WYNDHAM INTERNATIONAL INC (WYN)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
August 16, 1999
The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in Patriot's and Wyndham's Joint Annual Report on Form
10- K, as amended, for the year ended December 31, 1998.
Certain statements in this Form 10-Q constitute "forward-looking statements" as that term is defined
under the Private Securities Litigation Reform Act of 1995 (the "Act"). The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
are predictions of or indicate future events and trends and which do not relate to historical matters identify
forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
Although forward-looking statements reflect management's good faith beliefs, forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievement
of Wyndham to differ materially from anticipated future results, performance or achievements expressed or implied
by such forward-looking statements. Wyndham undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise. Certain factors that might cause
a difference include, but are not limited to, risks associated with the availability of equity or debt financing
at terms and conditions favorable to Wyndham, Wyndham's ability to effect sales of assets on favorable terms and
conditions; risks associated with the hotel industry and real estate markets in general; and risks associated with
debt financing.
THE COMPANY
Effective June 30, 1999, Patriot and Old Wyndham completed a series of transactions which included a restructuring
of their existing organizational structure. As a result of this restructuring, a wholly-owned subsidiary of Old
Wyndham was merged with and into Patriot, with Patriot being the surviving entity. As such, Patriot is now a wholly-owned
subsidiary of Old Wyndham, and this combined entity, together with all subsidiaries, is hereafter referred to as
Wyndham. In connection with this restructuring, the pairing agreement between Patriot and Old Wyndham was terminated.
Patriot's status as a real estate investment trust terminated effective January 1, 1999, and Patriot became a taxable
corporation as of that date.
The restructuring was reflected as a reorganization of two companies under common control and was accounted for
in a manner similar to that used in pooling of interest accounting. As such, there was no revaluation of the assets
and liabilities of Old Wyndham or Patriot. The 1999 financial statements of Wyndham are presented on a consolidated
basis, representing the operations of the corporation and its subsidiaries, including Patriot. The 1998 financial
statements of Wyndham are presented on a combined basis, representing the combined results of both Old Wyndham
and Patriot. All significant intercompany accounts and transactions have been eliminated.
At June 30, 1999, Wyndham, directly or through its subsidiaries, owned interests in 173 hotels totaling over 43,300
rooms and leased 39 hotels from third parties totaling over 5,700 rooms. In addition, Wyndham managed 95 hotels
with over 22,300 rooms for third party owners and franchised 11 hotels under the Wyndham, Summerfield or ClubHouse
brands with over 2,600 rooms. The hotels are diversified by franchise or brand affiliation and serve primarily
major U.S. business centers. In addition to hotels catering primarily to business travelers, Wyndham's portfolio
includes world-class resort hotels and prominent hotels in major tourist destinations.
Asset Sales and Acquisitions
In January 1999, Patriot acquired the remaining 25% minority interests in each of the five following hotels; Embassy
Suites Schaumburg, the Hilton Dania, the Marriott Suites at Valley Forge, the Marriott Boston Andover and the Marriott
Tysons Corner from CIGNA. The acquisition of such interests was financed through additional mortgage indebtedness
totaling $49.8 million and the sale of an additional 10% interest in the Marriott Warner Center.
In February 1999, Patriot and Old Wyndham sold their interest in the Bay Meadows Racecourse located in San Mateo,
California. Patriot and Old Wyndham received cash proceeds of approximately $3.4 million after payment of legal
costs and other closing costs. Patriot and Old Wyndham recognized an estimated impairment loss on assets held for
sale of $42.2 million related to the racecourse facility in 1998. In connection with the transaction, Patriot terminated
its lease to Wyndham for the racecourse facilities. The actual loss on the sale of the asset was $42.8 million.
In March 1999, Patriot sold the Holiday Inn Crockett, realizing net cash proceeds of approximately $18.0 million
and recognized a gain of approximately $2.6 million.
In April 1999, Patriot acquired the remaining 10% minority interests in each of the four following hotels; the
Radisson Akron; the Courtyard Beachwood; the Holiday Inn Westlake; the Radisson Beachwood from IAH Snavely L.L.C.
("Snavely"). In addition, Patriot sold the Holiday Inn Beachwood to Snavely. The transaction generated
net proceeds of approximately $8.8 million. Patriot recorded a loss on the sale of approximately $6.6 million.
On April 30, 1999, Patriot sold the following hotels: Hampton Inn Rochester, Hampton Inn Jacksonville, Hampton
Inn Cleveland, and the Hampton Inn Canton, for net proceeds of approximately $23.5 million and recognized a loss
of approximately $1.4 million.
On May 7, 1999, Patriot exercised its option to purchase the interest in ISIS 2000, formerly owned by certain related
parties and Old Wyndham senior executive officers, for a cash payment of $3.1 million. Subsequent to the exercise
of the option, Wyndham owns 100% of this entity which provides reservations and other services to Wyndham.
On May 11, 1999, Wyndham sold the Holiday Inn Sebring for net proceeds of approximately $4.1 million, and recognized
a gain of approximately $0.6 million.
On May 18, 1999, Wyndham purchased the Billerica hotel for a total purchase price of approximately $23.8 million
including the assumption of debt of $16.4 million.
Equity Investment
Effective June 30, 1999, Wyndham completed a $1 billion equity investment with a group of investors. Pursuant to
the terms of this investment Wyndham issued 9.55 million shares of series B preferred stock in exchange for gross
proceeds of $955 million, representing an approximate 41% voting control of Wyndham. Wyndham incurred approximately
$76.4 million in costs directly attributable to the equity investment. The remaining $45 million of this investment
was funded through the transfer of one of the investor's loan receivable from PAH Realty Company, LLC. to Wyndham
International Inc. for the purchase of 450,000 shares of series B preferred stock. Among other terms, this series
B preferred stock pays quarterly dividends on a cumulative basis, at a rate of 9.75% per year, and is convertible
at the holders option into Wyndham class B common stock.
For a period of 170 days following the completion of the investment, Wyndham may redeem up to $300 million of the
series B preferred stock at a redemption price of $102.00 per share (102% of the stated amount) plus all accrued
dividends. Wyndham currently plans to fund this redemption with the proceeds of an offering to its stockholders
and the limited partners in the Operating Partnerships of rights to purchase three million shares of its series
A preferred stock, which generally will have the same economic terms as the series B preferred stock, but will
have no voting rights, except as required by law and except for a limited right to elect two directors if dividends
are in arrears for six quarterly periods.
Organizational Restructuring
As a condition of the above investment, Old Wyndham was required to terminate its pairing agreement with Patriot
and restructured its existing organization such that Patriot became a wholly-owned subsidiary of Wyndham. Patriot's
status as a real estate investment trust terminated effective January 1, 1999, and Patriot became a taxable corporation
as of that date.
Wyndham recorded a one-time charge of $675 million as required by SFAS No. 109 to establish a deferred tax liability
that resulted from Patriot's change in tax status from a REIT to a C corporation. This charge is included in income
tax expense in the accompanying 1999 condensed consolidated statement of operations.
Wyndham also recorded a restructuring charge of $185.4 million as a result of the termination of the paired share
structure, and management's decision to exit out of certain activities, resulting in the write-down of certain
nonstrategic assets, and costs to sever certain employees. Wyndham recorded a charge of approximately $83.1 million
for the write off of the unamortized intangible asset associated with the paired share structure which was abandoned
June 30, 1999. In addition, Wyndham incurred approximately $4.7 million in severance and employee related costs
for seven employees in the New York corporate office and two employees in the Dallas corporate office. The New
York office was closed on June 30, 1999 and its employees were terminated at that time. Wyndham has paid $1.5 million
in the form of cash and forgiveness of debt, the remaining unpaid portion of $3.2 million has been included in
accrued liabilities at June 30, 1999. Wyndham recorded a charge of $82.3 million for the write-down of assets to
estimated fair value including $28.4 million of goodwill as a result of management's strategy to exit from the
European market for their non-branded assets which will be sold. In addition, Wyndham recorded costs of $7.0 million
associated with anticipated staffing reductions and other exits costs necessary to reduce Wyndham's infrastructure
in Arcadian International, Wyndham's management division in Europe. Included in accounts payable and accrued expenses
at June 30, 1999 was $3.2 million related to severance costs to terminate 67 employees in the European office and
$2.7 million related to other exit costs, primarily lease cancellations. Wyndham expects these actions to be completed
by March 2000.
In addition, a charge of $8.3 million for the tradename intangibles attributable to the Carefree brand was recorded,
as management has decided that none of the owned or managed assets will carry the Carefree brand now or in the
future.
As part of the restructuring the preferred stockholders of Old Wyndham were offered an opportunity to exchange
their preferred stock for Wyndham Class A common stock. Each of the 1.78 million shares of Old Wyndham series A
preferred stock and each of the 1.78 million shares of Old Wyndham series B preferred stock were exchanged for
one share of Wyndham Class A common stock.
Pursuant to the merger of a wholly-owned subsidiary of Old Wyndham with Patriot, each outstanding paired share
and shares of Patriot series A preferred stock was converted into a single share of Wyndham class A common stock
and each outstanding share of Patriot series B preferred stock was converted into $25 per share and $1.61 of accrued
dividends, or an aggregate of $14.9 million in cash.
Additionally, the third party limited partners in both the Patriot Partnership and the Wyndham Partnership were
offered an opportunity to exchange their limited partnership interests for Wyndham Class A common stock. As a result,
an additional 15.1 million shares of Wyndham Class A common stock were issued in exchange for limited partnership
units in the Operating Partnerships. The effect of the exchange of certain limited partners' interests for Wyndham
Class A common stock, resulted in an adjustment to the basis of certain assets from the application of EITF 95-7.
This adjustment is reflected in the accompanying condensed consolidated balance sheet as a reduction in basis of
Wyndham's investment in real estate and related improvements of $37.2 million, investment in unconsolidated subsidiaries
of $2.6 million and goodwill and intangibles of $78.4 million.
Interstate's Third-Party Hotel Management Business
On May 27, 1998, Wyndham and Old Interstate entered into a settlement agreement, as amended, with Marriott which
addressed certain claims asserted by Marriott in connection with Wyndham's then proposed merger with Old Interstate.
The settlement agreement provided for the dismissal of litigation brought by Marriott, and allowed Wyndham's merger
with Old Interstate to close. In addition to dismissal of the Marriott litigation, the settlement agreement provides
for the re-branding of ten Marriott hotels under the Wyndham name, the assumption by Marriott of the management
of ten Marriott hotels formerly managed by Old Interstate for the remaining term of the Marriott franchise agreement,
and the spin-off by Wyndham of the third-party management business.
Effective June 18, 1999, Wyndham distributed approximately 92% of Interstate in the form of a dividend to shareholders.
Shareholders of record on June 7, 1999 received one share of newly issued Interstate stock for every thirty paired
shares of Patriot and Old Wyndham. The remaining 8% is owned equally by Wyndham and Marriott International, Inc.
As a result of the spin-off, Wyndham now also owns an approximate 55% non- controlling interest in the subsidiary
of Interstate which now operates the third-party management business that Wyndham acquired from Old Interstate.
Forward Equity Contracts
Wyndham's aggregate obligation under the forward equity contracts was approximately $335.8 million at June 30,
1999. Effective June 30, 1999, Wyndham settled in full all of the forward equity contracts in cash, with part of
the proceeds of the $1 billion equity investment. The 100.7 million shares owned or held by the counterparties
were retired effective June 30, 1999.
WYNDHAM INTERNATIONAL, INC.
Results of Operations: Quarter Ended June 30, 1999 Compared with Quarter Ended June 30, 1998
For the three months ended June 30, 1999, Wyndham (including its consolidated subsidiaries) had hotel revenues
of $628,332,000 as compared to $422,010,000 during the three months ended June 30, 1998. Of the approximate $206,322,000
increase, approximately $137,057,000 was a result of hotels acquired in the Interstate Merger and the Summerfield
acquisition. These two transactions were completed in June of 1998. The second contributing factor is the acquisition
of leaseholds, from CHC Lease Partners, DTR North Canton Inc. (the "Doubletree Lessee") and North Coast
Hotels, L.L.C. ("North Coast"). In the second quarter of 1998, the income generated from these leases
was reflected as participating lease income. In the second quarter of 1999, approximately $45,253,000 was reflected
as hotel revenues, adding to the increase in hotel revenues between periods. Hotel expenses increased from $299,021,000
to $450,544,000, as with revenues, the vast majority of this increase is a result of the two transactions, which
occurred in June of 1998, and the acquisition of the leaseholds.
As discussed above, the decline in participating lease revenue to $255,000 in the second quarter of 1999 from $13,505,000,
was a result of the acquisition of the leaseholds from third party lessees. At June 30, 1999, Wyndham owned one
hotel that was leased to a third party, as compared to fourteen in June of 1998.
Management fee and service fee income was $20,427,000 and $22,982,000 for the three months ended June 30, 1999
and 1998, respectively. The decrease is primarily the result of a decrease in incentive fee income associated with
seventeen management contracts which were renewed in 1998 with no provision for Wyndham to earn incentive fees.
Interest and other income decreased from $5,024,000 for the three months ended June 30, 1998 to $2,139,000 for
the three months ended June 30, 1999. This decline was due to a termination fee of $2,950,000, in 1998 recorded
as other income for the termination of a management contract, in the second quarter of 1998.
Total revenues and expenses from the racecourse facility operations were $1,942,000 and $2,673,000 respectively,
for the three months ended June 30, 1998. There were no revenues or expenses for the same period in 1999, as the
racetrack operations were sold in February of 1999.
General and administrative expenses were $60,962,000 for the three months ended June 30, 1999 as compared to $20,502,000
for the same period last year. This $40,460,000 increase is due in part to the overhead required due to the growth
in the portfolio of managed and leased hotels since 1998. However, a significant portion is due to several additional
factors as follows:
As a result of the $1 billion equity investment, Wyndham incurred costs of $6,737,000 due to acceleration of vesting
of certain employees' stock awards and incurred $3,309,000 of expenses in
reviewing different strategic alternatives. The reorganization resulted in the work associated with a high yield
bond offering and a bond offering in Puerto Rico to cease resulting in a write-off of costs associated with the
offerings totaling $3,687,000, and $2,390,000 in other abandoned transaction costs.
Wyndham also incurred $2,671,000 in legal and unwind fees in order to settle the forward equity contracts at June
30, 1999 and $3,704,000 of costs associated with the spin-off of Old Interstate's third-party management business.
Wyndham also recorded $4,495,000 in bad debt expense for the write-off of receivables from a hotel that Wyndham
no longer intends to manage and has given notice to terminate the management contract.
In addition, Wyndham has also reflected in general and administrative expenses, costs of $2,867,000 for the quarter
associated with becoming Year 2000 compliant.
As discussed in Note 4, Wyndham recorded a restructuring charge of $185,382,000. The charge primarily consisted
of the following: $83,094,000, for the write off of an intangible asset associated with the paired share structure
which was abandoned June 30, 1999, and $4,667,000 for severance payments due to the elimination of job responsibilities.
In addition, Wyndham reflected $82,299,000 in costs to write-down assets to estimated fair values, including goodwill
of $28,394,000, as a result of management's strategy to exit from the European market for their non-branded assets
which will be sold, and $7,059,000 in staffing reductions and other exit costs, primarily lease cancellations,
necessary to reduce Wyndham's infrastructure in Arcadian International, Wyndham's management division in Europe.
In addition, a charge of $8,263,000 for the tradename intangibles attributable to the Carefree brand was recorded,
as management has decided that none of the owned or managed assets will carry the Carefree brand now or in the
future.
Depreciation and amortization expense was $80,796,000 for the three months ended June 30, 1999 compared to $51,326,000
for the three months ended June 30, 1998. This increase results from the hotels acquired in June of 1998 from the
Interstate and Summerfield acquisitions.
Interest expense for the three months ended June 30, 1999 was $90,985,000 compared to $53,494,000 in 1998 resulting
in an increase of $37,491,000. The increase in interest expense is in part due to an additional $1.45 billion in
debt borrowed on June 2, 1998, in order to complete the Interstate Merger. This debt resulted in interest expense
and related amortization of loan costs of $29,417,000 for the quarter ended June 30, 1999 as compared to $3,968,000
for the quarter ended June 30, 1998. In addition, $11,700,000 in fees were recorded during the quarter ended June
30, 1999 as interest expense for the extension of certain maturities relating to the credit facility. The remaining
increase is due to the mortgage debt assumed in the Interstate transaction, and the refinancing of other mortgage
debt.
The primary components of interest expense for the three months ended June 30, 1999 are $52,291,000 of interest
related to the revolving credit facility and term loans, $21,426,000 of interest on mortgage notes, $12,333,000
of amortization of deferred financing costs and $6,672,000 of other interest related to other miscellaneous notes,
capital lease obligations and commitments payable. Interest expense for the three months ended June 30, 1998 consists
primarily of $32,429,000 of interest on the credit facility, and $10,669,000 of mortgage note balances outstanding,
$5,374,000 of amortization of deferred financing costs and $7,438,000 of interest related to other miscellaneous
notes, capital lease obligations and commitments payable. Additionally, Wyndham capitalized interest totaling $1,737,000
and $2,416,000 for the three months ended June 30, 1999 and 1998, respectively, associated with major renovations
of certain hotel properties.
In connection with the acquisition of certain leaseholds and license agreements, Wyndham recognized an expense
of $57,062,000 related to the cost of acquiring these agreements for the second quarter of 1998, no such expenses
were recognized for the same period in 1999.
In 1999, Wyndham recognized $8,102,000 of net losses related to the disposition of assets during the second quarter.
Wyndham's share of income from unconsolidated subsidiaries was $1,230,000 for the three months ended June 30, 1999
as compared to $2,293,000 in 1998.
The provision for income taxes increased to $645,496,000 for the three months ended June 30, 1999 from $932,000
for the three months ended June 30, 1998. The increase is primarily due to the $675,000,000 charge recorded during
June 1999 due to Patriot converting from a REIT to a C corporation, and the operations of certain special purpose
controlled subsidiaries, which separately report and pay taxes on their taxable income. For federal income tax
purposes, the taxable income from these entities cannot be consolidated with Wyndham's taxable income or loss,
and hence cannot be offset by operating losses created at the Wyndham Partnership.
Wyndham repaid certain debt obligations of Interstate and Summerfield and, as a result, Wyndham incurred certain
prepayment penalties and wrote off the remaining balance of unamortized deferred financing costs associated with
such debt in the amount of $11,843,000 net of minority interest, and income tax effects in 1998. In 1999, because
of the new financing obtained, Wyndham wrote off the remaining balance of unamortized deferred financing costs
associated with the Old Credit facility resulting in an extraordinary loss of $9,838,000, net of minority interest,
and income tax effects.
As a result, the net loss was $877,230,000 for the three months ended June 30, 1999 and $26,254,000 for the three
months ended June 30, 1998.
Results of Operations: Six Months Ended June 30, 1999 Compared withSix Months Ended June 30, 1998
For the six months ended June 30, 1999, hotel revenues were $1,267,162,000 as compared to $712,653,000 during the
six months ended June 30, 1999. Of the approximate $554,509,000 increase, approximately $407,857,000 was attributable
to 1998 acquisitions including Interstate, Summerfield, Arcadian International and WHG. In addition, the purchase
of the remaining third party leaseholds interests, primarily CHC Lease Partners, NorthCoast Hotels, and Doubletree
Lessee, on June 30, 1998, December of 1998, and January of 1999 led to increases of hotel revenue of $94,067,000
as the operations of the hotels during 1999 were consolidated in the statement of operations, whereas in 1998,
Wyndham was receiving a participating rent payment. Hotel expenses increased from $499,874,000 in 1998 to $896,276,000
in 1999. As with revenues, the vast majority of this increase is a result of these acquisitions, and the acquisition
of the leaseholds. As a percentage of revenue, gross operating profits remained relatively constant between periods.
As discussed above, the contributing factor of the decline in participating lease revenue from $34,070,000 during
the six months ended June 30, 1998, to only $588,000 for the same period in 1999 was the acquisition of the third
party leaseholds. At June 1999, Wyndham leases only one hotel to a third party lessee as compared to 14 in June
of 1998.
Management fee and service fee income was $43,218,000 and $36,821,000 for the six months ended June 30, 1999 and
1998, respectively. The increase is primarily the result of the acquisition of the third party management contracts
during 1998 resulting from the Interstate merger and the Summerfield acquisition.
Interest and other income remained relatively constant between periods, decreasing slightly from $6,734,000 in
1998 to $6,699,000 in 1999.
Total revenues from the racecourse facility operations (including interest and other income) were $4,561,000 for
the six months ended June 30, 1999 compared to $24,991,000 for the same period last year. Total costs and expenses
associated with the racecourse operations (included marketing costs, and general and administrative expenses) were
$3,867,000 for the six months ended June 30, 1999 compared to $20,857,000 for the same period last year. These
decreases are due to the sale of Bay Meadows racecourse effective February 1999.
General and administrative expenses were $111,358,000 for the 1999 period compared to $37,808,000 for the 1998
period. In part, the increase is due to the overhead required due to the growth in the portfolio of owned managed
and leased hotels during 1998. However, the significant portion of the increase was due to several factors as follows:
As a result of the $1 billion equity investment, Wyndham incurred costs of $6,737,000 due to the acceleration of
vesting of certain employees' stock awards and Wyndham incurred $3,309,000 of expenses
in reviewing different strategic alternatives. The reorganization resulted in work associated with a high yield
bond offering and a bond offering in Puerto Rico to cease, resulting in a write-off of costs associated with the
offerings totaling $3,687,000, and $5,038,000 in other abandoned transaction costs.
Wyndham also incurred $4,681,000 in legal and unwind fees in order to settle the forward equity contracts at June
30, 1999 and $3,704,000 of costs associated with the spin-off on Intestate's third-party management business.
In addition, Wyndham has also reflected in general and administrative expenses, costs associated with becoming
Year 2000 compliant of $3,554,000 during 1999.
Wyndham also recorded $4,495,000 in bad debt expense for the write-off of receivables from a hotel that Wyndham
no longer intends to manage and has given notice to terminate the management contract.
Cost of acquiring license agreements and leaseholds was $803,000 for the six months ended June 30, 1999 as compared
to $57,062,000 for the same period in 1998. This decrease is primarily due to the prior year amount including the
purchase of 17 leasehold interest acquired in connection with the CHCI merger.
As discussed in Note 4, Wyndham recorded $185,382,000, of costs associated with the restructuring. The costs primarily
consisted of the following: $83,094,000 for the write off an intangible asset associated with the paired share
structure which was abandoned June 30, 1999, and $4,667,000 associated with severance payments due to the elimination
of job responsibilities. In addition, Wyndham reflected $82,299,000 in costs to write-down assets to estimated
fair values, including goodwill of $28,394,000 as a result of management's strategy to exit from the European market
for non-branded assets which will be sold, and $7,059,000 in staffing reductions and other exit costs, primarily
lease cancellations, necessary to reduce Wyndham's infrastructure in Arcadian International, Wyndham's management
division in Europe. Wyndham also recorded a charge of $8,263,000 for the write-off of the Carefree trade name that
will no longer be used with any existing or future hotels.
Interest expense for the six months ended June 30, 1999 was $181,200,000 as compared to $89,451,000 for the same
period last year. The increase is due in part to the closing of $1.45 billion in debt in June of 1998 for the merger
with Old Interstate. Related to this increased debt, interest of $3,968,000 was reflected for one month in June
of 1998, as compared to $53,528,000 for the six months in 1999. Secondly, as a result of extending certain maturities
of the credit facilities, Wyndham paid $11,700,000 in fees which has been reflected in interest expense. Finally,
Wyndham assumed, and incurred additional debt in order to finance the Summerfield, Interstate and Arcadian transactions
during 1998.
The primary components of interest expense for the six months ended June 30, 1999 are $104,919,000 of interest
related to the revolving credit facility and term loans, $41,162,000 of interest on mortgage notes, $24,821,000
of amortization of deferred financing costs and $14,864,000 of other miscellaneous notes, capital lease obligations
and commitments payable. Interest expense for the six months ended June 30, 1998 consists primarily of $54,987,000
of interest on the credit facility, $21,014,000 on mortgage note balances outstanding, $8,984,000 of amortization
of deferred financing costs and $9,077,000 of interest related to other miscellaneous notes, capital lease obligations
and commitments payable. Additionally, Wyndham capitalized interest totaling $4,566,000 and $4,611,000 for the
six months ended June 30, 1999 and 1998, respectively, associated with major renovations of certain hotels.
Depreciation and amortization expense was $156,905,000 for the six months ended June 30, 1999 compared to $86,929,000
for the six months ended June 30, 1998. Of the $69,976,000 increase, $54,904,000 was attributable to the significant
transactions which occurred during the first six months of 1998, which included Arcadian International in April
of 1998, Summerfield and Interstate in June of 1998. The remaining increase is due to depreciation on renovations
at the hotels and amortization of goodwill.
In 1999, Wyndham also recognized $5,327,000 of net losses related to the disposition of assets.
Wyndham's share of income from unconsolidated subsidiaries was $3,931,000 for the six months ended June 30, 1999
as compared to $5,487,000 for the six months ended June 30, 1998.
The provision for income taxes increased from $4,490,000 for the six months ended June 30, 1998 to $654,439,000
for the six months ended June 30, 1999. The increase is primarily due to the $675,000,000 charge recorded during
June 1999 due to Patriot converting from a REIT to a C corporation, and the operations of certain special purpose
controlled subsidiaries, which separately report and pay taxes on their taxable income. For federal income tax
purposes, the taxable income from these subsidiaries cannot be consolidated with Wyndham's taxable income or loss
and hence can not be offset by operating losses created at the Wyndham Partnership.
Minority interest's share of loss associated with the Operating Partnerships was $6,642,000 for the six months
ended June 30, 1999 as compared to $1,447,000 for the same period last year due to increased losses in the Operating
Partnerships.
Minority interest's share of income in Wyndham's other consolidated subsidiaries was $4,064,000 in 1999 as compared
to $3,014,000 in 1998.
For the six months ended 1998, certain debt obligations of Old Wyndham, Interstate and Summerfield were repaid
upon the merger and acquisition of these entities. As a result, Wyndham incurred certain prepayment penalties and
wrote off the remaining balance of unamortized deferred financing costs associated with such debt resulting in
an extraordinary loss of $30,560,000, net of minority interest and income taxes. In connection with the new debt
financing in 1999, Wyndham wrote off the remaining balance of unamortized deferred financing costs associated with
the Old Credit facility resulting in an extraordinary loss of $9,838,000, net of minority interest and income taxes.
As a result, the net loss was $876,658,000 for the six months ended June 30, 1999 and $7,842,000 for the six months
ended June 30, 1998.
Results of Reporting Segments: Quarter Ended June 30, 1999 Compared with Quarter Ended June 30, 1998
Wyndham's results of operations are classified into six reportable segments. Those segments include Wyndham hotels,
resort properties, all suite properties, other proprietary branded properties, non-proprietary branded properties
and other.
Wyndham hotel properties include Wyndham Hotels, Wyndham Gardens and Wyndham Grand Heritage and represent approximately
22.5% and 25.3% of total revenue for the three months ended June 30, 1999 and 1998, respectively. Total revenue
was $146,640,000 compared to $117,841,000 for the quarters ended June 30, 1999 and 1998, respectively. The increase
is primarily due to the conversion of other non proprietary assets acquired in June of 1998 to Wyndham hotels.
Operating income for the Wyndham hotels was $40,861,000 compared to $29,192,000 for the quarters ended June 30,
1999 and 1998, respectively.
Resort hotel properties, including Grand Bay and Wyndham represent approximately 19.3% and 26.9% of total revenue
for the quarters ended June 30, 1999 and 1998, respectively. Total revenue was $125,976,000 compared to $125,392,000
for the quarters ended June 30, 1999 and 1998, respectively. Operating income for the resort properties was $29,014,000
compared to $32,373,000 for the quarters ended June 30, 1999 and 1998, respectively.
All suite properties, including Summerfield and Sierra represent approximately 5.4% and 2.2% of total revenue for
the three months ended June 30, 1999 and June 30, 1998. Total revenue and operating income were $35,192,000 and
$7,931,000, respectively for the three months ended June 30, 1999, and $10,175,000 and $814,000, respectively,
for the three months ended June 30, 1998. The increase is because the portfolio was not acquired until June of
1998.
Other proprietary branded properties including Malmaison, Grand Heritage, Clubhouse and hotels acquired in the
Arcadian acquisition, represent approximately 3.9% and 5.2% of total revenue for the quarters ended
June 30, 1999 and 1998, respectively. Total revenue was $25,087,000 compared to $24,060,000 for the quarters ended
June 30, 1999 and 1998, respectively. Operating income for these properties was $7,922,000 and $8,203,000 for the
quarters ended June 30, 1999 and 1998, respectively.
Non proprietary branded properties including Hilton, Holiday Inn, Marriott, Ramada, Radisson, Hampton and other
major hotel franchises, represent approximately 45.4% and 31.1% of total revenue for the quarters ended June 30,
1999 and 1998, respectively. Total revenue was $295,436,000 compared to $144,541,000 for the quarters ended June
30, 1999 and 1998, respectively. The increase is due primarily to the acquisition of the owned and leased Interstate
properties; the leasehold interests in CHC Lease Partners and North Coast hotels in June and December of 1998,
respectively; as well as several other leasehold acquisitions throughout 1998. After accounting for these changes,
there was no significant change in revenue from 1998. Operating income for these properties was $71,945,000 and
$45,779,000 for the quarters ended June 30, 1999 and 1998, respectively. After accounting for the above acquisitions,
operating income was consistent with 1998.
Other represents revenue from various operating businesses including management and other service companies, and
participating lease revenue for one hotel and a parcel of land. Expenses in this segment are primarily interest,
depreciation, amortization and corporate general and administrative expenses. Wyndham recorded restructuring expenses
that have also been included in this segment. Total revenue for the other segment was $22,822,000 and $43,454,000
for the quarters ended June 30, 1999 and 1998, respectively. The overall $20,632,000 decrease in this segment's
revenue was caused by several factors including, the sale of the Bay Meadows Race Track operations and leasehold
effective February 1, 1999 which reduced revenue by approximately $1,942,000. The purchase of the remaining third
party leasehold interests, primarily CHC Lease Partners and North Coast Hotels in June and December of 1998, respectively,
reduced participating lease revenue by $13,250,000. Operating losses for the segment were $383,291,000 and $134,976,000
for the quarters ended June 30, 1999 and 1998, respectively. In addition to the decrease in revenues, the increase
in the segment's operating loss is a result of increased expenses resulting from the mergers and acquisitions in
1998. Interest expense increased $37,491,000, depreciation and amortization increased $29,470,000 and corporate
general and administrative expense increased $40,460,000. The sale of the Bay Meadows Race Track accounted for
an approximate $2,673,000 decrease in expenses. Wyndham also recorded a restructuring charge of $185,382,000.
Results of Reporting Segments:
Six months Ended June 30, 1999 Compared with Six months Ended June 30, 1998
Wyndham hotel properties represent approximately 21.9% and 33.1% of total revenue for the six months ended June
30, 1999 and 1998, respectively. Total revenue was $289,936,000 in 1999 as compared to $269,647,000 or an increase
of 7.5%. Operating income was $82,846,000 in 1999 as compared to $72,781,000 in 1998. The increase is primarily
a result of the rebranding of certain hotels acquired in 1998 from non-proprietary brand to Wyndham Hotels.
Resort hotel properties represent approximately 21.6% and 24.6% of total revenue for the six months ended June
30, 1999 and 1998 respectively. Total revenue increased from $200,226,000 to $285,655,000 while operating income
increased from $59,172,000 in 1998 to $87,157,000 in 1999. The increase is primarily due to the acquisition of
the remaining partner's interest in WHG in March of 1998. Prior to the acquisition, Wyndham accounted for its investment
in El Conquistador and El San Juan, on the equity basis of accounting. Subsequent to the purchase of the partners'
interest, the operations were consolidated into the statement of operations.
All suite properties represent approximately 5.2% and 1.2% of total revenue for the six months ended June 1999,
as compared to 1998. Total revenue increased from $10,175,000 to $68,305,000 and operating income increased from
$814,000 to $14,410,000 for the six months ended 1998 to 1999, respectively. Summerfield was not acquired until
June of 1998; the timing of the acquisition is the primary reason for the increase of both revenues and operating
income.
Other proprietary branded properties represent approximately 3.5% and 3.6% of total revenue for the six months
ended June 1999, as compared to 1998. Total revenue increased from $29,265,000 to $46,710,000 and operating income
increased from $10,060,000 to $13,477,000 for the six months ended 1998 to 1999. The hotels acquired in the Arcadian
acquisition were not acquired until April of 1998, accounting primarily for the increase of both revenues and operating
income.
Other nonproprietary branded properties represent approximately 43.6% and 24.9% of total revenue for the six months
ended June 1999, as compared to 1998. Total revenue increased from $203,340,000 to $576,557,000 and operating income
increased from $61,021,000 to $136,479,000 for the six months ended 1998 to 1999, respectively. The increase is
due primarily to the acquisition of the owned and leased Interstate properties; the leasehold interest in CHC Lease
Partners, NorthCoast, and the Doubletree Lessees. After accounting for these changes, there were no significant
changes in revenue and operating income between periods.
Other represents revenue from various operating businesses including management and other service companies, and
participating lease revenue for one hotel and a parcel of land. Expenses in the segment are primarily interest,
depreciation and amortization and cooperate general and administrative expenses. In 1999, Wyndham also recorded
restructuring expenses that have also been included in this segment. Total revenue for the other segment was $55,065,000
and $102,616,000 for the six months ended June 30, 1999 and June 30, 1998 respectively. The overall $47,551,000
decrease in this segment's revenue was caused by several factors. The sale of Bay Meadows Race Track operations
and leasehold effective February 1, 1999 reduced revenue by $20,430,000. The purchase of the third party leasehold
interests, primarily CHC Lease Partners and NorthCoast Hotels reduced participating lease revenue by $33,482,000.
The decrease in revenues was partially offset by increases in management and service fees due to additional management
contracts acquired in the Interstate, and Summerfield acquisitions. Operating losses for the segment were $553,259,000
and $180,560,000 for the six months ended June 30, 1999 and 1998, respectively. In addition to the decrease in
revenues, the increase in the segment's operating loss is a result of increased expenses resulting from the mergers
and acquisitions in 1998. Interest expense increased $91,749,000, depreciation and amortization increased $69,976,000
and corporate and general and administrative expenses increased $69,055,000. The sale of the Bay Meadows Racetrack
accounted for an approximate $16,990,000 decrease in expenses, and the cost of acquiring the third party leaseholds
in 1998 decreased expenses by an additional $56,259,000. However, Wyndham recorded a restructuring charge in the
second quarter of 1999, for $185,382,000 contributing to the loss in this segment.
Statistical Information
During 1999, Wyndham's portfolio of owned and leased hotels, experienced continued growth in both average daily
rate ("ADR") and revenue per available room ("REVPAR") of approximately 3.0% and 1.4% for the
three months ended June 30, 1999, and 3.5% and 1.9% for the six months ended June 30, 1999, respectively, while
occupancy remained relatively stable. Management attributes this growth to continued marketing efforts throughout
the portfolio on hotels that have been newly renovated, and repositioned in certain cases, as well as to the current
strength of market conditions in the U.S. lodging industry. The following table sets forth certain statistical
information for Wyndham's owned and leased hotels for the three and six month periods ended June 30, 1999 and 1998
as if the hotels were owned at the beginning of the periods presented.
|
Three months ended June 30 |
||||||||
|
Occupancy |
ADR |
REVPAR |
Occupancy |
|||||
|
1999 |
1998 |
1999 |
1998 |
1999 |
1998 |
1999 |
1998 |
|
| Wyndham Branded Hotels |
74.2% |
75.2% |
$120.65 |
$116.13 |
$89.57 |
$ 87.36 |
72.9% |
73.8% |
Grand Bay Hotels & Resorts |
69.1 |
68.1 |
263.07 |
258.72 |
181.68 |
176.13 |
71.4 |
72.1 |
Summerfield and Sierra Suites |
82.5 |
85.4 |
117.78 |
115.50 |
97.13 |
98.62 |
80.0 |
82.2 |
| Malmaison |
85.6 |
74.4 |
125.82 |
118.15 |
107.75 |
87.90 |
83.3 |
76.2 |
| Clubhouse |
61.5 |
71.8 |
68.97 |
68.57 |
42.45 |
49.23 |
58.3 |
68.0 |
| Arcadian |
64.7 |
63.0 |
124.91 |
124.54 |
80.79 |
78.50 |
58.4 |
56.4 |
| Non Proprietary Brands |
73.9 |
75.4 |
103.49 |
101.50 |
76.52 |
76.53 |
71.0 |
72.4 |
| Weighted Average |
74.6% |
75.8% |
$113.46 |
$110.16 |
$84.60 |
$83.47 |
72.2% |
73.4% |
|
Six months ended June 30 |
|||
|
ADR |
REVPAR |
||
|
1999 |
1998 |
1999 |
1998 |
|
$129.76 |
$123.80 |
$ 94.60 |
$ 91.36 |
|
311.91 |
311.21 |
222.61 |
224.25 |
|
119.27 |
116.69 |
95.38 |
95.96 |
|
125.49 |
117.00 |
104.60 |
89.21 |
|
69.24 |
68.53 |
40.37 |
46.57 |
|
121.18 |
116.67 |
70.77 |
65.81 |
|
103.56 |
101.32 |
73.51 |
73.37 |
|
$117.72 |
$113.72 |
$ 85.01 |
$ 83.45 |
Cash and cash equivalents as of June 30, 1999 were $252.5 million, including restricted cash of $93.9 million. Cash and cash equivalents as of June 30, 1998 were $163.5 million, including capital improvement reserves of $25.2 million.
Cash Flow Provided by Operating Activities
Wyndham's principal source of cash to fund operating expenses and pay dividends on its preferred stock is cash flow provided by operating activities. Wyndham's principal source of cash flow is from the operation of the hotels that it owns, leases and manages. Cash flows from operating activities were $127.1 million for the six months ended June 30, 1999, and $152.7 million for the six months ended June 30, 1998. The decrease is primarily due to increased interest expense, and general and administration expenses related to evaluating strategic alternatives, and certain severance costs.
As a result of the reorganization, Wyndham will pay significantly more in federal income taxes, but will have the ability to retain significantly more earnings than was previously the case because Wyndham is not required to distribute at least 95% or more of its taxable income to its shareholders. Wyndham anticipates that its enhanced ability to retain earnings will allow it to utilize cash flow from operating activities to fund maintenance, capital expenditures and acquisitions. Wyndham does not anticipate paying a dividend to its common shareholders. However, as a result of the issuance of the series B preferred stock, for the first six years dividends are structured to ensure an aggregate fixed cash dividend payment of $29.25 million per year, so long as there is no redemption or conversion of the investors' preferred stock; therefore, for that period, dividends are payable partly in cash and partly in additional shares of preferred stock. For the following four years, dividends are payable in cash or additional shares of series B preferred stock as determined by the Board of Directors. After year ten, dividends are payable solely in cash.
Cash Flows From Investing and Financing Activities
Cash flows used in investing activities of Wyndham were $142.1 million for the six months ended June 30, 1999, resulting primarily from the acquisition of hotel properties, property renovations and improvements, and cash deposited as escrows and property improvement reserves. Cash flows provided by financing activities of $50.5 million for the six months ended June 30, 1999 were primarily related to the net proceeds from the sale of the series B preferred stock, the net proceeds from the new credit facility and the net proceeds from the new mortgage debt, partially offset by the repayment of the old credit facility, term loans, and the settlement of the forward equity contracts.
Cash flows used in investing activities of Wyndham were $1.4 billion for the six months ended June 30, 1998, resulting primarily from the acquisition of hotel properties and management companies, renovation expenditures at certain hotels, as well as cash deposited as collateral under the forward equity contracts. Cash flows from financing activities of $1.3 billion for the six months ended June 30, 1998 were primarily related to borrowings under the revolving credit facility and mortgage notes, and net proceeds from private placements of equity securities, net of payments of dividends and distributions.
As of June 30, 1999, Wyndham had approximately $1.3 billion outstanding under the term loan, $650 million outstanding under the increasing rate loan facility, and $50 million outstanding under the revolving credit facility. Additionally, Wyndham had outstanding letters of credit totaling $24.4 million. As of June 30, 1999, Wyndham also had over $1.5 billion of mortgage debt outstanding that encumbered 83 hotels and approximately $40.9 million in other debt, resulting in total indebtedness of approximately $3.5 billion. As of June 30, 1999, Wyndham had $425.6 million of additional availability under the new revolving credit facility.
Forward Equity Transactions
Wyndham's aggregate obligation under the forward equity transactions was approximately $335.8 million at June 30, 1999. Effective June 30, 1999, Wyndham settled in full all of the forward equity transactions in cash, with part of the proceeds of the $1 billion equity investment. The 100.7 million shares owned or held by the counterparties were retired effective June 30, 1999.
Credit Facility and Term Loan
Wyndham's old credit facility with The Chase Manhattan Bank, Chase Securities, Inc. and Paine Webber Real Estate consisted of a $900 million revolving credit facility and a series of term loans in the aggregate amount of $1.8 billion. Interest rates were based on Wyndham's leverage ratio and varied from 1.5% to 3% over LIBOR. On June 30, 1999 the credit facility and term loans were repaid with net proceeds of the $1 billion equity investment and the new credit facilities.
New Credit Facility
Concurrent with the closing of the $1 billion equity investment, Wyndham closed on a new $2.45 billion credit facility which consists of a $1.3 billion term loan with a seven year term, a $500 million revolving credit facility with a five year term, and a $650 million increasing rate loan facility with a five year term. Proceeds, net of closing costs and fees of approximately $41.1 million from the term loan and the revolving credit facility, and proceeds, net of closing costs and fees of approximately $17.9 million from the increasing rate loan facilities, were used to retire existing indebtedness.
Interest rates are based upon LIBOR spread varying from 2.75% to 3.50% per annum for the term loan, and 1.25% to 2.75% per annum for the revolving credit facility, based both on Wyndham's leverage ratio, as defined, and whether any increasing rate loans are outstanding. The term loan and the revolving credit facility are guaranteed by the domestic subsidiaries of Wyndham, and are secured by pledges of equity interest held by Wyndham and its subsidiaries. Wyndham's ability to borrow under its revolving credit facility is subject to Wyndham's compliance with a number of customary financial and other covenants, including total leverage and interest coverage ratios.
Interest rates for the increasing rate loans are based on LIBOR rates (less statutory reserves), plus 3.50% through September 30, 1999, and increasing 0.50% every three months, with a cap of LIBOR plus 4.75%. The lender under the increasing rate loans receive the benefit of the same guarantees and pledges of security provided under the new term loan, and revolving credit facility.
New Mortgage Debt
Effective June 30, 1999 Wyndham also closed on a $346 million mortgage loan with Bear, Stearns Funding, Inc., which is secured by twenty-five properties. The loan matures on July 1, 2004 and bears interest at the LIBOR rate, plus 3.25% per annum. Proceeds from the mortgage debt were used to retire existing mortgage indebtedness.
Additionally, effective June 30, 1999 Wyndham closed on a $235 million mortgage loan with Lehman Brothers Holdings Inc. which is secured by ten properties. The mortgage loan has a three-year term, with a one year extension option, and bears interest at the LIBOR rate plus 3.50% per annum, plus an additional 1.75% on the principal amount payable at maturity. Proceeds from this mortgage loan were used to retire existing mortgage indebtedness.
Renovations and Capital Improvements
During the first six months of 1999, Wyndham invested approximately $79.8 million in capital improvements and renovations. Management reserves an average of 4.0% of total hotel revenues, and believes such amounts are sufficient to fund recurring capital expenditures for the hotels. Capital expenditures, exclusive of renovations, may exceed 4.0% of total hotel revenues in a single year.
Wyndham attempts to schedule renovations and improvements during traditionally lower occupancy periods in an effort to minimize disruption to the hotel's operations. Therefore, management does not believe such renovations and capital improvements will have a material effect on the results of operations of the hotels. Capital expenditures will be financed through capital expenditure reserves or with working capital.
Inflation
Operators of hotels in general possess the ability to adjust room rates quickly. However, competitive pressures may limit Wyndham's ability to raise room rates in the face of inflation.
Seasonality
The hotel industry is seasonal in nature. Revenues for certain of Wyndham's hotels are greater in the first and second quarters of a calendar year and at other hotels in the second and third quarters of a calendar year. Seasonal variations in revenue at the hotels may cause quarterly fluctuations in the Wyndham's revenues.
Year 2000 Compliance
Many computer systems were not designed to interpret any dates beyond 1999, which could lead to business disruptions in the United States and internationally (the "Year 2000 issue"). Wyndham recognizes the importance of minimizing the number and seriousness of any disruptions that may occur as a result of Year 2000 and have adopted an extensive compliance program. The compliance program involves three major program areas:
. corporate information technology infrastructure and reservation systems
. other electronic assets, which include automated time clocks; point-of- sale systems; non-information technology systems, such as embedded technologies that operate fire-life safety systems, phone systems, energy management systems; and other similar systems
. third parties with whom Wyndham conducts business
Wyndham is applying a three phase approach to each program area:
. Inventory Phase identify systems and third parties that may be affected by Year 2000 issues
. Assessment Phase prioritize the inventoried systems and third parties, assess their Year 2000 readiness, and plan corrective actions
. Remediation Phase implement corrective actions, verify implementation, and formulate contingency plans
Wyndham has engaged a consulting firm to conduct the inventory and assessment phases of the compliance program. Wyndham has completed inventory and assessment phases with respect to the corporate information technology infrastructure and reservation systems. Wyndham has also completed the inventory and assessment phases with respect to the information technology and other electronic assets that are located in the hotels, other than some of the Hotels which are either managed, but not owned, by Wyndham or owned, but not leased or operated, by Wyndham (the "Third Party Compliance Hotels"). Based on those assessments and working with our consultants, it was determined which systems were not Year 2000 compliant and developed appropriate remediation plans.
Wyndham is implementing the necessary work to remediate those systems at its owned and leased hotels, and have completed 80 percent of that work. Wyndham engaged a consulting firm to provide the support and additional skills to effect the necessary remediation in sufficient time for testing and any necessary modifications.
Of the 93 Third Party Compliance Hotels that were not acquired in the merger with Interstate Hotels (the "Interstate Merger"), 66 Third Party Compliance Hotels have been assessed as part of the compliance program and we have begun to implement remediation plans at 52 of those hotels. The owners of the other 14 Third Party Compliance Hotels that were assessed have to date neither taken any action to effect the necessary remediation identified in the assessment nor authorized Wyndham to effect the remediation on behalf of the owners. While none of the remaining 27 Third Party Compliance Hotels have been assessed by the consultants, 20 of the owners have informed Wyndham that they completed their own assessments. Wyndham continues to monitor the status
of the Third Party Compliance Hotels and have reminded the owners of the importance of making the Third Party Compliance Hotels Year 2000 compliant in sufficient time to permit adequate testing. Wyndham is surveying the Year 2000 compliance of the owners of the hotels that are franchised under the Wyndham brand but not managed by Wyndham, and have informed those owners of the appropriate standards to make the equipment operating the systems Year 2000 compliant. However, as the systems at the Third Party Compliance Hotels and franchised hotels are not under Wyndham's control, Wyndham must rely on the information provided by those owners or managers/operators and will not be able to test the assessment or remediation effected by third parties at the Third Party Compliance Hotels or the franchised hotels.
Wyndham presently expects to expend approximately $34 million in connection with Year 2000 issues. As of June 30,1999, $2.0 million had been incurred in connection with the inventory and assessment phases of the compliance program and $9.9 million to remediate the systems. However, the anticipated expenditures may increase as the remediation plans are completed.
As part of the settlement of litigation arising out of the Interstate Merger, Wyndham agreed to contribute to a new company management of the Third Party Compliance Hotels acquired in that merger, and then dispose of substantially all of that new company's stock by means of a spin-off to stockholders or otherwise. That spin-off has been completed and Wyndham does not expect to bear any of the costs related to the inventory, assessment and remediation of those hotels.
Wyndham has identified the vendors and service providers that are critical to its businesses and have requested those parties to provide information concerning their Year 2000 compliance and remediation efforts. Wyndham has received responses from 55 percent of those vendors as of June 30, 1999. Wyndham is continuing to seek additional information from those parties that did not respond or did not provide sufficient information, but cannot guarantee that all vendors or service providers will comply with these requests. More importantly, Wyndham must rely on the information provided by the third parties and will not be able to test the third parties' compliance. As a result, Wyndham may not be able to accurately determine the Year 2000 compliance of those vendors or service providers. Based on preliminary responses, Wyndham believes that its most critical vendors and service providers will not cause its operations to be materially disrupted as a result of Year 2000 issues. During the remainder of 1999, Wyndham intends to determine the extent to which it will be able to replace vendors and service providers that are expected to be non-compliant. Due to the lack of alternate sources, however, in most instances Wyndham will be required to remain with non-compliant vendors or service providers. As the non-compliant vendors and service providers are identified, appropriate contingency plans will be determined.
Wyndham believes that its current compliance program will allow sufficient time to identify which of its systems and other electronic assets are not Year 2000 compliant and to effect the necessary remediation to avoid substantial problems arising from Year 2000 induced failures. Wyndham believes that its reprogramming, upgrading and systems replacements will be implemented by the end of the third quarter of 1999. Wyndham believes that this should provide adequate time to further correct any problems that did not surface during the implementation and testing for those systems. Notwithstanding that, Wyndham recognizes that some vendors and the owners and managers/operators of the Third Party Compliance Hotels may not comply with their present schedules and could affect timing and remediation efforts generally. If Wyndham is not successful in implementing its Year 2000 compliance plan, Wyndham may suffer a material adverse impact on its consolidated results of operations and financial condition.
In addition to those systems within our control and the control of our vendors and suppliers, there are other systems that could have an impact on our businesses and which may not be Year 2000 compliant by January 1, 2000. These systems could affect the operations of the air traffic control system and airlines or other segments of the lodging and travel industries, or the economy and travel generally. In addition, these systems could affect the Third Party Compliance Hotels or the hotels franchised under our brands whose owners and managers/operators
are implementing their own compliance programs. These systems are outside of our control or influence and their compliance may not be verified by Wyndham. However, these systems could adversely affect our financial condition or results of operation.
Wyndham is continuing to develop contingency plans to address potential Year 2000 induced failures. Because Wyndham has no control over third party assessment and remediation efforts, its contingency planning is focused on externally caused disruptions. Wyndham is developing its plans on the belief that the consequences of Year 2000 induced failures will be local in nature. Wyndham's plans will be based on existing contingency plans for operations during storms and other natural disasters. While each Hotel is developing a contingency plan, any disruption in utilities or other key local services could have the effect of disrupting operations of several hotels located in the affected geographic area. As part of the contingency planning, Wyndham is evaluating the continued management of the Third Party Compliance Hotels that do not become Year 2000 compliant. Wyndham's initial contingency plans are expected to be completed in October 1999.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISKS
Wyndham's primary market risk exposure is to future changes in interest rates related to the Companies' derivative financial instruments and other financial instruments including debt obligations, interest rate swaps, interest rate caps, and future debt commitments.
Wyndham manages its debt portfolio by periodically entering into interest rate swaps and caps to achieve an overall desired position of fixed and floating rates or to limit its exposure to rising interest rates.
The following table provides information about Wyndham's derivative and other financial instruments that are sensitive to changes in interest rates.
. For fixed rate debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity date and contracted interest rates at June 30, 1999. For variable rate debt obligations, the table presents principal cash flows by expected maturity date and contracted interest rates at June 30, 1999.
. For interest rate swaps and caps, the table presents notional amounts and weighted-average interest rates or strike rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at June 30, 1999.
1999 2000 2001 2002 2003 Thereafter Face Value Fair Value
-------- ---------- -------- -------- -------- ---------- ---------- ----------
(in thousands, except for share data)
Debt
Long-term debt
obligations including
Current Portion
Fixed Rate............. $ 2,290 $ 32,817 $ 8,322 $ 46,129 $ 6,766 $ 334,891 $ 431,215 $ 431,215
Average Interest Rate.. 8.71% 8.66% 7.85% 8.93% 8.56% 8.18%
Variable Rate.......... $ 65,093 $ 121,861 $140,047 $276,234 $ 78,208 $2,410,854 $3,092,297 $3,092,297
Average Interest Rate.. 7.70% 8.11% 7.82% 8.41% 7.64% 8.70%
Interest Rate Derivative
Financial Instruments
Related to Debt
Interest Rate Swaps
Pay Fixed/Receive
Variable.............. -- $ 91,640 $ 29,910 $500,000 $250,000 -- $ 871,550 $ 800
Average Pay Rate....... 5.96% 5.96% 5.98% 6.00% 5.84% --
Average Receive Rate... 5.96% 5.96% 6.00% 6.01% 6.05% --
Interest Rate Caps
Notional Amount........ $208,750 $1,500,000 $ 55,420 -- -- $ 30,000 $1,794,170 $ 415
Strike Rate............ 6.98% 6.97% 6.50% 8.50% 8.50% 8.50%
Forward Rate........... 5.60% 6.22% 6.46% 6.50% 6.61% 6.65%