of shares awarded will be determined based
upon the fair market value of the stock at the date of the grant. Such shares
vest immediately upon grant and are nonforfeitable.
Stock Grant Awards
During 1996, pursuant to Patriot's Directors' Plan and the 1995 Plan, Patriot
awarded 48,000 shares of common stock to its non-employee directors and 314,800
shares of common stock to certain of its officers and employees. Patriot has
recorded $5,144 (the aggregate value of Patriot's common stock based on the
market price at the date of the award) as unearned stock compensation which is
being amortized over the vesting period of four years. For 1996 and 1995,
$1,068 and $71, respectively, of amortization of stock compensation related to
stock grants awarded to Patriot's directors, officers and certain employees is
included in general and administrative expense in the accompanying consolidated
financial statements.
In 1996, the directors were granted 2,640 common shares with an aggregate
value of $37 in payment of one-half of the annual retainer payable to each
director. In 1995, the directors were granted 3,120 common shares with an
aggregate value of $37 in payment of one-half the annual retainer payable to
each director.
Stock Option Awards
During 1996, pursuant to Patriot's Directors' Plan and the 1995 Plan, the
Board of Directors granted stock options to purchase 30,000 shares of common
stock to Patriot's directors and stock options to purchase 355,600 shares of
common stock to Patriot's officers and certain employees. The exercise price of
the options granted to the directors is $14.188 (the market price of Patriot's
common stock on the date of the grant, May 23, 1996). For the officers and
employees employed as of the grant date of April 19, 1996, the exercise price of
the options is $13.438 (the market price of Patriot's common stock on the date
of grant). For officers and employees hired subsequent to April 19, 1996, the
exercise price is equal to the market price of Patriot's common stock on the
employee's hire date. The options to purchase common stock vest annually over a
period of seven years.
Upon completion of the Initial Offering, 1,000,000 options were granted to the
executive officers to purchase shares of common stock of Patriot. Each option
is exercisable at an amount equal to the initial public offering price of $12.00
per share. Of the options granted, 55,560 vested immediately, while the
remaining options become exercisable at various dates through January 1, 2005.
In addition, each eligible director who was a member of the Board as of
September 27, 1995, was awarded nonqualified options to purchase 15,000 shares
of common stock on that date (each such director, a "Founding Director"). The
options granted to Founding Directors have an exercise price equal to the
initial public offering price of $12.00 per share and vested immediately.
As of December 31, 1996, no options had been exercised.
Patriot has elected to follow APB 25 and related Interpretations in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under Statement 123 requires use of
F-19
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of Patriot's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Patriot's Directors' Plan and the 1995 Plan have authorized the grant of
options to management personnel for up to 1,475,600 shares of Patriot's common
stock. All options granted have ten year terms and either vest immediately or
vest over a period of three to ten years and become fully exercisable at the end
of the specified period of continued employment.
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
Patriot has accounted for its employee stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1996 and 1995, respectively: risk-free interest rates of
6.09% and 5.97%; dividend yields of 6%; volatility factors of the expected
market price of Patriot's common stock of 0.173, and a weighted average expected
life of the options of 4 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Patriot's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options that have vesting
periods and are non-transferable.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Patriot's pro forma
information is as follows:
1996 1995
---- ----
Pro forma net income................ $ 37,607 $ 5,193
Pro forma earnings per share:
Primary........................... $ 1.05 $ 0.18
A summary of Patriot's stock option activity, and related information for the
years ended December 31 is as follows:
1996 1995
------------------------- --------------------------
Options Weighted Average Options Weighted Average
(000's) Exercise Price (000's) Exercise Price
------- ---------------- ------- ----------------
Outstanding, beginning of year........................................... 1,090 $12.00 -- $ --
Granted.................................................................. 386 13.51 1,090 12.00
Exercised................................................................ -- -- -- --
Forfeited................................................................ -- -- -- --
------- ------ -------- ------------
Outstanding, end of year................................................. 1,476 $12.39 1,090 $12.00
======= ====== ======= ============
Exercisable at end of year............................................... 401 $12.00 145 $12.00
Weighted average fair value of
options granted during year............................................ $ 1.27 $1.19
Exercise prices for options outstanding as of December 31, 1996 ranged from
$12.00 to $15.125. The weighted-average remaining contractual life of those
options is 9 years.
F-20
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Private Placement
In May 1996, Patriot sold an aggregate of approximately $40,000 of equity
securities to an institutional investor that purchased the securities on behalf
of two owners (the "Private Placement"). The securities consisted of 1,622,786
shares of common stock sold at $13.475 per share and 662,391 Preferred OP Units
(the "Preferred OP Units") sold at $27.375 per unit. The common stock is of the
same class as Patriot's existing common stock and is entitled to the same voting
and dividend rights as all outstanding common stock, subject to certain
restrictions on the resale of the stock. The Preferred OP Units are entitled to
quarterly distributions equal to 103% of the quarterly dividends paid on the
common stock. Generally, three years following issuance, the Preferred OP Units
may be converted into shares of common stock on a two-for-one basis, subject to
certain limitations. After 10 years, Patriot will have the right to exchange
all outstanding Preferred OP Units for shares of common stock on a two-for-one
basis.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires disclosure
about the fair value for all financial instruments, whether or not recognized,
for financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1996. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Management estimates that the fair value of (i) accounts receivable,
accounts payable and accrued expenses approximate carrying value due to the
relatively short maturity of these instruments; (ii) the notes receivable
approximate carrying value based upon effective borrowing rates for issuance of
debt with similar terms and remaining maturities; and (iii) the borrowings under
the Line of Credit approximate carrying value as the Line of Credit accrues
interest at floating interest rates based on market.
12. NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the acquisition of hotel properties in 1996, the following
assets and liabilities were assumed:
Receivables from selling entities........................... $ 537
Inventory................................................... 613
Prepaid expenses and other assets........................... 510
Deferred expenses........................................... 685
Accounts payable and accrued liabilities.................... 4,195
Issuance of OP Units in connection with the acquisition of
hotel properties in 1996.................................. $16,391
In connection with Patriot's investment in an unconsolidated subsidiary,
Patriot issued a promissory note payable to the unconsolidated subsidiary in the
amount of $6,217 which has been included in due to unconsolidated subsidiaries
in the accompanying financial statements.
In connection with the Initial Offering and acquisition of the Initial
Hotels in 1995, the following assets and liabilities were assumed:
Deferred expenses, net of write-off of deferred financing
costs of $679................................................... $ 127
Prepaid expenses and other assets................................ 313
Accrued real estate and personal property taxes.................. (1,102)
F-21
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In connection with Patriot's investment in an unconsolidated subsidiary in 1995:
Accrued stock subscription.................................... $ (220)
Accrued receivables from unconsolidated subsidiary, net of
payables of $43.............................................. 354
In connection with the Initial Offering and acquisition of the Initial
Hotels in 1995:
Predecessor basis of interests acquired from affiliates....... $ 1,840
Issuance of OP units to non-affiliates........................ 9,363
Distribution of note receivable as consideration.............. (479)
Minority interest at closing of the Initial Offering.......... (41,670)
Accrued Initial Offering costs................................ (843)
Other noncash investing and financing activities:
1996 1995
------- --------
Dividends and distributions declared and payable........ $13,129 $ 8,154
Issuance of shares to directors......................... 37 37
Accrued acquisition and other costs..................... 844 28
F-22
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The unaudited pro forma condensed consolidated statements of operations of
Patriot are presented as if the (i) the Initial Offering and the acquisition of
the 20 Initial Hotels, (ii) the subsequent investment in 26 additional hotel
properties, and (iii) the Private Placement and Follow-on Offering had occurred
on January 1, 1995, and the hotels (except the Crowne Plaza Ravinia Hotel and
the Marriott WindWatch Hotel) had been leased to the Lessees pursuant to the
Participating Leases. These unaudited pro forma condensed consolidated
statements of operations are not necessarily indicative of what actual results
of operations of Patriot would have been assuming such transactions had been
completed as of January 1, 1995, nor do they purport to represent the results of
operations for future periods.
YEAR ENDED DECEMBER 31,
----------------------
1996 1995
----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Participating lease revenue............ $102,980 $95,017
Interest and other income.............. 621 580
-------- -------
Total revenue........................ 103,601 95,597
-------- -------
Expenses:
Real estate and personal property
taxes and casualty insurance.......... 10,977 10,109
Ground lease expense................... 1,390 1,368
General and administrative............. 5,192 4,435
Interest expense....................... 16,416 17,467
Depreciation and amortization.......... 25,870 24,096
-------- -------
Total expenses....................... 59,845 57,475
-------- -------
Income before equity in earnings of
unconsolidated subsidiaries
and minority interests................. 43,756 38,122
Equity in earnings of unconsolidated
subsidiaries.......................... 7,217 4,676
-------- -------
Income before minority interests........ 50,973 42,798
Minority interest in Realty
Partnership........................... (6,384) (5,363)
Minority interest in other partnerships (705) (566)
-------- -------
Net income applicable to common
shareholders........................... $ 43,884 $36,869
======== =======
Net income per common share (1)......... $1.01 $0.84
======== =======
Weighted average number of common
shares and common share
equivalents outstanding (1)............ 43,614 43,614
======== =======
- ---------------
(1) After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to
shareholders of record on March 7, 1997
F-23
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. SUBSEQUENT EVENTS:
Merger Agreement
On February 24, 1997, Patriot, Cal Jockey and Bay Meadows entered into an
Agreement and Plan of Merger (the "Merger Agreement"), which by its terms
supersedes the October 31, 1996 Agreement and more fully details the
transactions to be consummated by the parties (see Note 7). Pursuant to the
Merger Agreement, Patriot will merge with and into Cal Jockey (the "Merger"),
with Cal Jockey being the surviving company. Immediately following the Merger,
Cal Jockey's name will be changed to Patriot American Hospitality, Inc. ("New
Patriot REIT") and Bay Meadows name will be changed to Patriot American
Hospitality Operating Company ("New Patriot Operating Company").
Pursuant to the Merger Agreement, Patriot shareholders will be entitled to
receive for each share of common stock, no par value per share, of Patriot held
by them at the effective time of the Merger 0.5189 shares of common stock, par
value $0.01 per share, of New Patriot REIT and 0.5189 shares of common stock,
par value $0.01 per share, of New Patriot Operating Company, which shares will
be paired and transferable only as a single unit.
Upon completion of the Merger and the related transactions, it is
anticipated that New Patriot REIT and New Patriot Operating Company will
continue the operations of Patriot, Cal Jockey and Bay Meadows within the
paired share ownership structure.
Hotel Properties Acquired
On January 16, and January 17, 1997, Patriot acquired Resorts Limited
Partnership ("RLP"), Carefree Resorts Corporation ("Carefree") and their assets
(the "Carefree Acquisition"). The assets of these entities include a 100% fee
interest in The Boulders near Scottsdale, Arizona and The Lodge at Ventana
Canyon in Tucson, Arizona, and a 50% partnership interest in the entities that
own The Peaks Resort and Spa at Telluride, Colorado and Carmel Valley Ranch in
Carmel, California. The four resort properties are collectively referred to as
the Carefree Resorts.
Additionally, on January 17, 1997, Patriot acquired from The Morgan Stanley
Real Estate Fund, L.P. and certain of its affiliates the remaining 50%
partnership interest in the entities that own The Peaks Resort and Spa and
Carmel Valley Ranch (the "Morgan Stanley Acquisition").
The aggregate purchase price of the Carefree Acquisition and the Morgan
Stanley Acquisition was approximately $263,600 and consisted of 1,295,077 OP
Units valued at approximately $58,662, the assumption of approximately $28,489
of debt related to The Lodge at Ventana Canyon, the assumption of a net working
capital liability of approximately $5,900 and approximately $170,549 in cash
(including closing costs and loan commitment fees). The cash portion of the
purchase price was financed primarily with funds drawn on the Line of Credit.
Patriot has leased the Carefree Resorts to PAH RSI, L.L.C. (the "PAH RSI
Lessee") for a period of one year pursuant to separate Participating Lease
agreements. PAH RSI Lessee is owned and controlled by certain executive
officers of Patriot.
In connection with the Carefree Acquisition, the Realty Partnership and
certain of its subsidiaries acquired certain assets relating to the Carefree
Resorts and then sold these assets to PAH RSI Lessee in exchange for promissory
notes in an aggregate amount of approximately $2,000. The principal amount of
the notes is due in January 1998. Interest at an annual rate of 13% is payable
semi-annually commencing July 1, 1997. In addition, PAH RSI Lessee acquired
from the Realty Partnership and certain of its subsidiaries certain trade names
and the right to receive royalty fees through the issuance of a promissory note
for $9,000. The principal amount of the note is due January 17, 2002. Interest
at an annual rate of 13% is payable semi-annually commencing July 1, 1997.
In addition, certain Carefree employees were retained to provide consulting
services for the Carefree Resorts. As consideration for entering into
consulting agreements with Patriot, on January 17, 1997, certain Carefree
employees
F-24
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
were granted nonqualified options to purchase an aggregate of 780,000 shares of
Patriot common stock at an exercise price of $19.125 (based on the market price
of Patriot's common stock on the date the purchase contract with Carefree
Resorts was executed after giving effect to the 2-for-1 stock split). The
options to purchase common stock vest annually over a period of seven years.
Additionally, in connection with the Carefree Acquisition, certain assets
associated with the Carefree Resorts were transferred to PAH Boulders, Inc., a
corporation owned by certain executive officers of Patriot (who hold voting
common stock representing a 1% economic interest) and the Realty Partnership
(who holds non-voting common stock representing a 99% economic interest). PAH
Boulders, Inc. acquired the right to receive certain royalty fees through the
issuance of a promissory note to the Realty Partnership.
On January 14, 1997, Patriot, through the Realty Partnership, acquired the
190-room Radisson Hotel in Overland Park, Kansas for approximately $7,700, which
was financed primarily with funds drawn on the Line of Credit. The hotel is
leased for a period of ten years to CHC Lease Partners pursuant to a
Participating Lease agreement.
On January 29, 1997, Patriot, through the Realty Partnership, acquired the
313-room Radisson Hotel in Northbrook, Illinois for approximately $15,600, which
was financed primarily with funds drawn on the Line of Credit. The hotel is
leased to PAH RSI Lessee for a period of one year pursuant to a Participating
Lease agreement.
In March 1997, Patriot, through the Realty Partnership, acquired the 112-
room Redmont Hotel in Birmingham, Alabama for approximately $2,625. In
addition, a separate partnership in which the Realty Partnership holds a 90%
general partnership interest and DTR holds a 10% limited partnership interest
acquired the 230-room Luxeford Suites Hotel in Minneapolis, Minnesota for
approximately $18,500. The acquisition of the hotels was financed primarily
with funds drawn on the Line of Credit. The Redmont Hotel is leased to the
Grand Heritage Lessee and the Luxeford Suites Hotel is leased to the PAH RSI
Lessee for one-year periods pursuant to separate Participating Lease agreements.
Line of Credit and Mortgage Note
On January 17, 1997, Patriot, through the Realty Partnership, obtained
financing from the First National Bank of Commerce, New Orleans, Louisiana in
the amount of $13,500. The net proceeds from the financing of approximately
$13,388 were used to repay the Line of Credit and release the Bourbon Orleans
Hotel from the borrowing base of the Line of Credit. The principal amount of
the note along with accrued interest is due January 1, 2004. Interest at a rate
of LIBOR plus 2% is payable monthly commencing February 1, 1997 through January
1, 1999. Thereafter, monthly payments of principal and interest are due through
maturity. Initial interest is at a rate of 7.469% per annum. The note is
collateralized by a first mortgage lien on the Bourbon Orleans Hotel.
In January 1997, the maximum amount available under the Line of Credit with
PaineWebber Real Estate was increased from $250,000 to $475,000, along with
certain other modifications provided, however, the maximum amount that Patriot
may draw on the Line of Credit will be reduced by $48,000 as a result of the
single asset loans related to the the Wyndham Greenspoint Hotel and the debt
assumed in connection with the Carefree Acquisition.
Stock Split
On January 30, 1997, the Board of Directors declared a 2-for-1 stock split
on Patriot's common stock effected in the form of a stock dividend distributed
on March 18, 1997 to shareholders of record on March 7, 1997. All references in
the consolidated financial statements to the number of shares, per share
amounts, and market prices of Patriot's common stock and options to purchase
common stock have been restated to reflect the impact of the stock split.
Coincident with the 2-for-1 stock split, the OP Unit conversion factor has
been changed such that each OP Unit subject to redemption will now be redeemed
for cash equal to the value of two shares of Patriot's common stock (or, at
Patriot's election, Patriot may purchase each OP Unit offered for redemption for
two shares of common stock).
F-25
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Potential Acquisitions
Patriot has entered into an agreement to acquire Grand Heritage Hotels, a
hotel management and marketing company, and other Grand Heritage subsidiaries
(including the Grand Heritage Lessee); to purchase the 220-room Ambassador West
Hotel in Chicago, Illinois; and to make an investment in the 262-room Broadview
Hotel in Wichita, Kansas. The total purchase price of approximately $40,800 is
expected to be financed by a combination of common stock, OP Units and/or funds
drawn on the Line of Credit.
In addition, Patriot has entered into contracts or letters of intent to
acquire 14 hotels with an aggregate 4,378 guest rooms for approximately
$378,200.
Stock Grant Award
On March 18, 1997, pursuant to Patriot's 1995 Plan, the Board of Directors
awarded 280,000 shares of common stock to one of its executive officers.
Patriot will record compensation expense based on the market price at the date
of the award.
F-26
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Investment in hotel properties, net of accumulated depreciation of
$28,275 in 1997 and $19,815 in 1996.................................... $ 947,722 $641,825
Cash and cash equivalents, including capital improvement reserves of
$2,394 in 1997 and $2,458 in 1996...................................... 6,271 6,604
Lease revenue receivable................................................. 14,769 5,351
Receivables from selling entities........................................ 879 847
Investments in unconsolidated subsidiaries............................... 12,140 11,291
Mortgage notes and other receivables from unconsolidated subsidiaries.... 73,622 72,209
Promissory notes and other receivables from Lessees...................... 10,189 631
Inventory................................................................ 1,821 1,648
Deferred expenses, net of accumulated amortization of $1,144 in 1997
and $750 in 1996....................................................... 4,297 3,063
Prepaid expenses and other assets........................................ 10,188 17,462
---------- --------
Total assets........................................................ $1,081,898 $760,931
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit and mortgage notes....................... $ 466,712 $214,339
Dividends and distributions payable...................................... 13,938 13,129
Accounts payable and accrued expenses.................................... 10,843 10,117
Due to unconsolidated subsidiaries....................................... 6,098 6,034
Due to PAH RSI, LLC...................................................... 2,655 --
Minority interest in Realty Partnership.................................. 127,262 68,562
Minority interest in other partnerships.................................. 13,774 11,711
Commitments and contingencies............................................ -- --
Shareholders' equity:
Preferred stock, no par value, 20,000,000 shares authorized,
no shares issued and outstanding.................................... -- --
Common stock, no par value, 200,000,000 shares authorized,
shares issued and outstanding were 44,093,496 in 1997
and 43,613,496 in 1996 (1).......................................... -- --
Paid-in capital........................................................ 457,178 442,540
Unearned stock compensation, net of accumulated amortization
of $1,760 in 1997 and $1,139 in 1996................................ (16,261) (5,427)
Retained earnings (distributions in excess of retained earnings)....... (301) (74)
---------- --------
Total shareholders' equity............................................. 440,616 437,039
---------- --------
Total liabilities and shareholders' equity.......................... $1,081,898 $760,931
========== ========
- ---------------------
(1) After restatement to reflect the impact of the 2-for-1 stock split effected
in the form of a stock dividend distributed on March 18, 1997 to
shareholders of record on March 7, 1997.
See accompanying notes.
F-27
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
Revenue:
Participating lease revenue...................................... $35,013 $12,371
Interest and other income........................................ 375 92
------- -------
Total revenue................................................. 35,388 12,463
------- -------
Expenses:
Real estate and personal property taxes and casualty insurance... 3,201 1,082
Ground lease expense............................................. 345 77
General and administrative....................................... 2,782 941
Interest expense................................................. 7,805 601
Depreciation and amortization.................................... 8,496 2,838
------- -------
Total expenses................................................ 22,629 5,539
------- -------
Income before equity in earnings of unconsolidated subsidiaries
and minority interest............................................ 12,759 6,924
Equity in earnings of unconsolidated subsidiaries................ 1,021 1,362
------- -------
Income before minority interest.................................... 13,780 8,286
Minority interest in Realty Partnership.......................... (2,232) (1,158)
Minority interest in other partnerships.......................... (200) --
------- -------
Net income applicable to common shareholders....................... $11,348 $ 7,128
======= =======
Net income per common share (1).................................... $0.25 $0.24
======= =======
Weighted average number of common shares and common share
equivalents outstanding (1)...................................... 44,552 29,468
======= =======
- -------------------------
(1) Amounts for 1996 have been restated to reflect the impact of the 2-for-1
stock split effected in the form of a stock dividend distributed on March
18, 1997 to shareholders of record on March 7, 1997.
See accompanying notes.
F-28
PATRIOT AMERICAN HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 11,348 $ 7,128
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................................... 8,467 2,808
Amortization of unearned stock compensation....................... 621 166
Amortization of deferred loan costs............................... 330 43
Amortization of lease inducement costs............................ 36 23
Other amortization................................................ 29 30
Payment of interest on notes receivable from
unconsolidated subsidiaries..................................... 349 1,064
Equity in earnings of unconsolidated subsidiaries................. (1,021) (1,362)
Minority interest in income of Realty Partnership................. 2,232 1,158
Minority interest in income of other partnerships................. 200 --
Changes in assets and liabilities:
Lease revenue receivable.......................................... (9,418) (19)
Receivables from selling entities................................. (23) --
Receivables from Lessees.......................................... (58) --
Prepaid expenses and other assets................................. (1,751) (361)
Accounts payable and other accrued expenses....................... 566 (1,664)
Due to unconsolidated subsidiaries................................ 64 (12)
Due to PAH RSI, LLC............................................... (482) --
--------- --------
Net cash provided by operating activities.................... 11,489 9,002
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties and related working capital assets... (191,462) (38,550)
Improvements and additions to hotel properties....................... (17,634) (1,198)
Collection of receivables from selling entities...................... 10 354
Prepaid acquisition costs............................................ (2,369) (503)
Investment in unconsolidated subsidiaries............................ (1,574) --
Investment in promissory notes receivable from Lessees............... (9,500) --
Advances from unconsolidated subsidiaries............................ -- 2,009
Principal payment received on other note receivable.................. -- 50
--------- --------
Net cash used in investing activities........................ (222,529) (37,838)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and mortgage note.................... 237,272 40,750
Repay borrowings under line of credit................................ (13,388) --
Payment of deferred loan costs....................................... (1,627) (68)
Payment of other prepaid expenses.................................... -- (58)
Payment of offering costs............................................ (84) (305)
Contribution received from minority interest in other partnerships... 1,863 --
Redemption of OP Units............................................... (201) --
Dividends and distributions paid..................................... (13,128) (8,154)
--------- --------
Net cash provided by financing activities.................... 210,707 32,165
--------- --------
Net (decrease) increase in cash and cash equivalents................... (333) 3,329
Cash and cash equivalents at beginning of period....................... 6,604 4,769
--------- --------
Cash and cash equivalents at end of period............................. $ 6,271 $ 8,098
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............................. $ 7,421 $ 620
========= ========
See accompanying notes.
F-29
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Patriot American Hospitality, Inc. (collectively with its subsidiaries,
"Patriot"), a Virginia corporation, was formed April 17, 1995 as a self-
administered real estate investment trust ("REIT") for the purpose of acquiring
equity interests in hotel properties. On October 2, 1995, Patriot completed an
initial public offering (the "Initial Offering") of 29,210,000 shares of its
common stock and commenced operations.
Patriot, through its wholly-owned subsidiary, PAH GP, Inc., is the sole
general partner and the holder of a 1.0% general partnership interest in Patriot
American Hospitality Partnership, L.P. (the "Realty Partnership"). In
addition, Patriot, through its wholly-owned subsidiary, PAH LP, Inc., owns an
approximate 82.1% limited partnership interest in the Realty Partnership as of
March 31, 1997.
At March 31, 1997, Patriot, through the Realty Partnership and other
subsidiaries, owned interests in 54 hotels in 21 states with an aggregate of
12,671 guest rooms.
Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel
and the Marriott WindWatch Hotel, which are separately owned through special
purpose corporations, to lessees who are responsible for operating the hotels
(the "Lessees"). Patriot leases 25 of its hotel investments to CHC Lease
Partners for staggered terms of ten to twelve years pursuant to separate
participating leases providing for the payment of the greater of base or
participating rent, plus certain additional charges, as applicable (the
"Participating Leases"). Nine of the hotels are leased to NorthCoast Hotels,
L.L.C. ("NorthCoast Lessee") under similar Participating Lease agreements. Six
of the hotels are leased to PAH RSI, L.L.C. ("PAH RSI Lessee") under similar
Participating Lease agreements. DTR North Canton, Inc. (the "Doubletree
Lessee") leases six hotels; Crow Hotel Lessee, Inc. (the "Wyndham Lessee")
leases two hotels; Metro Hotels Leasing Corporation ("Metro Lease Partners")
leases one hotel and Grand Heritage Leasing, L.L.C. (the "Grand Heritage
Lessee") leases three hotels under similar Participating Lease agreements. The
Lessees, in turn, have entered into separate agreements with hotel management
entities (the "Operators") to manage the hotels. The Crowne Plaza Ravinia Hotel
and the Marriott WindWatch Hotel acquisitions were structured without lessees
and are managed directly by Holiday Inns, Inc. and Marriott International, Inc.,
respectively.
These unaudited consolidated financial statements include the accounts of
Patriot, its wholly-owned subsidiaries and the partnerships in which Patriot
owns at least 50% controlling interest. All significant intercompany accounts
and transactions have been eliminated. These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in Patriot's Annual Report
on Form 10-K for the year ended December 31, 1996. Certain prior year amounts
have been reclassified to conform to current period presentation.
On January 30, 1997, the Board of Directors declared a 2-for-1 stock split
on Patriot's common stock effected in the form of a stock dividend distributed
on March 18, 1997 to shareholders of record on March 7, 1997. All references in
the consolidated financial statements to the number of shares, per share
amounts, and market prices of Patriot's common stock and options to purchase
common stock related to periods prior to the stock split have been restated to
reflect the impact of the stock split. The number of units of limited
partnership interest in the Realty Partnership ("OP Units") outstanding did not
change after the 2-for-1 stock split. However, the OP Unit conversion factor
has changed such that each OP Units subject to redemption will now be redeemed
for cash equal to the value of two shares of Patriot's common stock (or, at
Patriot's election, Patriot may purchase each OP Unit offered for redemption for
two shares of common stock).
F-30
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("Statement
128"). Statement 128 specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a material
effect on Patriot's earnings per share.
2. ACQUISITION OF HOTEL PROPERTIES:
On January 16, and January 17, 1997, Patriot acquired Resorts Limited
Partnership, Carefree Resorts Corporation and their assets (the "Carefree
Acquisition"). The assets of these entities include a 100% fee interest in The
Boulders near Scottsdale, Arizona and The Lodge at Ventana Canyon in Tucson,
Arizona, and a 50% partnership interest in the entities that own The Peaks
Resort and Spa at Telluride, Colorado and Carmel Valley Ranch in Carmel,
California. The four resort properties are collectively referred to as the
"Carefree Resorts."
Additionally, on January 17, 1997, Patriot acquired from The Morgan Stanley
Real Estate Fund, L.P. and certain of its affiliates the remaining 50%
partnership interest in the entities that own The Peaks Resort and Spa and
Carmel Valley Ranch (the "Morgan Stanley Acquisition").
The aggregate purchase price of the Carefree Acquisition and the Morgan
Stanley Acquisition was approximately $263,600 and consisted of 1,295,077 OP
Units valued at approximately $58,662, the assumption of approximately $28,489
of debt related to The Lodge at Ventana Canyon, the assumption of a net working
capital liability of approximately $5,900 and approximately $170,549 in cash
(including closing costs and loan commitment fees). The cash portion of the
purchase price was financed primarily with funds drawn on the Line of Credit.
Patriot has leased the Carefree Resorts to PAH RSI Lessee for a period of
one year pursuant to separate Participating Lease agreements. PAH RSI Lessee is
owned and controlled by certain executive officers of Patriot.
On January 14, 1997, Patriot, through the Realty Partnership, acquired the
190-room Radisson Hotel in Overland Park, Kansas for approximately $7,700, which
was financed primarily with funds drawn on the Line of Credit. The hotel is
leased for a period of ten years to CHC Lease Partners pursuant to a
Participating Lease agreement.
On January 29, 1997, Patriot, through the Realty Partnership, acquired the
313-room Radisson Hotel in Northbrook, Illinois for approximately $15,600, which
was financed primarily with funds drawn on the Line of Credit. The hotel is
leased to PAH RSI Lessee for a period of one year pursuant to a Participating
Lease agreement.
On March 6, 1997, Patriot, through the Realty Partnership, acquired the
112-room Holiday Inn Redmont Hotel in Birmingham, Alabama for approximately
$2,700. The acquisition was financed primarily with funds drawn on the Line of
Credit. The hotel is leased to Grand Heritage Lessee for a period of one year
pursuant to a Participating Lease agreement.
In addition, Patriot, through a consolidated partnership (see Note 6),
acquired the 230-room Luxeford Suites Hotel in Minneapolis, Minnesota for
approximately $18,600. The hotel is leased to PAH RSI Lessee for a one-year
period pursuant to a Participating Lease agreement. The acquisition of the
hotel was financed through a combination of cash and funds drawn on the Line of
Credit.
In March 1997, Patriot paid $475 to NorthCoast Lessee which represents
acquisition fees and reimbursement of expenses related to the acquisition of
certain hotel properties.
3. INVESTMENTS IN AND MORTGAGE NOTES RECEIVABLE FROM UNCONSOLIDATED
SUBSIDIARIES:
In connection with the Carefree Acquisition, Patriot, through the Realty
Partnership, contributed certain assets associated with the Carefree Resorts
(including the right to receive certain royalty fees) valued at $1,574 in
exchange
F-31
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
for an approximate 99% non-voting ownership interest in PAH Boulders,
Inc., a Virginia corporation. The controlling 1% voting ownership interest in
PAH Boulders, Inc. is held by certain executive officers of Patriot.
4. PROMISSORY NOTES AND OTHER RECEIVABLES FROM LESSEES:
PAH RSI Lessee
In connection with the Carefree Acquisition, the Realty Partnership and
certain of its subsidiaries acquired certain assets relating to the Carefree
Resorts and then sold these assets to PAH RSI Lessee for approximately $2,000.
In addition, PAH RSI Lessee acquired from the Realty Partnership and certain of
its subsidiaries certain trade names and the right to receive royalty fees
through the issuance of a promissory note for $9,000. The principal amount of
the note is due January 17, 2002. Interest at an annual rate of 13% is payable
semi-annually commencing July 1, 1997.
NorthCoast Lessee
In March 1997, the Realty Partnership advanced $500 to the NorthCoast
Lessee for construction of laundry facilities at the Hyatt Regency in Lexington,
Kentucky. Interest accrues on the outstanding note balance at a rate of 9.6%
per annum. Monthly payments of principal and interest are required in an amount
sufficient to pay accrued interest and amortize the principal balance over the
three year loan term. The note may be prepaid without penalty.
5. LINE OF CREDIT AND MORTGAGE NOTES:
Borrowings under the Line of Credit and Mortgage Notes consist of the
following:
March 31, December 31,
1997 1996
--------- ------------
Line of credit..................................... $424,723 $214,339
Mortgage note payable to First National Bank
of Commerce....................................... 13,500 --
Senior note payable to FINOVA Capital Corporation.. 18,758 --
Junior note payable to FINOVA Capital Corporation.. 8,830 --
Interest payable to FINOVA Capital Corporation..... 901 --
-------- --------
$466,712 $214,339
======== ========
Line of Credit
In January 1997, the maximum amount available under Patriot's revolving
credit facility (the "Line of Credit") with PaineWebber Real Estate Securities,
Inc. was increased from $250,000 to $475,000, along with certain other
modifications provided, however, the maximum amount that Patriot may draw on the
Line of Credit will be reduced by $22,000 as a result of the single asset loan
related to the Wyndham Greenspoint Hotel. The Line of Credit bears interest on
the outstanding balance at a rate per annum equal to 30-day LIBOR plus 1.90%.
LIBOR was 5.44% at March 31, 1997 and 5.56% at December 31, 1996. The weighted
average interest rate incurred by Patriot under this borrowing during the first
quarter of 1997 and 1996 was 7.40% and 7.56%, respectively.
The Line of Credit requires Patriot to maintain certain financial ratios
with respect to liquidity, loan to value and net worth and imposes certain
limitations on acquisitions. Patriot is in compliance with such covenants at
March 31, 1997. The unused commitment under the Line of Credit at March 31,
1997, is approximately $24,300, subject to certain restrictions and provisions
of the Line of Credit Agreement.
F-32
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Mortgage Notes
On January 17, 1997, Patriot, through the Realty Partnership, obtained
financing from the First National Bank of Commerce, New Orleans, Louisiana in
the amount of $13,500. The net proceeds from the financing of approximately
$13,388 were used to repay the Line of Credit and release the Bourbon Orleans
Hotel from the borrowing base of the Line of Credit. The principal amount of
the note along with accrued interest is due January 1, 2004. Interest at a rate
of LIBOR plus 2% is payable monthly commencing February 1, 1997 through January
1, 1999. Thereafter, monthly payments of principal and interest are due through
maturity. The weighted average interest rate incurred by Patriot under this
borrowing during the first quarter of 1997 was 7.49%. The note is
collateralized by a first mortgage lien on the Bourbon Orleans Hotel.
In connection with the Carefree Acquisition, Patriot assumed certain
mortgage debt in the amount of $28,489 which is collateralized by the property
and equipment at The Lodge at Ventana Canyon. The senior and junior notes
payable to FINOVA Capital Corporation ("FINOVA") provide for annual interest to
accrue at a rate of 6.5% (computed based on stated interest payment amounts);
however, through March 1, 1998, actual interest paid is dependent on the
attainment of certain levels of annual cash flows, as defined, of The Lodge at
Ventana Canyon. Any interest which accrues on the notes which is unpaid during
this period is added to the senior note balance. If The Lodge at Ventana Canyon
is sold after March 1, 2000 and distributions of the net sales proceeds, as
defined, are made to FINOVA in accordance with the terms specified in the
related purchase agreement, any remaining unpaid balance on the junior note may
be deemed discharged. Except as noted above, all unpaid principal and interest
is due upon maturity on March 1, 2005.
Patriot also has a construction loan available from FINOVA which was
assumed in connection with the acquisition of The Lodge at Ventana Canyon.
Under the terms of the construction loan agreement, FINOVA is required to loan
to Patriot a maximum of $4,500 (approximately 60% of the budgeted construction
cost) for the planned expansion of The Lodge at Ventana Canyon. No funds have
been drawn under this agreement by Patriot as of March 31, 1997.
6. MINORITY INTERESTS:
Minority Interest in Realty Partnership
During the first quarter of 1997, the Realty Partnership issued an
additional 10,188 OP Units valued at approximately $370 in connection with The
Tutwiler Hotel acquisition, and 1,295,077 OP Units valued at approximately
$58,662 in connection with the Carefree Resorts acquisition.
In accordance with their redemption rights, in January 1997 certain
partners elected to redeem a total of 4,255 OP Units for a total of $201 in cash
(based upon the market price of Patriot's common stock on the effective dates of
the redemptions).
The Realty Partnership has 3,818,818 OP Units and 662,391 Preferred OP
Units outstanding as of March 31, 1997 (excluding OP Units held by Patriot).
Minority Interest in Other Partnerships
In February 1997, Patriot entered into a partnership agreement in which the
Realty Partnership owns a 90% general partnership interest and DTR PAH Holding,
Inc. ("DTR"), an affiliate of Doubletree Hotels Corporation, owns a 10% limited
partnership interest. The partnership, PAH-DT Minneapolis Partnership, L.P.
("PAH-DT Minneapolis"), was formed for the purpose of acquiring certain hotel
properties.
F-33
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
On March 3, 1997, PAH-DT Minneapolis acquired the 230-room Luxeford Suites
Hotel in Minneapolis, Minnesota for approximately $18,600. The acquisition was
financed through cash contributions to the partnership of approximately $16,737
by Realty Partnership and $1,863 by DTR. Realty Partnership's contribution
was financed primarily with funds drawn on the Line of Credit.
7. SHAREHOLDERS' EQUITY:
Capital Stock
On January 30, 1997, Patriot declared a 2-for-1 stock split effected in the
form of a stock dividend which was distributed on March 18, 1997 to shareholders
of record on March 7, 1997.
On March 24, 1997, Patriot declared a $0.2625 per common share dividend to
holders of record on March 31, 1997. Concurrent with the dividend declaration,
the Realty Partnership authorized distributions in the same amount. The
dividend and distributions were paid on April 30, 1997. Patriot paid dividends
of $0.24 per common share for the first quarter of 1996.
Stock Grant Awards
On March 18, 1997, pursuant to Patriot's 1995 Incentive Plan, the Board of
Directors awarded 480,000 shares of common stock to two of its executive
officers. Patriot has recorded $11,455 (the aggregate value of Patriot's common
stock based on the market price at the date of the award) as unearned stock
compensation which is being amortized over the vesting period of three to four
years. For the first quarters of 1997 and 1996, $621 and $166, respectively, of
amortization of stock compensation related to stock grants awarded to Patriot's
directors, officers and certain employees is included in general and
administrative expense in the accompanying consolidated financial statements.
Stock Option Awards
In connection with the Carefree Acquisition, on January 17, 1997, certain
Carefree owners who are also Carefree employees were granted nonqualified
options to purchase an aggregate of 780,000 shares of Patriot common stock at an
exercise price of $19.125 (based on the market price of Patriot's common stock
on the date the purchase contract with Carefree Resorts was executed after
giving effect to the 2-for-1 stock split) as additional consideration for
entering into the purchase and sale agreement for the Carefree Resorts. The
estimated fair value of the options issued, in the aggregate amount of $3,266,
was recorded as additional purchase consideration for the acquisition of the
Carefree Resorts. The options to purchase common stock vest annually over a
period of four years.
F-34
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the acquisition of hotel properties, the following
assets and liabilities were assumed:
1997 1996
-------- --------
Receivables from selling entities................................ $ (19) $ (78)
Inventory........................................................ (156) -
Prepaid expenses and other assets................................ (23) (151)
Mortgage debt.................................................... 28,489 -
Accounts payable and accrued liabilities......................... (270) 267
Due to PAH RSI Lessee for working capital liabilities assumed.... 3,712 -
Reclassification of prepaid acquisition costs to property costs.. $11,392 $ -
Capital lease obligation acquired................................ $ 430 $ -
Issuance of options in connection with the acquisition
of hotel properties............................................ $ 3,266 $ -
Issuance of OP Units in connection with the acquisition of
hotel properties............................................... $59,032 $4,000
9. COMMITMENTS AND CONTINGENCIES:
Business Combination
Patriot has entered into an Agreement and Plan of Merger (the "Merger
Agreement") with California Jockey Club ("Cal Jockey") and Bay Meadows Operating
Company ("Bay Meadows") pursuant to which, subject to stockholder approval and
other conditions, Patriot will merge with and into Cal Jockey (the "Merger"),
with Cal Jockey being the surviving company. Cal Jockey's shares of common
stock are paired and trade together with the shares of common stock of Bay
Meadows as a single unit pursuant to a stock pairing arrangement (referred to
herein as a "paired share" ownership structure). Immediately following the
Merger, Cal Jockey's name will be changed to Patriot American Hospitality, Inc.
("New Patriot REIT") and Bay Meadows name will be changed to Patriot American
Hospitality Operating Company ("New Patriot Operating Company").
Pursuant to the Merger Agreement, Patriot shareholders will be entitled to
receive for each share of common stock, no par value per share, of Patriot held
by them at the effective time of the Merger 0.51895 shares of common stock, par
value $0.01 per share, of New Patriot REIT and 0.51895 shares of common stock,
par value $0.01 per share, of New Patriot Operating Company, which shares will
be paired and transferable only as a single unit.
Upon completion of the Merger and the related transactions, it is
anticipated that New Patriot REIT and New Patriot Operating Company will
continue the operations of Patriot, Cal Jockey and Bay Meadows within the
paired share ownership structure.
Development Fees
The Carefree Resorts which are leased to PAH RSI Lessee are managed by
Resorts Services, Inc., an Arizona corporation. In connection with the
acquisition of the Carefree Resorts, Patriot agreed to pay certain executive
officers and employees a development fee equal to 3% of the total development
cost, as defined, of certain new resort construction.
F-35
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Contingencies
Except as described in Note 11, Patriot currently is not subject to any
material legal proceedings or claims nor, to management's knowledge, are any
material legal proceedings or claims currently threatened.
10. PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma condensed consolidated statements of
operations of Patriot are presented as if (i) the acquisition of the 54 hotels
owned by Patriot as of March 31, 1997, and (ii) the private placement of equity
securities and public offering of Patriot's common stock which occurred during
1996 had occurred on January 1, 1996, and the hotels (except the Crowne Plaza
Ravinia Hotel and the Marriott WindWatch Hotel) had been leased to the Lessees
pursuant to the Participating Leases. These unaudited pro forma condensed
consolidated statements of operations are not necessarily indicative of what
actual results of operations of Patriot would have been assuming such
transactions had been completed as of January 1, 1996, nor do they purport to
represent the results of operations for future periods.
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1997 1996
------------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Participating lease revenue..................................... $36,551 $35,336
Interest and other income....................................... 430 392
------- -------
Total revenue............................................... 36,981 35,728
------- -------
Expenses:
Real estate and personal property taxes and casualty insurance.. 3,380 3,365
Ground lease expense............................................ 345 335
General and administrative...................................... 3,461 2,158
Interest expense................................................ 8,840 9,011
Depreciation and amortization................................... 9,064 8,900
------- -------
Total expenses.............................................. 25,090 23,769
------- -------
Income before equity in earnings of unconsolidated subsidiaries
and minority interest........................................... 11,891 11,959
Equity in earnings of unconsolidated subsidiaries.............. 1,021 1,185
------- -------
Income before minority interests................................... 12,912 13,144
Minority interest in Realty Partnership......................... (2,145) (2,184)
Minority interest in other partnerships......................... (219) (216)
------- -------
Net income applicable to common shareholders....................... $10,548 $10,744
======= =======
Net income per common share (1).................................... $0.23 $0.24
======= =======
Weighted average number of common shares and
common share equivalents outstanding (1)........................ 44,919 44,919
======= =======
- ----------------------
(1) The 1996 amounts have been restated to reflect the impact of the 2-for-1
stock split effected in the form of a stock dividend distributed on March
18, 1997 to shareholders of record on March 7, 1997.
F-36
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. SUBSEQUENT EVENTS:
Acquisition of Hotel Properties
On April 14, 1997, a separate partnership in which the Realty Partnership
holds a 90% general partnership interest and DTR holds a 10% limited partnership
interest acquired the 298-room Sheraton Park Place Hotel in Minneapolis,
Minnesota for a purchase price of approximately $17,000 in cash. The hotel has
been leased to PAH RSI Lessee for a period of one year pursuant to a
Participating Lease agreement.
Potential Acquisitions
On April 14, 1997, Patriot entered into a merger agreement and a related
stock purchase agreement (collectively, the "Wyndham Merger Agreement") pursuant
to which Wyndham Hotel Corporation ("Wyndham") will merge with and into New
Patriot REIT with New Patriot REIT being the surviving company (the "Wyndham
Merger"). As a result of the Wyndham Merger, New Patriot REIT will acquire all
of the assets and liabilities of Wyndham, including Wyndham's portfolio of 23
owned and leased hotels, with an aggregate of 4,877 rooms, as well as Wyndham's
79 managed and franchised properties and the Wyndham, Wyndham Garden and Wyndham
Hotels & Resorts proprietary brand names. Pursuant to the Wyndham Merger
Agreement, upon consummation of the Wyndham Merger, each outstanding share of
common stock of Wyndham ("Wyndham Common Stock") will be converted into the
right to receive 0.712 paired shares of New Patriot REIT common stock and New
Patriot Operating Company common stock (the "Wyndham Exchange Ratio"), subject
to certain adjustments. In lieu of receiving paired shares, Wyndham
stockholders have the right to elect to receive cash (in an amount per share
based upon the Wyndham Exchange Ratio, as it may be adjusted, and the average
closing price of the paired shares over the five trading days immediately
preceding the closing date of the Wyndham Merger) up to a maximum aggregate
amount of $100,000. If stockholders holding shares of Wyndham Common Stock with
a value in excess of $100,000 elect to receive cash, such cash will be allocated
on a pro rata basis among such stockholders. In connection with the execution
of the Wyndham Merger Agreement, Patriot also entered into agreements with
partnerships affiliated with members of the Trammell Crow family providing for
the acquisition by New Patriot REIT of 11 full-service Wyndham-branded hotels
with 3,072 rooms for approximately $331,664 in cash, plus approximately $14,000
in additional consideration if two hotels meet certain operations targets (the
"Crow Acquisition" and, collectively with the Wyndham Merger, the "Proposed
Wyndham Transactions"). The Wyndham Merger and the Crow Acquisition, which will
be consummated concurrently, are subject to various conditions including,
without limitation, the consummation of the Merger and approval of the Proposed
Wyndham Transactions by the stockholders of New Patriot REIT, New Patriot
Operating Company and Wyndham. It is currently anticipated that the stockholder
meetings to approve the Proposed Wyndham Transactions will occur in the fourth
quarter of 1997.
In addition, Patriot has entered into contracts or letters of intent to
purchase 14 hotels with an aggregate of 3,506 rooms for a combined purchase
price (excluding closing costs and other acquisition-related expenses) of
approximately $268,500. In addition, Patriot has entered into an agreement to
acquire Grand Heritage Hotels, a hotel management and marketing company, and
other Grand Heritage subsidiaries, including an investment in one hotel
property, for a total acquisition price estimated to be approximately $25,250.
These acquisitions are subject to a number of conditions including completion of
Patriot's due diligence.
Line of Credit
Patriot is currently in negotiations with certain lenders regarding
expanding and replacing the Line of Credit with a new credit facility with
availability of up to approximately $1,400,000 (the "New Credit Facility").
This credit facility will consist of a $600,000 revolving line of credit and two
term loans (each for $300,000). It is anticipated that these three portions of
the New Credit Facility will be secured by substantially all of the assets and
properties of Patriot (following the Merger, the assets and properties of New
Patriot REIT and New Patriot Operating Company). Additionally, the New Credit
Facility will include an additional $200,000 term loan which can be drawn upon
in
F-37
PATRIOT AMERICAN HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
connection with the Proposed Wyndham Transactions and the acquisition of certain
other properties and may either be secured by specific assets, subordinate to
the rest of the New Credit Facility, or unsecured. While negotiations concerning
the New Credit Facility are ongoing, there can be no assurance that such a
credit facility will be obtained, or if obtained, when it will become effective
or available or what the specific terms of such credit facility will be.
Legal Proceedings
On April 14, 1997, an action styled Kwalbrun v. James D. Carreker, et. al.,
was filed in the Delaware Court of Chancery in and for New Castle County,
purportedly as a class action on behalf of Wyndham stockholders, against
Wyndham, Patriot and the members of the Board of Directors of Wyndham. The
complaint alleges that the Wyndham Board of Directors breached its fiduciary
duties owed to Wyndham's public stockholders in connection with the Board of
Directors' approval of the Wyndham Merger. In particular, the complaint alleges
that the Wyndham Merger was negotiated at the expense of Wyndham's public
stockholders, and that the Wyndham Board of Directors permitted Patriot to
negotiate on more favorable terms the Crow Acquisition with members of the
Trammell Crow family. Patriot is alleged to have knowingly aided and abetted
the alleged breach of fiduciary duties. The complaint seeks to enjoin,
preliminarily and permanently, consummation of the Wyndham Merger under the
terms presently proposed and also seeks unspecified damages. Patriot denies the
allegations in the complaint and expects to defend the action vigorously.
F-38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of CHC Lease Partners:
In our opinion, the accompanying balance sheets and the related statements of
operations, partners' capital and of cash flows present fairly, in all material
respects, the financial position of CHC Lease Partners at December 31, 1996 and
1995, and the results of its operations and its cash flows for the year ended
December 31, 1996 and the period inception (October 2, 1995) to December 31,
1995 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Miami, Florida
February 13, 1997, except
as to note 4, which is as
of March 18, 1997
F-39
CHC LEASE PARTNERS
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1996 1995
---- ----
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 11,096 $ 9,385
Accounts receivable, net of
allowance for doubtful accounts
of $159 and $142 at December 31, 1996 and
1995, respectively........................ 6,895 5,833
Due from affiliates........................... 341 46
Inventories................................... 2,588 2,136
Prepaid expenses.............................. 1,189 441
-------- --------
Total current assets................... 22,109 17,841
Investments...................................... 5,100 5,100
Deposits......................................... 272 71
-------- --------
Total assets........................... $ 27,481 $ 23,012
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable.............................. $ 4,656 $ 2,202
Accrued lease payments due to
Patriot American Hospitality
Partnership, L.P. ........................ 3,829 2,260
Due to affiliates............................. 57 184
Accrued payroll............................... 2,922 2,219
Taxes payable................................. 1,452 1,556
Guest deposits................................ 2,412 958
Accrued expenses and other
liabilities.................................. 2,611 2,012
-------- --------
Total current liabilities.............. 17,939 11,391
Due to Patriot American Hospitality
Partnership, L.P................................ 809 1,035
Lease inducement................................. 1,546 977
-------- --------
Total liabilities...................... 20,294 13,403
Commitments and contingencies (Note 2)........... -- --
Partners' capital................................ 7,187 9,609
-------- --------
Total liabilities and
partners' capital..................... $ 27,481 $ 23,012
======== ========
The accompanying notes are an integral part of these financial statements.
F-40
CHC LEASE PARTNERS
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
TWELVE INCEPTION
MONTHS (OCTOBER 2,
ENDED 1995) TO
DECEMBER 31, DECEMBER 31,
1996 1995
---------- ----------
Revenue:
Rooms....................................... $ 109,537 $ 21,092
Food and beverage........................... 36,225 8,524
Conference center........................... 2,354 576
Telephone and other......................... 10,175 1,703
---------- ----------
Total revenue........................... 158,291 31,895
---------- ----------
Expenses:
Departmental costs and expenses............. 58,153 11,949
Participating lease payments................ 54,186 10,432
General and administrative.................. 13,779 2,655
Repairs and maintenance..................... 7,213 1,436
Utilities................................... 7,215 1,290
Marketing................................... 14,880 2,865
Insurance................................... 893 191
---------- ----------
Total expenses.......................... 156,319 30,818
---------- ----------
Income before lessee income (expense)...... 1,972 1,077
---------- ----------
Limited partnership distributions,
interest and miscellaneous income ........... 1,401 198
Management fees............................... (2,542) (536)
Lessee general and administrative expenses.... (1,163) (230)
---------- ----------
Total lessee income (expense).......... (2,304) (568)
---------- ----------
Net income (loss)...................... $ (332) $ 509
========== ==========
The accompanying notes are an integral part of these financial statements.
F-41
CHC LEASE PARTNERS
STATEMENTS OF PARTNERS' CAPITAL
FOR THE PERIOD INCEPTION (OCTOBER 2, 1995) TO DECEMBER 31, 1995
AND THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
Capitalization at inception.......................... $ 9,100
Net income........................................... 509
-------
Balance, December 31, 1995...................... 9,609
Net loss............................................. (332)
Distributions........................................ (2,090)
-------
Balance, December 31, 1996...................... $ 7,187
=======
The accompanying notes are an integral part of these financial statements.
F-42
CHC LEASE PARTNERS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
TWELVE INCEPTION
MONTHS (OCTOBER 2,
ENDED 1995) TO
DECEMBER 31, DECEMBER 31,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ (332) $ 509
Adjustments to reconcile net income
(loss) to net cash (used in)/provided by
operating activities:
Recognition of lease inducement........... (116) (23)
Provision for losses on accounts
receivable.............................. 17 142
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable....................... 678 (3,282)
Due from affiliates....................... (295) (46)
Inventories............................... 247 (101)
Prepaid expenses and other assets......... (949) (178)
Increase (decrease) in:
Accounts payable.......................... (1,918) 1,306
Accrued lease payments due to Patriot
American Hospitality Partnership, L.P... 1,569 2,260
Due to affiliates......................... (127) 184
Accrued payroll........................... 703 1,219
Taxes payable............................. (104) 1,265
Guest deposits............................ 41 (182)
Accrued expenses and other liabilities.... 452 1,517
----------- -----------
Net cash (used in)/provided by operating
activities...................................... (134) 4,590
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired at inception................ -- 795
Acquired cash from new operating leases... 3,935 --
----------- -----------
Net cash provided by investing activities........ 3,935 795
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial capitalization........................ -- 4,000
Partnership distributions..................... (2,090) --
----------- -----------
Net cash (used in)/provided by financing
activities...................................... (2,090) 4,000
----------- -----------
Net increase in cash and cash equivalents........ 1,711 9,385
Cash and cash equivalents at beginning
of period....................................... 9,385 --
----------- -----------
Cash and cash equivalents at end of period....... $ 11,096 $ 9,385
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-43
CHC LEASE PARTNERS
STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
TWELVE INCEPTION
MONTHS (OCTOBER 2,
ENDED 1995) TO
DECEMBER 31, DECEMBER 31,
1996 1995
----------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capitalization in units of limited
partnership interest........................ $ -- $ 5,100
=========== ===========
Assumption of assets and liabilities
upon consummation of participating
lease agreements with Patriot American
Hospitality Partnership, L.P.:
Acquired cash................................. $ 3,935 $ 795
Inventories................................... 699 2,035
Accounts receivable........................... 1,757 2,693
Prepaid expenses and other assets............. -- 334
Lease inducement.............................. (685) (1,000)
Due to Patriot American Hospitality
Partnership, L.P............................. 79 (1,035)
Accounts payable.............................. (4,372) (896)
Accrued payroll............................... -- (1,000)
Taxes payable................................. -- (291)
Accrued expenses and other liabilities........ -- (495)
Guest deposits................................ (1,413) (1,140)
----------- -----------
Net assets.................................. $ -- $ --
=========== ============
The accompanying notes are an integral part of these financial statements.
F-44
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
CHC Lease Partners was formed as the initial lessee to lease and operate
certain hotels owned by Patriot American Hospitality Partnership, L.P. (the
"Realty Partnership"). At December 31, 1996, Patriot American Hospitality,
Inc. ("Patriot"), through its subsidiaries, owns approximately 87.3% of the
Realty Partnership. CHC Lease Partners, a general partnership, is owned
jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC
International, Inc. ("CHC") and by Gencom Lessee, L.P., an affiliate of a
principal of the Gencom group of companies.
CHC Lease Partners began operating the twenty initial hotels on October 2,
1995. During 1996, CHC Lease Partners and the Realty Partnership entered into
additional operating leases for four hotels acquired by the Realty Partnership.
The leases are substantially similar to the other lease agreements between CHC
Lease Partners and the Realty Partnership. At December 31, 1996, CHC Lease
Partners leases twenty-four hotels.
The hotels are leased by the Realty Partnership to CHC Lease Partners
under separate participating operating lease agreements which contain cross-
default provisions. These leases, which require CHC Lease Partners to maintain
minimum levels of net worth and working capital, have an average term of eleven
years and require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, conference center revenue and telephone and other revenues of
each of the hotels.
The hotels leased by CHC Lease Partners consist of eighteen full service
hotels, four limited service hotels, one executive conference center and one
resort. Twenty of the twenty-four hotels are operated under franchise licenses
with nationally recognized hotel companies. The cost of obtaining the franchise
licenses is paid by the Realty Partnership while continuing franchise fees are
paid by CHC Lease Partners. Franchise and related fees generally range from
3.5% to 8.0% of room revenues for the hotels under franchise licenses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles. Significant accounting policies are summarized
below.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Fiscal Year
CHC Lease Partners' fiscal year ends on November 30, however, these
financial statements have been prepared as of and for the twelve months ended
December 31, 1996 and as of December 31, 1995 and for the period inception
(October 2, 1995) to December 31, 1995.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three
months or less when purchased are considered to be cash equivalents.
Inventories
Inventories, consisting of food, beverages, china, linens, silverware and
glassware, are stated at the lower of cost (first-in, first-out) or market.
F-45
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
Investments
Investments consist of 250,001 units of limited partnership interest in the
Realty Partnership ("OP Units"). The OP Units are subject to redemption rights
which became exercisable, subject to certain restrictions, on October 2, 1996.
The redemption rights require the Realty Partnership to redeem each OP Unit for
cash equal to the value of two shares of Patriot common stock or, at Patriot's
election, for two shares of Patriot common stock. The OP Units are also subject
to restrictions as to transfer until October 2, 1997. Under the participating
lease agreements CHC Lease Partners has collaterally assigned 166,668 OP Units
to the Realty Partnership. The OP Units are stated at cost which is based upon
the fair market value of Patriot common stock at the date of issue with an
appropriate discount for restrictions imposed on the OP Units.
Revenue Recognition
Revenue is recognized upon performance of hotel-related services and
delivery of food and beverages. Credit evaluations are performed and an
allowance for doubtful accounts is provided against accounts receivable which
are estimated to be uncollectible.
Income Taxes
Under the provisions of the Internal Revenue Code and applicable state
income tax law, CHC Lease Partners is not subject to taxation on income. The
federal and state income tax consequences of CHC Lease Partners' profits and
losses accrue to the partners.
Concentration of Credit Risk
Financial instruments which potentially subject CHC Lease Partners to
concentrations of credit risk consist principally of cash balances with banks in
excess of Federal Deposit Insurance Corporation ("FDIC") insured limits,
accounts receivable from hotel customers and investments in OP Units. CHC Lease
Partners places its cash with high quality financial institutions, however, at
December 31, 1996 CHC Lease Partners has cash balances with banks in excess of
FDIC insured limits. Management believes the credit risk related to these
deposits is minimal.
Concentrations of credit risk with respect to accounts receivable from
hotel customers are limited due to the large number of customers and their
dispersion across many hotels and geographies. Management believes the credit
risk related to the OP Units is minimal.
Fair Value of Financial Instruments
The following notes summarize the major methods and assumptions used in
estimating fair values of financial instruments:
Cash and Cash Equivalents. The carrying amount approximates fair value due
to the relatively short period to maturity of these instruments.
Accounts Receivable. The carrying amount approximates fair value.
Investments. The fair value of the OP Units is estimated based upon the
quoted market price of Patriot common stock less an appropriate discount for the
restrictions imposed on the OP Units. The carrying amount of the OP Units at
December 31, 1995 approximates fair value. The estimated fair value of the OP
Units at December 31, 1996 is $9,970.
F-46
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
CHC Lease Partners at December 31, 1996 has future lease commitments to the
Realty Partnership under the participating lease agreements through the year
2008. Minimum future rental payments under these noncancellable operating
leases are as follows:
Year Ending December 31, Amount
------------------------ --------
1997.................... $ 44,437
1998.................... 44,771
1999.................... 45,106
2000.................... 45,445
2001.................... 45,786
Thereafter.............. 237,100
--------
$462,645
========
Under the participating lease agreements for the twenty initial hotels, CHC
Lease Partners is obligated to return the inventory to the Realty Partnership
at the end of each lease term less a total of $1,000, which is accounted for as
a lease inducement. Additionally, a lease inducement of $685 was received in
1996 related to leasing one resort property. These lease inducements are
recorded as reductions on a straight-line basis to participating lease payments
over the lives of the participating lease agreements. Exclusive of the lease
inducements, CHC Lease Partners incurred base rents of $35,470 and $6,801 and
participating rents of $18,832 and $3,654 for the twelve months ending
December 31, 1996 and for the period inception (October 2, 1995) to
December 31, 1995, respectively. CHC Lease Partners owed the Realty Partnership
$3,829 and $2,260 at December 31, 1996 and 1995, respectively, for rents due
under the terms of the participating leases. Lease inducements were $1,546 and
$977 and inventory due to the Realty Partnership was $809 and $1,035 at
December 31, 1996 and 1995, respectively.
CHC Lease Partners entered into management agreements with hotel management
subsidiaries of CHC and GAH-II, L.P. ("GAH"), an affiliate of CHC and the Gencom
group of companies, to perform all management functions necessary to operate 23
of the 24 hotels leased by CHC Lease Partners. The terms of these agreements
range from ten to twelve years with management fees due based upon a percentage
of gross revenue of each of the hotels. The fees under these management
agreements are subordinate to CHC Lease Partners' obligations to the Realty
Partnership under the participating lease agreements. If, after payment of
management fees at the contract rate, CHC Lease Partners would incur an
operating loss under any of the participating lease agreements in any year, CHC
and GAH would be required to refund and forego management fees for each of the
hotels which are deficient in participating lease payments up to the amount of
the operating loss. If after the management fees are refunded and foregone, CHC
Lease Partners would still incur an operating loss under any of the
participating lease agreements, CHC and GAH would be required to pay CHC Lease
Partners up to 50% of the management fees earned by CHC and GAH, respectively.
Management fees incurred under these management agreements were $2,274 and $460
for the twelve months ended December 31, 1996, and the period inception
(October 2, 1995) to December 31, 1995, respectively. These management fees are
net of management fees refunded and foregone by CHC and GAH of $1,784 and $274
for the twelve months ended December 31, 1996 and the period inception (October
2, 1995) to December 31, 1995, respectively. Included in due to (from)
affiliates were amounts for management fees under these management agreements
due (from) CHC of $(300) and $(46) and due to (from) GAH of $(41) and $43 at
December 31, 1996 and 1995, respectively.
CHC Lease Partners fully reimburses CHC for office space it occupies within
the corporate offices of CHC and for payroll and related costs CHC and GAH incur
on behalf of CHC Lease Partners. These costs amounted to $615 and $141 for the
twelve months ended December 31, 1996 and for the period inception (October 2,
1995) to December 31, 1995, respectively. At December 31, 1996 and 1995, CHC
Lease Partners owed CHC and GAH in the aggregate $57 and $141, respectively,
which is included in due to affiliates.
F-47
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The unaudited pro forma statements of operations are presented as if the
leases and the operation of the twenty-four hotels had commenced on
January 1, 1995. The unaudited pro forma statements of operations are not
necessarily indicative of what the actual results of operations of CHC Lease
Partners would have been assuming such operations had commenced as of
January 1, 1995, nor do they purport to represent the results of operations for
future periods. Pro forma lessee expenses represent management fees and
estimated lessee overhead expenses and exclude pro forma distribution income on
250,001 OP Units and interest income associated with working capital balances.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Revenue:
Rooms......................................... $ 118,652 $ 113,022
Food and beverage............................. 41,835 43,185
Conference center............................. 2,354 2,434
Telephone and other........................... 12,361 12,016
---------- ----------
Total revenue............................. 175,202 170,657
---------- ----------
Expenses:
Departmental costs and expenses............... 66,606 66,888
Participating lease payments.................. 57,381 52,760
General and administrative.................... 15,944 14,614
Repairs and maintenance....................... 8,285 8,695
Utilities..................................... 8,174 7,737
Marketing..................................... 16,668 16,405
Insurance..................................... 1,015 1,325
---------- ----------
Total expenses............................ 174,073 168,424
---------- ----------
Income before lessee expenses.................... 1,129 2,233
Lessee expenses.................................. (2,234) (2,278)
---------- ----------
Net loss...................................... $ (1,105) $ (45)
========== ==========
4. SUBSEQUENT EVENTS:
In January 1997, CHC Lease Partners and the Realty Partnership entered
into an operating lease for a hotel acquired by the Realty Partnership. The
lease is substantially similar to the other participating lease agreements
between CHC Lease Partners and the Realty Partnership except the lease may be
terminated due to the sale of the hotel with the Realty Partnership not being
obligated to CHC Lease Partners to replace the operating lease. The base rent
for the hotel is anticipated to be approximately $1,350 for the twelve months
ended December 31, 1997, subject to completion of planned renovations and other
activities.
On January 30, 1997, the Board of Directors of Patriot declared a 2-for-1
stock split on Patriot's common stock effected in the form of a stock dividend
distributed on March 18, 1997 to shareholders of record on March 7, 1997.
Coincident with the 2-for-1 stock split, the OP Unit conversion factor has
changed such that each OP Unit subject to redemption will now be redeemed for
cash equal to the value of two shares of Patriot's common stock (or, at
Patriot's election, Patriot may purchase each OP Unit offered for redemption for
two shares of Patriot's common stock). All references in the financial
statements to the OP Unit conversion factor have been restated to reflect the
impact of Patriot's stock split.
F-48
CHC LEASE PARTNERS
BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 1997 DECEMBER 31, 1996
--------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $10,368 $11,096
Accounts receivable, net of allowance for doubtful accounts
of $138 and $159 at March 31, 1997 and
December 31, 1996, respectively............................ 11,092 6,895
Due from affiliates.......................................... 537 341
Inventories.................................................. 2,666 2,588
Prepaid expenses............................................. 1,801 1,189
------- -------
Total current assets.................................... 26,464 22,109
Investments....................................................... 5,100 5,100
Deposits.......................................................... 321 272
------- -------
Total assets............................................... $31,885 $27,481
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable............................................. $ 5,207 $ 4,656
Accrued lease payments due to Patriot American
Hospitality Partnership, L.P............................... 5,841 3,829
Due to affiliates............................................ 126 57
Accrued payroll.............................................. 3,305 2,922
Taxes payable................................................ 1,974 1,452
Guest deposits............................................... 2,218 2,412
Accrued expenses and other liabilities....................... 3,363 2,611
------- -------
Total current liabilities............................... 22,034 17,939
Due to Patriot American Hospitality Partnership, L.P.............. 799 809
Lease inducement.................................................. 1,509 1,546
------- -------
Total liabilities....................................... 24,342 20,294
Commitments and contingencies (Note 2)............................ -- --
Partners' capital................................................. 7,543 7,187
------- -------
Total liabilities and partners' capital................. $31,885 $27,481
======= =======
The accompanying notes are an integral part of these financial statements.
F-49
CHC LEASE PARTNERS
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
Revenue:
Rooms............................................. $32,216 $24,260
Food and beverage................................. 11,665 7,998
Conference center................................. 748 645
Telephone and other............................... 3,122 2,295
------- -------
Total revenue................................... 47,751 35,198
------- -------
Expenses:
Departmental costs and expenses................... 17,417 12,765
Participating lease payments...................... 15,514 11,918
General and administrative........................ 4,167 2,883
Repairs and maintenance........................... 2,160 1,544
Utilities......................................... 1,997 1,496
Marketing......................................... 4,544 3,174
Insurance......................................... 254 220
------- -------
Total expenses.................................. 46,053 34,000
------- -------
Income before lessee income (expense)........... 1,698 1,198
------- -------
Limited partnership distributions, interest and
income miscellaneous........................... 345 210
Management fees................................... (520) (597)
Lessee general and administrative expenses........ (167) (178)
------- -------
Total lessee expense........................... (342) (565)
------- -------
Net income..................................... $ 1,356 $ 633
======= =======
The accompanying notes are an integral part of these financial statements.
F-50
CHC LEASE PARTNERS
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
Cash flows from operating activities:
Net income........................................................... $ 1,356 $ 633
Adjustments to reconcile net income to net cash
provided by operating activities:
Recognition of lease inducement.................................. (37) (23)
Provision for losses on accounts receivable...................... 17 46
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.............................................. (4,208) (897)
Due from affiliates.............................................. (196) --
Inventories...................................................... (15) 255
Prepaid expenses................................................. (648) (500)
Deposits......................................................... -- (44)
Increase (decrease) in:
Accounts payable................................................. 551 51
Accrued lease payments due to Patriot American
Hospitality Partnership, L.P.................................. 2,012 19
Due to affiliates................................................ 69 373
Accrued payroll.................................................. 383 52
Taxes payable.................................................... 522 239
Guest deposits................................................... (205) 871
Accrued expenses and other liabilities........................... 664 (674)
------- -------
Net cash provided by operating activities............................... 265 401
------- -------
Cash flows from investing activities:
Acquired cash from new operating leases............................... 7 736
------- -------
Net cash provided by investing activities............................... 7 736
------- -------
Cash flows from financing activities:
Partnership distribution.............................................. (1,000) (340)
------- -------
Net cash used by financing activities................................... (1,000) (340)
------- -------
Net (decrease) increase in cash and cash equivalents.................... (728) 797
Cash and cash equivalents at beginning of period........................ 11,096 9,385
------- -------
Cash and cash equivalents at end of period.............................. $10,368 $10,182
======= =======
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Assumption of assets and liabilities upon consummation of
participating lease agreements with Patriot American
Hospitality Partnership, L.P.:
Acquired cash...................................................... $ 7 $ 736
Accounts receivable................................................ 5 --
Inventories........................................................ 63 336
Prepaid expenses................................................... 13 68
Due to Patriot American Hospitality Partnership, L.P............... (63) (320)
Guest deposits..................................................... (11) (820)
Accrued expenses and other liabilities............................. (14) --
------- -------
Net assets......................................................... $ -- $ --
======= =======
The accompanying notes are an integral part of these financial statements.
F-51
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CHC Lease Partners was formed as the initial lessee to lease and operate
certain hotels owned by Patriot American Hospitality Partnership, L.P. (the
"Realty Partnership"). CHC Lease Partners, a general partnership, is owned
jointly by CHC REIT Lessee Corp., a wholly owned subsidiary of CHC
International, Inc. ("CHC") and by Gencom Lessee, L.P., an affiliate of a
principal of the Gencom group of companies.
CHC Lease Partners began operating the twenty initial hotels on October 2,
1995. During 1996 and 1997, CHC Lease Partners and the Realty Partnership
entered into additional operating leases for five hotels acquired by the Realty
Partnership. The leases are substantially similar to the other lease agreements
between CHC Lease Partners and the Realty Partnership. At March 31, 1997, CHC
Lease Partners leases twenty-five hotels.
The hotels are leased by the Realty Partnership to CHC Lease Partners
under separate participating operating lease agreements which contain cross-
default provisions. These leases, which require CHC Lease Partners to maintain
minimum levels of net worth and working capital, have terms ranging from ten to
twelve years and require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, conference center revenue and telephone and other revenues of
each of the hotels.
The hotels leased by CHC Lease Partners consist of nineteen full service
hotels, four limited service hotels, one executive conference center and one
resort. Twenty-one of the twenty-five hotels are operated under franchise
licenses with nationally recognized hotel companies. The cost of obtaining the
franchise licenses is paid by the Realty Partnership while continuing franchise
fees are paid by CHC Lease Partners. Franchise and related fees generally range
from 3.5% to 8.0% of room revenues for hotels under franchise licenses.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month periods ended March 31, 1997 and 1996 are not
necessarily indicative of the results that may be expected for the years ended
December 31, 1997 and 1996, respectively. For further information, refer to the
CHC Lease Partners financial statements and footnotes thereto included in the
Annual Report on Form 10-K of Patriot American Hospitality, Inc. for the year
ended December 31, 1996.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
Under the participating lease agreements for the twenty intial hotels, CHC
Lease Partners is obligated to return the inventory to the Realty Partnership
at the end of each lease term less a total of $1,000, which is accounted for as
a lease inducement. Additionally, a lease inducement of $685 was received in
1996 related to leasing one resort property. These lease inducements are
recorded as reductions on a straight-line basis to participating lease payments
over the lives of the participating lease agreements. Exclusive of the lease
inducements, CHC Lease Partners incurred base rents of $9,515 and $7,321 and
participating rents of $6,036 and $4,620 for the three months ended March 31,
1997 and 1996, respectively. CHC Lease Partners owed the Realty Partnership
$5,841 and $3,829 at March 31, 1997 and December 31, 1996, respectively, for
lease payments due under the terms of the participating leases. Lease
inducements were $1,509 and $1,546 and inventory due to the Realty Partnership
was $799 and $809 at March 31, 1997 and December 31, 1996, respectively.
CHC Lease Partners entered into management agreements with hotel
management subsidiaries of CHC and GAH-II, L.P. ("GAH"), an affiliate of CHC
and the Gencom group of companies, to perform all management functions necessary
to operate 24 of the 25 hotels leased by CHC Lease Partners. The terms of these
agreements range from ten to twelve years with management fees due based upon a
percentage of gross revenue of each of the hotels. The fees under these
management agreements are subordinate to CHC Lease Partners' obligations to the
Realty Partnership under the participating lease agreements. If, after payment
of management fees at the contract rate, CHC Lease Partners would incur an
operating loss under any of the participating lease agreements in any year, CHC
and GAH would be required to refund and forego management fees for each of the
hotels which are deficient in participating lease payments up to the amount of
the operating loss. If after the management fees are refunded and foregone, CHC
Lease Partners would still incur an operating loss under any of the
participating lease agreements, CHC and GAH would be required to pay CHC Lease
Partners up to 50% of the management fees earned by CHC and GAH, respectively.
Management fees incurred under these management agreements were $441 and $516
for the three months ended March 31, 1997 and 1996, respectively. These
management fees are net of management fees refunded and foregone by CHC and GAH
of $782 and $297 for the three months ended March 31, 1997 and 1996,
respectively. Included in due to (from) affiliates
F-52
CHC LEASE PARTNERS
NOTES TO FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
were amounts for management fees under these management agreements due from CHC
of $305 and $300 and due from GAH of $232 and $41 at March 31, 1997 and December
31, 1996, respectively.
CHC Lease Partners fully reimburses CHC for office space it occupies within
the corporate offices of CHC and for the payroll and related costs CHC and GAH
incur on behalf of CHC Lease Partners. These costs amounted to $239 and $149
for the three months ended March 31, 1997 and 1996, respectively. At March 31,
1997 and December 31, 1996, CHC Lease Partners owed CHC and GAH in the aggregate
$126 and $57, respectively, which is included in due to affiliates.
During the three months ended March 31, 1997 and 1996, CHC Lease Partners
made distributions to its partners of $1,000 and $340, respectively.
3. PRO FORMA FINANCIAL INFORMATION:
The unaudited pro forma statements of operations are presented as if the
leases and the operation of the twenty-five hotels had commenced on January 1,
1996. The unaudited pro forma statements of operations are not necessarily
indicative of what the actual results of operations of CHC Lease Partners would
have been assuming such operations had commenced as of January 1, 1996, nor do
they purport to represent the results of operations for future periods. Pro
forma lessee expenses include management fees, estimated lessee overhead
expenses, distribution income on 250,001 units of limited partnership interest
in the Realty Partnership and interest income associated with working capital
balances. No pro forma interest income associated with working capital balances
has been included.
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------- -------------
(IN THOUSANDS)
Revenue:
Rooms............................ $32,318 $31,528
Food and beverage................ 11,704 11,457
Conference center................ 748 645
Telephone and other.............. 3,126 3,658
------- -------
Total revenue................... 47,896 47,288
------- -------
Expenses:
Departmental costs and expenses.. 17,480 17,783
Participating lease payments..... 15,596 15,409
General and administrative....... 4,181 4,021
Repairs and maintenance.......... 2,167 2,118
Utilities........................ 2,006 2,025
Marketing........................ 4,557 4,240
Insurance........................ 255 317
------- -------
Total expenses.................. 46,242 45,913
------- -------
Income before lessee expenses..... 1,654 1,375
Lessee expenses................... 305 624
------- -------
Net income....................... $ 1,349 $ 751
======= =======
F-53
REPORT OF INDEPENDENT AUDITORS
To the Members of NorthCoast Hotels, L.L.C.:
We have audited the accompanying balance sheet of NorthCoast Hotels, L.L.C.
as of December 31, 1996, and the related statements of operations, members'
equity, and cash flows for the period April 2, 1996 (inception of operations)
through December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NorthCoast Hotels, L.L.C. as
of December 31, 1996, and the results of its operations and its cash flows for
the period April 2, 1996 (inception of operations) through December 31 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Seattle, Washington
March 5, 1997
F-54
NORTHCOAST HOTELS, L.L.C.
BALANCE SHEET
(IN THOUSANDS)
December 31,
1996
-----------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,756
Accounts receivable, net of allowance
for doubtful accounts of $43...................... 4,224
Receivable from Patriot American
Hospitality Partnership, L.P...................... 245
Inventories........................................ 320
Prepaid expenses................................... 387
Other assets....................................... 792
-----------
Total current assets................................ 7,724
Deferred assets, net of accumulated
amortization of $33............................... 500
Investments........................................ 825
-----------
Total assets...................................... $ 9,049
===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable................................... $ 2,064
Accrued rent due to Patriot American
Hospitality Partnership, L.P...................... 943
Due to affiliates.................................. 113
Accrued payroll and benefits....................... 2,088
Guest deposits..................................... 155
Accrued expenses and other liabilities............. 986
FF&E reserve due to Patriot American
Hospitality Partnership, L.P...................... 415
-----------
Total current liabilities........................... 6,764
-----------
Due to Patriot American Hospitality
Partnership, L.P................................... 242
-----------
Total liabilities................................. 7,006
Commitments and contingencies....................... --
Members' equity..................................... 2,043
-----------
Total liabilities and members' equity............... $9,049
===========
See accompanying notes.
F-55
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
April 2, 1996
(inception of
operations)
through
December 31,
1996
-------------
Revenue:
Rooms.................................................... $ 27,402
Food and beverage........................................ 12,900
Telephone and other...................................... 2,518
-------------
Total revenue.......................................... 42,820
-------------
Expenses:
Departmental costs and other expenses.................... 17,547
Participating rent....................................... 12,553
General and administrative............................... 3,734
Ground lease expense..................................... 818
Repairs and maintenance.................................. 2,319
Utilities................................................ 1,516
Marketing................................................ 3,078
-------------
Total expenses......................................... 41,565
-------------
Income before lessee income (expense).................. 1,255
-------------
Dividend and interest income............................. 132
Management fees.......................................... (1,103)
Depreciation and amortization............................ (33)
Lessee general and administrative expenses............... (343)
-------------
Total lessee expenses.................................. (1,347)
-------------
Net loss............................................... (92)
=============
See accompanying notes.
F-56
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF MEMBERS' EQUITY
FOR THE PERIOD FROM APRIL 2, 1996
(INCEPTION OF OPERATIONS) THROUGH DECEMBER 31, 1996
(IN THOUSANDS)
Notes Retained
Capital Receivable Earnings Total
--------- ---------- -------- --------
Contributions on April 2, 1996.... $ 3,300 $ (1,050) $ -- $ 2,250
Distributions to members.......... (165) -- -- (165)
Payments on notes receivable...... -- 50 -- 50
Net loss.......................... -- -- (92) (92)
--------- --------- -------- --------
Balance at December 31, 1996...... $ 3,135 $ (1,000) $ (92) $ 2,043
========= ========= ======== ========
See accompanying notes.
F-57
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
April 2, 1996
(inception of
operations)
through
December 31,
1996
-------------
Cash flows from operating activities:
Net loss............................................... $ (92)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Provision for losses on accounts receivable......... 43
Depreciation and amortization....................... 33
Increase in assets and liabilities:
Accounts receivable................................. (4,268)
Receivable from Patriot American
Hospitality Partnership, L.P....................... (44)
Inventories......................................... (78)
Prepaid expenses and other assets................... (387)
Accounts payable.................................... 1,968
Accrued rent due to Patriot American
Hospitality Partnership, L.P....................... 943
Due to affiliates................................... 113
Accrued payroll and benefits........................ 1,187
Guest deposits...................................... 155
Accrued expenses and other liabilities.............. 903
FF&E reserve due to Patriot American
Hospitality Partnership, L.P....................... 415
-------------
Net cash provided by operating activities.................. 891
-------------
Cash flows from investing activities:
Purchase of equipment................................... (7)
Payments for capital improvements on
behalf of owner........................................ (104)
Payment of organization costs and
capitalized lease costs................................ (533)
Payment for deferred purchase consideration............. (785)
-------------
Net cash used in investing activities...................... (1,429)
-------------
Cash flows from financing activities:
Cash received from assumption of
operating liabilities.................................. 901
Proceeds from repayment of member note.................. 50
Capital contributions................................... 1,425
Distributions........................................... (82)
-------------
Net cash provided by financing activities.................. 2,294
-------------
Net increase in cash and cash equivalents.................. 1,756
-------------
Cash and cash equivalents at end of period................. $ 1,756
=============
Supplemental Disclosure of Non-Cash
Investing and Financing Activities:
Contribution of Patriot Partnership Units............... $ 825
=============
Inventory received in exchange for a
liability to Patriot American Hospitality
Partnership, L.P....................................... $ 242
=============
Operating liabilities assumed in
exchange for receivables from Patriot American
Hospitality Partnership, L.P........................... $ 96
=============
Distributions declared and unpaid....................... $ 83
=============
See accompanying notes.
F-58
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
NorthCoast Hotels, L.L.C. ("NorthCoast Lessee"), a Washington limited
liability company, was formed January 10, 1996 to lease and operate certain
hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty
Partnership"). At December 31, 1996, Patriot American Hospitality, Inc.
("Patriot"), through its subsidiaries, owns approximately 87.3% of the Realty
Partnership. NorthCoast Lessee will continue for a term of fifty years unless
terminated earlier pursuant to the terms of the limited liability company
agreement. In general, members are not individually liable for any debts or
losses of NorthCoast Lessee that exceed their respective capital contribution,
except as discussed in Note 2, and losses are generally allocated to the members
in proportion to their capital contributions.
NorthCoast Lessee began leasing five hotels on April 2, 1996. On April 5,
1996, May 22, 1996, August 29,1996, and November 26, 1996, NorthCoast Lessee and
the Realty Partnership entered into four additional operating leases for four
hotels which were acquired by the Realty Partnership. At December 31, 1996,
NorthCoast leased nine hotels as follows:
Property Name Location Guest Rooms
------------------------------------- ------------------------- -----------
Hyatt Regency Lexington Lexington, Kentucky 365 rooms
Hyatt Newporter Newport Beach, California 410 rooms
Plaza Park Suites Seattle, Washington 193 rooms
The Pickwick San Francisco, California 192 rooms
The Roosevelt Hotel Seattle, Washington 151 rooms
Valley River Inn Eugene, Oregon 257 rooms
WestCoast Gateway Hotel Seattle, Washington 145 rooms
WestCoast Long Beach Hotel and Marina Long Beach, California 192 rooms
WestCoast Wenatchee Center Hotel Wenatchee, Washington 147 rooms
Each hotel is leased by the Realty Partnership to NorthCoast Lessee under
separate participating operating lease agreements. Eight of the nine hotel
leases contain cross-default provisions. These leases, which have an average
term of eleven years, require NorthCoast Lessee to maintain a minimum net worth,
a minimum level of cash, and adequate working capital, (as those terms are
defined) and require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, and telephone and other revenues of each of the hotels, plus
certain additional charges, as applicable.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three
months or less when purchased are considered to be cash equivalents.
Inventories
Inventories, consisting of food, beverages, china, linens, silverware and
glassware, are stated at the lower of cost (generally first-in, first-out) or
market.
Deferred Assets
Deferred assets consist of organization costs and capitalized lease costs.
Amortization of organization costs is computed using the straight-line method
over five years. Capitalized lease costs are amortized over the average lease
term of eleven years.
F-59
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
Investments
Investments consist of 31,074 restricted units of limited partnership
interest in the Realty Partnership ("OP Units") and are stated at cost. The OP
Units may be redeemed, subject to certain restrictions, at NorthCoast's election
after April 2, 1997, for cash equal to the market value (as defined) of two
shares of Patriot common stock or, at Patriot's election, two shares of Patriot
common stock. Under the participating lease agreements, NorthCoast has assigned
certain of the OP Units to the Realty Partnership as collateral for certain
deferred rents. Such deferred rents were paid by NorthCoast Lessee in January
1997, and the assignment was released. Dividends are included in dividend and
interest income.
Other Assets
Other assets consist primarily of additional purchase consideration due
from the Realty Partnership related to two of the hotels. Receipt of the
additional purchase consideration is dependent upon the respective hotels
achieving certain operating performance goals in 1997. Management believes this
additional purchase consideration will be collected.
Revenue Recognition
Revenue is recognized upon performance of hotel-related services and
delivery of food and beverages. Credit evaluations are performed and an
allowance for doubtful accounts is provided against accounts receivable which
are estimated to be uncollectible.
Income Taxes
Under the provisions of the Internal Revenue Code and applicable state
income tax law, NorthCoast Lessee has elected to be taxed as a partnership for
federal and state purposes. Therefore, federal and state income tax consequences
of NorthCoast Lessee's profits and losses pass through to the limited liability
company members.
Concentration of Credit Risk
Financial instruments which potentially subject NorthCoast Lessee to
concentrations of credit risk consist principally of cash balances with banks in
excess of Federal Deposit Insurance Corporation ("FDIC") insured limits,
accounts receivable from hotel customers. NorthCoast Lessee places its cash with
high quality financial institutions, however, at December 31, 1996, NorthCoast
Lessee has cash balances with banks in excess of FDIC insured limits. Management
believes the credit risk related to these deposits is minimal. Concentrations of
credit risk with respect to accounts receivable from hotel customers are limited
due to the large number of customers and their dispersion across many hotels and
geographies.
2. MEMBERS' EQUITY:
Initial Capitalization
Each of the four members is required to contribute $825 to NorthCoast
Lessee. Contributions can be in the form of cash or other property. At December
31, 1996, cash contributions of $1,475 and OP Units of $825 have been received.
Two members contributed notes receivable totaling $1,050, which bear
interest at 7% per annum. One note, which is unsecured, is due in two
installments with $50 paid July 31, 1996 and the balance due March 31, 1997.
The other note is due October 31, 1998, and can be paid with either cash or OP
Units. This note is secured by an approximate 12.6% interest in LeParc
Investment Group, LLC (the "LeParc Entity"). These notes receivable from
members have been offset against members' equity in the accompanying financial
statements.
At December 31, 1996, NorthCoast Lessee had $83 accrued for distributions
which were declared and unpaid.
Minimum Net Worth
Under the terms of the participating lease agreements, NorthCoast Lessee is
required to maintain minimum net worth, as defined, equal to 20% of the
projected annual lease payments for all hotels leased. The minimum net worth
must be composed of certain components in specified minimum amounts, including
at least 15% in cash or certain cash equivalents. No more than 25% of the
minimum net worth can be composed of a promissory note secured by an interest in
the LeParc Entity. NorthCoast Lessee is also required to maintain ownership of
shares of common stock of Patriot or OP Units. NorthCoast Lessee was in
compliance with these covenants as of December 31, 1996.
F-60
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
Participating Lease Commitments
At December 31, 1996, NorthCoast Lessee has future lease commitments to the
Realty Partnership under the participating lease agreements through the year
2008. Minimum future rental payments under these noncancellable operating
leases are as follows:
Year Ending December 31, Amount
------------------------ -------
1997............................... $ 17,597
1998............................... 18,247
1999............................... 18,280
2000............................... 18,307
2001............................... 18,328
Thereafter......................... 93,221
--------
$183,980
========
NorthCoast Lessee incurred rents of $12,553 during the period April 2, 1996
through December 31, 1996, consisting of $10,453 in base rents, $1,171 in
participating rents, and $929 in additional rent. At December 31, 1996,
NorthCoast Lessee owed the Realty Partnership $943 for rents under the terms of
the participating leases.
Under the participating lease agreements, NorthCoast Lessee is obligated to
return to the Realty Partnership the inventory at each of the hotels at the end
of the related lease term. As of December 31, 1996, the balance of the inventory
due to the Realty Partnership was $242. In addition, two of the hotels are
managed by Hyatt Corporation ("Hyatt"). Under the terms of the hotel management
agreements, Hyatt funds a percentage of the hotel gross revenues to a reserve
account for furniture, fixtures and equipment (the "FF&E Reserve"), which is
payable to the Realty Partnership to make improvements to the hotels. At
December 31, 1996, the FF&E Reserve payable to the Realty Partnership was $415.
Management and Franchise Agreements
Seven of the nine hotels leased by NorthCoast Lessee are managed by
WestCoast Hotels, Inc. ("WestCoast Hotels"), an affiliate of a member, and are
marketed under a franchise agreement with WestCoast Marketing, Inc., an
affiliate of WestCoast Hotels. WestCoast Hotels receives a hotel management fee
per hotel of $2 per month for four of the seven hotels and 1% of gross room
revenue, as defined, for the WestCoast Long Beach Hotel and Marina, the Valley
River Inn and The Pickwick. All management fees payable to WestCoast Hotels
greater than 1% of hotel revenues are subordinate to NorthCoast Lessee's
obligations to the Realty Partnership under the terms of the participating lease
agreements. WestCoast Marketing, Inc. receives a franchise fee of 2.5% of gross
room revenues, as well as certain reservation fees in connection with the use of
the WestCoast brand. Two of the nine hotels are managed by Hyatt and include an
asset management agreement with WestCoast Hotels. WestCoast Hotels received an
asset management fee in 1996 on the Hyatt Regency Lexington of $6 per month and
on the Hyatt Newporter of $2 per month. In 1997, the asset management fees will
be $6 per month and $5 per month on the Hyatt Regency Lexington and Hyatt
Newporter, respectively. The asset management fees are subject to escalation
based on increases in the Consumer Price Index beginning in 1998.
Hyatt receives management fees ranging from 3.5% to 5% of gross revenues
plus incentive fees if certain operating results based on cash flow and profits
(as defined) are achieved by the hotels. In addition, the management agreement
with Hyatt provides for the allocation of certain advertising, marketing and
reservation related expenses incurred by Hyatt to all hotels in the Hyatt chain
based upon the number of total rooms available during the year.
Management Contract for Convention Center
The WestCoast Wenatchee Center Hotel has entered into an agreement with the
City of Wenatchee (the "City") to provide management services for the Wenatchee
Center, including marketing and space rental for meetings, conferences and
banquets. The agreement, which commenced in October 1980, provides for an
initial term of seven years and the option to extend the agreement for three
consecutive periods of seven years each. The WestCoast Wenatchee Center Hotel
pays the City fees based on the greater of $50 annually, adjusted for the
increase in the Consumer Price Index, or a percentage of gross revenues from
operation of the hotel.
F-61
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
Ground Lease
NorthCoast Lessee has commitments under two ground lease agreements. The
term of the lease for the Hyatt Newporter is through December 31, 2048 and the
lease is subject to an escalation clause for each five-year period based on the
Consumer Price Index, not to exceed 8% per year compounded annually for the five
years then ending. In addition, the lease requires the hotel to pay a percentage
of its annual sales, as defined, as additional rent. During 1996, NorthCoast
Lessee paid $569 in base rent and $187 in additional rent. Minimum annual lease
payments of $831 are due under the lease through 2001, at which time the base
rent will be adjusted.
The term of the lease for the WestCoast Long Beach Hotel and Marina is
through March 31, 2052. Annual minimum rent payments are approximately $173
through September 30, 1999, at which time the rent will be negotiated for the
next five-year period. Half of the minimum rent payments through March 1998 are
deferred and accrue interest at 7% per annum. Percentage rent is payable, if in
excess of the minimum rent, based upon certain percentages of room revenue, food
and beverage revenue, and telephone and other revenues of the hotel.
Employment and Other Agreements
NorthCoast Lessee has entered into an agreement with an individual
affiliated with one of the members. Pursuant to that agreement, this individual
serves as President of NorthCoast Lessee for a term of five years.
NorthCoast Lessee pays WestCoast Hotels for office space it occupies within
the corporate offices of WestCoast Hotels and for the payroll and related costs
WestCoast Hotels administers on behalf of NorthCoast Lessee. The amount paid to
WestCoast Hotels for these costs was $18 during the period from April 2, 1996
through December 31, 1996.
F-62
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The following unaudited pro forma statements of operations are presented as
if the leases and the operation of the nine hotels leased by NorthCoast Lessee
had commenced on January 1, 1995. The unaudited pro forma statements of
operations are not necessarily indicative of what the actual results of
operations of NorthCoast Lessee would have been assuming such operations had
commenced as of January 1, 1995, nor do they purport to represent the results of
operations for future periods. Pro forma lessee expenses represent management
fees and estimated lessee overhead expenses and exclude pro forma dividend
income on 31,074 OP Units and interest income associated with working capital
balances.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Revenue:
Rooms....................................... $ 42,797 $ 40,750
Food and beverage........................... 19,575 19,525
Telephone and other......................... 3,878 3,705
---------- ----------
Total revenue........................... 66,250 63,980
---------- ----------
Expenses:
Departmental costs and expenses............. 27,818 27,067
Participating rent.......................... 20,293 18,996
General and administrative.................. 5,752 5,461
Ground lease expense........................ 1,114 1,147
Repairs and maintenance..................... 3,673 3,570
Utilities................................... 2,473 2,387
Marketing................................... 4,898 4,863
Insurance................................... 501 306
---------- ----------
Total expenses.......................... 66,522 63,797
---------- ----------
Income before lessee expenses.................. (272) 183
Lessee expenses................................ 1,918 2,088
---------- ----------
Net loss.................................... $(2,190) $ (1,905)
========== ==========
5. SUBSEQUENT EVENT:
On January 30, 1997, the Board of Directors of Patriot declared a 2-for-1
stock split on Patriot's common stock effected in the form of a stock dividend
distributed on March 18, 1997 to shareholders of record on March 7, 1997.
Coincident with the 2-for-1 stock split, the OP Unit conversion factor has been
changed such that each OP Unit subject to redemption will now be redeemed for
cash equal to the value of two shares of Patriot's common stock (or, at
Patriot's election, Patriot may purchase each OP Unit offered for redemption for
two shares of Patriot's common stock). All references in the financial
statements to the OP Unit conversion factor have been restated to reflect the
impact of Patriot's stock split.
F-63
NORTHCOAST HOTELS, L.L.C.
BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................................. $1,817 $1,756
Accounts receivable, net of allowance for doubtful accounts of $38 and
$43 at March 31, 1997 and December 31, 1996, respectively......................... 3,967 4,224
Receivable from Patriot American Hospitality Partnership, L.P......................... 182 245
Inventories........................................................................... 309 320
Prepaid expenses...................................................................... 460 387
Other assets.......................................................................... 812 792
------ ------
Total current assets........................................................... 7,547 7,724
Deferred assets, net of accumulated amortization of $47 and $33 at
March 31, 1997 and December 31, 1996, respectively................................ 518 500
Investments.............................................................................. 825 825
Cash held in trust....................................................................... 172 --
Construction in progress................................................................. 330 --
------ ------
Total assets................................................................... $9,392 $9,049
====== ======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $2,269 $2,064
Accrued rent due to Patriot American Hospitality Partnership, L.P..................... 1,622 943
Due to affiliates..................................................................... 199 113
Accrued payroll and benefits.......................................................... 1,683 2,088
Guest deposits........................................................................ 203 155
Accrued expenses and other liabilities................................................ 1,030 986
FF&E reserve due to Patriot American Hospitality Partnership, L.P..................... 13 415
------ ------
Total current liabilities...................................................... 7,019 6,764
Note payable to Patriot American Hospitality Partnership, L.P............................ 500 --
Due to Patriot American Hospitality Partnership, L.P..................................... 242 242
------ ------
Total liabilities.............................................................. 7,761 7,006
Commitments and contingencies............................................................ -- --
Members' equity.......................................................................... 1,631 2,043
------ ------
Total liabilities and members' equity.......................................... $9,392 $9,049
====== ======
See accompanying notes.
F-64
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
THREE
MONTHS
ENDED
MARCH 31,
1997
----------
Revenue:
Rooms.......................................... $ 9,912
Food and beverage.............................. 4,792
Telephone and other............................ 944
-------
Total revenue.............................. 15,648
-------
Expenses:
Departmental costs and other expenses.......... 6,806
Participating lease payments................... 4,683
General and administrative..................... 1,408
Ground lease expense........................... 320
Repairs and maintenance........................ 911
Utilities...................................... 586
Marketing...................................... 1,248
-------
Total expenses............................. 15,962
-------
Loss before lessee income (expense)........ (314)
-------
Dividend and interest income................... 56
Service fee income............................. 422
Management fees................................ (471)
Depreciation and amortization.................. (14)
Lessee general and administrative expenses..... (91)
-------
Total lessee income (expense).............. (98)
-------
Net loss................................... $ (412)
=======
See accompanying notes.
F-65
NORTHCOAST HOTELS, L.L.C.
STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED
MARCH 31,
1997
-------------
Cash flows from operating activities:
Net loss................................................................................ $ (412)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization....................................................... 14
Changes in assets and liabilities:
Accounts receivable................................................................. 257
Inventories......................................................................... 11
Prepaid expenses and other assets................................................... (74)
Accounts payable.................................................................... 300
Accrued rent due to Patriot American Hospitality Partnership, L.P................... 679
Due to affiliates................................................................... 86
Accrued payroll and benefits........................................................ (405)
Guest deposits...................................................................... 48
Accrued expenses and other liabilities.............................................. 127
FF&E Reserve due to Patriot American Hospitality Partnership, L.P................... (402)
------
Net cash provided by operating activities.................................................. 229
------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements....................................... (334)
Cash held in trust...................................................................... (172)
Payment for capital improvements on behalf of owner..................................... (31)
Payment of organization costs and capitalized lease costs............................... (32)
Payment for deferred purchase consideration............................................. (16)
------
Net cash used in investing activities...................................................... (585)
------
Cash flows from financing activities:
Proceeds from issuance of note.......................................................... 500
Distributions........................................................................... (83)
------
Net cash provided by financing activities.................................................. 417
------
Net increase in cash and cash equivalents.................................................. 61
Cash and cash equivalents at beginning of period........................................... 1,756
------
Cash and cash equivalents at end of period................................................. $1,817
======
See accompanying notes.
F-66
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NorthCoast Hotels, L.L.C. ("NorthCoast Lessee"), a Washington limited
liability company, was formed January 10, 1996 to lease and operate certain
hotels owned by Patriot American Hospitality Partnership, L.P. (the "Realty
Partnership"). NorthCoast Lessee will continue for a term of fifty years
unless terminated earlier pursuant to the terms of the limited liability company
agreement. In general, members are not individually liable for any debts or
losses of NorthCoast Lessee that exceed their respective capital contribution,
and losses are generally allocated to the members in proportion to their capital
contributions.
NorthCoast Lessee began leasing five hotels on April 2, 1996. During 1996,
NorthCoast Lessee and the Realty Partnership entered into additional operating
leases for four hotels which were acquired by the Realty Partnership. At March
31, 1997, NorthCoast Lessee leased nine hotels.
Each hotel is leased by the Realty Partnership to NorthCoast Lessee under
separate participating operating lease agreements. Eight of the nine hotel
leases contain cross-default provisions. These leases, which have an average
term of eleven years, require NorthCoast Lessee to maintain a minimum net worth,
a minimum level of cash, and adequate working capital, (as those terms are
defined) and require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, and telephone and other revenues of each of the hotels, plus
certain additional charges, as applicable.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997. For
further information, refer to the NorthCoast Hotels, L.L.C. financial statements
and footnotes thereto included in the Annual Report on Form 10-K of Patriot
American Hospitality, Inc. for the year ended December 31, 1996.
2. MEMBERS' EQUITY:
Initial Capitalization
Each of the four members is required to contribute $825 to NorthCoast
Lessee. Contributions can be in the form of cash or other property. At March
31, 1997, cash contributions of $1,475 and OP Units of $825 have been received.
Two members contributed notes receivable totaling $1,050 which bear
interest at 7% per annum. One note, which is unsecured, is due in two
installments, with $50 paid July 31, 1996 and the balance due May 31, 1997. The
other note is due October 31, 1998, and can be paid with either cash or OP
Units. This note is secured by an approximate 12.6% interest in LeParc
Investment Group, LLC. These notes receivable from members have been offset
against members' equity in the accompanying financial statements.
Minimum Net Worth
Under the terms of the participating lease agreements, NorthCoast Lessee is
required to maintain minimum net worth, as defined, equal to 20% of the
projected annual lease payments for all hotels leased, subject to certain agreed
upon adjustments. The minimum net worth must be composed of certain components
in specified minimum amounts, including at least 15% in cash or certain cash
equivalents. No more than 25% of the minimum net worth can be composed of a
promissory note secured by an interest in LeParc Investment Group, LLC.
NorthCoast Lessee is also required to maintain ownership of shares of common
stock of Patriot or units of limited partnership interest of the Realty
Partnership.
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
NorthCoast Lessee incurred rents of $4,683 during the three months ended
March 31, 1997, consisting of $3,902 in base rents, $490 in participating rents,
and $291 in additional rent. At March 31, 1997 and December 31, 1996,
NorthCoast Lessee owed the Realty Partnership $1,622 and $943, respectively,
for rents under the terms of the participating leases.
F-67
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Under the participating lease agreements, NorthCoast Lessee is obligated to
return to the Realty Partnership the inventory at each of the hotels at the end
of the related lease term. As of March 31, 1997, the balance of the inventory
due to the Realty Partnership was $242. In addition, two of the hotels are
managed by Hyatt Corporation ("Hyatt"). Under the terms of the hotel management
agreements, Hyatt funds a percentage of the hotel gross revenues to a reserve
account for furniture, fixtures and equipment (the "FF&E Reserve"), which is
payable to the Realty Partnership to make improvements to the hotels. At March
31, 1997 and December 31, 1996, the FF&E Reserve payable to the Realty
Partnership was $13 and $415, respectively.
NorthCoast Lessee pays WestCoast Hotels for office space it occupies within
the corporate offices of WestCoast Hotels and for the payroll and related costs
WestCoast Hotels administers on behalf of NorthCoast Lessee. The amount paid to
WestCoast Hotels for these costs was $6 for the three months ended March 31,
1997.
NorthCoast Lessee borrowed $500 from the Realty Partnership on March 13, 1997
(the "Note") for the construction of a laundry facility at the Hyatt Regency
Lexington. The Note bears interest at 9.6% per annum, requires monthly payments
of principal and interest commencing June 1, 1997 and is due March 13, 1999.
Construction in progress consists of direct costs and capitalized interest and
are recorded at cost. As of March 31, 1997, NorthCoast Lessee had capitalized
$330 related to this project and held $172 in cash restricted to expenditures
related to the project.
Service fee income consists of fees received for acquisition, project
development and renovation services provided to the Realty Partnership net of
reimbursed expenses of $53. NorthCoast Lessee received $475 for such services
during the three months ended March 31, 1997.
F-68
NORTHCOAST HOTELS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
4. PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma statement of operations for the three
months ended March 31, 1996 is presented as if the leases and the operation of
the nine hotels leased by NorthCoast Lessee had commenced on January 1, 1996.
The unaudited pro forma statement of operations is not necessarily indicative of
what the actual results of operations of NorthCoast Lessee would have been
assuming such operations had commenced as of January 1, 1996, nor do they
purport to represent the results of operations for future periods. Pro forma
lessee expenses represent management fees and estimated lessee overhead expenses
and exclude pro forma dividend income on 31,074 units of limited partnership
interest of the Realty Partnership and pro forma interest income associated
with working capital balances.
THREE MONTHS
ENDED
MARCH 31,
1996
--------------
(IN THOUSANDS)
Revenue:
Rooms............................ $ 9,390
Food and beverage................ 4,374
Telephone and other.............. 900
-------
Total revenue................ 14,664
-------
Expenses:
Departmental costs and expenses.. 6,505
Participating lease payments..... 4,232
General and administrative....... 1,552
Ground lease expense............. 289
Repairs and maintenance.......... 898
Utilities........................ 597
Marketing........................ 1,196
Insurance........................ 93
-------
Total expenses............... 15,362
-------
Loss before lessee expenses......... (698)
Lessee expenses..................... 417
-------
Net loss......................... $(1,115)
=======
F-69
PAH RSI, L.L.C.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
MARCH 31,
1997
---------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents................................................... $16,637
Accounts receivable, net of allowance for doubtful accounts of $1........... 3,485
Due from Patriot American Hospitality Partnership, L.P and affiliates....... 2,655
Due from Resorts Services, Inc.............................................. 382
Inventories................................................................. 1,833
Prepaid expenses and other assets........................................... 1,770
-------
Total current assets...................................................... 26,762
Organizational costs, net of accumulated amortization of $1................... 34
Tradenames, net of accumulated amortization of $62............................ 8,937
Deposits...................................................................... 332
-------
Total assets.............................................................. $36,065
=======
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable............................................................ $ 1,213
Accrued rent due to Patriot American Hospitality Partnership, L.P........... 5,879
Accrued expenses and other liabilities...................................... 6,163
Accrued interest............................................................ 237
Guest and other deposits.................................................... 6,498
-------
Total current liabilities................................................. 19,990
Due to selling entities....................................................... 5,276
Note payable to Patriot American Hospitality Partnership, L.P................. 9,000
-------
Total liabilities......................................................... 34,266
Commitments and contingencies................................................. --
Members' equity............................................................... 1,799
-------
Total liabilities and members' equity..................................... $36,065
=======
See accompanying notes.
F-70
PAH RSI, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
JANUARY 16,
1997 (INCEPTION
OF OPERATIONS)
THROUGH
MARCH 31,
1997
-----------------
(Restated)
Revenue:
Rooms................................................. $11,129
Food and beverage..................................... 4,981
Telephone and other revenue........................... 3,175
Club, club membership and spa revenue................. 8,013
Shopping center revenue............................... 363
Royalty revenues...................................... 382
-------
Total revenue..................................... 28,043
-------
Expenses:
Departmental costs and other expenses................. 11,199
Participating lease payments.......................... 8,015
General and administrative............................ 1,611
Repairs and maintenance............................... 1,812
Utilities............................................. 706
Marketing............................................. 1,055
Interest expense...................................... 237
Insurance............................................. 104
-------
Total expenses.................................... 24,739
-------
Income before lessee expenses..................... 3,304
-------
Management fees....................................... (1,342)
Amortization.......................................... (63)
Lessee general and administrative expenses............ (100)
-------
Total lessee expenses............................. (1,505)
-------
Net income........................................ $ 1,799
=======
See accompanying notes.
F-71
PAH RSI, L.L.C.
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
JANUARY 16, 1997
(INCEPTION OF
OPERATIONS)
THROUGH
MARCH 31,
1997
---------------
(Restated)
Initial capitalization at inception.. $ 4,110
Notes receivable from members........ (4,110)
Net income........................... 1,799
-------
Balance, March 31, 1997.............. $ 1,799
=======
See accompanying notes.
F-72
PAH RSI, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
JANUARY 16,
1997 (INCEPTION
OF OPERATIONS)
THROUGH
MARCH 31,
1997
-----------------
(Restated)
Cash flows from operating activities:
Net income................................................................................... $ 1,799
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable.............................................. 1
Amortization............................................................................. 63
Increase in assets and liabilities:
Accounts receivable...................................................................... (2,733)
Due from Patriot American Hospitality Partnership, L.P................................... 1,058
Due from Resorts Services, Inc........................................................... (382)
Inventories.............................................................................. (76)
Prepaid expenses and other assets........................................................ 19
Other assets............................................................................. (332)
Accounts payable......................................................................... 1,112
Accrued lease payments due to Patriot American Hospitality Partnership, L.P.............. 5,879
Accrued expenses and other liabilities................................................... (573)
Accrued interest......................................................................... 237
Guest and other deposits................................................................. 988
Due to selling entities.................................................................. 5,276
-------
Net cash provided by operating activities 12,336
-------
Cash flows from investing activities:
Payment for organizational costs............................................................. (35)
Cash acquired at inception................................................................... 4,336
-------
Net cash provided by investing activities....................................................... 4,301
-------
Net increase in cash and cash equivalents....................................................... 16,637
-------
Cash and cash equivalents at end of period...................................................... $16,637
=======
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Contribution of member notes receivable...................................................... $ 4,110
=======
Issuance of note payable to Patriot American Hospitality Partnership,
L.P. for purchase of tradenames.......................................................... $ 9,000
=======
Operating liabilities assumed in exchange for receivables from Patriot American
Hospitality Partnership, L.P............................................................. $ 3,712
=======
See accompanying notes.
F-73
PAH RSI, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
PAH RSI, L.L.C. (the "PAH RSI Lessee"), a Delaware limited liability company,
was formed on January 16, 1997 to lease and operate certain hotels owned by
Patriot American Hospitality Partnership, L.P. (the "Realty Partnership"). At
March 31, 1997, Patriot American Hospitality, Inc. ("Patriot"), through its
subsidiaries, owns approximately 83.1% of the Realty Partnership. PAH RSI
Lessee, is owned jointly by Messrs. Thomas W. Lattin, Rex E. Stewart and Michael
Murphy, each of whom is an executive officer of Patriot. PAH RSI Lessee will
continue for a term of 49 years unless terminated earlier pursuant to the terms
of the limited liability company agreement. In general, members are not
personally liable for any debts or losses of PAH RSI Lessee that exceed their
respective capital contribution, except as discussed in Note 5, and losses are
generally allocated to the members in proportion to their capital contributions.
PAH RSI Lessee commenced operations and began leasing two resort properties
from the Realty Partnership on January 16, 1997. On January 17, 1997, January
29, 1997 and March 14, 1997, PAH RSI Lessee and the Realty Partnership entered
into four additional operating leases for two additional resort properties and
two hotels which were acquired by the Realty Partnership. At March 31, 1997,
PAH RSI Lessee leased six hotels as follows:
Property Name Location Guest Rooms
- ----------------------------------- ---------------------- -----------
Resorts:
Carmel Valley Ranch Carmel, California 100
The Boulders Scottsdale, Arizona 160
The Lodge at Ventana Canyon Tucson, Arizona 49
The Peaks Resort and Spa Telluride, Colorado 177
Full-service hotels:
Radisson Hotel Northbrook, Illinois 313
Luxeford Suites Hotel Minneapolis, Minnesota 230
Each hotel is leased by the Realty Partnership to PAH RSI Lessee for one-year
terms under separate participating operating lease agreements. These leases,
which require PAH RSI Lessee to maintain a minimum net worth and adequate
working capital, require payment of the greater of (1) minimum base rent or (2)
participating rent based upon certain percentages of room revenue, food and
beverage revenue, and telephone and other revenues of each of the hotels, plus
certain additional charges, as applicable.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
period January 16, 1997 (inception of operations) through March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. Significant accounting policies are summarized below.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of PAH RSI Lessee
and its wholly-owned subsidiaries, Boulders Carefree Sewer Corporation, BJV
Realty, Inc., and The Peaks Real Estate Services, Inc. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three months
or less when purchased are considered to be cash equivalents.
F-74
PAH RSI, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(in thousands, except per share data)
Inventories
Inventories, consisting of food, beverages, china, linens, silverware,
glassware, and gift and golf shop merchandise, are principally stated at the
lower of cost (generally first-in, first-out) or market.
Tradenames
Tradenames are stated at cost and are amortized using the straight-line method
over a 40-year estimated useful life.
Organization costs
Organization costs are being amortized using the straight-line method over
five years.
Revenue Recognition
Revenue is recognized upon performance of hotel-related services and delivery
of food and beverages. Credit evaluations are performed and an allowance for
doubtful accounts is provided against accounts receivable which are estimated to
be uncollectible.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management believes that the actual results will not differ materially from the
estimates used in preparing the financial statements.
Income Taxes
Under the provisions of the Internal Revenue Code and applicable state income
tax law, PAH RSI Lessee is taxed as a limited liability company, an entity which
is taxed in the same manner as a partnership and, therefore, is not subject to
taxation on income. The federal and state income tax consequences of PAH RSI
Lessee's profits and losses accrue to the limited liability company members.
Basis of Restatement
The accompanying financial statements have been restated to reflect the
correction of an error in departmental costs and other expenses and inventory
from amounts previously reported.
2. TRADENAMES:
PAH RSI Lessee acquired certain tradenames or licensing rights to certain
tradenames, including the Carefree(R) and Boulders(R) trademarks, simultaneously
with the Realty Partnership's acquisition of the four Carefree Resort
properties. The acquisition of the tradenames and licensing rights was financed
by a promissory note in the amount of $9,000 payable to a subsidiary of the
Realty Partnership (see Note 3). PAH RSI Lessee has assigned certain of these
licensing rights to Resorts Services, Inc. ("RSI"), an Arizona corporation.
Substantially all of the economic interests in RSI are owned individually by the
members of PAH RSI Lessee (see Note 4).
3. NOTES PAYABLE:
In connection with the acquisition of certain tradenames and licensing rights,
on January 17, 1997, PAH RSI Lessee issued a promissory note in the amount of
$9,000 payable to a subsidiary of the Realty Partnership. The principal amount
of the note is due January 17, 2002. Interest at an annual rate of 13% is
payable semi-annually commencing July 1, 1997.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
Participating Lease Commitments
At March 31, 1997, PAH RSI Lessee has future lease commitments to the Realty
Partnership under the participating lease agreements through March 1998.
Minimum future rental payments under these operating leases for the remainder of
the lease terms aggregate approximately $12,241. PAH RSI Lessee incurred base
rents of $2,840 and participating rents of $5,175 for the period January 16,
1997 through March 31, 1997. At March 31, 1997, PAH RSI Lessee owed the Realty
Partnership $5,879 for rents under the terms of the participating leases.
F-75
PAH RSI, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(in thousands, except per share data)
The Realty Partnership has the right to terminate all participating lease
agreements with PAH RSI Lessee. In the event such termination occurs, Patriot
will be obligated to pay PAH RSI Lessee the fair market value of the leasehold
interests. In addition, in the event of such termination, Patriot intends to
acquire the assets, including inventory, tradenames and right to receive certain
royalty fees, of PAH RSI Lessee.
Management and Franchise Agreements
The four resort properties leased by PAH RSI Lessee are managed by RSI. RSI
receives management fees per resort ranging from 2% to 3% of gross room revenue,
as defined. In addition, certain executive officers and employees of RSI are
entitled to receive an annual incentive fee equal to 10% of the excess recurring
cash flow of the resorts, as defined. All management fees payable to RSI are
subordinate to PAH RSI Lessee's obligations to the Realty Partnership under the
terms of the participating lease agreements.
The Luxeford Suites Hotel is managed by Doubletree Hotels Corporation which
receives a management fee of 3% of gross revenues, plus incentive fees if
certain operating results based on cash flow and profits (as defined) are
achieved by the hotel. The Radisson Hotel in Northbrook, Illinois is managed by
a hotel management entity affiliated with CHC International, Inc. and the Gencom
group of companies which receives a management fee of 1.5% of gross revenues, as
defined.
RSI is subject to an exclusive license agreement with PAH RSI Lessee for the
use of certain tradenames. Certain royalties may be paid to PAH RSI Lessee by
RSI if adjusted gross receipts, as defined, of RSI exceed certain thresholds.
Royalties earned in conjuction with this agreement were approximately $382 for
the three months ended March 31, 1997.
Stock Purchase Option
Pursuant to a stock option agreement dated January 17, 1997, PAH RSI Lessee's
members were granted an exclusive option to purchase all of the outstanding
voting common stock (an aggregate 625 shares of common stock, no par value per
share) of RSI for $1.00 per share. The option expires January 17, 2007.
Expense Reimbursements
PAH RSI Lessee fully reimburses the Realty Partnership for office space it
occupies within the corporate offices of Patriot and for payroll and related
costs the Realty Partnership incurs on behalf of PAH RSI Lessee. These costs
amounted to $100 for the period ended March 31, 1997. At March 31, 1997, PAH
RSI Lessee owed the Realty Partnership $100 for such reimbursements.
Payables to Selling Entities
At March 31, 1997, PAH RSI Lessee has aggregate payables of $5,276 due to
certain of the former owners of the four resort properties leased from the
Realty Partnership. These payables to selling entities are related to the
final proration of net current assets of the resort properties and are to be
repaid from the collection of such net assets.
5. MEMBERS' EQUITY:
Initial Capitalization
Each of the three members has executed a non-interest bearing demand note in
the principal amount of $1,370 in consideration of their required capital
contributions. These notes receivable from members have been offset against
members' equity in the accompanying financial statements.
Minimum Net Worth
Under the terms of the participating lease agreements, PAH RSI Lessee is
required to maintain minimum net worth, as defined, equal to 20% of the
projected annual lease payments for all resorts or hotels leased. The minimum
net worth must be composed of certain components which generally exclude
F-76
PAH RSI, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(in thousands, except per share data)
intangible assets as defined by generally accepting accounting principles. In
addition, PAH RSI Lessee is required to maintain at all times during the
participating lease term a debt to members' equity ratio of no more than four to
one.
6. LEASES:
The El Pedregal Shopping Center leases have remaining terms that range from 1
to 4 years. The leases generally provide for minimum annual rental amounts that
may be subject to cost of living increases, and for reimbursement by tenants for
common area environmental costs. Minimum future rental income under these
noncancelable operating leases for the next four years is as follows:
Year Rent Amount
---- -----------
1997............... $1,087
1998............... 666
1999............... 448
2000............... 165
------
$2,366
======
F-77
PAH RSI, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
(in thousands, except per share data)
7. PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma statements of operations are presented as
if the leases and the operation of the six hotels leased by PAH RSI Lessee had
commenced on January 1, 1996. The unaudited pro forma statements of operations
are not necessarily indicative of what the actual results of operations of PAH
RSI Lessee would have been assuming such operations had commenced as of January
1, 1996, nor do they purport to represent the results of operations for future
periods. Pro forma lessee expenses represent management fees and estimated
lessee overhead expenses and exclude pro forma interest income associated with
working capital balances.
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------- -------------
(IN THOUSANDS)
Revenue:
Rooms.................................. $13,177 $12,152
Food and beverage...................... 5,891 5,958
Telephone and other revenue............ 3,770 3,067
Club, club membership and spa revenue.. 9,054 8,729
Shopping center revenue................ 474 437
Royalty revenue........................ 458 377
------- -------
Total revenue......................... 32,824 30,720
------- -------
Expenses:
Departmental costs and expenses........ 13,827 12,897
Participating lease payments........... 9,428 8,863
General and administrative............. 1,927 1,916
Repairs and maintenance................ 2,247 2,148
Utilities.............................. 949 950
Marketing.............................. 1,405 1,442
Interest expense....................... 293 293
Insurance.............................. 130 157
------- -------
Total expenses........................ 30,206 28,666
------- -------
Income before lessee expenses........... 2,618 2,054
Lessee expenses......................... 1,602 1,450
------- -------
Net income............................. $ 1,016 $ 604
======= =======
8. SUBSEQUENT EVENTS:
On April 14, 1997. PAH RSI Lessee and the Realty Partnership entered into
an operating lease for a hotel acquired by the Realty Partnership. The lease
is substantially similar to the other participating lease agreements between PAH
RSI Lessee and the Realty Partnership. The base rent for the hotel is
anticipated to be approximately $1,864 for the year ended December 31, 1997.
F-78
NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY
INTRODUCTION TO
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
On October 31, 1996, Patriot American Hospitality, Inc., a Virginia
corporation ("Patriot"), Patriot American Hospitality Partnership, L.P., a
Virginia limited partnership (the "Realty Partnership"), California Jockey Club,
a Delaware corporation ("Cal Jockey") and Bay Meadows Operating Company, a
Delaware corporation ("Bay Meadows") entered into an agreement pursuant to which
the parties agreed to engage in a business combination. Cal Jockey and Bay
Meadows are collectively referred to herein as "CJC/BMOC". On July 1, 1997,
pursuant to an Agreement and Plan of Merger, dated as of February 24, 1997, as
amended and restated as of May 28, 1997 (the "Merger Agreement") by and among,
Patriot, Realty Partnership, Cal Jockey and Bay Meadows, Patriot was merged with
the into Cal Jockey (the "Merger") with Cal Jockey as the surviving corporation
in the Merger. The Merger and the Merger Agreement were approved by the
stockholders of Patriot, Cal Jockey and Bay Meadows at their respective Special
Meetings of Stockholders held on July 1, 1997. In connection with the Merger,
Cal Jockey's name was changed to "Patriot American Hospitality, Inc."
(hereinafter, "New Patriot REIT") and Bay Meadows' name was changed to "Patriot
American Hospitality Operating Company" (hereinafter, "New Patriot Operating
Company").
Pursuant to the Merger Agreement, each issued and outstanding share of common
stock, no par value, of Patriot (the "Patriot Common Stock"), was converted, at
the effective time, into 0.51895 shares of common stock, $.01 par value, of New
Patriot REIT (the "New Patriot REIT Common Stock") and 0.51895 shares of common
stock, $.01 par value, of New Patriot Operating Company (the "New Patriot
Operating Company Common Stock"), which shares are paired and transferable only
as a single unit (as so paired, the "Paired Shares"). In lieu of issuing
fractional Paired Shares, the Merger Agreement provided that a holder of Patriot
Common Stock otherwise entitled to such fractional Paired Shares became entitled
to receive an amount in cash (without interest), rounded to the nearest cent. As
a result of the exchange, Patriot stockholders received approximately 22,964,173
Paired Shares in connection with the Merger.
The following unaudited Pro Forma Financial Statements have been adjusted for
the purchase method of accounting whereby the Bay Meadows Racecourse facility
and related leasehold improvements owned by CJC/BMOC are adjusted to estimated
fair market value. Although CJC/BMOC issued their Paired Shares to Patriot
stockholders and are the surviving legal entities following the Merger, CJC/BMOC
are considered the acquired companies for accounting purposes as the current
Patriot stockholders hold the majority of the combined paired shares of New
Patriot REIT Common Stock and New Patriot Operating Company Common Stock
subsequent to the Merger. The fair market values of the assets and liabilities
of CJC/BMOC have been determined based upon preliminary estimates and are
subject to change as additional information is obtained. Management of Patriot
does not anticipate that the preliminary allocation of purchase costs based upon
the estimated fair market value of the assets and liabilities of CJC/BMOC will
materially change; however, the allocations of purchase costs are subject to
final determination based upon estimates and other evaluations of fair market
value as of the date of the Merger. Therefore, the allocations reflected in the
following unaudited Pro Forma Financial Statements may differ from the amounts
ultimately determined.
In the first quarter of 1997, Patriot acquired ownership interests in four
hotel properties (the "Recent Acquisitions") which include the Radisson
Overland Park Hotel in Overland Park, Kansas, the Radisson Hotel in
Northbrook, Illinois, the Luxeford Suites Hotel in Minneapolis, Minnesota and
the Holiday Inn Redmont Hotel in Birmingham, Alabama. Additionally, in April
1997, Patriot acquired the Sheraton Park Place Hotel in Minneapolis, Minnesota
and in May 1997, Patriot acquired the Myrtle Beach Hilton Oceanfront Golf
Resort. The acquisitions were financed primarily with funds drawn on Patriot's
Line of Credit.
In January 1997, Patriot acquired the Carefree Resorts for a total purchase
price of approximately $264 million. This acquisition was primarily financed
with funds drawn on Patriot's Line of Credit and the issuance of 1,295,077
units of limited partnership interest of the Realty Partnership ("OP Units").
Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel and
the Marriott WindWatch Hotel (which are separately owned through two special
purpose non-controlled entities), to lesses who are responsible for operating
the hotels (the "Lessees"). Patriot's investments in these two special purpose
entities are accounted for using the equity method of accounting and Patriot's
share of their net income is reflected in Equity in Earnings of Unconsolidated
Subsidiaries in the accompanying unaudited Pro Forma Financial Statements. The
Lessees, in turn, have entered into separate agreements with hotel management
entities (the "Operators") to manage the hotels. Following the Merger, New
Patriot REIT expects to terminate its leases with PAH RSI, L.L.C., a limited
liability company owned by certain executive officers of Patriot ("PAH RSI
Lessee")
F-79
relating to the Carefree Resorts, the Radisson Northbrook Hotel, the Luxeford
Suites Hotel, the Sheraton Park Place Hotel and the Myrtle Beach Hilton
Oceanfront Golf Resort and re-lease such hotel properties to New Patriot
Operating Company. In addition, it is anticipated that New Patriot Operating
Company will offer to acquire certain assets of PAH RSI Lessee including
inventories, trade names and the right to receive certain royalty fees
subsequent to the Merger and the Related Transactions.
As of March 31, 1997 Patriot owned interests in 54 hotels and resorts and
had an approximate 83.1% interest in the Realty Partnership. This ownership
interest in the Realty Partnership is also reflected for unaudited Pro Forma
Financial Statement presentation purposes.
Patriot and PaineWebber Incorporated ("PaineWebber") have entered into an
agreement pursuant to which following the close of the Merger an affiliate of
PaineWebber will purchase substantially all of the land of Cal Jockey excluding
the land subject to a certain lease (the "Borders Lease"), for a purchase price
of $78.05 million (the "PaineWebber Land Sale"). New Patriot REIT will retain
ownership of the improvements located on the land. Simultaneously with the
consummation of such purchase, the PaineWebber affiliate and New Patriot REIT
have entered into a ground lease covering that portion of the land on which the
Bay Meadows Racecourse (sometimes referred to herein as the "Racecourse") is
situated. New Patriot REIT has subleased the Racecourse land and related
improvements to New Patriot Operating Company.
In addition, Patriot has agreed in principle to loan an aggregate of $103
million to partnerships affiliated with the members of CHC Lease Partners to
enable such partnerships to refinance existing indebtedness relating to four
hotels, the Sheraton Grand Hotel in Tampa, the Sheraton Gateway Hotel in Miami
(also known as the River House Hotel), the Grand Bay Hotel in Miami, and the
Doubletree Hotel in Glenview, Illinois. The loans would mature in two years,
bear interest at a rate per annum equal to 30-day LIBOR plus 2.75%, and would be
secured by first priority liens on the assets of the respective partnerships,
including first mortgages on the hotels.
The following unaudited Pro Forma Condensed Combined Statements of Operations
assume the following transactions have occurred at the beginning of the periods
presented: (i) the Merger and the related transactions have been consummated on
terms set forth in the Merger Agreement; (ii) the PaineWebber Land Sale has been
consummated, the PaineWebber affiliate has leased that portion of the land upon
which the Racecourse is situated to New Patriot REIT, and New Patriot REIT has
subleased this land to New Patriot Operating Company; (iii) New Patriot REIT has
leased certain land to Borders, Inc. ("Borders"); (iv) Patriot has acquired the
Recent Acquisitions and the Carefree Resorts and (v) the mortgage notes to
affiliates of CHC Lease Partners have been funded. In addition, the unaudited
Pro Forma Combined Balance Sheet data is presented as if the transactions
discussed above had occurred on March 31, 1997.
The following unaudited Pro Forma Condensed Combined Statements of Operations
for the year ended December 31, 1996 and the three months ended March 31, 1997
of New Patriot REIT and New Patriot Operating Company are derived from the
individual unaudited Pro Forma Condensed Consolidated Statements of Operations
of New Patriot REIT and New Patriot Operating Company included in this report on
pages F-88 through F-93. These Pro Forma Condensed Combined Statements of
Operations are also derived from the unaudited Pro Forma Condensed Consolidated
Statements of Operations of Patriot (Pre-Merger) which have been included in
this report on pages F-99 through F-102. Such pro forma information is based in
part upon the Separate and Combined Statements of Income of CJC/BMOC filed with
CJC/BMOC's Annual Report on Form 10-K for the year ended December 31, 1996 and
Quarterly Report on Form 10-Q for the three months ended March 31, 1997, as
amended; the Consolidated Statements of Operations of Patriot filed with
Patriot's Annual Report on Form 10-K for the year ended December 31, 1996 and
Quarterly Report on Form 10-Q for the three months ended March 31, 1997; the
historical financial statements of certain hotels acquired by Patriot filed in
Patriot's Current Reports on Form 8-K dated April 2, 1996, as amended, December
5, 1996 and January 16, 1997, as amended; and the Pro Forma Condensed Combined
Statements of Operations of the Lessees which have been included in this report
on pages F-95 and F-96. In management's opinion, all material adjustments
necessary to reflect the effects of these transactions have been made. The
following unaudited Pro Forma Condensed Combined Statements of Operations do not
include the results of operations of the Sheraton Park Place Hotel acquired by
Patriot in April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort
acquired by Patriot in May 1997.
The following unaudited Pro Forma Condensed Combined Statements of
Operations are not necessarily indicative of what the actual results of
operations of New Patriot REIT and New Patriot Operating Company would have
been assuming such transactions had been completed as of the beginning of the
period presented, nor do they purport to represent the results of operations
for future periods. Further, the unaudited Pro Forma Condensed Combined
Statement of Operations for the interim period ended March 31, 1997 is not
necessarily indicative of the results of operations for the full year.
F-80
NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
NEW PATRIOT
NEW PATRIOT OPERATING
REIT COMPANY PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
----------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Participating lease rev-
enue................... $130,570 $ -- $(25,967)(A) $104,603
Hotel revenue........... -- 58,685(B) -- 58,685
Club and spa revenue.... -- 24,710 -- 24,710
Racecourse facility rev-
enue................... 6,682 51,946 (6,348)(C) 52,280
Club membership reve-
nue.................... -- 4,277 -- 4,277
Shopping center reve-
nue.................... -- 1,730 -- 1,730
Interest and other in-
come................... 10,765 12,274 (1,204)(D) 21,835
-------- -------- -------- --------
Total revenue........... 148,017 153,622 (33,519) 268,120
-------- -------- -------- --------
Expenses:
Departmental costs--ho-
tel operations......... -- 47,280 -- 47,280
Racing facility opera-
tions.................. -- 47,180 (6,348)(C) 40,832
Ground lease expense.... 5,354 -- -- 5,354
General and administra-
tive................... 5,992 10,181 (34)(D) 16,139
Repair and maintenance.. -- 8,045 -- 8,045
Utilities............... -- 4,082 -- 4,082
Interest expense........ 45,201 1,300 (1,170)(D) 45,331 (E)
Real estate and personal
property taxes and ca-
sualty insurance....... 13,372 398 -- 13,770
Marketing............... -- 7,767 -- 7,767
Management fees......... -- 3,194 -- 3,194
Depreciation and amorti-
zation................. 38,335 1,072 -- 39,407
Participating lease pay-
ments.................. -- 25,967 (25,967)(A) --
General liability insur-
ance................... -- 656 -- 656
-------- -------- -------- --------
Total expenses.......... 108,254 157,122 (33,519) 231,857
-------- -------- -------- --------
Income (loss) before eq-
uity in earnings of un-
consolidated subsidiar-
ies, income tax provi-
sion and minority inter-
ests.................... 39,763 (3,500) -- 36,263
Equity in earnings of
unconsolidated subsidi-
aries.................. 7,560 -- -- 7,560
-------- -------- -------- --------
Income (loss) before in-
come tax provision and
minority interests...... 47,323 (3,500) -- 43,823
Income tax provision.... -- (62) -- (62)
-------- -------- -------- --------
Income (loss) before mi-
nority interests........ 47,323 (3,562) -- 43,761
Minority interest in the
Realty Partnerships.... (6,548) 499 -- (6,049)
Minority interest in
other partnerships..... (553) -- -- (553)
-------- -------- -------- --------
Net income (loss) appli-
cable to common share-
holders................. $ 40,222 $ (3,063) $ -- $ 37,159 (E)
======== ======== ======== ========
Net income (loss) per
common paired share(F).. $ 1.40 $ (0.11) $ 1.29 (E)
======== ======== ========
Weighted average number
of common paired shares
and common paired share
equivalents
outstanding............. 28,793 28,793 28,793 (E)
======== ======== ========
- --------
(A) Represents elimination of participating lease revenue and expense related
to the six hotel properties leased by New Patriot REIT to New Patriot
Operating Company.
(B) Hotel revenue includes revenue from rooms of $38,940 and food and beverage
sales of $19,745.
(C) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by New Patriot REIT to New Patriot
Operating Company.
(D) Represents the elimination of $1,170 of interest income and expense
related to a note receivable issued to Patriot in connection with the sale
of certain assets to PAH RSI Lessee, which assets are assumed to be
acquired by New Patriot Operating Company, and the elimination of other
intercompany income and expense items.
(E) The pro forma amounts presented assume an average interest rate of 7.2502%
per annum (representing LIBOR plus 1.7%) on the outstanding debt
obligations with a term of three years. An increase of 0.25% in the
interest rate would increase pro forma interest expense to $46,652,
decrease net income applicable to common shareholders to $36,244 and
decrease net income per common share to $1.26.
F-81
Patriot has entered into a commitment letter with PaineWebber Real Estate
and The Chase Manhattan Bank ("Chase") which will modify and extend the Line
of Credit up to $700,000 and provide for a term loan of $500,000 (the "New
Credit Facility"). The additional availability under this New Credit
Facility will be primarily used to finance future acquisitions. In the event
Patriot is successful in obtaining the New Credit Facility, deferred loan
costs totaling approximately $16,325, including fees, legal Credit Facility
(of which approximately $10,150 relates to the modification and extension of
the Line of Credit and has been reflected in the pro forma financial
information).
(F) In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 Earnings Per Share
("Statement 128"). Statement 128 specifies the computation, presentation
and disclosure requirements for basic earnings per share and diluted
earnings per share. Management believes that adoption of Statement 128
will not have a material effect on the earnings per share of New Patriot
REIT and New Patriot Operating Company.
F-82
NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
NEW PATRIOT
NEW PATRIOT OPERATING
REIT COMPANY PRO FORMA
PRO FORMA PRO FORMA ELIMINATIONS TOTAL
----------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Participating lease rev-
enue................... $36,551 $ -- $ (9,428)(A) $27,123
Hotel revenue........... -- 19,068(B) -- 19,068
Club and spa revenue.... -- 8,706 -- 8,706
Racecourse facility rev-
enue................... 1,760 20,269 (1,677)(C) 20,352
Club membership reve-
nue.................... -- 348 -- 348
Shopping center reve-
nue.................... -- 474 -- 474
Interest and other in-
come................... 2,669 4,459 (317)(D) 6,811
------- ------- -------- -------
Total revenue........... 40,980 53,324 (11,422) 82,882
------- ------- -------- -------
Expenses:
Departmental costs--ho-
tel operations......... -- 13,828 -- 13,828
Racing facility opera-
tions.................. -- 16,949 (1,677)(C) 15,272
Ground lease expense.... 1,336 -- -- 1,336
General and administra-
tive................... 3,502 2,591 -- 6,093
Repair and maintenance.. -- 2,247 -- 2,247
Utilities............... -- 949 -- 949
Interest expense........ 11,709 319 (317)(D) 11,711(E)
Real estate and personal
property taxes and ca-
sualty insurance....... 3,404 129 -- 3,533
Marketing............... -- 1,870 -- 1,870
Management fees......... -- 1,482 -- 1,482
Depreciation and amorti-
zation................. 9,862 268 -- 10,130
Participating lease pay-
ments.................. -- 9,428 (9,428)(A) --
General liability insur-
ance................... -- 252 -- 252
------- ------- -------- -------
Total expenses.......... 29,813 50,312 (11,422) 68,703
------- ------- -------- -------
Income (loss) before eq-
uity in earnings of un-
consolidated subsidiar-
ies, income tax provi-
sion and minority inter-
ests.................... 11,167 3,012 -- 14,179
Equity in earnings of
unconsolidated subsidi-
aries.................. 1,021 -- -- 1,021
------- ------- -------- -------
Income (loss) before in-
come tax provision and
minority interests...... 12,188 3,012 -- 15,200
Income tax provision.... -- (1,205) -- (1,205)
------- ------- -------- -------
Income (loss) before mi-
nority interests........ 12,188 1,807 -- 13,995
Minority interest in the
Realty Partnerships.... (1,676) (253) -- (1,929)
Minority interest in
other partnerships..... (219) -- -- (219)
------- ------- -------- -------
Net income (loss) appli-
cable to common share-
holders................. $10,293 $ 1,554 $ -- $11,847 (E)
======= ======= ======== =======
Net income (loss) per
common paired share(F).. $ 0.35 $ 0.05 $ 0.40 (E)
======= ======= =======
Weighted average number
of common paired shares
and common paired share
equivalents
outstanding............. 29,074 29,074 29,074 (E)
======= ======= =======
- --------
(A) Represents elimination of participating lease revenue and expense related
to the six hotel properties leased by New Patriot REIT to New Patriot
Operating Company.
(B) Hotel revenue includes revenue from rooms of $13,177 and food and beverage
sales of $5,891.
(C) Represents elimination of rental income and expense related to the
Racecourse facility and land leased by New Patriot REIT to New Patriot
Operating Company.
(D) Represents the elimination of $293 of interest income and expense related
to a note receivable issued to Patriot in connection with the sale of
certain assets to PAH RSI Lessee, which assets are assumed to be acquired
by New Patriot Operating Company, and the elimination of other
intercompany income and expense items.
(E) The pro forma amounts presented assume an average interest rate of 7.2012%
per annum (representing LIBOR plus 1.7%) on the outstanding debt
obligations with a term of three years. An increase of 0.25% in the
interest rate would increase pro forma interest expense to $12,073 and
decrease net income applicable to common shareholders to $11,590. Net
income per common share would be unchanged.
F-83
Patriot has entered into a Commitment Letter with PaineWebber Real Estate
and Chase which will modify and extend the Line of Credit up to $700,000 and
provide for a term loan of $500,000. The additional availability under this
New Credit Facility will be primarily used to finance future acquisitions.
In the event Patriot is successful in obtaining the New Credit Facility,
deferred loan costs totaling approximately $16,325, including fees, legal
and other expenses are expected to be incurred in connection with the New
Credit Facility (of which approximately $10,150 relates to the modification
and extension of the Line of Credit and has been reflected in the pro forma
financial information).
(F) In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 which specifies the computation, presentation and
disclosure requirements for basic earnings per share and diluted earnings
per share. Management believes that adoption of Statement 128 will not
have a material effect on the earnings per share of New Patriot REIT and
New Patriot Operating Company.
F-84
NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited Pro Forma Condensed Combined Balance Sheet is
presented as if the Merger and the related transactions, as well as (i) the
sale of substantially all of the Cal Jockey land to an affiliate of
PaineWebber, (ii) the subsequent leaseback of certain land by New Patriot REIT
on which the Racecourse is situated, (iii) the sub-lease of the Racecourse
land and related improvements from New Patriot REIT to New Patriot Operating
Company, and (iv) the lease of certain land of New Patriot REIT to Borders,
had occurred as of March 31, 1997. The following unaudited Pro Forma Condensed
Combined Balance Sheet is also derived from Patriot's Pro Forma Condensed
Consolidated Balance Sheet as of March 31, 1997 included elsewhere in this
Report on Form 8-K which is presented as if the funding of the mortgage notes to
affiliates of CHC Lease Partners had occurred as of March 31, 1997. Such pro
forma information is based in part upon CJC/BMOC's Combined Balance Sheet as of
March 31, 1997 and Patriot's Consolidated Balance Sheet as of March 31, 1997 and
should be read in conjunction with the financial statements filed with
CJC/BMOC's and Patriot's respective Quarterly Reports on Form 10-Q for the three
months ended March 31, 1997. In management's opinion, all material adjustments
necessary to reflect the effect of these transactions have been made. The
following unaudited Pro Forma Condensed Combined Balance Sheet does not include
the Sheraton Park Place Hotel acquired by Patriot in April 1997 and the Myrtle
Beach Hilton Oceanfront Golf Resort acquired by Patriot in May 1997.
Although Cal Jockey and Bay Meadows issued their Paired Shares to Patriot
stockholders and are the surviving legal entities following the Merger, CJC/BMOC
are considered the acquired companies for accounting purposes as the current
Patriot stockholders hold the majority of paired shares of the combined
companies subsequent to the Merger. Accordingly, the accompanying Pro Forma
Condensed Combined Balance Sheet reflects adjustments to record the net assets
of CJC/BMOC at their estimated fair market values and the elimination of
CJC/BMOC's historical shareholders' equity. The fair market values of the assets
and liabilities of CJC/BMOC have been determined based upon preliminary
estimates and are subject to change as additional information is obtained.
Management of Patriot does not anticipate that the preliminary allocation of
purchase costs based upon the estimated fair market value of the assets and
liabilities of CJC/BMOC will materially change; however, the allocations of
purchase costs are subject to final determination based upon estimates and other
evaluations of fair market value as of the date of the Merger. Therefore, the
allocations reflected in the following unaudited Pro Forma Condensed Combined
Balance Sheet may differ from the amounts ultimately determined. The following
unaudited Pro Forma Condensed Combined Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of March 31, 1997, nor does it purport to
represent the future financial position of New Patriot REIT and New Patriot
Operating Company.
F-85
NEW PATRIOT REIT AND NEW PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
CJC/
PATRIOT BMOC PRO FORMA
PRO FORMA HISTORICAL ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------
ASSETS
Net investment in hotel and
resort properties and land
held for sale.............. $ 947,722 $ -- $ -- $ 947,722
Net investment in Racecourse
facility and related im-
provements................. -- 18,800 5,465 (A) 24,265
Mortgage notes and other re-
ceivables from unconsoli-
dated subsidiaries......... 73,622 -- -- 73,622
Notes receivable............ 113,189 -- (9,237)(B) 103,952
Investment in unconsolidated
subsidiaries............... 12,140 -- -- 12,140
Cash and equivalents........ 6,271 7,708 -- 13,979
Restricted cash............. -- -- 78,050 (C) 78,050
Securities available for
sale....................... -- 5,609 -- 5,609
Accounts receivable......... 15,648 1,269 -- 16,917
Goodwill.................... -- -- 97,216 (D) 97,216
Deferred expenses, net...... 14,447 -- -- 14,447
Prepaid expenses and other
assets..................... 12,009 733 6,337 (B) 19,079
Deferred income taxes....... -- 227 -- 227
---------- ------- -------- ----------
Total assets............... $1,195,048 $34,346 $177,831 $1,407,225
========== ======= ======== ==========
LIABILITIES AND SHAREHOLD-
ERS' EQUITY
Borrowings under a line of
credit and mortgage notes.. $ 579,862 $ -- $ -- (G) $ 579,862
Dividends and distributions
payable.................... 13,938 -- -- 13,938
Accounts payable and accrued
expenses................... 13,498 7,738 14,252 (E) 35,488
Note payable................ -- 2,900 (2,900)(B) --
Due to unconsolidated sub-
sidiaries.................. 6,098 -- -- 6,098
Minority interest in the
Realty Partnership......... 127,262 -- -- 127,262
Minority interest in other
partnerships............... 13,774 -- -- 13,774
Shareholders' equity:
Preferred stock............ -- -- -- --
Common stock............... -- 116 457 (F) 573
Paid-in capital............ 457,178 18,385 171,229 (G) 646,792
Unearned stock compensa-
tion, net................. (16,261) -- -- (16,261)
Unrealized gain on securi-
ties available for sale... -- 1,323 (1,323)(G) --
Retained earnings.......... (301) 3,884 (3,884)(G) (301)
---------- ------- -------- ----------
Total shareholders' equi-
ty........................ 440,616 23,708 166,479 630,803
---------- ------- -------- ----------
Total liabilities and
shareholders' equity...... $1,195,048 $34,346 $177,831 $1,407,225
========== ======= ======== ==========
- --------
(A) Represents adjustment for the purchase method of accounting whereby the
Racecourse facility and related leasehold improvements owned by CJC/BMOC
are adjusted to estimated fair market value after the sale of
substantially all of the Cal Jockey land to an affiliate of PaineWebber
for $78,050.
(B) Represents the elimination of $9,237 notes receivable and accrued interest
between New Patriot REIT and PAH RSI Lessee which relate to certain
assets, trade names and the right to receive certain royalty fees which
are to be acquired by New Patriot Operating Company. In addition, the
$2,900 note payable between CJC/BMOC and Patriot issued in connection with
the Merger has been eliminated.
(C) Represents the cash proceeds from the sale of substantially all of the Cal
Jockey land to an affiliate of PaineWebber. It is assumed that the sale of
the land will be structured as a tax-deferred exchange. In order to
qualify as a tax-deferred exchange, suitable properties must be located
and exchanged and the exchange must be effectuated within a relatively
short time period allowed by applicable IRS regulations. Until such time
that suitable properties are located, the proceeds from the sale of land
will be maintained in a restricted trust account.
(D) Represents the purchase consideration in excess of the fair market value
of the net assets of CJC/BMOC. Patriot primarily attributes this amount to
the paired share structure that, subsequent to the Merger, will enable New
Patriot REIT and New Patriot Operating Company to be a fully integrated
owner and operator of hotels. The paired share tax treatment is no longer
available under the Code; however, CJC/BMOC is one of only four publicly-
held companies in existence for which this structure has been
"grandfathered."
(E) Represents adjustment for accrued Merger costs including, legal and
accounting fees, printing and various other professional fees anticipated
in connection with the Merger and the related transactions.
F-86
(F) Represents the exchange of shares of Patriot Common Stock for paired shares
of New Patriot REIT Common Stock and New Patriot Operating Company Common
Stock. Pursuant to the Merger Agreement, Patriot stockholders received, for
each share of Patriot Common Stock held by them at the time the Merger
became effective, 0.51895 shares of New Patriot REIT Common Stock and
0.51895 shares of New Patriot Operating Company Common Stock, which shares
are paired and transferable only as a single unit. At March 31, 1997,
Patriot had 44,093,496 shares of Patriot Common Stock outstanding which were
exchanged for approximately 22,882,320 paired shares of New Patriot REIT
Common Stock and New Patriot Operating Company Common Stock, resulting in an
increase in common stock of approximately $457, which has been offset by a
corresponding adjustment to Paid-in Capital.
(G) Pursuant to the Merger Agreement, Patriot stockholders received 0.51895
shares of New Patriot REIT Common Stock and 0.51895 shares of New Patriot
Operating Company Common Stock for each Patriot share. The estimated value
of the CJC/BMOC shares, based on the closing price of Patriot shares on
October 30, 1996, of $17.125 (adjusted for the 2-for-1 stock split), is
$33.00 per paired share. Based on 5,763,257 CJC/BMOC Paired Shares
outstanding, the total purchase consideration is approximately $190,187. The
adjustments to shareholders' equity eliminate CJC/BMOC historical equity
accounts totaling $23,708 and record equity based on the number of Paired
Shares held by CJC/BMOC that remain outstanding after the Merger at $33.00
per Paired Share.
F-87
NEW PATRIOT REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
PATRIOT CAL JOCKEY
PRO FORMA HISTORICAL MERGER PRO FORMA
(A) (B) ADJUSTMENTS TOTAL
--------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Participating lease revenue..... $130,570 $ -- $ -- $130,570
Rental of Racecourse facility
and land....................... -- 4,918 1,764 (C) 6,682
Interest and other income....... 10,271 494 -- 10,765
-------- ------- ------ --------
Total revenue................... 140,841 5,412 1,764 148,017
-------- ------- ------ --------
Expenses:
Ground lease expense............ 1,390 -- 3,964 (D) 5,354
General and administrative...... 5,342 5,696 (5,046)(E) 5,992
Interest expense................ 45,201 -- -- 45,201
Real estate and personal prop-
erty taxes and casualty insur-
ance........................... 13,372 -- -- 13,372
Depreciation and amortization... 35,123 932 2,280 (F) 38,335
-------- ------- ------ --------
Total expenses.................. 100,428 6,628 1,198 108,254
-------- ------- ------ --------
Income (loss) before equity in
earnings of unconsolidated sub-
sidiaries and minority inter-
ests............................ 40,413 (1,216) 566 39,763
Equity in earnings of unconsoli-
dated subsidiaries............. 7,560 -- -- 7,560
-------- ------- ------ --------
Income (loss) before minority in-
terests......................... 47,973 (1,216) 566 47,323
Minority interest in the Patriot
Partnership.................... (8,014) -- 1,466 (G) (6,548)
Minority interest in other part-
nerships....................... (553) -- -- (553)
-------- ------- ------ --------
Net income (loss) applicable to
common shareholders............. $ 39,406 $(1,216) $2,032 $ 40,222
======== ======= ====== ========
Net income (loss) per common
share(H)........................ $ 0.89 $ (0.21) $ 1.40
======== ======= ========
Weighted average number of common
shares and common share equiva-
lents outstanding............... 44,378 5,763 28,793
======== ======= ========
- --------
(A) Represents Patriot's pro forma results of operations for the year ended
December 31, 1996. See page F-99.
(B) Represents the historical results of operations of Cal Jockey for the year
ended December 31, 1996.
(C) Represents adjustments to Racecourse facility rental revenue as a result
of (i) the lease agreement between New Patriot REIT and New Patriot
Operating Company subsequent to the Merger and the related transactions
and the PaineWebber Land Sale and (ii) rental income related to the Borders
Lease.
(D) Represents ground lease payments to be made with respect to the ground lease
with an affiliate of PaineWebber.
(E) Represents adjustment for certain administrative salaries and other
expenses not expected to be incurred by New Patriot REIT of $568 and
approximately $1,194 of non-recurring legal fees and Merger related costs
of $3,284.
(F) Represents adjustment to reduce depreciation related to the Racecourse
facility by $93, offset by amortization of goodwill of $2,373 which
results from the adjustment for purchase method of accounting whereby the
Racecourse facility and retained leasehold improvements owned by CJC/BMOC
are adjusted to estimated fair market value. Depreciation is computed
using the straight-line method and is based upon the estimated useful
lives of 20 years for the Racecourse facility and 5 to 7 years for F, F &
E. These estimated useful lives are based on management's knowledge of the
properties and the industry in general. Amortization of goodwill is
computed using the straight-line method over a 40 year estimated useful
life. Because the paired share structure is "grandfathered" under the
Code, Patriot believes the life of the paired share structure is
perpetual. Under generally accepted accounting principles, however, the
maximum amortization period is 40 years for intangible assets.
(G) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Merger of approximately
14.0%.
(H) In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a
material effect on the earnings per share of New Patriot REIT.
F-88
NEW PATRIOT REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
PATRIOT CAL JOCKEY
PRO FORMA HISTORICAL MERGER PRO FORMA
(A) (B) ADJUSTMENTS TOTAL
--------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Participating lease revenue...... $36,551 $ -- $ -- $36,551
Rental of Racecourse facility and
land............................ -- 1,660 100 (C) 1,760
Interest and other income........ 2,555 114 -- 2,669
------- ------ ----- -------
Total revenue.................... 39,106 1,774 100 40,980
------- ------ ----- -------
Expenses:
Ground lease expense............. 345 -- 991 (D) 1,336
General and administrative....... 3,461 456 (415)(E) 3,502
Interest expense................. 11,709 36 (36)(F) 11,709
Real estate and personal property
taxes and casualty insurance.... 3,380 24 -- 3,404
Depreciation and amortization.... 9,064 239 559 (G) 9,862
------- ------ ----- -------
Total expenses................... 27,959 755 1,099 29,813
------- ------ ----- -------
Income (loss) before equity in
earnings of unconsolidated sub-
sidiaries and minority inter-
ests............................. 11,147 l,019 (999) 11,167
Equity in earnings of unconsoli-
dated subsidiaries.............. 1,021 -- -- 1,021
------- ------ ----- -------
Income (loss) before minority in-
terests.......................... 12,168 1,019 (999) 12,188
Minority interest in the Patriot
Partnership..................... (2,019) -- 343 (H) (1,676)
Minority interest in other part-
nerships........................ (219) -- -- (219)
------- ------ ----- -------
Net income (loss) applicable to
common shareholders.............. $ 9,930 $1,019 $(656) $10,293
======= ====== ===== =======
Net income (loss) per common
share(I)......................... $ 0.22 $ 0.18 $ 0.35
======= ====== =======
Weighted average number of common
shares and common share equiva-
lents outstanding................ 44,919 5,763 29,074
======= ====== =======
- --------
(A) Represents Patriot's pro forma results of operations for the three months
ended March 31, 1997. See page F-101.
(B) Represents the historical results of operations of Cal Jockey for the
three months ended March 31, 1997.
(C) Represents adjustments to Racecourse facility rental revenue as a result of
(i) the lease agreement between New Patriot REIT and New Patriot Operating
Company subsequent to the Merger and the related transactions and the
PaineWebber Land Sale and (ii) rental income related to the Borders Lease.
(D) Represents ground lease payments to be made with respect to the ground lease
with an affiliate of PaineWebber.
(E) Represents adjustment for non-recurring legal fees and Merger-related
costs not expected to be incurred by New Patriot REIT.
(F) Represents elimination of $36 of interest expense related to the $2,900
note payable between CJC/BMOC and Patriot.
(G) Represents adjustment to reduce depreciation related to the Racecourse
facility by $30, offset by amortization of goodwill of $589 which results
from the adjustment for purchase method of accounting whereby the
Racecourse facility and retained leasehold improvements owned by CJC/BMOC
are adjusted to estimated fair market value. Depreciation is computed
using the straight-line method and is based upon the estimated useful
lives of 20 years for the Racecourse facility and 5 to 7 years for F, F &
E. These estimated useful lives are based on management's knowledge of the
properties and the industry in general. Amortization of goodwill is
computed using the straight-line method over a 40 year estimated useful
life. Because the paired share structure is "grandfathered" under the
Code, Patriot believes the life of the paired share structure is
perpetual. Under generally accepted accounting principles, however, the
maximum amortization period is 40 years for intangible assets.
(H) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Merger of approximately
14.0%.
(I) In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a
material effect on the earnings per share of New Patriot REIT.
F-89
NEW PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
PRO FORMA ADJUSTMENTS
---------------------------------------
BAY
MEADOWS CAREFREE RECENT
HISTORICAL RESORTS ACQUISITIONS PRO FORMA
(A) (B) (C) ADJUSTMENTS TOTAL
---------- -------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Room revenue........... $ -- $29,251 $ 9,689 $ -- $ 38,940
Food and beverage...... -- 17,356 2,389 -- 19,745
Club and spa revenue... -- 24,710 -- -- 24,710
Pari-mutuel revenue.... 41,476 -- -- -- 41,476
Other racing income.... 10,470 -- -- -- 10,470
Club membership reve-
nue................... -- 4,277 -- -- 4,277
Shopping center reve-
nue................... -- 1,730 -- -- 1,730
Telephone and other ho-
tel revenue........... -- 9,569 769 -- 10,338
Interest and other in-
come.................. 1,526 410 -- -- 1,936
------- ------- ------- ----- --------
Total revenue.......... 53,472 87,303 12,847 -- 153,622
------- ------- ------- ----- --------
Expenses:
Departmental costs--
hotel, club and spa
operations............ -- 42,175 5,105 -- 47,280
Direct operating costs
of racing facility.... 20,950 -- -- -- 20,950
Purses and incentive
awards................ 17,054 -- -- -- 17,054
Commissions, concession
costs and Racecourse
facility rental....... 8,483 -- -- 693 (D) 9,176
General and administra-
tive.................. 3,552 6,229 961 (561)(E) 10,181
Repair and mainte-
nance................. -- 7,386 659 -- 8,045
Utilities.............. -- 3,480 602 -- 4,082
Marketing.............. 1,436 5,589 742 -- 7,767
Management fees........ -- 2,971 223 -- 3,194
Depreciation and amor-
tization.............. 754 -- -- 318 (F) 1,072
Participating lease
payments.............. -- 21,464 (G) 4,503 (G) -- 25,967
Interest expense....... 130 1,170 (H) -- -- 1,300
Real estate and per-
sonal property taxes
and insurance......... 398 -- -- -- 398
General liability
insurance............. -- 492 164 -- 656
------- ------- ------- ----- --------
Total expenses......... 52,757 90,956 12,959 450 157,122
------- ------- ------- ----- --------
Income (loss) before
income tax provision
and minority interest.. 715 (3,653) (112) (450) (3,500)
Income tax (provision)
benefit............... (260) -- -- 198 (I) (62)
------- ------- ------- ----- --------
Income (loss) before
minority interest...... 455 (3,653) (112) (252) (3,562)
Minority interest in
the Patriot Operating
Partnership........... -- 511 (J) 16 (J) (28) (J) 499
------- ------- ------- ----- --------
Net income (loss)
applicable to common
shareholders........... $ 455 $(3,142) $ (96) $(280) $ (3,063)
======= ======= ======= ===== ========
Net income (loss) per
common share(K)........ $ 0.08 $ (0.11)
======= ========
Weighted average number
of common shares and
common share
equivalents
outstanding............ 5,763 28,793
======= ========
- --------
(A) Represents the historical results of operations of Bay Meadows for the
year ended December 31, 1996.
(B) Represents adjustments to New Patriot Operating Company's results of
operations assuming the Carefree Resort properties had been leased to New
Patriot Operating Company at the beginning of the period presented.
(C) Represents adjustments to New Patriot Operating Company's results of
operations assuming the Radisson Northbrook Hotel and the Luxeford Suites
Hotel had been leased to New Patriot Operating Company at the beginning of
the period presented.
(D) Represents adjustment to Racecourse facility rental expense as a result of
(i) the lease agreement between New Patriot REIT and New Patriot Operating
Company subsequent to the Merger and the related transactions and (ii) the
PaineWebber Land Sale.
F-90
(E) Represents adjustment for estimated incremental general and administrative
expenses of approximately $300 and certain expenses not expected to be
incurred by New Patriot Operating Company of $861, including approximately
$472 of non-recurring legal fees and approximately $389 of Merger-related
costs.
(F) Represents an increase in depreciation of furniture and equipment of $245,
and amortization of goodwill of $73 which results from the adjustment for
purchase method of accounting whereby the furniture and equipment owned by
Bay Meadows is adjusted to estimated fair market value. Depreciation is
computed using the straight-line method and is based upon the estimated
useful lives of 5 to 7 years for F, F & E. Amortization of goodwill is
computed using the straight-line method over a 40 year estimated useful
life. Because the paired share structure is "grandfathered" under the
Code, Patriot believes the life of the paired share structure is
perpetual. Under generally accepted accounting principles, however, the
maximum amortization period is 40 years for intangible assets.
(G) Represents lease payments from New Patriot Operating Company to New
Patriot REIT calculated on a pro forma basis by applying the provisions of
the Participating Leases to the historical revenue of the hotels for the
period presented.
(H) Represents interest expense incurred on promissory notes issued to the
Realty Partnership by PAH RSI Lessee in connection with the acquisition
of certain assets, which assets are assumed to be acquired by New Patriot
Operating Company.
(I) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma operating loss of the Carefree Resorts and
the pro forma adjustments to Bay Meadows for the year ended December 31,
1996.
(J) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Merger of approximately
14.0%.
(K) In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a
material effect on the earnings per share of New Patriot Operating
Company.
F-91
NEW PATRIOT OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
PRO FORMA ADJUSTMENTS
--------------------------------------
BAY
MEADOWS CAREFREE RECENT
HISTORICAL RESORTS ACQUISITIONS PRO FORMA
(A) (B) (C) ADJUSTMENTS TOTAL
---------- -------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Room revenue........... $ -- $11,059 $2,118 $ -- $13,177
Food and beverage...... -- 5,440 451 -- 5,891
Club and spa revenue... -- 8,706 -- -- 8,706
Pari-mutuel revenue.... 17,099 -- -- -- 17,099
Other racing income.... 3,170 -- -- -- 3,170
Club membership reve-
nue................... -- 348 -- -- 348
Shopping center reve-
nue................... -- 474 -- -- 474
Telephone and other ho-
tel revenue........... -- 3,588 181 -- 3,769
Interest and other in-
come.................. 232 458 -- -- 690
------- ------- ------ ----- -------
Total revenue.......... 20,501 30,073 2,750 -- 53,324
------- ------- ------ ----- -------
Expenses:
Departmental costs--
hotel, club and spa
operations............ -- 12,670 1,158 -- 13,828
Direct operating costs
of racing facility.... 6,608 -- -- -- 6,608
Purses and incentive
awards................ 7,240 -- -- -- 7,240
Commissions, concession
costs and Racecourse
facility rental....... 3,084 -- -- 17 (D) 3,101
General and administra-
tive.................. 783 1,809 248 (249)(E) 2,591
Repair and mainte-
nance................. -- 2,105 142 -- 2,247
Utilities.............. -- 759 190 -- 949
Marketing.............. 465 1,185 220 -- 1,870
Management fees........ -- 1,425 57 -- 1,482
Depreciation and amor-
tization.............. 181 -- -- 87 (F) 268
Participating lease
payments.............. -- 8,292 (G) 1,136 (G) -- 9,428
Interest expense....... 26 293 (H) -- -- 319
Real estate and per-
sonal property taxes
and insurance......... 129 -- -- -- 129
General liability
insurance............. 122 108 22 -- 252
------- ------- ------ ----- -------
Total expenses......... 18,638 28,646 3,173 (145) 50,312
------- ------- ------ ----- -------
Income (loss) before
income tax provision
and minority interest.. 1,863 1,427 (423) 145 3,012
Income tax (provision)
benefit............... (748) -- -- (457)(I) (1,205)
------- ------- ------ ----- -------
Income (loss) before
minority interest...... 1,115 1,427 (423) (312) 1,807
Minority interest in
the Patriot Operating
Partnership........... -- (200)(J) 59 (J) (112)(J) (253)
------- ------- ------ ----- -------
Net income (loss)
applicable to common
shareholders........... $ 1,115 $ 1,227 $ (364) $(424) $ 1,554
======= ======= ====== ===== =======
Net income (loss) per
common share(K)........ $ 0.19 $ 0.05
======= =======
Weighted average number
of common shares and
common share
equivalents
outstanding............ 5,763 29,074
======= =======
- --------
(A) Represents the historical results of operations of Bay Meadows for the
three months ended March 31, 1997.
(B) Represents adjustments to New Patriot Operating Company's results of
operations assuming the Carefree Resort properties had been leased to New
Patriot Operating Company at the beginning of the period presented.
(C) Represents adjustments to New Patriot Operating Company's results of
operations assuming the Radisson Northbrook Hotel and the Luxeford Suites
Hotel had been leased to New Patriot Operating Company at the beginning of
the period presented.
(D) Represents adjustment to Racecourse facility rental expense as a result of
(i) the lease agreement between New Patriot REIT and New Patriot
Operating Company subsequent to the Merger and the related transactions
and (ii) the PaineWebber Land Sale.
(E) Represents adjustment for estimated incremental general and administrative
expenses of approximately $75 and certain expenses not expected to be
incurred by New Patriot Operating Company of $324, including approximately
$257 of non-recurring legal fees and approximately $67 of Merger related
costs.
F-92
(F) Represents an increase in depreciation of furniture and equipment of $69,
and amortization of goodwill of $18 which results from the adjustment for
purchase method of accounting whereby the furniture and equipment owned by
Bay Meadows is adjusted to estimated fair market value. Depreciation is
computed using the straight-line method and is based upon the estimated
useful lives of 5 to 7 years for F, F & E. Amortization of goodwill is
computed using the straight-line method over a 40 year estimated useful
life. Because the paired share structure is "grandfathered" under the
Code, Patriot believes the life of the paired share structure is
perpetual. Under generally accepted accounting principles, however, the
maximum amortization period is 40 years for intangible assets.
(G) Represents lease payments from New Patriot Operating Company to New
Patriot REIT calculated on a pro forma basis by applying the provisions of
the Participating Leases to the historical revenue of the hotels for the
period presented.
(H) Represents interest expense incurred on promissory notes issued to the
Realty Partnership by PAH RSI Lessee in connection with the acquisition
of certain assets, which assets are assumed to be acquired by New Patriot
Operating Company.
(I) Represents an adjustment to the estimated federal and state tax liability
as a result of the pro forma operating income of the Carefree Resorts and
the pro forma adjustments to Bay Meadows for the three months ended March
31, 1997.
(J) Represents the adjustments to minority interest to reflect the estimated
minority interest percentage subsequent to the Merger of approximately
14.0%.
(K) In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a
material effect on the earnings per share of New Patriot Operating
Company.
F-93
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Patriot leases each of its hotels, except the Crowne Plaza Ravinia Hotel and
the Marriott WindWatch Hotel, which are separately owned through two special
purpose non-controlled entities, to Lessees. The Combined Lessees subsequent to
the Merger and the related transactions consist of CHC Lease Partners which
leases 25 hotels, NorthCoast Hotel, L.L.C. ("NorthCoast Lessee"), which leases 9
hotels, DTR North Canton, Inc. (the "Doubletree Lessee") which leases 6 hotels,
Crow Hotel Lessee, Inc. (the "Wyndham Lessee") which leases 2 hotels, Metro
Hotels Leasing Corporation ("Metro Lease Partners") which leases 1 hotel and
Grand Heritage Leasing L.L.C. (the "Grand Heritage Lessee") which leases 3
hotels. With respect to the hotels leased to PAH RSI Lessee, New Patriot REIT
expects to terminate its leases with PAH RSI Lessee and release such hotels to
New Patriot Operating Company. PAH RSI Lessee leased six hotels from Patriot as
of March 31, 1997 which have been eliminated in the following unaudited Pro
Forma Condensed Combined Statements of Operations. Patriot acquired the Sheraton
Park Place Hotel in April 1997 and the Myrtle Beach Hilton Oceanfront Golf
Resort in May 1997 and then leased these hotels to PAH RSI Lessee. The
operations of the Sheraton Park Place Hotel and the Myrtle Beach Hilton
Oceanfront Golf Resort have not been included in the following pro forma
financial data. The Participating Leases provide for staggered terms of ten to
twelve years and the payment of the greater of base or participating rent, plus
certain additional charges, as applicable.
The Combined Lessees' unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1996 and the three months ended
March 31, 1997 are presented as if 46 of the hotels that Patriot currently
leases to the Combined Lessees pursuant to Participating Leases had been
leased as of January 1, 1996. Six of the hotels leased to PAH RSI Lessee
(excluding the Sheraton Park Place Hotel, which was acquired by Patriot in
April 1997, and the Myrtle Beach Hilton Oceanfront Golf Resort, which was
acquired by Patriot in May 1997) are assumed to have been leased to New
Patriot Operating Company and, therefore, have been eliminated from the Pro
Forma Condensed Combined Statements of Operations for the Combined Lessees.
The pro forma information is based in part upon the Statements of Operations
of CHC Lease Partners, and the Statement of Operations of NorthCoast Lessee
filed with Patriot's Annual Report on Form 10-K for the year ended December
31, 1996 and the Statements of Operations of CHC Lease Partners, the Statement
of Operations of NorthCoast Lessee and the Statement of Operations of PAH RSI
Lessee filed with Patriot's Quarterly Report on Form 10-Q for the three months
ended March 31, 1997. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of what the actual results of operations of the
Combined Lessees would have been assuming such transactions had been completed
as of the beginning of the periods presented, nor do they purport to represent
the results of operations for future periods. Further, the unaudited Pro Forma
Condensed Combined Statement of Operations for the interim period ended March
31, 1997 is not necessarily indicative of the results of operations for the
full year.
F-94
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
LESSEES COMBINED
PRE-MERGER MERGER LESSEES
PRO FORMA ADJUSTMENTS PRO FORMA
(A) (G) TOTAL
----------- ------------ ---------
(IN THOUSANDS)
Revenue:
Room................................... $260,991 $(38,940) $222,051
Food and beverage...................... 105,234 (19,745) 85,489
Conference center...................... 2,354 -- 2,354
Club and spa revenue................... 24,710 (24,710) --
Club membership revenue................ 4,277 (4,277) --
Shopping center revenue................ 1,730 (1,730) --
Telephone and other.................... 32,667 (10,748) 21,919
--------- -------- --------
Total revenue....................... 431,963 (100,150) 331,813
--------- -------- --------
Expenses:
Departmental costs and expenses........ 177,861 (47,280) 130,581
General and administrative............. 38,371 (6,822) 31,549
Ground lease expense................... 2,064 -- 2,064
Repair and maintenance................. 24,460 (8,045) 16,415
Utilities.............................. 19,793 (4,082) 15,711
Marketing.............................. 35,646 (6,331) 29,315
Interest expense....................... 1,173 (B) (1,170) 3
Insurance.............................. 2,881 (656) 2,225
Participating lease payments........... 130,570 (C) (25,967) 104,603
--------- -------- --------
Total expenses...................... 432,819 (100,353) 332,466
--------- -------- --------
Income (loss) before lessee income (ex-
pense)................................. (856) 203 (653)
--------- -------- --------
Dividend and interest income............ 1,543 (D) -- 1,543
Management fees......................... (10,265)(E) 3,195 (7,070)
Lessee general and administrative....... (2,043)(F) 367 (1,676)
--------- -------- --------
(10,765) 3,562 (7,203)
--------- -------- --------
Net loss................................ $ (11,621) $ 3,765 $ (7,856)
========= ======== ========
- --------
(A) The Lessees pre-Merger pro forma results of operations represent the
combined pro forma operating results of the Lessees. These Lessees' pro
forma results of operations include (i) the combined historical results of
operations of CHC Lease Partners and Metro Lease Partners for the year
ended December 31, 1996 and NorthCoast Lessee, Doubletree Lessee, Wyndham
Lessee and Grand Heritage Lessee for the period from their respective
inception of operations through December 31, 1996 and (ii) adjustments to
the Lessees' combined results of operations assuming the 52 hotels
currently leased by Patriot to the Lessees (including six of the hotel
properties leased to PAH RSI Lessee as of March 31, 1997 and excluding the
Sheraton Park Place Hotel acquired in April 1997 and the Myrtle Beach
Hilton Oceanfront Golf Resort acquired in May 1997) had been leased at the
beginning of the period presented.
(B) Represents pro forma interest expense on promissory notes issued in
connection with the acquisition of certain assets by PAH RSI Lessee,
assuming the notes were outstanding at the beginning of the period
presented.
(C) Represents lease payments calculated on a pro forma basis by applying the
provisions of the Participating Leases to the historical revenue of the
hotels.
(D) Includes dividend income on OP Units in the Realty Partnership which form
a portion of the required capitalization of CHC Lease Partners and
NorthCoast Lessee, respectively. Pro forma amounts exclude additional
dividend income earned on OP Units held by certain Lessees, and pro forma
interest income earned on invested cash balances.
(E) Represents pro forma management fees paid to the Operators under the terms
of their respective management agreements with the Lessees.
(F) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
(G) Represents the elimination of the pro forma results of operations for the
four Carefree Resorts, the Radisson Northbrook Hotel and the Luxeford
Suites Hotel which are expected to be leased to New Patriot Operating
Company following the Merger.
F-95
COMBINED LESSEES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
LESSEES COMBINED
PRE-MERGER MERGER LESSEES
PRO FORMA ADJUSTMENTS PRO FORMA
(A) (G) TOTAL
----------- ------------ ---------
(IN THOUSANDS)
Revenue:
Room................................... $ 69,862 $(13,177) $56,685
Food and beverage...................... 27,891 (5,891) 22,000
Conference center...................... 748 -- 748
Club and spa revenue................... 8,706 (8,706) --
Club membership revenue................ 348 (348) --
Shopping center........................ 474 (474) --
Telephone and other.................... 9,658 (4,227) 5,431
-------- -------- -------
Total revenue....................... 117,687 (32,823) 84,864
-------- -------- -------
Expenses:
Departmental costs..................... 46,332 (13,828) 32,504
General and administrative............. 9,610 (1,927) 7,683
Ground lease........................... 320 -- 320
Repairs and maintenance................ 6,322 (2,247) 4,075
Utilities.............................. 4,622 (949) 3,673
Marketing.............................. 9,081 (1,405) 7,676
Interest............................... 293 (B) (293) --
Insurance.............................. 631 (130) 501
Participating lease payments........... 36,551 (C) (9,428) 27,123
-------- -------- -------
113,762 (30,207) 83,555
-------- -------- -------
Income (loss) before lessee income
(expense).............................. 3,925 (2,616) 1,309
-------- -------- -------
Dividend and interest income............ 945 (D) -- 945
Management fees......................... (3,117)(E) 1,482 (1,635)
Lessee general and administrative....... (575)(F) 120 (455)
-------- -------- -------
(2,747) 1,602 (1,145)
-------- -------- -------
Net income (loss)....................... $ 1,178 $ (1,014) $ 164
======== ======== =======
- --------
(A) The Lessees pre-Merger pro forma results of operations represent the
combined pro forma operating results of the Lessees. These Lessees' pro
forma results of operations include (i) the combined historical results of
operations of CHC Lease Partners, Metro Lease Partners, NorthCoast Lessee,
Doubletree Lessee, Wyndham Lessee and Grand Heritage Lessee for the three
months ended March 31, 1997 and, for PAH RSI Lessee, for the period from
inception of operations through March 31, 1997 and (ii) adjustments to the
Lessees' combined results of operations assuming the 52 hotels currently
leased by Patriot to the Lessees (including six of the hotel properties
currently leased to PAH RSI Lessee as of March 31, 1997 and excluding the
Sheraton Park Place Hotel acquired in April 1997 and the Myrtle Beach
Hilton Oceanfront Golf Resort acquired in May 1997) had been leased at the
beginning of the period presented.
(B) Represents pro forma interest expense on promissory notes issued in
connection with the acquisition of certain assets by PAH RSI Lessee,
assuming the notes were outstanding at the beginning of the period
presented.
(C) Represents lease payments calculated on a pro forma basis by applying the
provisions of the Participating Leases to the historical revenue of the
hotels.
(D) Includes dividend income on OP Units in the Realty Partnership which form
a portion of the required capitalization of CHC Lease Partners and
NorthCoast Lessee, respectively. Pro forma amounts exclude additional
dividend income earned on OP Units held by certain Lessees, and pro forma
interest income earned on invested cash balances.
(E) Represents pro forma management fees paid to the Operators under the terms
of their respective management agreements with the Lessees.
(F) Represents pro forma overhead expenses, which include an estimate of the
Lessees' salaries and benefits, professional fees, insurance costs and
administrative expenses.
(G) Represents the elimination of the pro forma results of operations for the
four Carefree Resorts, the Radisson Northbrook Hotel and the Luxeford
Suites Hotel which are expected to be leased to New Patriot Operating
Company following the Merger.
F-96
PATRIOT (PRE MERGER)
PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Patriot completed the Initial Offering on October 2, 1995 and commenced
operations. Upon completion of the Initial Offering, Patriot, through its
wholly-owned subsidiary, PAH LP, contributed substantially all of the net
proceeds of the Initial Offering to the Realty Partnership in exchange for an
approximate 85.3% limited partnership interest in the Realty Partnership.
Patriot, through its wholly-owned subsidiary, PAH GP, is the sole general
partner and the holder of a 1.0% general partnership interest in the Realty
Partnership.
The Realty Partnership used approximately $263,600 of the net proceeds of
the Initial Offering to acquire ownership interests in 20 hotels (the "Initial
Hotels") from various entities (the "Selling Entities") and to repay existing
mortgage and other indebtness of the Initial Hotels. In consideration for the
sale of the Initial Hotels, certain owners in the Selling Entities, including
affiliates of Patriot, elected to receive OP Units in the Realty Partnership.
The 2,324,312 OP Units received by such owners represented an approximate
13.7% equity interest in the Realty Partnership as Patriot commenced
operations. The balance of the proceeds from the Initial Offering, together
with proceeds from the Line of Credit, were used to finance acquisitions of
two additional hotel investments, to provide for renovations to existing
hotels and for general working capital during 1995.
During 1996, Patriot acquired 24 additional hotel properties, utilizing cash
drawn on its Line of Credit and issuing 600,703 OP Units of the Realty
Partnership in connection with the purchases. In May 1996, Patriot sold an
aggregate of approximately $40,000 of equity securities in the Private
Placement. The proceeds of the Private Placement were used primarily to reduce
amounts outstanding under the Line of Credit.
During the third quarter of 1996, Patriot completed the Follow-On Offering.
The offering price of all shares sold in the Follow-On Offering was $14.125
per share, resulting in net proceeds (less the underwriters' discount and
offering expenses) of approximately $160,222, of which approximately $151,963
was used to reduce amounts outstanding under the Line of Credit. As a result,
at December 31, 1996, the Realty Partnership owned interests in 46 hotels in
18 states with an aggregate 11,340 guest rooms and Patriot owned an
approximate 87.3% interest in the Realty Partnership.
In the first quarter of 1997, Patriot acquired ownership interests in the
Recent Acquisitions. Subsequent to March 31, 1997, Patriot acquired the
Sheraton Park Place Hotel in Minneapolis, Minnesota and the Myrtle Beach
Hilton Oceanfront Golf Resort. These acquisitions were financed primarily with
funds drawn on the Line of Credit.
In addition, in January 1997, Patriot acquired the Carefree Resorts for a
total purchase price of approximately $264 million. The acquisition of the
Carefree Resorts was primarily financed with funds drawn on the Line of Credit
and the issuance of 1,295,077 OP Units of the Realty Partnership.
As of March 31, 1997, Patriot owned interests in 54 hotels and resorts in 21
states with an aggregate of 12,671 guest rooms and had an approximate 83.1%
interest in the Realty Partnership.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1996 and the three months ended
March 31, 1997 of Patriot are presented as if (i) the Private Placement and
the Follow-On Offering, (ii) the acquisition of 24 additional hotel properties
in 1996 including a hotel owned through a special-purpose, non-controlled
subsidiary, (iii) the acquisition of the Carefree Resorts and the Recent
Acquisitions (excluding the Sheraton Park Place Hotel acquired by Patriot in
April 1997 and the Myrtle Beach Hilton Oceanfront Golf Resort acquired by
Patriot in May 1997 and leased to PAH RSI Lessee) and (iv) the funding of the
mortgage notes to affiliates of CHC Lease Partners had occurred on January 1,
1996. Such pro forma information is based in part upon the Consolidated
Statements of Operations of Patriot filed with Patriot's Annual Report on Form
10-K for the year ended December 31, 1996 and the Quarterly Report on Form 10-Q
for the three months ended March 31, 1997; the historical financial statements
of certain hotels acquired by Patriot
F-97
filed in Patriot's Current Reports on Form 8-K dated April 2, 1996, as
amended, December 5, 1996 and January 16, 1997, as amended; and the Pro Forma
Condensed Combined Statements of Operations of the Lessees. In management's
opinion, all adjustments necessary to reflect the effects of these
transactions have been made. The following unaudited Pro Forma Financial
Statements do not reflect the Merger and the related transactions.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations are not necessarily indicative of what actual results of operations
of Patriot would have been assuming such transactions had been completed as of
January 1, 1996, nor do they purport to represent the results of operations
for future periods. Further, the unaudited Pro Forma Condensed Consolidated
Statement of Operations for the interim period ended March 31, 1997 is not
necessarily indicative of the results of operations for the full year.
F-98
PATRIOT (PRE MERGER)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
PRO FORMA ADJUSTMENTS
------------------------------------
PATRIOT RECENT CAREFREE
HISTORICAL ADJUSTMENTS ACQUISITIONS RESORTS PRO FORMA
(A) (B) (C) (D) TOTAL
---------- ----------- ------------ -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Participating lease
revenue............... $75,893 $27,111 (E) $6,102 (E) $21,464 (E) $130,570
Interest and other in-
come.................. 600 8,501 (F) -- 1,170 (F) 10,271
------- ------- ------ ------- --------
Total revenue.......... 76,493 35,612 6,102 22,634 140,841
------- ------- ------ ------- --------
Expenses:
Ground lease expense... 1,075 315 (G) -- -- 1,390
General and administra-
tive.................. 4,500 742 (H) -- 100 (H) 5,342
Interest expense....... 7,380 20,502 (I) 3,240 (I) 14,079 (I) 45,201
Real estate and per-
sonal property taxes
and casualty
insurance............. 7,150 3,703 (J) 1,076 (J) 1,443 (J) 13,372
Depreciation and amor-
tization.............. 17,420 8,451 (K) 1,843 (K) 7,409 (K) 35,123
------- ------- ------ ------- --------
Total expenses......... 37,525 33,713 6,159 23,031 100,428
------- ------- ------ ------- --------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries and
minority interests..... 38,968 1,899 (57) (397) 40,413
Equity in earnings of
unconsolidated
subsidiaries.......... 5,845 1,372 (L) -- 343 (M) 7,560
------- ------- ------ ------- --------
Income (loss) before
minority interests..... 44,813 3,271 (57) (54) 47,973
Minority interest in
the Patriot
Partnership........... (6,767) (1,247) -- -- (8,014)(N)
Minority interest in
other partnerships.... (55) (650)(O) 152 (O) -- (553)
------- ------- ------ ------- --------
Net income (loss)
applicable to common
shareholders........... $37,991 $ 1,374 $ 95 $ (54) $ 39,406
======= ======= ====== ======= ========
Net income per common
share (P)(Q)........... $ 1.06 $ 0.89
======= ========
Weighted average number
of common shares and
common share
equivalents outstanding
(P) ................... 35,938 44,378
======= ========
- --------
(A) Represents Patriot's historical results of operations for the year ended
December 31, 1996.
(B) Represents adjustments to Patriot's results of operations assuming the
Private Placement, the Follow-On Offering and the acquisition of the 24
hotels in 1996 had occurred as of the beginning of the period presented.
(C) Represents adjustments to Patriot's results of operations assuming the
acquisition of the four Recent Acquisitions: the Luxeford Suites Hotel,
the Holiday Inn Redmont Hotel, the Radisson Overland Park Hotel and the
Radisson Northbrook Hotel, had occurred at the beginning of the period
presented.
(D) Represents adjustments to Patriot's results of operations assuming the
acquisition of the Carefree Resort properties had occurred at the
beginning of the period presented. Sales and cost of sales related to the
residential real estate which was owned, developed and sold by the
Carefree Resorts are excluded because Patriot anticipates selling the
residential real estate to an affiliate at fair market value. Therefore,
no gain or loss on the sale of the residential real estate is expected.
(E) Represents lease payments from the Lessees to the Realty Partnership
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the
period presented.
(F) Pro forma interest and other income consists of historical interest and
other income of approximately $600 related to the 46 hotels owned as of
December 31, 1996, an adjustment for pro forma interest income of $21
earned on notes receivable issued to the Realty Partnership by certain
special-purpose, non-controlled subsidiaries, and pro forma interest income
of $1,170 earned on notes receivable issued to the Realty Partnership by PAH
RSI Lessee in connection with the sale of certain assets and the right to
receive certain royalty fees (assuming such notes were outstanding at the
beginning of the period presented), resulting in pro forma interest and
other income of $1,791. In addition, pro forma interest and other income has
been adjusted to include $8,480 of interest income earned on $103,000 of
mortgage notes receivable from certain affiliates of CHC Lease Partners
which bear interest at an annual rate equal to LIBOR plus 2.75%.
(G) Represents ground lease payments to be made with respect to certain of the
hotels.
(H) Represents increased salaries, insurance, travel, audit, legal and other
expenses associated with operating as a public company and the continued
growth of Patriot. Also includes annual amortization of unearned stock
compensation computed on a straight-line basis over the three to four year
vesting periods.
F-99
(I) Pro forma interest expense consists of historical interest expense and
amortization of deferred loan costs of $7,380, pro forma interest expense
of approximately $8,966 related to the 46 hotels owned as of December 31,
1996, pro forma interest expense of approximately $3,240 related to the
Recent Acquisitions, and pro forma interest expense of approximately
$14,079 related to the acquisition of Carefree Resorts. Pro forma interest
expense also includes an adjustment to reflect interest expense of
approximately $7,391 incurred on net borrowings under the Line of Credit
which will be used to fund $103,000 in mortgage notes receivable from
certain affiliates of CHC Lease Partners. In addition, pro forma interest
expense includes adjustments to reflect additional interest expense of
approximately $762 related to borrowings under the Line of Credit used to
fund deferred loan costs of approximately $10,150 associated with the
modification and extension of the Line of Credit and amortization of such
deferred loan costs of approximately $3,383. Deferred loan costs are
amortized over the term of the related loan.
Additionally, a 0.25% increase in the interest rate on the Line of Credit
would increase interest expense to $46,522, decrease net income to $38,308
and decrease net income per common share to $0.86 per share. Patriot has
entered into a commitment letter with PaineWebber Real Estate and Chase
which will modify and extend the Line of Credit up to $700,000 and provide
for a term loan of $500,000. The additional availability under this New
Credit Facility will be primarily used to finance future acquisitions.
In the event Patriot is successful in obtaining the New Credit Facility,
deferred loan costs totaling approximately $16,325, including fees, legal
and other expenses are expected to be incurred in connection with New Credit
Facility (of which approximately $10,150 relate to the modification and
extension of the Line of Credit and have been reflected in the pro forma
financial information).
(J) Represents real estate and personal property taxes, and casualty insurance
to be paid by the Realty Partnership.
(K) Represents adjustments to depreciation on the Patriot hotels owned as of
December 31, 1996 of $8,441 and amortization of $10. The adjustments
related to the Recent Acquisitions and the Carefree Resorts acquisition
represent depreciation. Depreciation is computed using the straight-line
method and is based upon the estimated useful lives of 35 years for hotel
buildings and improvements and 5 to 7 years for F, F & E. These estimated
useful lives are based on management's knowledge of the properties and the
hotel industry in general. Amortization of franchise fees is computed
using the straight-line method over the terms of the related franchise
agreement.
(L) Represents equity in income of the unconsolidated subsidiaries which own
the Crowne Plaza Ravinia Hotel and the Marriott WindWatch Hotel.
(M) Represents equity in income of PAH Boulders, Inc.
(N) Represents the adjustments to minority interest assuming the acquisition
of the 24 hotels by Patriot in 1996, including the hotels owned through the
special-purpose non-controlled subsidiaries, the Private Placement and the
Follow-On Offering of Patriot's common stock, the acquisition of the Recent
Acquisitions, and the acquisition of the Carefree Resorts had occurred at
the beginning of the period presented. Prior to the acquisition of the
Recent Acquisitions and the Carefree Resorts, the minority interest
percentage was approximately 12.7%. Subsequent to the acquisition of the
Carefree Resorts, the minority interest percentage was approximately 16.9%.
(O) Represents the minority interest related to the partnerships with DTR PAH
Holding, Inc., assuming such entities had been formed and the six hotels
owned by such partnerships had been acquired at the beginning of the
period presented.
(P) The net income per common share and the weighted average number of common
shares and common share equivalents have been adjusted for the 2-for-1
stock split effected in the form of a stock dividend.
(Q) In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a
material effect on the earnings per share of Patriot.
F-100
PATRIOT (PRE MERGER)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
PRO FORMA ADJUSTMENTS
-------------------------------------
PATRIOT RECENT CAREFREE
HISTORICAL ACQUISITIONS RESORTS PRO FORMA
(A) ADJUSTMENTS (B) (C) TOTAL
---------- ----------- ------------ -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Participating lease
revenue............... $35,013 $ -- $ 618 (D) $ 920 (D) $36,551
Interest and other
income................ 375 2,125 (E) -- 55 (E) 2,555
------- ------- ----- ----- -------
Total revenue.......... 35,388 2,125 618 975 39,106
------- ------- ----- ----- -------
Expenses:
Ground lease expense... 345 -- -- -- 345
General and
administrative........ 2,782 679 (F) -- -- 3,461
Interest expense....... 7,805 2,870 (G) 365 (G) 669 (G) 11,709
Real estate and per-
sonal property taxes
and casualty
insurance............. 3,201 -- 120 (H) 59 (H) 3,380
Depreciation and
amortization.......... 8,496 -- 229 (I) 339 (I) 9,064
------- ------- ----- ----- -------
Total expenses......... 22,629 3,549 714 1,067 27,959
------- ------- ----- ----- -------
Income (loss) before
equity in earnings of
unconsolidated
subsidiaries and
minority interests..... 12,759 (1,424) (96) (92) 11,147
Equity in earnings of
unconsolidated
subsidiaries.......... 1,021 -- -- -- 1,021
------- ------- ----- ----- -------
Income (loss) before
minority interests..... 13,780 (1,424) (96) (92) 12,168
Minority interest in
the Realty
Partnership........... (2,232) 213 (J) -- -- (2,019)(J)
Minority interest in
other partnerships.... (200) -- (19) (K) -- (219)
------- ------- ----- ----- -------
Net income (loss)
applicable to common
shareholders........... $11,348 $(1,211) $(115) $ (92) $ 9,930
======= ======= ===== ===== =======
Net income per common
share (L)(M)........... $ 0.25 $ 0.22
======= =======
Weighted average number
of common shares and
common share
equivalents outstanding
(L) ................... 44,552 44,919
======= =======
- --------
(A) Represents Patriot's historical results of operations for the three months
ended March 31, 1997.
(B) Represents adjustments to Patriot's results of operations assuming the
acquisition of the four Recent Acquisitions: the Luxeford Suites Hotel,
the Holiday Inn Redmont Hotel, the Radisson Overland Park Hotel and the
Radisson Northbrook Hotel, had occurred at the beginning of the period
presented.
(C) Represents adjustments to Patriot's results of operations assuming the
acquisition of the Carefree Resort properties had occurred at the
beginning of the period presented. Sales and cost of sales related to the
residential real estate which was owned, developed and sold by the
Carefree Resorts are excluded because Patriot anticipates selling the
residential real estate to an affiliate at fair market value. Therefore,
no gain or loss on the sale of the residential real estate is expected.
(D) Represents lease payments from the Lessees to the Realty Partnership
calculated on a pro forma basis by applying the provisions of the
Participating Leases to the historical revenue of the hotels for the
period presented.
(E) Pro forma interest and other income consists of historical interest and
other income of $375 related to the 54 hotels owned as of March 31, 1997
and pro forma interest income of $55 earned on notes receivable issued to
the Realty Partnership by PAH RSI Lessee in connection with the sale of
certain assets and the right to receive certain royalty fees (assuming
such notes were outstanding at the beginning of the period presented),
resulting in pro forma interest and other income of $430. In addition, pro
forma interest and other income has been adjusted to include $2,125 of
interest income earned on $103,000 of mortgage notes receivable from
certain affiliates of CHC Lease Partners which bear interest at an annual
rate equal to LIBOR plus 2.75%, assuming such notes were outstanding at
the beginning of the period presented.
(F) Represents amortization of unearned stock compensation computed on a
straight-line basis over the three to four year vesting periods.
(G) Pro forma interest expense consists of historical interest expense and
amortization of deferred loan costs of $7,805, pro forma interest expense
of approximately $365 incurred on the net borrowings under the Line of
Credit related to the Recent Acquisitions and pro forma interest expense
of approximately $669 incurred on the Carefree Resorts, resulting in pro
forma interest expense of $8,839. Pro forma interest expense also includes
an adjustment to reflect interest expense of approximately $1,835 incurred
on net borrowings under the Line of Credit which will be used to fund
$103,000 in mortgage notes receivable from certain affiliates of CHC Lease
Partners. In
F-101
addition, pro forma interest expense includes adjustments to reflect
additional interest expense of approximately $189 related to borrowings
under the Line of Credit used to fund deferred loan costs of approximately
$10,150 associated with the expansion and modification of the Line of Credit
and the amortization of such deferred loan costs of approximately $846.
Deferred loan costs are amortized over the term of the related loan.
Additionally, a 0.25% increase in the interest rate on the Line of Credit
would increase interest expense to $12,071, decrease net income to $9,628
and decrease net income per common share to $0.21 per share. Patriot has
entered into a commitment letter with PaineWebber Real Estate and Chase
which will modify and extend the Line of Credit up to $700,000 and provide
for a term loan of $500,000. The additional availability under this New
Credit Facility will be primarily used to finance future acquisitions.
In the event Patriot is successful in obtaining the New Credit Facility,
deferred loan costs totaling approximately $16,325, including fees, legal
and other expenses are expected to be incurred in connection with the New
Credit Facility (of which approximately $10,150 relate to the modification
and extension of the Line of Credit and have been reflected in the pro forma
financial information).
(H) Represents real estate and personal property taxes, and casualty insurance
to be paid by the Realty Partnership.
(I) Represents adjustments to depreciation on the Recent Acquisitions and the
Carefree Resorts. Depreciation is computed using the straight-line method
and is based upon the estimated useful lives of 35 years for hotel
buildings and improvements and 5 to 7 years for F, F & E. These estimated
useful lives are based on management's knowledge of the properties and the
hotel industry in general.
(J) Represents the adjustments to minority interest assuming the acquisition
of the Recent Acquisitions and the acquisition of the Carefree Resorts had
occurred at the beginning of the period presented. Prior to the
acquisition of the Recent Acquisitions and the Carefree Resorts, the
minority interest percentage was approximately 12.7%. Subsequent to the
acquisition of the Carefree Resorts, the minority interest percentage was
approximately 16.9%.
(K) Represents the minority interest related to the partnerships with DTR PAH
Holding, Inc., assuming such entities had been formed and the six hotels
owned by such partnerships had been acquired at the beginning of the
period presented.
(L) The net income per common share and the weighted average number of common
shares and common share equivalents have been adjusted for the 2-for-1
stock split effected in the form of a stock dividend.
(M) In February 1997, the Financial Accounting Standards Board issued
Statement 128 which specifies the computation, presentation and disclosure
requirements for basic earnings per share and diluted earnings per share.
Management believes that adoption of Statement 128 will not have a
material effect on the earnings per share of Patriot.
F-102
PATRIOT (PRE MERGER)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
presented as if the funding of the mortgage notes to certain affiliates of CHC
Lease Partners had occurred on March 31, 1997. Such pro forma information is
based in part upon Patriot's Consolidated Balance Sheet as of March 31, 1997
and should be read in conjunction with the financial statements filed with
Patriot's Quarterly Report on Form 10-Q for the period ended March 31, 1997.
In management's opinion, all adjustments necessary to reflect the effect of
this transaction have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
not necessarily indicative of what the actual financial position would have
been assuming the above described transaction had been completed as of March
31, 1997, nor does it purport to represent the future financial position of
Patriot.
PATRIOT PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Net investment in hotel and resort prop-
erties and land held for sale.......... $947,722 $ -- $ 947,722
Mortgage notes and other receivables
from unconsolidated subsidiaries....... 73,622 -- 73,622
Notes receivable........................ 10,189 103,000(A) 113,189
Investment in unconsolidated subsidiar-
ies.................................... 12,140 -- 12,140
Cash and cash equivalents............... 6,271 -- 6,271
Accounts receivable..................... 15,648 -- 15,648
Deferred expenses, net.................. 4,297 10,150(B) 14,447
Prepaid expenses and other assets....... 12,009 -- 12,009
---------- -------- ----------
Total assets........................... $1,081,898 $113,150 $1,195,048
========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under line of credit and
mortgage notes......................... $466,712 $113,150(C) $ 579,862
Dividends and distributions payable..... 13,938 -- 13,938
Accounts payable and accrued expenses... 13,498 -- 13,498
Due to unconsolidated subsidiaries...... 6,098 -- 6,098
Minority interest in the Realty Part-
nership................................ 127,262 -- 127,262
Minority interest in other partner-
ships.................................. 13,774 -- 13,774
Shareholders' equity:
Preferred stock........................ -- -- --
Common stock........................... -- -- --
Paid-in capital........................ 457,178 -- 457,178
Unearned stock compensation, net....... (16,261) -- (16,261)
Retained earnings...................... (301) -- (301)
---------- -------- ----------
Total shareholders' equity............. 440,616 -- 440,616
---------- -------- ----------
Total liabilities and shareholders' eq-
uity.................................. $1,081,898 $113,150 $1,195,048
========== ======== ==========
- --------
(A) Represents mortgage notes issued to the Realty Partnership by certain
affiliates of CHC Lease Partners.
(B) Represents deferred loan costs to be incurred in connection with
modification and extension of the Line of Credit.
(C) Represents draws on the Line of Credit related to the funding of mortgage
notes receivable from certain affiliates of CHC Lease Partners. Patriot
has entered into a commitment letter with PaineWebber Real Estate and
Chase which will modify and extend the Line of Credit up to $700,000 and
provide for a term loan of $500,000. The additional availability under
this New Credit Facility will be primarily used to finance future
acquisitions. In the event Patriot is successful in obtaining the New Credit
Facility, deferred loan costs totaling approximately $16,325, including
fees, legal and other expenses are expected to be incurred in connection
with the New Credit Facility (of which approximately $10,150 relate to the
modification and extension of the Line of Credit and have been reflected in
the pro forma financial information).
F-103