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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(MARK ONE)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
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EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-6869
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PRIME HOSPITALITY CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-2640625
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
700 ROUTE 46 EAST, FAIRFIELD, NEW JERSEY 07004
(address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(201)882-1010
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, New York Stock Exchange
Par Value $.01 Per Share
Securities registered pursuant to Section 12(g) of the Act: Warrants To
Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
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The aggregate market value of the registrant's common stock held by
non-affiliates on April 17, 1995 based on the last sale price as reported
by the National Quotation Bureau, Inc. on that date was approximately
$306,834,440.
The Registrant had 30,683,444 shares of Common Stock outstanding as of
April 17, 1995.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes x No
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THIS ANNUAL REPORT ON FORM 10-K/A IS SUBMITTED FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994 FOR PRIME HOSPITALITY CORP., A DELAWARE CORPORATION ("THE
COMPANY" OR "PRIME"), AND ITS PREDECESSOR CORPORATION PRIME MOTOR INNS, INC.
("PMI"). ON JULY 31, 1992 (THE "EFFECTIVE DATE"), PMI MERGED WITH AND INTO THE
COMPANY, WHICH PRIOR TO SUCH MERGER HAD BEEN A WHOLLY-OWNED SUBSIDIARY OF PMI.
THE COMPANY WAS THE SURVIVING CORPORATION IN THE MERGER. THE COMPANY
IMPLEMENTED "FRESH START REPORTING" ON JULY 31, 1992 AND CHANGED ITS FISCAL
YEAR END FROM JUNE 30 TO DECEMBER 31.
THIS REPORT CONTAINS THE (A) COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF JULY
31, 1992, DECEMBER 31, 1993 AND 1994 AND CONSOLIDATED STATEMENTS OF INCOME,
STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE FIVE MONTHS ENDED DECEMBER 31, 1992
AND THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND (B) PMI'S CONSOLIDATED
BALANCE SHEET AS OF JUNE 30, 1992 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR ENDED JUNE 30,
1992 AND THE ONE MONTH ENDED JULY 31, 1992.
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY PRESENTED HEREIN WILL VARY
SIGNIFICANTLY FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF PMI. ACCORDINGLY,
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AS OF AND SUBSEQUENT TO
JULY 31, 1992 ARE NOT COMPARABLE IN ALL MATERIAL RESPECTS TO STATEMENTS OF PMI
AS OF ANY DATE PRIOR TO JULY 31, 1992. THE HISTORICAL CONSOLIDATED FINANCIAL
STATEMENTS OF PMI AND ITS SUBSIDIARIES HAVE BEEN PREPARED IN ACCORDANCE WITH
THE AICPA STATEMENT OF POSITION 90-7.
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PART I and PART II
Items 1 and 2. Business and Properties
General
BUSINESS
THE COMPANY
Prime is a leading hotel owner/operator with a portfolio of 87 hotels
totalling 12,743 rooms. Located primarily in secondary markets in 19 states and
the U.S. Virgin Islands, Prime's hotels operate either under franchise
agreements with hotel brands such as Marriott, Radisson, Sheraton, Holiday Inn,
Ramada and Howard Johnson, or under the Company's proprietary brand names,
AmeriSuites(R) and Wellesley Inns(R). The Company owns or leases 50 hotels
(the "Owned Hotels") and manages 37 hotels for third parties (the "Managed
Hotels"). Prime holds financial interests in the form of mortgages on or profit
participations in 17 of the Managed Hotels. In total, the Company has equity
or financial interests in 67 hotels containing approximately 10,000 rooms.
The Company operates in three major lodging industry segments:
full-service, all-suites and limited-service. Approximately 53% of Prime's hotel
rooms are in full-service hotels. The AmeriSuites hotels, which comprise
approximately 12% of the Company's hotel rooms, are mid-priced, all-suites
hotels, situated near office parks and travel destinations in the Southern and
Central United States. Prime also competes in the limited-service segment, which
comprises approximately 35% of its hotel rooms, primarily through its
economically priced Wellesley Inns, which are located in Florida, the Middle
Atlantic and the Northeast.
Prime is fundamentally committed to hotel equity ownership. Significant
elements of Prime's ownership strategy are strong in-house hotel management and
control of its proprietary brands, both of which have contributed to improved
hotel operating performance. Reflecting Prime's operating strengths, the
Company's hotels generated average operating profit margins that exceeded
comparable industry averages for 1993, as reported by industry sources, by
approximately 25% for full-service hotels, 21% for all-suites hotels and 6% for
limited-service hotels.
The Company's growth strategy is to:
- generate improved results at existing hotels through increased operating
efficiencies;
- acquire full-service hotels with potential for operating and marketing
improvements; and
- expand the AmeriSuites hotel brand to meet growing all-suites segment
demand.
The Company's strategy for improving results at its existing hotels
includes using sophisticated operating, marketing and financial systems and
capitalizing on the operating leverage inherent in the lodging industry.
Implementation of the Company's strategy, together with positive industry
trends, has produced improved performance in recent years. Exemplifying the
Company's operating leverage, during 1994 revenue per available room ("REVPAR")
increased 7.4% while net operating income increased 17.0%, as compared to the
prior year, for Company-owned comparable hotels, which are hotels that have
been open for all of 1993 and 1994. The Company expects further improvement
for the lodging sector and to continue to improve the performance of its
existing hotels.
The Company seeks to capitalize on its strength as a full-service hotel
owner/operator and the favorable outlook for the full-service segment by
continuing to pursue the acquisition of full-service hotels. In 1994 the Company
acquired four full-service hotels with approximately 1,000 rooms. With a
continued industry outlook for limited new room supply, steady demand growth and
acquisition prices at discounts to replacement cost in the full-service segment,
Prime believes that the acquisition of full-service hotels will continue to
provide significant growth opportunities.
Prime is also committed to developing its AmeriSuites all-suites hotel
brand. The Company believes that AmeriSuites provides an excellent guest
experience, and offers desirable suite accommodations and other amenities at
mid-scale prices. During the first quarter of 1995, the Company acquired the
option of ShoLodge, Inc. to purchase a 50% interest in 11 of the Company's 12
AmeriSuites hotels, acquired the only AmeriSuites hotel not already owned by
Prime and assumed management of all 12 of these AmeriSuites hotels
(collectively, the "ShoLodge Transaction"), thereby establishing Prime's
exclusive control over the AmeriSuites brand. Prior to completion of the
ShoLodge Transaction, the Company managed only one of the 13 AmeriSuites
hotels and the other 12 hotels were managed by ShoLodge, Inc. In 1994 the
Company opened four new AmeriSuites. The Company
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currently plans to open or commence construction of ten new AmeriSuites with
approximately 1,250 rooms in 1995. The Company already owns six development
sites for new AmeriSuites hotels and has begun construction at sites in Atlanta,
Greensboro and Miami.
The Company is the successor in interest to Prime Motor Inns, Inc. and
certain of its subsidiaries ("PMI"). PMI restructured its operations and
capital structure pursuant to a bankruptcy reorganization completed on July 31,
1992. Under its restructuring, PMI recruited new management and directors,
reduced its liabilities by $448.8 million, revalued its assets to reflect fair
market value, and eliminated unprofitable contract commitments. During the
period from July 31, 1992 through December 31, 1994, the Company further
reduced its debt by $82.6 million from $266.4 million to $183.8 million, and
reduced its portfolio of notes receivable through cash collections and
collateral recoveries by $143.4 million from $226.6 million to $83.2 million.
In the process, the Company increased its investment in hotel fixed assets by
$138.9 million from $160.4 million to $299.3 million, and increased
stockholders' equity by $68.5 million from $135.6 million to $204.1 million.
With a strengthened balance sheet, a diminished note receivable portfolio and a
significantly increased base of Owned Hotels, the Company believes that it is
well positioned to implement its growth strategy.
LODGING INDUSTRY
Overview
As a leading owner/operator of hotels, Prime believes that it is well
positioned to benefit from the continuing recovery occurring in the lodging
industry. The recovery has been driven by a favorable supply/demand imbalance
resulting primarily from increased economic activity and the sharp decline in
the growth of the supply of new hotel rooms since 1991. Demand growth exceeded
new supply growth by 3.0% in 1993 and by 3.3% in 1994, as reported by Smith
Travel Research. Since 1991, demand growth has outpaced new room supply growth,
resulting in an increase in industry-wide occupancy levels from 60.9% in 1991
to 65.2% in 1994. Higher occupancy levels have allowed the industry to increase
rates. In 1994, ADR increased by 3.8% over 1993 levels, marking the first
inflation-adjusted ADR growth since 1986. REVPAR increased by 7.3% in 1994.
Because of the operating leverage inherent in the lodging industry, increases
in REVPAR have had a major impact on hotel operating performance, with industry
pretax profits growing from breakeven levels in 1992 to approximately $4.6
billion in 1994, as estimated by Smith Travel Research.
U.S. Lodging Industry Profile
The following table was compiled from industry operating data as reported
by Smith Travel Research and highlights industry data for the United States and
the regions in which most of the Company's hotels are located: the Middle
Atlantic region, which is comprised of New Jersey, New York and Pennsylvania;
and the South Atlantic region, which is comprised of Florida, Georgia, South
Carolina, North Carolina, Virginia, Maryland and Delaware. The table also
includes operating data concerning the three price levels in which the Company
competes: upscale, mid-price and economy.
<TABLE>
<CAPTION>
OPERATING PERFORMANCE FOR THE TWELVE MONTHS % CHANGE IN:
ENDED DECEMBER 31 ---------------------------------------------------------
---------------------------------------------------
ROOM SUPPLY ROOM DEMAND REVPAR
OCCUPANCY PERCENTAGE ADR ----------------- ----------------- -----------------
---------------------- ------------------------ 1993 1994 1993 1994 1993 1994
1992 1993 1994 1992 1993 1994 V. 1992 V. 1993 V. 1992 V. 1993 V. 1992 V. 1993
---- ---- ---- ------ ------ ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States.... 61.9% 63.1% 65.2% $59.62 $61.30 $63.63 1.0% 1.4% 4.0% 4.7% 4.8% 7.3%
BY REGION:
Middle
Atlantic....... 61.8% 64.2% 66.5% $77.03 $78.79 $84.03 0.6% 0.4% 4.8% 4.0% 6.3% 10.5%
South Atlantic... 62.7% 64.0% 65.4% $59.29 $60.47 $62.09 0.7% 1.1% 4.1% 3.2% 4.1% 4.9%
BY SERVICE
(PRICE LEVEL):
Upscale.......... 64.7% 66.8% 68.0% $73.11 $72.05 $74.32 0.9% 2.0% 2.9% 3.8% 1.7% 5.0%
Mid-Price........ 62.9% 63.9% 65.3% $53.98 $54.99 $56.78 1.4% 2.0% 2.9% 4.2% 3.5% 5.5%
Economy.......... 61.4% 61.3% 62.1% $43.76 $42.66 $44.21 0.8% 1.1% 1.6% 2.6% (2.7)% 5.0%
</TABLE>
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Lodging industry analysts expect further improvement for the lodging
sector. The primary reasons contributing to continued growth include:
- Overall supply growth is expected to remain modest in 1995 and 1996 as
replacement costs continue to exceed acquisition prices and the
availability of construction financing remains limited. However, these
disincentives are not equally prevalent in all segments of the industry
as evidenced by the new supply growth in the budget and economy price
levels.
- Room demand growth is expected to continue due to continued economic
growth, expected increases in leisure and international travel and
favorable demographics.
- Higher occupancy rates have provided the industry with pricing power as
evidenced by the 3.8% increase in ADR in 1994, which outpaced the growth
in the consumer price index.
PRIME'S LODGING OPERATIONS
The following table sets forth information with respect to the Owned and
Managed Hotels as of December 31, 1994:
<TABLE>
<CAPTION>
MANAGED WITH
FINANCIAL
OWNED(1) INTEREST(2) OTHER MANAGED TOTAL
-------------- -------------- -------------- ---------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE:
Marriott.............................. 1 517 0 0 1 525 2 1,042
Radisson.............................. 0 0 1 204 1 192 2 396
Sheraton.............................. 4 927 0 0 0 0 4 927
Holiday Inn........................... 2 362 4 868 0 0 6 1,230
Ramada................................ 9 1,494 4 912 2 277 15 2,683
Howard Johnson........................ 0 0 2 326 1 115 3 441
-- -- -- --
----- ----- ----- ------
Total Full-Service.......... 16 3,300 11 2,310 5 1,109 32 6,719
ALL-SUITES:
AmeriSuites(3)........................ 12 1,497 0 0 0 0 12 1,497
LIMITED-SERVICE:
Wellesley Inn......................... 14 1,505 5 478 11 1,030 30 3,013
Howard Johnson........................ 6 610 1 149 2 284 9 1,043
Other................................. 1 140 0 0 2 205 3 345
-- -- -- --
----- ----- ----- ------
Total Limited-Service....... 21 2,255 6 627 15 1,519 42 4,401
Total....................... 49 7,052 17 2,937 20 2,628 86 12,617
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
- ---------------
(1) Of the 49 Owned Hotels, nine are leased. The leases covering the Company's
leased hotels provide for fixed lease rents and, in most instances,
additional percentage rents based on a percentage of room revenues. The
leases also generally require the Company to pay the cost of repairs,
insurance and real estate taxes. In addition, some of the Company's Owned
Hotels are located on land subject to long-term leases, generally for terms
in excess of the depreciable lives of the improvements.
(2) Seventeen Managed Hotels in which the Company holds a mortgage or profit
participation on the property.
(3) Sholodge managed eleven of the AmeriSuites owned by the Company as of
December 31, 1994, but, as of March 31, 1995, these hotels are managed by
the Company.
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The following table sets forth the location of the Company's hotels as of
December 31, 1994:
<TABLE>
<CAPTION>
MANAGED WITH
FINANCIAL
OWNED(1) INTEREST(2) OTHER MANAGED TOTAL
---------------- ------------------ ---------------- -----------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona............... 1 118 -- -- -- -- 1 118
Arkansas.............. 1 130 -- -- -- -- 1 130
California............ -- -- -- -- 1 95 1 95
Connecticut........... 4 589 -- -- -- -- 4 589
Delaware.............. 1 142 -- -- -- -- 1 142
Florida............... 13 1,417 3 395 5 527 21 2,339
Georgia............... 1 114 -- -- 1 189 2 303
Indiana............... 1 126 -- -- -- -- 1 126
Kansas................ 1 126 -- -- -- -- 1 126
Kentucky.............. 1 126 -- -- -- -- 1 126
Maryland.............. -- -- -- -- 2 609 2 609
Nevada................ 1 201 -- -- -- -- 1 201
New Jersey............ 11 1,691 10 2,021 4 559 25 4,271
New York.............. 4 577 1 99 4 361 9 1,037
Ohio.................. 3 380 -- -- -- -- 3 380
Oregon................ 1 161 -- -- -- -- 1 161
Pennsylvania.......... 1 280 3 422 1 90 5 792
Tennessee............. 2 251 -- -- -- -- 2 251
Virginia.............. 1 106 -- -- 2 198 3 304
Virgin Islands........ 1 517 -- -- -- -- 1 517
----- ----- ----- ----- ----- ----- ----- ------
Total....... 49 7,052 17 2,937 20 2,628 86 12,617
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
- ---------------
(1) Of the 49 Owned Hotels, nine are leased. The leases covering the Company's
leased hotels provide for fixed lease rents and, in most instances,
additional percentage rents based on a percentage of room revenues. The
leases also generally require the Company to pay the cost of repairs,
insurance and real estate taxes. In addition, some of the Company's Owned
Hotels are located on land subject to long-term leases, generally for terms
in excess of the depreciable lives of the improvements.
(2) Seventeen Managed Hotels in which the Company holds a mortgage or profit
participation on the property.
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The following table sets forth for the five years ended December 31,
1994, annual operating data for the 86 hotels in the Company's portfolio as of
December 31, 1994. Operating data for the Owned Hotels built or acquired during
the five-year period are presented from the dates such hotels commenced
operations or became Owned Hotels. For purposes of showing operating trends,
the results of six Owned Hotels that were managed by the Company prior to their
acquisition by the Company during the five-year period are presented as if they
had been Owned Hotels from the dates the Company began managing the hotels.
<TABLE>
<CAPTION>
MANAGED WITH FINANCIAL
OWNED INTEREST OTHER MANAGED TOTAL
--------------------------- --------------------------- --------------------------- -------------------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990...... 33 5,013 16 2,710 17 2,235 66 9,958
1991...... 34 5,143 17 2,957 17 2,234 68 10,334
1992...... 37 5,476 17 2,951 17 2,236 71 10,663
1993...... 42 6,116 17 2,946 18 2,347 77 11,409
1994...... 49 7,052 17 2,937 20 2,628 86 12,617
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------ --------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990...... 64.0% $69.99 $44.81 72.6% $58.39 $42.38 68.2% $59.77 $40.78 67.5% $63.88 $43.14
1991...... 64.7 64.45 41.70 64.2 57.95 37.19 65.7 59.79 39.31 64.8 61.61 39.91
1992...... 66.4 64.70 42.97 69.5 60.04 41.75 69.3 59.52 41.24 67.9 62.23 42.26
1993...... 70.3 66.66 46.88 70.8 61.68 43.68 72.5 60.19 43.61 70.9 63.95 45.34
1994...... 68.4 68.80 47.04 70.4 65.96 46.44 72.1 61.88 44.60 69.7 66.51 46.35
</TABLE>
Full-Service Hotels
The Company currently operates 32 full-service hotels under franchise
agreements with Marriott, Radisson, Sheraton, Holiday Inn (including Crowne
Plaza), Ramada and Howard Johnson. The full-service hotels are concentrated in
the Northeast region of the United States. The hotels are generally positioned
along major highways within close proximity to corporate headquarters, office
parks, airports, convention or trade centers and other major facilities. The
customer base for full-service hotels consists primarily of business travelers
and tourists. Consequently, the Company's sales force markets to companies which
have a significant number of employees travelling in the Company's operating
regions who consistently produce a high volume demand for hotel room nights. In
addition, the Company's sales force actively markets meeting and banquet
services to groups and individuals for seminars, business meetings, holiday
parties and weddings.
The Company owns and operates one resort hotel, the Frenchman's Reef in St.
Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 517-room resort hotel
which includes a 421-room eight-story building and 96 rooms in the adjacent
Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive
convention facilities, complete sports and beach facilities and a self-contained
total energy and desalinization system. The Frenchman's Reef is marketed
directly through its own sales force in New York City and at the hotel, and
through the Marriott reservation system. The Frenchman's Reef markets primarily
to tour groups, corporate meetings, conventions and individual vacationers.
The full-service hotels generally have between 150 and 300 rooms, pool,
restaurant, lounge, banquet and meeting facilities. Other amenities include
fitness rooms, room service, remote-control cable television and facsimile
services. In order to enhance guest satisfaction, the Company has recently
introduced or expanded theme concept lounges such as sports bars, fifties clubs
and country and western bars in a number of its hotels. In recent years, the
Company has received recognition from various franchisors and associations for
its hotel quality and service.
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The following table sets forth for the five years ended December 31,
1994, annual operating data for the 32 full-service hotels in the Company's
portfolio as of December 31, 1994. Operating data for the hotels built or
acquired during the five-year period are presented from the dates such hotels
commenced operations or became Owned Hotels. For purposes of showing operating
trends, the results of six Owned Hotels that were managed by the Company prior
to their acquisition by the Company during the five-year period are presented
as if they had been Owned Hotels from the dates the Company began managing the
hotels.
<TABLE>
<CAPTION>
MANAGED WITH FINANCIAL
OWNED INTEREST OTHER MANAGED TOTAL
--------------------------- --------------------------- --------------------------- -------------------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990...... 15 3,032 10 2,079 4 992 29 6,103
1991...... 15 3,032 11 2,327 4 992 30 6,351
1992...... 15 3,017 11 2,322 4 995 30 6,334
1993...... 15 3,015 11 2,317 5 1,110 31 6,442
1994...... 16 3,300 11 2,310 5 1,109 32 6,719
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------- ------ --------- ------- ------ --------- ------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990...... 61.8% $84.41 $52.16 71.6% $61.72 $44.17 60.5% $84.77 $51.27 65.1% $75.55 $49.16
1991...... 63.0 77.76 48.96 62.4 60.81 37.95 61.6 82.44 50.78 62.5 72.55 45.37
1992...... 64.2 79.27 50.89 68.8 62.99 43.30 66.1 82.83 54.81 66.2 73.63 48.72
1993...... 69.8 83.02 57.94 69.7 64.86 45.22 67.2 84.09 56.47 69.4 76.51 53.06
1994...... 67.7 88.33 59.77 70.0 69.79 48.85 69.3 86.69 60.08 68.8 81.26 55.90
</TABLE>
The Company believes opportunities exist for acquisitions of
full-service hotels at attractive multiples of cash flow or at significant
discounts to replacement values. During 1994, the Company acquired the 183-room
Ramada Inn in Clifton, New Jersey, the 280-room Ramada Inn in Trevose,
Pennsylvania, which the Company has since converted to a Radisson, the 340-room
Sheraton in Hasbrouck Heights, New Jersey and the 225-room Sheraton hotel in
Mahwah, New Jersey. In addition, the Company obtained ownership of the 517-room
Frenchman's Reef hotel through a note receivable settlement in 1994. The
Company does not anticipate the acquisition of other resort hotels. The Company
currently plans to pursue the acquisition of additional full-service hotels in
1995. With a continued outlook for limited new room supply, steady demand
growth and acquisition prices at discounts to replacement cost in the
full-service segment, Prime believes that the acquisition of full-service
hotels will continue to provide significant growth opportunities. Although the
Company evaluates potential acquisitions of hotels located throughout the
United States based primarily on hotel-specific economic factors, acquisition
opportunities in the Mid-Atlantic region are more likely to come to the
Company's attention given the Company's current ownership concentration.
The majority of the Company's repositioning efforts have been performed at
the full-service hotels. During 1993 and 1994, the Company successfully
completed the repositioning of nine of its full-service hotels which included
changing the franchise affiliations of four such hotels. The Company is in the
process of repositioning two additional full-service hotels, including an $8.5
million project to reposition the recently acquired Hasbrouck Heights Sheraton.
All-Suites Hotels
The Company currently owns 13 AmeriSuites hotels, which are positioned in
the all-suites segment of the lodging industry. AmeriSuites hotels offer guests
an attractively designed suite unit with a complimentary continental breakfast
in a spacious lobby cafe, remote-control cable television and facsimile/computer
service. AmeriSuites is a limited-service concept which offers group meeting
space, but does not include restaurant or lounge facilities. AmeriSuites attract
customers who typically stay in mid-market limited-service and full-service
hotels principally because of the quality of the guest suites, which offer
distinct living, sleeping and kitchen areas. AmeriSuites contain approximately
125 suites and two to four meeting rooms. AmeriSuites are
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primarily located near corporate office parks and travel destinations in the
Southern and Central parts of the United States. The target customer is
primarily the business traveler with an average length of stay of two to three
nights. AmeriSuites are marketed on a local level primarily through direct sales
and use the ShoLodge reservation system.
In February 1995, the Company entered into the agreements pertaining to
the ShoLodge Transaction, pursuant to which the Company acquired the option
of ShoLodge to purchase a 50% interest in 11 of the Company's 12 AmeriSuites
hotels. As part of this transaction, the Company also acquired the only
remaining AmeriSuites not already owned by Prime and assumed management of
all 12 of these AmeriSuites hotels, thereby establishing Prime's exclusive
control over the AmeriSuites brand.
The following table sets forth for the five years ended December 31,
1994, certain data with respect to AmeriSuites hotels owned by the Company.
Operating data for the hotels built during the five-year period are presented
from the dates such hotels commenced operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, HOTELS ROOMS OCCUPANCY ADR REVPAR
- --------------------------------------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1990................................. 3 367 37.9% $60.23 $22.81
1991................................. 4 497 48.5% 55.33 26.83
1992................................. 6 749 60.0% 54.99 32.97
1993................................. 8 993 64.1% 56.21 36.01
1994................................. 12 1,497 65.9% 59.90 39.50
</TABLE>
The Company believes that the all-suites segment will continue to be a
high growth segment of the industry. For 1994, REVPAR for the all-suites
segment grew by 7.8%, according to Smith Travel Research. The REVPAR growth at
the Company's AmeriSuite hotels exceeded this favorable industry trend. For the
six owned AmeriSuites hotels which were opened for all of 1993 and 1994, REVPAR
increased by 13.1% in 1994 resulting in a 19.3% increase in operating income.
The Company plans to develop the AmeriSuites brand through new
construction. All of the AmeriSuites were constructed within the past five
years. The Company has historically built AmeriSuites at a cost of
approximately $50,000 per room. AmeriSuites have a low cost structure and have
generally achieved stable occupancy and ADR within 24 to 36 months after
opening. During 1994, the Company opened four newly constructed AmeriSuites
hotels in Overland Park, Kansas, Columbus, Ohio, Tampa, Florida, and
Louisville, Kentucky. The Company has begun developing or has plans to
develop AmeriSuites on sites it currently owns in Atlanta, Greensboro,
Miami, Baltimore, Detroit and Cleveland areas and has entered into a contract
to purchase an additional AmeriSuites site in the Dallas area. The Company
currently plans to open or commence construction on 10 new AmeriSuites hotels
in 1995 and has already begun construction at the Atlanta, Greensboro and Miami
sites.
Limited-Service Hotels
The Company's limited service hotels consist of 30 Wellesley Inns and
12 other hotels operated under franchise agreements primarily with Howard
Johnson. Of the Company's 30 Wellesley Inns, 16 are located in Florida and the
remainder in the Middle Atlantic and Northeast United States. The Company owns
and operates 14 Wellesley Inns and manages 16 Wellesley Inns for independent
owners. Of the Company-owned Wellesley Inns, ten are located in Florida and
four are located in the Middle Atlantic and the Northeast. The Company has
developed separate strategies for the Wellesley Inns located in Florida and the
Wellesley Inns outside of Florida. In Florida, where the population has grown
rapidly and development opportunities continue to exist, it has built a
geographically concentrated group of Wellesley Inns thereby developing brand
name recognition in Florida. In 1994, the comparable Florida Wellesley Inns
average occupancy was approximately 84.7% and gross operating profits averaged
over 52% of hotel revenues. The prototypical Florida Wellesley Inn has 105
8
<PAGE> 10
rooms and is distinguished by its classic stucco exterior, spacious lobby and
amenities such as continental breakfast, remote control cable television and
facsimile services. The Florida properties are operated through the Company's
Florida regional office. Marketing efforts rely heavily on direct marketing and
billboard advertising. In the Middle Atlantic and Northeast where the Company
believes new development opportunities are limited, the Company has focused on
building the Wellesley Inns system through acquisition and conversion of
existing properties. In 1994, the comparable Wellesley Inns outside of Florida
had an average occupancy of 71.1% and average gross operating profits of 47%.
The Company's other limited-service hotels have an average of between 100
and 120 rooms and offer complimentary continental breakfast, remote control
cable television, pool facilities and facsimile services, generally with
restaurant facilities within a short distance of the hotel. They are designed to
appeal primarily to business travelers.
The following table sets forth for the five years ended December 31, 1994,
annual operating data for the 42 limited-service hotels in the Company's
portfolio as of December 31, 1994. Operating data for the Owned Hotels built or
acquired during the five-year period are presented from the dates such hotels
commenced operations or became Owned Hotels.
<TABLE>
<CAPTION>
MANAGED WITH FINANCIAL
OWNED INTEREST OTHER MANAGED TOTAL
--------------------------- --------------------------- --------------------------- -------------------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990...... 15 1,614 13 1,243 6 631 34 3,488
1991...... 15 1,614 13 1,242 6 630 34 3,486
1992...... 16 1,710 13 1,241 6 629 35 3,580
1993...... 19 2,108 13 1,237 6 629 38 3,974
1994...... 21 2,255 15 1,519 6 627 42 4,401
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------ --------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990...... 71.7% $45.82 $32.87 74.3% $43.97 $32.65 76.0% $48.03 $36.49 73.5% $45.55 $33.49
1991...... 71.9 44.03 31.66 69.1 43.68 30.18 70.2 49.17 34.54 70.6 44.83 31.65
1992...... 73.2 44.12 32.31 71.8 42.29 30.35 72.4 49.71 36.01 72.6 44.48 32.28
1993...... 74.3 45.15 33.55 76.8 43.20 33.16 74.8 50.80 38.02 75.2 45.45 34.19
1994...... 70.7 47.08 33.28 74.1 44.94 33.30 72.0 52.26 37.61 72.1 47.06 33.92
</TABLE>
The majority of the Florida Wellesley Inns were constructed within the
past five years. The Company historically has constructed these properties at a
cost of approximately $40,000 per room. Florida Wellesley Inns have a low cost
structure and have had rapid stabilization periods generally within six to
twelve months of opening. During 1994, the Company completed construction of
Wellesley Inns in Fort Lauderdale and Lakeland, Florida and converted a Howard
Johnson's hotel in Penns Grove, New Jersey to a Wellesley Inn.
REFURBISHMENT PROGRAM
The Company continuously refurbishes its Owned Hotels in order to maintain
consistent quality standards. The Company generally spends approximately 4% to
6% of hotel revenue on capital improvements at its Owned Hotels and typically
refurbishes each hotel approximately every five years. The Company believes that
its Owned Hotels are in generally good physical condition, with over half of the
Owned Hotels being five years old or less. The Company recommends the
refurbishment and repair projects on its Managed Hotels although spending
amounts vary based on the financial strength of the hotel and its owner and the
significance of the Company's interest as a mortgagee.
9
<PAGE> 11
In addition to making normal capital improvements, the Company reviews on
an on-going basis each hotel's competitive position in the local market in order
to decide the types of product that will best meet the market's demand
characteristics. During the past two years, the Company has implemented a
program of repositioning its Owned Hotels. Repositioning a hotel generally
requires renovation and refurbishment of the exterior and interior of the
building and may result in a change of brand name. In 1993 and 1994, the Company
spent $2.8 million and $8.9 million on the repositioning of 12 of its Owned
Hotels, which included changing the franchise affiliation of six of such hotels.
While the major refurbishment efforts at the Company's existing hotels have
substantially been completed, the Company's future refurbishing spending will
focus on newly acquired hotels. During 1995, the Company currently plans to
spend approximately $10.8 million to reposition or refurbish recently acquired
hotels.
MORTGAGES AND NOTES RECEIVABLE
As of December 31, 1994, mortgages and notes receivable totalled $83.2
million (including current portion) and consisted of an aggregate principal
amount of $60.6 million of mortgages and notes secured by Managed Hotels and
hotels that are leased by the Company from third parties and $22.6 million of
other mortgages and notes secured primarily by other hotels. The Company has
pursued a strategy of converting its mortgage and notes receivable into cash or
operating hotel assets. Since July 31, 1992, the Company has received $98.5
million in cash and added seven operating hotel assets through note settlements
and lease terminations. During 1994, the Company reduced its long-term mortgage
and notes receivable portfolio by $81.8 million to $81.3 million at December
31, 1994. This reduction is primarily attributable to the settlement of the
Rose and Cohen note receivable, which carried a book value of $25.0 million,
for $31.2 million in cash, and the conversion of the Company's mortgage note
receivable secured by the Frenchman's Reef with a book value of $50.0 million
into an operating hotel asset. The Company will continue to pursue settlements
with mortgage and note obligors and will utilize the cash for debt repayments
or for general corporate purposes.
The Company's mortgage notes secured by hotel properties consist
primarily of notes with a book value of $46.5 million secured by mortgages on
ten Managed Hotels. These notes currently bear interest at rates ranging from
8.5% to 13.5% per annum and have various maturities through 2017. The mortgages
were primarily derived from the sales of hotel properties. The Company has
restructured approximately $33.0 million of these mortgages and notes to
receive the majority of available cash flow and a participation in the future
excess cash flow of such hotel properties. The restructurings generally include
senior mandatory- payment notes and junior notes payable annually based on cash
flow. The Company believes that these senior, mandatory-payment notes generally
do not exceed the current realizable value of the hotels they encumber.
However, the Company believes that, taken together, the restructured senior and
junior mortgage notes often exceed the value of the properties they encumber.
As a result, these junior notes bear many of the characteristics and risks of
operating hotel equity investments and are not reflected on the Company's
balance sheet. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Liquidity and Capital Resources."
In addition to the mortgage positions referred to above, the Company also
holds the junior, accruing or cash flow notes and other interests on other
properties managed by the Company. With regard to these properties, third
parties generally hold significant senior mortgages. Because there is
substantial doubt that the Company will recover any of the value on its junior
notes, none of these subordinated financial interests are assigned a value
on the Company's balance sheet.
In 1994, the Company recognized $15.9 million of interest on mortgages and
notes receivable. Approximately $4.6 million, or 28.9%, of the 1994 interest was
derived from the Company's note receivable secured by the Frenchman's Reef which
was converted into an equity ownership position in December 1994. Approximately
$2.0 million or 12.6% of 1994 interest was derived from the junior notes which
are assigned no value on the Company's balance sheet. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
10
<PAGE> 12
In addition to mortgages and notes receivable, as of December 31, 1994, the
Company had other assets that totalled $16.9 million, which consisted of real
property not related to Owned Hotels (approximately $8.0 million of which
consisted of an office building).
MANAGEMENT AGREEMENTS
The Company provides hotel management services to third party hotel owners
of 37 Managed Hotels including 16 Wellesley Inns for which the Company provides
the brand name. The number of Managed Hotels declined during 1994 due to the
sale of ten hotels by independent owners, four of which were acquired by the
Company. Management fees are derived from the Managed Hotels based on fixed
percentages of the property's total revenues and performance related incentive
payments based on certain measures of hotel income. Additional fees are also
generated from the rendering of specific services such as accounting services,
construction services, design services and sales commissions. The Company's
fixed management fee percentages range from 1.0% to 5.0% and average 3.5% of the
Managed Hotel's total revenues before giving consideration to performance
related incentive payments. The base and incentive fees comprised approximately
59%, or $5.9 million, of the total management and other fees in 1994. Terms of
the management agreements vary but the majority are short-term and, therefore,
there are risks associated with termination of these agreements. Furthermore,
management agreements may be terminated in connection with a change in ownership
of the underlying hotels. Although such risks may be limited due to the
Company's role as lender or provider of the Wellesley Inn brand name, 18 of the
Managed Hotels, including the 16 Wellesley Inns referenced above, are highly
leveraged with debt maturing in December 1995. There can be no assurance that
such debt can be repaid or restructured by the third party hotel owners in a
manner that would permit the Company to continue as manager of such properties.
The Company holds financial interests in the form of mortgages or profit
participations in 17 of the 37 Managed Hotels and other interests and control
rights (primarily brand control) in 13 of the remaining 20 Managed Hotels.
OPERATIONS
As a leading domestic hotel operating company, the Company enjoys a number
of operating advantages over other lodging companies. With 86 hotels covering a
number of price points and broad geographic regions, the Company possesses the
critical mass to support sophisticated operating, marketing and financial
systems. The Company believes that its broad array of central services permits
on-site hotel general managers to effectively focus on providing guest services,
results in economies of scale and leads to above-market hotel profit margins. As
a result of these operating strategies, the Company's hotels generated average
operating profit margins that exceeded comparable industry averages for 1993, as
reported by industry sources, by approximately 25% for full-service hotels,
approximately 21% for all-suites hotels and approximately 6% for limited-service
hotels.
The Company's operating strategy combines operating service and guidance
from its central management team, with decentralized decision-making authority
delegated to each hotel's on-site management. The on-site hotel management teams
focus on providing guest services and consist of a general manager and,
depending on the hotel's size and market positioning, managers of sales and
marketing, food and beverage, front desk services, housekeeping and engineering.
The Company's operating objective is to exceed guest expectations by providing
quality services and comfortable accommodations at the lowest cost consistent
with each hotel's market position. On-site hotel management is responsible for
efficient expense controls and uses operating standards provided by the Company.
Within parameters established in the operating and capital planning process,
on-site management possesses broad decision-making authority on operating issues
such as guest services, marketing strategies, hiring practices and incentive
programs. Each hotel's management team is empowered to take all necessary steps
to ensure guest satisfaction within established guidelines. Key on-site
personnel participate in an incentive program based on hotel revenues and
profits.
11
<PAGE> 13
The central management team, located in Fairfield, New Jersey, provides
four major categories of services: (i) operations management, (ii) sales and
marketing management, (iii) financial reporting and control and (iv) hotel
support services.
Operations Management. Operations management consists of the development,
implementation and monitoring of hotel operating standards and is provided by a
network of regional operating officers who are each responsible for the
operations of 10 to 15 hotels. They are supported by training, food and beverage
and human resources departments, each staffed full-time by specialized
professionals. The cornerstone of operations management is employee training,
with a staff of professionals dedicated to training in sales, housekeeping, food
service, front desk services and leadership. The Company believes these efforts
increase employee effectiveness, reduce turnover and improve the level of guest
services.
The Company's cost-effective centralized management services benefit not
only its existing operations but also provide additional opportunities for
growth and development from acquisitions. In all of the recently acquired
hotels, the Company's headquarters have assumed certain of the operational
responsibilities which previously had been performed by the on-site hotel
management. In addition, the Company believes it has improved operating
efficiencies for each of these hotels that it has acquired.
Sales and Marketing Management. Aggressive sales and marketing is a
top operating priority. Sales and marketing management is directed by a
corporate staff of 20 professionals, including regional marketing directors who
are responsible for each hotel's sales and marketing strategies, and the
Company's national sales group, Market Segments, Inc. ("MSI"). In cooperation
with the regional marketing and organization staff, on-site sales management
develops and implements short- and intermediate-term marketing plans. The
Company focuses on yield management techniques, which optimize the relationship
between hotel rates and occupancies and seek to maximize profitability. In
addition, the Company assumes prominent roles in franchise marketing
associations to obtain maximum benefit from franchise affiliations. The
Company's in-house creative department creates hotel advertising materials and
programs at cost-effective rates.
Complementing regional and on-site marketing efforts, MSI's marketing team
targets specific hotel room demand generators including tour operators, major
national corporate accounts, athletic teams, religious groups and others with
segment-specialized sales initiatives. MSI's primary objective is to book hotel
rooms at the Company's hotels and its secondary objective is to market its
services on a commission basis to major operators throughout the industry. Sales
activities on behalf of non-affiliated hotels increase the number of hotels
where bookings can be made to support marketing efforts and defray the costs of
the marketing organization.
Financial Reporting and Control. The Company's system of centralized
financial reporting and control permits management to closely monitor
decentralized hotel operations without the cost of financial personnel on site.
Centralized accounting personnel produce detailed financial and operating
reports for each hotel. Additionally, central management directs budgeting and
analysis, processes payroll, handles accounts payable, manages each hotel's
cash, oversees credit and collection activities and conducts on-site hotel
audits.
Hotel Support Services. The Company's hotel support services combine a
number of technical functions in central, specialized management teams to attain
economies of scale and minimize costs. Central management handles purchasing,
directs construction and maintenance and provides design services. Technical
staff teams support each hotel's information and communication systems needs.
Additionally, the Company directs safety/risk management activities and provides
central legal services.
12
<PAGE> 14
FRANCHISE AGREEMENTS
The Company enters into non-exclusive franchise licensing agreements with
various franchisors, which agreements typically have a ten year term and allow
the Company to benefit from franchise brand recognition and loyalty. The
non-exclusive nature of the franchise agreement allows the Company the
flexibility to continue to develop properties with the brands that have shown
success in the past or to develop in conjunction with other brand names. This
flexibility also plays an important role in the Company's repositioning strategy
for continued earnings growth which emphasizes proper positioning of its
properties within these respective markets to maximize their return on
investment. Over the past two years, the Company has repositioned several hotels
that were either owned or managed or recently acquired. These repositionings
include the Portland, Oregon Crowne Plaza (formerly Howard Johnson), the Las
Vegas, Nevada Crowne Plaza (formerly Howard Johnson), the Saratoga Springs, New
York Sheraton (formerly Ramada Renaissance), the Fairfield, New Jersey Radisson
(formerly Sheraton), the Orlando, Florida Shoney's Inn (formerly Howard
Johnson), and the Trevose, Pennsylvania Radisson (formerly Ramada). The Company
believes its relationships with numerous nationally recognized franchisors
provides significant benefits for both its existing hotel portfolio and
prospective hotel acquisitions. While the Company currently enjoys good
relationships with its franchisors, there can be no assurance that a desirable
replacement would be available if any of the franchise agreements were to be
terminated.
The franchise agreements require the Company to pay annual fees, to
maintain certain standards and to implement certain programs which require
additional expenditures by the Company such as remodeling or redecorating. The
payment of annual fees, which typically total 7% to 8% of room revenues, cover
royalty fees and the costs of marketing and reservation services provided by the
franchisors. The use of franchisor reservation systems typically result in
increased occupancy. Franchise agreements, when initiated, generally provide for
an initial fee in addition to annual fees payable to the franchisor.
13
<PAGE> 15
Working Capital
The Company has financed its operations and capital needs principally
through a combination of cash flow from operations, cash from note
receivable settlements and proceeds from mortgage financings. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition."
Seasonality
The impact of seasonality on the Company as a whole is insignificant due
to the seasonal balance achieved from the geographical location of the
Company's hotel properties in the Northeast and Southeast.
Competition
The Company operates and manages hotel properties in areas that contain
numerous other hotels, some of which are affiliated with national or regional
brands. The Company competes with other hotels primarily on the basis of
price, physical facilities and customer service.
Employees
As of December 31, 1994, the Company employed approximately 5,000
employees. Certain of the Company's employees are covered by collective
bargaining agreements. The Company believes that relations with its employees
are good.
Environmental Matters
The Hotels are subject to environmental regulations under Federal, state
and local laws. Certain of these laws may require a current or previous owner
or operator of real estate to clean up designated hazardous or toxic substances
or petroleum product releases affecting the property. In addition, the owner
or operator may be held liable to a governmental entity or to third parties for
damages or costs incurred by such parties in connection with the contamination.
The Company does not believe that it is subject to any material environmental
liability.
Item 3. Legal Proceedings.
In April 1994, the Company received a favorable ruling from the U.S.
Bankruptcy Court for the Southern District of Florida in its litigation with
Financial Security Assurance, Inc. ("FSA") to recover a payment to be made to
the Company under the Rose and Cohen note receivable. In 1993, the Company
reached a
14
<PAGE> 16
settlement with Rose and Cohen of an adversary proceeding regarding a
promissory note and personal guarantee. The settlement provided for Rose or
his affiliate to pay the Company the sum of $25.0 million, all of which was
paid into escrow in February 1994, plus proceeds from the sale of approximately
1.1 million shares of the Company's common stock held by Rose. FSA asserted
that it was entitled to receive the settlement proceeds under the terms of an
intercreditor agreement. Upon receipt of the Bankruptcy Court order in April
1994, the Company used the $25.0 million of settlement proceeds to retire its
Senior Secured Notes. On April 21, 1994, FSA filed its notice of appeal of the
Bankruptcy Court's order. The appeal was argued before the United States
District Court in November 1994 and the decision of the District Court is
pending. During 1994, Rose sold approximately 1.0 million shares of the
Company's common stock under the terms of the settlement for net proceeds of
approximately $6.2 million. Subject to further court order, the Company is
required to use the stock proceeds principally to retire Senior Secured Notes.
As the Rose and Cohen note had a book value of $25.0 million on the Company's
balance sheet, approximately $6.2 million was recorded as other income in the
Company's statement of operations.
In December 1994, the Company obtained ownership of the Frenchman's Reef
through a pre-negotiated plan of reorganization. The Company had previously
reached an agreement in 1993 to restructure its mortgage notes receivable
secured by the Frenchman's Reef with the general partner of Frenchman's Reef
Beach Associates ("FRBA"), the owner of the hotel. In conjunction with the
agreement, FRBA filed a pre-negotiated chapter 11 petition in September 1993.
During the reorganization period, the Company continued to receive cash
payments on its mortgage notes receivable under a cash collateral order
approved by the Bankruptcy Court. Under the plan of reorganization, which was
approved by the Bankruptcy Court on November 29, 1994, the Company obtained
ownership and control of the hotel.
PMI did not submit its Annual Report on Form 10-K for the fiscal year
ended June 30, 1990 and Quarterly Reports on Form 10-Q during the pendency of
its reorganization, except for its Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992.
In addition to the foregoing legal proceedings, the Company is involved
in various other proceedings incidental to the normal
15
<PAGE> 17
course of its business. Management does not expect that any of such other
proceedings will have a material adverse effect on the Company's financial
position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fiscal quarter ended December 31,
1994 to a vote of the security holders of the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock, par value $.01 per share, commenced trading
on the New York Stock Exchange (the "NYSE") on August 3, 1992 under the symbol
"PDQ." As of April 17, 1995 there were 30,683,444 shares of common stock
outstanding. The Company's Plan of Reorganization ("the Plan") provided for
the issuance of 33,000,000 shares of common stock to holders of claims under
the Plan. The number of shares ultimately distributed under the Plan was
reduced to 29,913,000 shares based upon the final outcome of disputed claims.
In addition, under the Plan warrants to purchase an aggregate of 1,612,079
shares of common stock are outstanding as of April 17, 1995. The warrants are
not listed on any exchange.
The following table sets forth the reported high and low closing sales
prices of the common stock on the NYSE.
<TABLE>
<CAPTION>
Five Months Ended
December 31, 1992 High Low Dividend/Share
- ----------------- ---- ----- --------------
<S> <C> <C> <C>
Third Quarter (August 3, . . . . . 2 1/8 1 1/2 -0-
1992 - September 30, 1992)
Fourth Quarter . . . . . . . . . . 2 1/4 1 1/2 -0-
Year Ended
December 31, 1993
- -----------------
First Quarter . . . . . . . . . . . 3 5/8 2 1/8 -0-
Second Quarter . . . . . . . . . . 4 1/2 3 1/2 -0-
Third Quarter . . . . . . . . . . . 4 3/4 3 1/8 -0-
Fourth Quarter . . . . . . . . . . 6 4 3/8 -0-
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . 8 1/8 5 3/8 -0-
Second Quarter . . . . . . . . . . 7 5/8 5 3/8 -0-
Third Quarter . . . . . . . . . . . 8 3/4 6 3/4 -0-
Fourth Quarter . . . . . . . . . . 9 6 7/8 -0-
</TABLE>
As of April 17, 1995, the closing sales price of the common stock on the
NYSE was $10. As of April 17, 1995, there were approximately 2,900 holders
of record of common stock.
The Company has not declared any cash dividends on its common stock since
the Effective Date and does not currently anticipate paying any dividends on
the common stock in the foreseeable future. The Company currently anticipates
that it will retain any future earnings for use in its business. The Company is
prohibited by the terms of its 10% Senior Secured Notes due July 31, 1999 and
certain other debt instruments from paying cash dividends on its Common Stock.
17
<PAGE> 19
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
OF THE COMPANY AND ITS PREDECESSOR
The Company is the successor in interest to the Company's predecessor, PMI,
which emerged from chapter 11 reorganization on the Effective Date, July 31,
1992. PMI had filed for protection under chapter 11 of the United States
Bankruptcy Code in September 1990. The Company implemented "fresh start"
reporting pursuant to the Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" of the American Institute
of Certified Public Accountants, as of the Effective Date. Accordingly, the
consolidated financial statements of the Company are not comparable in all
material respects to any such financial statement as of any date or any period
prior to the Effective Date. Subsequent to the Effective Date, the Company
changed its fiscal year end from June 30 to December 31. The table below
presents selected consolidated financial data derived from: (i) the Company's
historical financial statements for the years ended December 31, 1993 and 1994,
(ii) the Company's historical financial statements as of and for the five-month
period ended December 31, 1992, (iii) the Company's "fresh start" balance sheet
as of the Effective Date, and (iv) the historical consolidated financial
statements of PMI for the one month ended July 31, 1992 and for the years ended
June 30, 1990, 1991 and 1992. This data should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial information
included herein.
<TABLE>
<CAPTION>
PRE-REORGANIZATION POST-REORGANIZATION
--------------------------------------------------- ---------------------------------------------
AS OF AND AS OF AND
FOR THE FOR THE FOR THE YEAR ENDED
AS OF AND FOR THE YEAR ENDED JUNE 30, ONE MONTH FIVE MONTHS
ENDED AS OF ENDED DECEMBER 31,
-------------------------------------- JULY 31, JULY 31, DEC. 31, -------------------
1990(1)(2) 1991(1) 1992(1) 1992(1) 1992(1) 1992 1993 1994
---------- -------- -------------- ---------- -------- ------------ -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues........... $277,239 $205,699 $134,190 $ 8,793 -- $ 41,334 $108,860 $134,303
Valuation writedowns and
reserves............... (240,855) (59,149) (62,123) (13,000) -- -- -- --
Reorganization items..... -- (181,655) (23,194) 1,796 -- -- -- --
Income (loss) from
continuing operations
before extraordinary
items(3)............... (280,387) (246,110) (71,965) (10,274) -- 1,393 8,175 18,258
Extraordinary items-gains
on discharge of
indebtedness (net of
income taxes).......... -- -- -- 249,600 -- -- 3,989 172
Net income (loss)........ (267,075) (227,188) (71,965) 239,326 -- 1,393 12,164 18,430
BALANCE SHEET DATA:
Total assets............. $934,116 $679,916 $554,118 -- $468,650 $403,314 $410,685 $434,932
Long-term debt, net of
current portion........ 368,925 2,851 8,921 -- 204,438 192,913 168,618 178,545
Stockholders' equity
(deficiency)........... 66,681 (157,327) (229,292) -- 135,600 137,782 171,364 204,065
</TABLE>
- ---------------
(1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at
which time it owned or managed 141 hotels. During its approximately
two-year reorganization, PMI restructured its assets, operations and
capital structure. On the Effective Date, the Company emerged from chapter
11 reorganization with 75 Owned or Managed Hotels, $135.6 million of
stockholders' equity and $266.4 million of total debt.
(2) PMI effectively discontinued the operations of its franchise segment on July
1, 1990 with the sales of the Howard Johnson, Ramada and Rodeway franchise
businesses in July, 1990.
(3) Approximately $2.3 million, $28.0 million and $25.3 million of contractual
interest expense during the one month ended July 31, 1992 and for the
fiscal years ended June 30, 1992 and 1991, respectively, was not accrued
and was not paid due to the chapter 11 proceeding.
18
<PAGE> 20
Item 6. (Continued) Selected Quarterly Financial Data (Unaudited)
Quarterly financial data for the years ending December 31, 1993 and 1994 is
presented as follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1993(a) 1993 (a) 1993 (a) 1993 (a) 1994 (a) 1994 (a) 1994
------------------------------------------- --------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue . . . . . . . . $24,783 $26,694 $29,480 $27,903 $28,079 $33,194 $36,063
Operating income . . . . . 5,594 6,366 7,545 5,391 6,850 8,632 9,394
Net income before
extraordinary items . . 995 1,588 3,379 2,213 2,840 6,869 4,117
Extraordinary items
(net of tax) . . . . . 3,426 631 -- (68) 111 58 3
Net income . . . . . . . . 4,421 2,219 3,379 2,145 2,951 6,927 4,120
Income per common share:
Income before
extraordinary items . . 0.03 0.06 0.11 0.07 0.08 0.22 0.13
Extraordinary items . . . . 0.12 0.01 -- -- 0.01 -- --
----------------------------------------------------------------------------------------------------
Net income. . . . . . . . . $0.15 $0.07 $0.11 $0.07 $0.09 $0.22 $0.13
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
December 31,
1994
-----------------------
<S> <C>
Net revenue . . . . . . . $36,967
Operating income . . . . 8,492
Net income before
extraordinary items . 4,432
Extraordinary items
(net of tax) . . . . --
Net income . . . . . . . 4,432
Income per common share:
Income before
extraordinary items . 0.14
Extraordinary items . . . --
------------
Net income . . . . . . . $0.14
============
</TABLE>
(a) Income per share has been restated to reflect a 9.4% retroactive reduction
in the number of shares distributed under PMI's plan of reorganization.
19
<PAGE> 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading hotel owner/operator which owns or leases 50
Owned Hotels and manages 37 Managed Hotels for third parties. The Company has a
financial interest in the form of mortgages or profit participations (primarily
incentive management fees) in 17 of the Managed Hotels. The Company
consolidates the results of operations of its Owned Hotels and records
management fees (including incentive management fees) and interest income,
where applicable, on the Managed Hotels.
The Company has implemented a growth strategy which focuses on improving
results at existing hotels through increased operating efficiencies, acquiring
full-service hotels and expanding its AmeriSuites hotel brand in the all-suites
segment. Operating results have continued to improve at comparable hotels due to
repositioning efforts, yield management programs and overall improvements in the
industry. The Company also added 11 Owned Hotels in 1994 through acquisition,
construction or settlements of notes receivable, thereby increasing its Owned
Hotel rooms by approximately 40%. Although future results of operations may be
adversely affected in the short-term by the costs associated with the
acquisition and construction of new hotels, it is expected that this impact
will be offset, after an initial period, by revenues generated by these new
hotels. The Company believes it is well positioned to benefit from the expected
continued improvements in the lodging industry due to its hotel equity ownership
position and its growth strategy.
The Company has restated net income per common share for all periods to
reflect a 9.4% reduction in the number of shares distributed under the plan of
reorganization (the "Plan") of the Company's predecessor, PMI. The financial
statements had previously given effect to the maximum amount of 33,000,000
shares of Common Stock issuable under the Plan, whereas the Company in total
distributed only 29,913,000 shares under the Plan.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR
ENDED
DECEMBER 31, 1993
The following table presents the components of operating income, operating
expense margins and other data for the Company and the Company's comparable
Owned Hotels for 1993 and 1994. The results of the four hotels divested during
1993 and 1994 are not material to an understanding of the results of the
Company's operations in such periods and, therefore, are not separately
discussed.
<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
------------------- -------------------
1993 1994 1993 1994
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
Revenues:
Room.............................................. $69,487 $88,753 $62,305 $66,821
Food and Beverage................................. 12,270 18,090 10,875 11,410
Management Fees................................... 10,831 10,021
Interest on Mortgages and Notes Receivable........ 14,765 15,867
Rental and Other.................................. 1,507 1,572
------- -------
Total Revenues................................. 108,860 134,303
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
------------------- -------------------
1993 1994 1993 1994
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND
REVPAR)
<S> <C> <C> <C> <C>
Direct Hotel Operating Expenses:
Room.............................................. $19,456 $24,539 $16,870 $17,281
Food and Beverage................................. 10,230 13,886 9,029 9,143
Selling and General............................... 20,429 26,733 17,779 18,889
Occupancy and Other Operating....................... 11,047 11,261
General and Administrative.......................... 15,685 15,089
Depreciation and Amortization....................... 7,117 9,427
Operating Income.................................... 24,896 33,368
Operating Expense Margins:
Direct Hotel Operating Expenses:
Room, as a percentage of room revenue............. 28.0% 27.6% 27.1% 25.9%
Food and Beverage, as a percentage of food and
beverage revenue............................... 83.4% 76.8% 83.0% 80.1%
Selling and General, as a percentage of room and
food and beverage revenue...................... 25.0% 25.0% 24.3% 24.1%
Occupancy and Other Operating, as a percentage of
room and food and beverage revenue................ 13.5% 10.5%
General and Administrative, as a percentage of total
revenue........................................... 14.4% 11.2%
Other Data:
Occupancy........................................... 70.4% 68.0% 73.2% 73.1%
ADR................................................. $ 56.14 $ 60.36 $ 56.84 $ 61.16
REVPAR.............................................. $ 39.52 $ 41.04 $ 41.61 $ 44.71
Gross Operating Profit.............................. $31,642 $41,685 $29,500 $32,917
</TABLE>
- ---------------
(1) For purposes of this discussion of results of operations for 1994 compared
to 1993, comparable Owned Hotels refers to the 31 Owned Hotels that were
owned or leased by the Company during all of 1994 and 1993.
Room revenues increased by $19.3 million, or 27.7%, from $69.5 million in
1993 to $88.8 million in 1994. This increase was primarily due to incremental
room revenues of $17.6 million from hotels acquired or built in 1993 and 1994
and an increase in room revenues at comparable Owned Hotels. Room revenues for
comparable Owned Hotels increased by $4.5 million, or 7.2%, in 1994 compared to
1993 due to improvements in ADR. ADR increased by $4.22 or 7.5% for all hotels
and $4.32 or 7.6% for comparable Owned Hotels due to repositioning and
refurbishment efforts at several full-service hotels and the continued
improvements in the lodging industry. In 1994, the industry continued its
recovery, as demand growth continued to outpace new hotel supply growth,
resulting in higher occupancy levels which have allowed the industry to increase
room rates. The Company has pursued a strategy of increasing ADR, which has a
greater impact on net operating income than changes in occupancy. Occupancy
rates for all hotels decreased from 70.4% in 1993 to 68.0% in 1994 due to the
lower occupancy rates normally associated with new hotels, including both
newly constructed hotels and repositioned hotels during the refurbishment
period. Occupancy rates for comparable Owned Hotels remained constant in 1994
compared to 1993.
Food and beverage revenues increased by $5.8 million, or 47.4%, from $12.3
million in 1993 to $18.1 million in 1994. This increase was primarily due to the
impact of incremental revenues of $5.6 million from additional food and beverage
operations of four full-service hotels acquired in 1994. Food and beverage
revenues for comparable Owned Hotels increased by $535,000, or 4.9%, in 1994
compared to 1993 primarily as a result of increased banquet sales and the
repositioning of three lounges to a sports bar theme.
Management and other fees consist of base and incentive fees earned under
management agreements, fees for additional services rendered to Managed Hotels
and sales commissions earned by the Company's national sales group, Market
Segments, Inc. Management and other fees decreased by $810,000, or 7.5%, from
$10.8 million in 1993 to $10.0 million in 1994 primarily due to the loss of
management fees on four Managed Hotels acquired by the Company during 1994. In
addition, the Company's management contracts covering six additional hotels were
terminated during 1994 upon divestiture of those hotels by the third party
21
<PAGE> 23
hotel owners. Partially offsetting these decreased management fees were the
addition of two new management contracts and increased revenues associated with
the remaining Managed Hotels.
Interest on mortgages and notes receivable in 1993 and 1994 primarily
related to mortgages secured by certain Managed Hotels including the Frenchman's
Reef. Interest income on mortgages and notes receivable increased by $1.1
million, or 7.5%, from $14.8 million in 1993 to $15.9 million in 1994 primarily
due to interest recognized on the Company's cash flow notes, which are
subordinated or junior mortgages which remit payment based on hotel cash flow.
In accordance with fresh start reporting adopted on the Effective Date, assets
and liabilities were recorded at their then-current fair market values. As
these cash flow notes bear many of the characteristics and risks of operating
hotel equity investments and no value was assigned to these notes on the
Company's balance sheet due to substantial doubt as to their recoverability.
The Company's policy is to recognize interest on cash flow notes when cash is
received. In 1994, the portion of interest on mortgages and other notes
receivable attributable to cash flow notes increased to $2.0 million from
$1.0 million in 1993 primarily due to the execution of revised cash flow note
agreements on three hotels and the improved operating performance of the
underlying hotels. See "Business -- Mortgages and Notes Receivable."
Approximately $4.3 million and $4.6 million of interest on mortgages and
notes receivable in 1993 and 1994, respectively, was derived from the Company's
$50.0 million note receivable secured by the Frenchman's Reef. This note was
restructured in December 1994 and pursuant to such restructuring, the Company
obtained ownership and control of the Frenchman's Reef (see "-- Liquidity and
Capital Resources"). The impact of this restructuring on operating income is
expected to be minimal, as direct revenues, expenses and depreciation will
increase and interest income and management fees will decrease.
Direct room expenses increased by $5.0 million, or 26.1%, from $19.5
million in 1993 to $24.5 million in 1994 due primarily to the addition of new
hotels. As a percentage of room revenue, direct room expenses decreased from
28.0% in 1993 to 27.6% in 1994 primarily due to increases in ADR which had
minimal corresponding increases in expenses. For comparable Owned Hotels, direct
room expenses increased $411,000, or 2.4%, but decreased as a percentage of
comparable room revenue from 27.1% in 1993 to 25.9% in 1994.
Direct food and beverage expenses increased by $3.7 million, or 35.7%, from
$10.2 million in 1993 to $13.9 million in 1994 due primarily to the addition of
new full-service hotels. As a percentage of food and beverage revenue, direct
food and beverage expenses decreased from 83.4% in 1993 to 76.8% in 1994
primarily due to increased revenues in higher margin areas such as banquet
departments and sports lounges. For comparable Owned Hotels, direct food and
beverage expenses increased $114,000, or 1.3%, but decreased as a percentage of
food and beverage revenue from 83.0% in 1993 to 80.1% in 1994.
Direct hotel selling and general expenses consist primarily of hotel
expenses which are not specifically allocated to rooms or food and beverage
activities, such as administration, selling and advertising, utilities, repairs
and maintenance. Direct hotel selling and general expenses increased by $6.3
million, or 30.9%, from $20.4 million in 1993 to $26.7 million in 1994 due
primarily to the addition of 11 new hotels. Of these 11 hotels, four were
managed by the Company in 1993 or during a portion of 1994, while the other
seven had no previous relationship to the Company. As a percentage of hotel
revenues (defined as rooms and food and beverage revenues), direct hotel
selling and general expenses remained relatively constant at 25.0% in 1994 and
1993. For comparable Owned Hotels, direct selling and general expenses
increased $1.1 million, or 6.2%, but decreased slightly as a percentage of
comparable Owned Hotel revenues from 24.3% in 1993 to 24.1% in 1994.
Occupancy and other operating expenses which consist primarily of
insurance, real estate and other taxes, and rent expense, increased by $214,000,
or 1.9%, from $11.0 million in 1993 to $11.3 million in 1994. As a percentage of
hotel revenues, occupancy and other operating expenses decreased from 13.5% in
1993 to 10.5% in 1994 primarily due to operating leverage, lower property and
liability insurance charges based on favorable claims experiences and reductions
in real estate taxes as a result of successful tax appeals on certain
properties.
General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating both the Owned and Managed
Hotels and general corporate expenses. General and administrative expenses
decreased by $596,000, or 3.8%, from $15.7 million in 1993 to $15.1 million in
1994 primarily due to savings realized from the restructuring of the Company's
centralized management operations in 1993. As a percentage of total revenues,
general and administrative expenses decreased from 14.4% in 1993 to 11.2% in
1994.
22
<PAGE> 24
Depreciation and amortization expense increased by $2.3 million, or 32.5%,
from $7.1 million in 1993 to $9.4 million in 1994, due to the impact of new
hotel properties acquired in the past year and refurbishment efforts at several
hotels.
Interest expense decreased by $2.1 million, or 13.2%, from $16.1 million in
1993 to $14.0 million in 1994, primarily due to the net reduction of
approximately $27.4 million of debt over the past two years. Interest income on
cash investments increased by approximately $700,000, or 55.2%, from $1.3
million in 1993 to $2.0 million in 1994 due to higher average cash balances in
1994.
Other income for 1994 consisted primarily of a gain of approximately $6.2
million related to the settlement of the Rose and Cohen note receivable (see
"-- Liquidity and Capital Resources"), gains on sales of other hotel assets of
approximately $1.0 million and rebates of prior years' insurance premiums of
$1.2 million.
Pretax extraordinary gains of approximately $292,000 for 1994 relate to the
retirement of secured notes with a face value of $8.3 million. Pretax
extraordinary gains of approximately $6.8 million in 1993 relate to the
retirement of debt with a face value of $25.8 million.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1992
The Company is the successor in interest to PMI, which emerged from chapter
11 reorganization on the Effective Date. During its approximately two-year
reorganization, PMI restructured its assets, operations and capital structure.
As a result, the Company (i) eliminated numerous unprofitable lease and
management agreements, (ii) revalued its assets to reflect the then approximate
current fair market value of such assets on its financial statements and (iii)
reduced its liabilities by $448.8 million. On the Effective Date, the Company
emerged from chapter 11 reorganization with 75 Owned or Managed Hotels (as
compared to 141 hotels prior to the chapter 11 reorganization), $135.6 million
of total equity and $266.4 million of long-term debt.
The Company implemented "fresh start" reporting in accordance with
Statement of Position 90-7 of the American Institute of Certified Public
Accountants upon its emergence from reorganization on the Effective Date. Under
"fresh start" reporting, the purchase method of accounting was used and the
assets and liabilities of the Company were restated to reflect their approximate
fair value at the Effective Date. In addition, during the reorganization period
(September 18, 1990 to the Effective Date), the Company's financial statements
were prepared under accounting principles for entities in reorganization which
include reporting interest expense only to the extent paid and recording
transactions and events directly associated with the reorganization proceedings.
Accordingly, the consolidated financial statements of the Company are not
comparable in all material respects to any such financial statement as of any
date or for any period prior to the Effective Date. Subsequent to the Effective
Date, the Company elected to change its fiscal year end from June 30 to December
31.
The financial information below should be read in conjunction with the
Consolidated Financial Statements of the Company included elsewhere in this
report. Since the Company changed its fiscal year in 1992, management has
compiled unaudited data for the calendar year ended December 31, 1992.
23
<PAGE> 25
The following table presents the components of operating income, operating
expense margins and other data for the Company and the Company's comparable
Owned Hotels for 1992 and 1993.
<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
--------------------- -------------------
1992 1993 1992 1993
-------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
Revenues:
Room............................................ $ 62,379 $ 69,487 $51,679 $55,219
Food and Beverage............................... 13,062 12,270 9,549 10,055
Management Fees................................. 11,452 10,831
Interest on Mortgages and Notes Receivable...... 20,063 14,765
Rental and Other................................ 2,232 1,507
-------- --------
Total Revenues............................... 109,188 108,860
Direct Hotel Operating Expenses:
Room............................................ 17,858 19,456 14,003 14,848
Food and Beverage............................... 11,402 10,230 8,278 8,480
Selling and General............................. 22,119 20,429 16,004 16,200
Occupancy and Other Operating..................... 13,043 11,047
General and Administrative........................ 17,162 15,685
Depreciation and Amortization..................... 7,224 7,117
Operating Income.................................. 20,380 24,896
Operating Expense Margins:
Direct Hotel Operating Expenses:
Room, as a percentage of room revenue........... 28.6% 28.0% 27.1% 26.9%
Food and Beverage, as a percentage of food and
beverage revenue............................. 87.3% 83.4% 86.7% 84.3%
Selling and General, as a percentage of room and
food and beverage revenue.................... 29.3% 25.0% 26.1% 24.8%
Occupancy and Other, as a percentage of room and
food and beverage revenue.................... 17.3% 13.5%
General and Administrative, as a percentage of
total revenue................................ 15.7% 14.4%
Other Data:
Occupancy....................................... 67.9% 70.4% 68.1% 72.2%
ADR............................................. $ 54.66 $ 56.14 $ 54.66 $ 55.96
REVPAR.......................................... $ 37.11 $ 39.52 $ 37.23 $ 40.38
Gross Operating Profit.......................... $ 24,062 $ 31,642 $22,943 $25,746
</TABLE>
- ---------------
(1) For purposes of this discussion of results of operations for the year ended
December 31, 1993 compared to the year ended December 31, 1992, Comparable
Owned Hotels refers to the 29 Owned Hotels that were owned or leased by the
Company during all of 1993 and 1992.
Room revenue increased by $7.1 million, or 11.4%, from $62.4 million in
1992 to $69.5 million in 1993. This increase was primarily due to incremental
room revenues of $10.9 million from hotels acquired or built during 1993 and
1992 and increased occupancy and ADR at comparable hotels. The increase was
partially offset by a decrease in room revenues of $7.4 million resulting from
the divestiture of four hotels in 1992 and 1993. Room revenues for comparable
Owned Hotels increased by $3.5 million, or 6.8%, in 1993 compared to 1992,
primarily due to an increase in occupancy of 5.9% for 1993, reflecting improved
economic conditions and continued limited new room supply. ADR increased $1.30,
or 2.4%, in 1993.
Food and beverage revenues decreased by $792,000, or 6.1%, from $13.1
million in 1992 to $12.3 million in 1993. The decrease was primarily due to the
loss of food and beverage operations at divested hotels which was partially
offset by an increase in food and beverage revenue at comparable Owned Hotels of
$506,000, or 5.3%, in 1993.
Management and other fees decreased by $621,000, or 5.4%, from $11.5
million in 1992 to $10.8 million in 1993. The decrease was primarily
attributable to the loss of five management contracts due to property
divestitures by independent owners, of which two properties were acquired by the
Company. This decrease was
24
<PAGE> 26
partially offset by increases in management fees attributable to improved
operating results of the Managed Hotels.
Interest on mortgages and notes receivable decreased by $5.3 million, or
26.4%, from $20.1 million in 1992 to $14.8 million in 1993. This decrease was
primarily due to the Company's early collection of a $58.0 million note
receivable in August 1992. The decrease was partially offset by interest income
of $1.0 million recognized on cash flow notes in 1993 due to the improved
performance of the underlying hotels.
Rental and other revenues decreased by $725,000, or 32.5% from $2.2 million
in 1992 to $1.5 million in 1993. The decrease was primarily attributable to the
loss of rental revenues on properties which the Company converted into operating
hotel assets.
Direct room expenses increased by $1.6 million, or 8.9%, from $17.9 million
in 1992 to $19.5 million in 1993. As a percentage of room revenue, direct room
expenses decreased from 28.6% in 1992 to 28.0% in 1993, primarily due to
increases in ADR which had minimal corresponding increases in expenses. Direct
room expenses for comparable Owned Hotels increased by $845,000, or 6.0%, but
decreased as a percentage of room revenue from 27.1% in 1992 to 26.9% in 1993.
Direct food and beverage expenses decreased by $1.2 million, or 10.3%, from
$11.4 million in 1992 to $10.2 million in 1993. As a percentage of food and
beverage revenue, direct food and beverage expenses decreased from 87.3% in 1992
to 83.4% in 1993 which reflected an increase in higher margin beverage sales.
For comparable hotels, direct food and beverage expenses increased by $202,000,
or 2.4%, but decreased as a percentage of food and beverage revenue from 86.7%
in 1992 to 84.3% in 1993.
Direct selling and general expenses decreased by $1.7 million, or 7.6%,
from $22.1 million in 1992 to $20.4 million in 1993. As a percentage of hotel
revenue, direct selling and general expenses decreased from 29.3% in 1992 to
25.0% in 1993, primarily due to the divestiture of four full-service hotels in
1992 and 1993, which generally required increased overhead costs. For comparable
Owned Hotels, direct selling and general expenses decreased as a percentage of
hotel revenue from 26.1% in 1992 to 24.8% in 1993, primarily due to the
restructuring of the Company's centralized operations which eliminated certain
allocated central office charges. These cost savings were offset by higher
utility charges as a result of an unusually warm summer in 1993.
Occupancy and other operating expenses decreased by $2.0 million or 15.3%
from $13.0 million in 1992 to $11.0 million in 1993 primarily due to the
divesture of two properties operated under lease agreements.
General and administrative expenses decreased by $1.5 million, or 8.6%,
from $17.2 million in 1992 to $15.7 million in 1993. As a percentage of total
revenue, general and administrative charges decreased from 15.7% in 1992 to
14.4% in 1993. These decreases were primarily due to the restructuring of the
Company's centralized management operations in February 1993 which eliminated
approximately $2.5 million of annual costs.
Depreciation expense decreased by $107,000 or 1.5% from $7.2 million in
1992 to $7.1 million in 1993. In accordance with fresh start reporting,
property, equipment and leasehold improvements were valued at their fair market
value as of the Effective Date. Prior to the Effective Date, property,
equipment and leasehold improvements were recorded at cost. Accordingly, a
meaningful comparison of depreciation expense cannot be made.
Interest expense increased by $5.0 million or 44.9% from $11.1 million in
1992 to $16.1 million in 1993. Prior to the Effective Date, the Company's
financial statements were prepared under accounting principles for entities in
reorganization which includes reporting interest expense only to the extent
paid. Additionally, the Company restructured its debt obligations pursuant to
the reorganization which was completed on the Effective Date. Accordingly, a
meaningful comparison of interest expense cannot be made.
Other income in 1993 consisted primarily of a gain on the sale of a hotel
of $1.0 million, settlement of closing adjustments of $625,000 related to the
sale of a hotel in a prior year, interest of $1.2 million received as part of a
federal tax refund and $500,000 received in settlement of prior year's fees on a
Managed Hotel.
Pretax extraordinary gains of $6.8 million in 1993 relate to the repurchase
of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital needs through a
combination of cash flow from operations, conversion of non-operating assets to
cash and proceeds from mortgage financings. The Company believes that its cash
flow from operations is sufficient to fund its anticipated working capital
needs, routine capital expenditures and debt service obligations due through
1995. An important component of the Company's growth strategy is to increase its
equity ownership in hotels, particularly in the full-service and all-suites
segments of the market. The Company intends to actively pursue acquisitions of
full-service hotels or hotel portfolios which may also require additional
capital for the costs of any necessary renovation or refurbishment.
Additionally, the Company plans to expand its AmeriSuites hotel brand by opening
or commencing construction on ten AmeriSuites hotels in 1995. The Company plans
to fund its development and acquisition program in 1995 with the proceeds of
debt or equity offerings, mortgage financings of $42.6 million being
25
<PAGE> 27
incurred in the first quarter of 1995 and additional mortgage financings on its
unencumbered properties, as well as, potentially, on any properties acquired.
The Company believes that these sources will be adequate to fund the
implementation of its growth strategy in 1995.
At December 31, 1994, the Company had cash and cash equivalents of $12.5
million and restricted cash of $9.7 million, which was primarily collateral for
various debt obligations. Cash and cash equivalents decreased by $29.0 million
during 1994 primarily due to capital expenditures related to the Company's
development plan.
Cash flow from operations was approximately $28.7 million in 1994 as
compared to $19.7 million in 1993. Cash flow from operations was positively
impacted by the utilization of net operating loss carryforwards ("NOLs") of $5.9
million and $4.5 million for 1994 and 1993, respectively. At December 31, 1994,
the Company had federal NOLs relating to its predecessor, PMI, of approximately
$117.5 million which are subject to annual utilization limitations and expire
beginning in 2005 and continuing through 2007.
The Company's other major sources of cash in 1994 were a settlement of the
Rose and Cohen note receivable for $31.2 million, mortgage financing and other
borrowings of $19.0 million and other collections of mortgages and notes
receivable of $5.0 million. The Company's major uses of cash in 1994 were
payments of debt of $43.8 million, capital expenditures of $63.4 million and
purchases of debt and other securities of $5.9 million.
Debt. During the first quarter of 1994, the Company purchased at a
discount $7.2 million of its Senior Secured Notes and Junior Secured Notes for
an aggregate purchase price of $7.0 million and retired the debt for a gain of
approximately $200,000. In addition, during the first quarter of 1994, the
Company purchased through a third party agent approximately $5.2 million of its
Senior Secured Notes and Junior Secured Notes for aggregate consideration of
$4.8 million. These notes were held by the third party agent and were not
retired due to certain restrictions under the note agreements. The purchases
were recorded as investments on the Company's balance sheet and gains will not
be recorded on these transactions until the notes mature or are redeemed. In
April 1994, approximately $1.1 million of these notes were retired with a
portion of the proceeds from settlement of the Rose and Cohen note receivable,
resulting in a pretax gain of approximately $100,000.
In April 1994, the Company retired its Senior Secured Notes, due July 31,
1997, with a prepayment of $26.4 million from proceeds of the settlement of the
Rose and Cohen note receivable and other collections from the collateral for the
Senior Secured Notes. The Company issued the Senior Secured Notes on July 31,
1992.
In July 1994, the Company received the required consents from holders of
its Junior Secured Notes to remove certain debt covenants which placed
limitations on the Company's hotel development spending. In consideration of the
consent to the amendment, the Company agreed to increase the interest rate of
the Junior Secured Notes from 9.2% to 10.0% per annum and to shorten the
maturity from July 31, 2000 to July 31, 1999. In addition, the designation of
the Junior Secured Notes changed to Senior Secured Notes as the original Senior
Secured Notes were retired.
In November 1994, the Company obtained mortgage financing of $10.8 million
on two of its unencumbered properties, the proceeds of which were used for the
Company's acquisition and development program in 1994. These notes bear interest
at 11.2% and mature in 2004.
In February 1995, the Company obtained $39.0 million of mortgage financing
on 11 of its unencumbered hotels under two separate loan agreements. Both loans
bear interest at variable rates (approximately 10.5% at closing) and have
five-year maturities. The funds will be used to finance the Company's
acquisition and development program. The Company incurred an additional $3.6
million of debt in connection with the ShoLodge Transaction. See "-- Capital
Investments."
The Company has $34.9 million of debt obligations related to the
Frenchman's Reef due in December 1996. The Company intends to seek an extension
of the maturity of such debt or refinance it. The debt is secured by the
property which has a book value of $50.0 million.
26
<PAGE> 28
At December 31, 1994, as adjusted to give effect to the
incurrence by the Company of $42.6 million of mortgage debt in the first quarter
of 1995, the Company would have had $83.7 million in debt that will bear
interest at floating rates. The Company has not entered into interest rate
protection agreements with respect to its floating rate debt, and, accordingly,
the interest the Company pays on such debt will increase or decrease depending
on the movement of interest rates generally.
Capital Investments. The Company has implemented a hotel development and
acquisition program which focuses on the acquisition of strategically positioned
full-service hotels or hotel portfolios and the development of AmeriSuites
hotels. The Company spent approximately $51.0 million and assumed $18.7 million
of debt in connection with its development and acquisition program in 1994. The
cash portion was funded by a combination of existing cash balances, cash flow
from operations and mortgage financing.
As part of the Company's full-service acquisition program in 1994, the
Company acquired four full-service hotels: the 183-room Ramada Inn in Clifton,
New Jersey, the 280-room Ramada Inn in Trevose, Pennsylvania (which the Company
has since converted to a Radisson hotel), the 340-room Sheraton hotel in
Hasbrouck Heights, New Jersey, and the 225-room Sheraton hotel in Mahwah, New
Jersey. The Company is continuing to pursue opportunities to acquire
full-service hotels or hotel portfolios to the extent that attractive
acquisition opportunities are available.
During 1994, the Company opened four newly constructed AmeriSuites hotels
in Overland Park, Kansas, Columbus, Ohio, Tampa, Florida, and Louisville,
Kentucky, and two newly constructed Wellesley Inns in Lakeland and Fort
Lauderdale, Florida. The Company has begun developing or has plans to develop
AmeriSuites on sites it currently owns in the Atlanta, Greensboro, Miami,
Baltimore, Detroit and Cleveland areas and has entered into a contract to
purchase an additional AmeriSuites site in the Dallas area. The Company
currently plans to spend approximately $70.0 million to open or commence
construction on 10 new AmeriSuites hotels in 1995 and has already begun
construction at the Atlanta, Greensboro and Miami sites.
In February 1995, the Company agreed to purchase an AmeriSuites hotel
in Richmond, Virginia and ShoLodge Inc.'s option to acquire a 50% interest in
11 of the Company's 12 AmeriSuites hotels. The acquisition closed on March 31,
1995. The total consideration payable by the Company in the ShoLodge
Transaction is $19.7 million and is comprised of (i) $6.1 million which was
paid on March 31, 1995 and $10.0 million which will be paid in two cash
installments during 1995, plus (ii) $18.5 million which will be paid in notes
maturing in 1997 less (iii) $14.9 million of existing debt on five hotels which
was forgiven at face value. The transaction will result in a net increase
of $3.6 million of long-term debt. As a result of the transaction, the Company
will manage these 12 AmeriSuites bringing to 13 the number of AmeriSuites
hotels to be owned and operated by the Company.
The Company continues to pursue its program of refurbishing certain of its
Owned Hotels and repositioning them in order to meet the local market's demand
characteristics. In some instances, this may involve a change in franchise
affiliation. The refurbishment and repositioning program primarily involves
hotels which the Company has recently acquired through mortgage foreclosures or
settlements, lease evictions/terminations or acquisitions. During 1993 and 1994,
the Company spent approximately $5.0 million and $11.9 million on capital
improvements at its Owned Hotels, of which approximately $2.8 million and $8.9
million related to refurbishments and repositionings on 12 Owned Hotels. In
1995, the Company intends to spend approximately $18.0 million on capital
improvements, of which $10.8 million relates to the refurbishing and
repositioning of recently acquired hotels.
Asset Realizations. The Company has pursued a strategy of converting the
mortgage notes receivable and other assets that it owns into cash or operating
hotel assets. Since July 31, 1992, the Company has received $98.5 million in
cash and added seven operating hotel assets through note settlements and lease
terminations. During 1994, the Company reduced its long-term mortgage and notes
receivable portfolio by $81.8 million to $81.3 million at December 31, 1994.
This reduction is primarily attributable to the settlement of the note
receivable from Rose and Cohen described below, which carried a book value of
$25.0 million, for $31.2 million in cash, and the conversion of the Company's
mortgage note receivable secured by the Frenchman's Reef with a book value of
$50.0 million into an operating hotel asset. The Company will
27
<PAGE> 29
continue to pursue settlement with mortgage and note obligors and will utilize
the cash for debt repayments or general corporate purposes.
In April 1994, the Company received a favorable ruling from the U.S.
Bankruptcy Court for the Southern District of Florida in litigation with
Financial Security Assurance, Inc. ("FSA"), with respect to FSA's attempt to
recover a payment made to the Company under the Rose and Cohen note receivable.
In 1993, the Company reached a settlement with Rose and Cohen of an adversary
proceeding regarding a promissory note and personal guarantee. The settlement
provided for Rose or his affiliate to pay the Company the sum of $25.0 million,
all of which was paid into escrow in February 1994, plus proceeds from the sale
of approximately 1.1 million shares of the Company's Common Stock held by Rose.
FSA asserted that it was entitled to receive the settlement proceeds under the
terms of an intercreditor agreement. Upon receipt of the Bankruptcy Court order
in April 1994, the Company used the $25.0 million of settlement proceeds to
retire its Senior Secured Notes. On April 21, 1994, FSA filed its notice of
appeal of the Bankruptcy Court's order. The appeal was argued before the United
States District Court in November 1994 and the decision of the District Court is
pending. During 1994, Rose sold approximately 1.0 million shares of the
Company's Common Stock under the terms of the settlement for net proceeds of
approximately $6.2 million. Subject to further court order, the Company is
required to use the stock proceeds principally to retire Senior Secured Notes.
As the Rose and Cohen note had a book value of $25.0 million on the Company's
balance sheet, approximately $6.2 million was recorded as income in the
Company's statement of operations.
In December 1994, the Company obtained ownership of the Frenchman's Reef
through a pre-negotiated plan of reorganization. The Company had previously
reached an agreement in 1993 to restructure its mortgage notes receivable
secured by the Frenchman's Reef with the general partner of Frenchman's Reef
Beach Associates ("FRBA"), the owner of the hotel. In conjunction with the
agreement, FRBA filed a pre-negotiated chapter 11 petition in September 1993.
During the reorganization period, the Company continued to receive cash payments
on its mortgage notes receivable under a cash collateral order approved by the
Bankruptcy Court. Under the plan of reorganization, which was approved by the
Bankruptcy Court on November 29, 1994, the Company obtained ownership and
control of the hotel.
In addition, during 1994, the Company received $2.1 million in settlement
of other mortgage notes receivable realizing a gain of $125,000. The Company
also sold its fee interests in two hotels in 1994 for a combination of cash and
notes of $2.5 million and realized gains of $1.0 million.
Item 8. Financial Statements and Supplementary Data.
See Index to Financial Statements included in Item 14.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
28
<PAGE> 30
PART III
Item 10. Directors and Executive Officers of the Registrant.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- ---- --------------------------------------------
<S> <C> <C>
David A. Simon............................. 43 President, Chief Executive Officer and
Chairman of the Board of Directors
John M. Elwood............................. 40 Executive Vice President, Chief Financial
Officer and Director
Howard M. Lorber(1)........................ 46 Director
Herbert Lust, II(1)........................ 68 Director
Jack H. Nusbaum............................ 54 Director
Allen J. Ostroff(1)........................ 59 Director
A.F. Petrocelli(1)......................... 50 Director
Paul H. Hower.............................. 60 Executive Vice President
Timothy E. Aho............................. 51 Senior Vice President/Development
Denis W. Driscoll.......................... 50 Senior Vice President/Human Resources
John H. Leavitt............................ 41 Senior Vice President/Sales and Marketing
Joseph Bernadino........................... 48 Senior Vice President, Secretary and General
Counsel
Richard T. Szymanski....................... 37 Vice President and Corporate Controller
Douglas W. Vicari.......................... 35 Vice President and Treasurer
</TABLE>
- ---------------
(1) Member of the Compensation and Audit Committee.
The following is a biographical summary of the experience of the directors
and executive officers of the Company:
David A. Simon has been President, Chief Executive Officer and a Director
since 1992 and Chairman of the Board of Directors of the Company since 1993. Mr.
Simon was a director of PMI from 1990 to 1992. Mr. Simon was the Chief Executive
Officer of PMI from 1990 to 1992 and was an executive officer in September 1990
when PMI filed for protection under chapter 11 of the United States Bankruptcy
Code.
John M. Elwood has been a Director and Executive Vice President of the
Company since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the
Director of Reorganization of PMI from September 1990, when PMI filed for
protection under chapter 11 of the United States Bankruptcy Code, through the
Effective Date, and during 1990 was the Director of Reorganization of Allegheny
International, Inc. prior to its emergence from chapter 11 bankruptcy protection
that year.
Howard M. Lorber has been a Director and a member of the Compensation and
Audit Committee since 1994. Mr. Lorber is Chairman of the Board of Directors of
Nathan's Famous, Inc., Hallman & Lorber, Inc. and Skybox International, Inc.,
and a director of New Valley Corporation, United Capital Corp. and Alpine Lace
Brands, Inc. Mr. Lorber has been Chief Executive Officer of Hallman & Lorber,
Inc. for more than the past five years, President and Chief Operating Officer of
New Valley Corporation since 1994, and Chief Executive Officer of Nathan's
Famous, Inc. since 1993. Mr. Lorber has also been a general partner or
shareholder of a corporate general partner of various limited partnerships
organized to acquire and operate real estate properties. Several of these
partnerships filed for protection under the federal bankruptcy laws in 1990 and
1991.
Herbert Lust, II has been a Director since 1992 and Chairman of the
Compensation and Audit Committee of the Company since 1993. Mr. Lust was a
member of the Committee of Unsecured Creditors of PMI from 1990 to 1992. Mr.
Lust has been a private investor and President of Private Water Supply Inc. for
more than the past five years. Mr. Lust is a director of BRT Realty Trust.
29
<PAGE> 31
Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum has been a
senior partner and Co-Chairman of the law firm of Willkie Farr & Gallagher for
more than the past five years. He also is a director of W.R. Berkley
Corporation, The Topps Company, Inc., GEV Corporation and Signet Star Holdings,
Inc.
Allen J. Ostroff has been a Director since 1992 and a member of the
Compensation and Audit Committee since 1993. Mr. Ostroff has been a Senior Vice
President of the Prudential Realty Group, a subsidiary of the Prudential
Insurance Company of America, for more than the last five years.
A.F. Petrocelli has been a Director since 1992 and a member of the
Compensation and Audit Committee since 1993. Mr. Petrocelli has been the
Chairman of the Board of Directors and Chief Executive Officer of United Capital
Corp. for more than the past five years. He is also a director of Nathan's
Famous, Inc.
Paul H. Hower has been an Executive Vice President of the Company since
1993. Mr. Hower was President of Integrity Hospitality Services from 1991 to
1993 and Vice President and Hotel Division Manager of B.F. Saul Co. from 1990 to
1991.
Timothy E. Aho has been a Senior Vice President of the Company since 1994.
Mr. Aho was a Senior Vice President of Development for Boykin Management Company
from 1993 to 1994 and Vice President of Development for Interstate Hotels
Corporation from 1990 to 1993.
Denis W. Driscoll has been a Senior Vice President of the Company since
1993. Mr. Driscoll was President of Driscoll Associates, a human resources
consulting organization, from 1990 to 1993.
John H. Leavitt has been a Senior Vice President of the Company since 1992.
Mr. Leavitt was a Senior Vice President of PMI from 1991 to 1992 and a Senior
Vice President of Medallion Hotel corporation from 1990 to 1991.
Joseph Bernadino has been Senior Vice President, Secretary and General
Counsel of the Company since 1992. Mr. Bernadino was an Assistant Secretary and
Assistant General Counsel of PMI from 1990 to 1992 and held such position when
PMI filed for chapter 11 bankrupcty protection.
Richard T. Szymanski has been a Vice President and Corporate Controller of
the Company since 1992. Mr. Szymanski was Corporate Controller of PMI from 1990
to 1992 and held such position when PMI filed for chapter 11 bankrupcty
protection.
Douglas W. Vicari has been a Vice President and Treasurer of the Company
since 1992 and was Vice President and Treasurer of PMI during 1992. Mr. Vicari
was the Director of Budget and Financial Analysis of PMI from 1990 to 1992 and
held such position when PMI filed for chapter 11 bankrupcty protection.
30
<PAGE> 32
Item 11. Executive Compensation
The following summary compensation table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to the persons who were, at December 31, 1994, the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company. The information shown reflects compensation for services in
all capacities awarded to, earned by or paid to these persons for the years
ending December 31, 1992, 1993 and 1994.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Other Annual Underlying All Other
------------ ----- ---------
Name and Principal Position Year Salary Bonus Compensation Options Compensation
--------------------------- ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
David A. Simon . . . . . . . . . . . 1994 $312,552 $161,538 $-0- -0- $ 5,507(1)
President and Chief . . . . . . . . 1993 303,853 -0- -0- 45,000 6,211
Executive Officer . . . . . . . . . 1992 298,175 655,045 -0- 330,000 1,402
John M. Elwood . . . . . . . . . . . 1994 $249,423 $129,231 $-0- 50,000 $ 3,147(2)
Executive Vice President . . . . . . 1993 240,000 -0- -0- 45,000 21,981
and Chief Financial Officer . . . . 1992 295,170 554,205 -0- 20,000 252
Paul H. Hower . . . . . . . . . . . 1994 $190,000 $ 20,000 $-0- 15,000 $ 5,410(3)
Executive Vice President . . . . . . 1993 94,320 -0- -0- 20,000 113
1992 -0- -0- -0- -0- -0-
Denis W. Driscoll . . . . . . . . . . 1994 $159,961 $ 10,000 $-0- 8,000 $ 959(4)
Senior Vice President - Human . . . 1993 68,565 -0- -0- 8,000 73
Resources 1992 -0- -0- -0- -0- -0-
Joseph Bernadino . . . . . . . . . . 1994 $126,184 $ 24,150 $-0- 8,000 $ 614(5)
Senior Vice President, . . . . . . 1993 120,750 -0- -0- 8,000 87
Secretary and General Counsel . . . 1992 114,648 43,125 -0- -0- 252
</TABLE>
1. Represents $102 for premiums of Company-provided life insurance, $141
related to 401K matching contributions and $5,264 in value of use of
Company-provided car.
2. Represents $102 for premiums for Company-provided life insurance,
$3,045 in value of use of Company-provided car.
3. Represents $702 for premiums for Company-provided life insurance, $826
related to 401K matching contributions and $3,882 in value of use of
Company-provided car.
4. Represents $280 for premiums for Company-provided life insurance and
$679 related to 401K matching contributions.
5. Represents $87 for premiums for Company-provided life insurance and
$527 related to 401K matching contributions.
Stock Option Grants During Year Ended December 31, 1994
The following table sets forth information concerning individual
grants of stock options made during the year ending December 31, 1994 to
each of the officers listed below. The Company did not grant any stock
appreciation rights during such period.
31
<PAGE> 33
<TABLE>
<CAPTION>
Individual Grants
-----------------
% of Total
----------
Number of Options Potential Realized Value at
--------- ------- ---------------------------
Securities Granted to Assumed Annual Rates of
---------- ---------- -----------------------
Underlying Employees Exercise Stock Price Appreciation For
---------- --------- -------- ----------------------------
Options in Fiscal Price Per Expiration Option Terms
------- --------- --------- ---------- ------------
Name Granted Year Share Date 0% 5% 10%
---- ------- ---- ----- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
David A. Simon . . . . . . -0- -0- -0- -0- -0- -0- -0-
John M. Elwood . . . . . . 50,000(1) 13.6% $7.38 1/23/2000 -0- 142,161 284,513
Paul H. Hower . . . . . . . 15,000(2) 4.0% $7.63 8/2/2000 -0- 38,898 88,247
Denis W. Driscoll . . . . . 8,000(2) 2.1% $7.63 8/2/2000 -0- 20,746 47,065
Joseph Bernadino . . . . . 8,000(2) 2.1% $7.63 8/2/2000 -0- 20,746 47,065
- ---------------
</TABLE>
(1) These stock options were granted to John M. Elwood under an employment
contract dated January 24, 1994, which options vest in equal annual
installments of 12,500 each on January 24, 1995, 1996, 1997 and 1998 and
will continue to be exercisable through January 23, 2000. These options
become immediately exercisable upon a change in control of the Company.
(2) These stock options vest with respect to one third of the grant on each
of August 2, 1995, 1996, and 1997 and will continue to be exercisable
through August 2, 2000. These options become immediately exercisable upon
a change in control of the Company.
Aggregated Option Exercises in the Year Ended December 31, 1994 and
Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
--------------------
Shares Underlying Unexercised Value of Unexercised In-
------ ---------------------- ------------------------
Acquired on Value Options at Year End The-Money Options
----------- ----- ------------------- -----------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Simon . . . . . . . -0- -0- 250,000 125,000 $1,182,800 $591,400
John M. Elwood . . . . . . . -0- -0- 62,500 52,500 $ 204,425 $ 69,375
Paul H. Hower . . . . . . . . -0- -0- 20,000 15,000 $ 70,000 --
Denis W. Driscoll . . . . . . -0- -0- 2,666 13,334 $ 10,317 $ 19,603
Joseph Bernadino . . . . . . -0- -0- 2,666 13,334 $ 10,317 $ 19,603
</TABLE>
Employment Agreement Under the Plan
As provided in the PMI Second Amended Joint Plan of Reorganization
(the "Plan"), Mr. Simon and the Company executed an employment agreement dated
July 31, 1992 which provides for an initial term of three years, with automatic
successive one-year extensions unless a prior election is made by either party
not to extend the agreement.
32
<PAGE> 34
The employment agreement provides for an annual base salary of
$300,000 (which will increase annually based upon increases in the consumer
price index), a discretionary annual bonus based on attainment of performance
objectives set by the Board of Directors, a life insurance policy in an amount
not less than $1,000,000, an automobile and other customary welfare benefits,
including medical and disability insurance. The agreement also provides that,
to the extent payments made by the Company for disability insurance, life
insurance and the use of the automobile are subject to federal, state or local
income taxes, the Company will pay Mr. Simon the amount of such additional
taxes plus such additional amount as will be reasonable to hold him harmless
from the obligation to pay such taxes.
Pursuant to this employment agreement, Mr. Simon was granted stock
options on July 31, 1992 to purchase 330,000 shares of Common Stock. Such
stock options are exercisable with respect to 110,000 shares at the end of each
of the first, second and third years of his employment, provided his employment
has not been terminated by such date.
This employment agreement may be terminated by the Company at any
time, with or without cause. If the agreement is terminated by the Company
prior to the expiration of the initial three-year term without cause, or if Mr.
Simon resigns because of circumstances amounting to constructive termination of
employment, severance would be paid in a single lump sum equal to one-year's
base salary or, if greater, the base salary that would have been payable over
the remainder of the initial term. All stock options would become fully vested
and remain exercisable for 90 days after termination or, if longer, until the
expiration of the initial three year term. Any bonus awarded for the year of
termination would be prorated. If the Company does not terminate the agreement
prior to the expiration thereof, but elects not to extend the agreement beyond
the initial term, severance would be payable in a single lump sum equal to
one-year's base salary. If the agreement is terminated by the Company for cause
(as such term is defined in the employment agreement), or if Mr. Simon resigns
voluntarily under circumstances not amounting to a constructive termination of
employment, no benefits are payable other than accrued but unpaid salary.
Employment Agreements Subsequent to the Plan
As of January 24, 1994, Mr. Elwood and the Company executed an
employment agreement which had a term of one year. This employment agreement
provided for an annual base salary of $250,000, a discretionary annual bonus
based on attainment of performance objectives set by the Board of Directors, a
life insurance policy in the amount of $500,000 (of which the Company will not
pay
33
<PAGE> 35
premiums which exceed $5,000), an automobile, and other customary welfare
benefits, including medical and disability insurance. Pursuant to the
agreement, Mr. Elwood was granted stock options to purchase 50,000 shares of
Common Stock pursuant to the 1992 Stock Option Plan, which options vest in
equal annual installments of 12,500 shares each on January 24, 1995, 1996, 1997
and 1998. This employment agreement has expired. The Company intends to
execute a new agreement with Mr. Elwood.
As of May 18, 1993, Mr. Paul H. Hower and the Company executed an
employment agreement which terminated on June 30, 1994. This employment
agreement provides for an annual base salary of $180,000, a cash bonus of
$10,000, a discretionary annual bonus based on attainment of performance
objectives set by the Board of Directors, a life insurance policy in an amount
not less than $360,000, an automobile, and other customary welfare benefits,
including medical and disability insurance. Pursuant to the agreement, Mr.
Hower was granted stock options as of June 23, 1993 to purchase 20,000 shares
of Common Stock.
Change in Control Agreements
As of February 15, 1995, the Company executed change in control
agreements with ten officers of the Company, including each named executive
officer. These agreements provide that, if within two years of a change in
control of the Company, the officer's employment with the Company is terminated
by the Company without cause or if the officer resigns for good reason (as
defined in the agreements), the Company will pay the beneficiary two and
one-half times the aggregate cash compensation earned by the beneficiary during
the fiscal year immediately preceding the termination of employment. Such
payments are to be reduced, however, to the extent necessary to avoid
characterization as "excess parachute payments" within the meaning of Section
280G of the Internal Revenue Code. In addition, any outstanding options to
purchase shares of the Company held by the officer will vest and become
exercisable as of the date of the change in control.
34
<PAGE> 36
Board of Directors Compensation and Benefits
Directors who are employees of the Company do not receive additional
compensation for serving on the Board of Directors. Non-employee Directors
receive $24,000 annually. In addition, each non-employee Director
receives $1,500 for each Board of Directors meeting attended, $1,500
for each committee meeting attended and $500 for each telephonic meeting if
such meeting extends beyond a period of 15 minutes. The Chairman of the
Compensation and Audit Committee receives an additional $15,000 annually. The
Directors' remuneration is paid quarterly. All Directors are reimbursed for
their expenses.
Compensation and Audit Committee Interlocks and Insider Participation
The members of the Compensation and Audit Committee are Herbert Lust,
II (Chairman), A. F. Petrocelli, Allen J. Ostroff and Howard M. Lorber. Mr.
Petrocelli has certain business relationships with the Company, which are
described under the heading "Certain Relationships and Related Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of February 16, 1995, information
with respect to the beneficial ownership of the Company's common stock by (i)
each person known by the Company to own beneficially 5% or more of the
Company's common stock, (ii) each director of the Company, (iii) the Company's
Chief Executive Officer and each of the four remaining most highly compensated
executive officers, and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Amount and Percent
---------- -------
Nature of of
--------- --
Name of Beneficial Owner Ownership Class(p)
------------------------ --------- --------
<S> <C> <C>
First Interstate Bank Corp.(a) . . . . . . . . . . . . . . . . . . . . . . 2,271,500 7.4
633 17th Street
Suite 1800
Denver, CO 80202
Ingalls & Snyder(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,983,179 6.5
61 Broadway
New York, New York 10006
David A. Simon(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408,895 1.3
John M. Elwood(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,622 *
Herbert Lust, II(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,151 *
Allen J. Ostroff(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 *
A.F. Petrocelli(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,276 *
Jack H. Nusbaum(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 *
Howard M. Lorber(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 *
John H. Leavitt(j) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,777 *
</TABLE>
35
<PAGE> 37
<TABLE>
<S> <C> <C>
Paul H. Hower(k) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,300 *
Denis W. Driscoll(l) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,450 *
Joseph Bernadino(m) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,666 *
Richard T. Szymanski(n) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,666 *
Douglas W. Vicari(o) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,666 *
Timothy E. Aho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 *
All directors and executive officers
as a group (14 persons)(p) . . . . . . . . . . . . . . . . . . . . . . . . . . 715,469 2.3
</TABLE>
(a) First Interstate Bank Corp. filed a Schedule 13G, dated February 10,
1995 with the Securities and Exchange Commission (the "SEC") reporting
ownership of 2,271,500 shares of Common Stock, with sole voting power
with respect to 1,443,400 shares and sole dispositive power with
respect to 2,271,500 shares.
(b) Ingalls & Snyder filed a Schedule 13G, dated January 13, 1995 with the SEC
reporting ownership of 1,983,179 shares of Common Stock, with sole voting
power with respect to 168,286 shares and sole dispositive power with
respect to 1,983,179 shares.
(c) Includes 151,726 shares owned by David A. Simon, 146 shares owned by
his wife and 249 shares held by Mr. Simon as custodian for his
children. Mr. Simon disclaims beneficial ownership of the shares owned
by his wife and held as custodian for his children. Also includes
warrants to purchase 5,510 shares with an exercise price of $2.71 per
share owned by Mr. Simon, 467 warrants owned by his wife, and 797
warrants held as custodian for his children. Mr. Simon disclaims
beneficial ownership of the warrants owned by his wife and held as
custodian for his children. Also includes options to purchase 250,000
shares with an exercise price of $3.20 per share as to 30,000 shares
and $2.71 as to 220,000 shares.
(d) Includes 47,000 shares, warrants to purchase 12,122 shares with an
exercise price of $2.71 per share and options to purchase 20,000
shares at an exercise price of $3.81 per share, options to purchase
30,000 shares at an exercise price of $3.20 per share and options to
purchase 12,500 at an exercise price of $7.38 per share.
(e) Includes 10,000 shares owned by Herbert Lust, 23,151 shares held by a
trust under which Mr. Lust and his wife are co-trustees and
beneficiaries and options held by Mr. Lust to purchase 20,000 shares
with an exercise price of $3.20 per share.
(f) Includes 5,000 shares and options to purchase 30,000 shares with an
exercise price of $3.20 per share.
36
<PAGE> 38
(g) Includes 8,276 shares held by United Capital Corp. of which Mr.
Petrocelli is Chairman of the Board of Directors and Chief Executive
Officer and options held by Mr. Petrocelli to purchase 30,000 shares
with an exercise price of $3.20 per share.
(h) Includes 10,000 shares and options to purchase 5,000 shares with an
exercise price of $7.25 per share.
(i) Includes options to purchase 5,000 shares with an exercise price of
$7.25 per share.
(j) Includes 26 shares, warrants to purchase 85 shares with an exercise
price of $2.71 per share and options to purchase 2,666 shares with an
exercise price of $3.63 per share.
(k) Includes 300 shares owned by his wife and options to purchase 20,000
shares with an exercise price of $4.00 per share.
(l) Includes 5,520 shares owned by Mr. Driscoll, 200 shares owned by his
son and daughter, warrants to purchase 64 shares with an exercise
price of $2.71 per share, and options to purchase 2,666 shares with an
exercise price of $3.63 per share.
(m) Includes 1,000 shares and options to purchase 2,666 shares with an
exercise price of $3.63 per share.
(n) Includes options to purchase 1,666 shares with an exercise price of
$3.63 per share.
(o) Includes options to purchase 1,666 shares with an exercise price of
$3.63 per share.
(p) With the exception of David Simon, the Directors and executive
officers each owns less than one percent of the outstanding Common Stock
and own approximately two percent of the outstanding Common Stock as a
group. Percentages were based on 30,683,444 shares outstanding as of
April 17, 1995.
Item 13. Certain Relationships and Related Transactions.
A.F. Petrocelli, a Director of the Company, is the Chairman of the
Board and Chief Executive Officer of United Capital Corp. In March 1994, the
Company entered into management agreements with the corporate owners of two
hotels who are affiliates of United Capital Corp. The Company received $90,000
in management fees for the fiscal year ended 1994.
During 1989, a partnership in which Peter E. Simon, father of David A.
Simon, is a partner acquired an interest in three hotels
37
<PAGE> 39
from PMI. In partial payment PMI received non-recourse junior loans aggregating
$21,590,000. As of December 31, 1994, the aggregate balance owed on these loans
was $21,472,766. The interest rates on these loans ranged from 9 1/2% to 11%
per annum. The Company has restructured these loans in order to obtain payment
based upon the available cash flow of the hotels. During 1994, the Company
recognized $853,000 of interest income related to these loans. The Company
managed these three hotels for the partnership and received $523,000 in
management fees for fiscal year 1994.
During 1989, this same partnership acquired PMI's interest in eight
hotel properties. In partial payment PMI received a junior non-recourse
mortgage note in the principal amount of $9,647,450. The Company restructured
this transaction as of December 1, 1992 by (i) conveying to the partnership its
interest in one hotel property, and (ii) amending the principal amount and
interest rate of the note to $8,103,362 and 8.2% per annum, respectively. No
debt payments were made on these loans during 1994. The Company managed these
nine hotels for the partnership and received $329,000 in accounting and
management fees for fiscal year 1994.
During February 1990, this same partnership purchased from PMI a note
owed by a third party in the original principal amount of $3,255,380. This
partnership paid PMI $488,318 in cash and granted PMI an 85% note
participation. In partial settlement of its claim on the note, the Company
acquired a hotel located in Miami, Florida in which the partnership has a 15%
interest.
In December 1993, the Company entered into a management agreement with
the corporate owner of a hotel in which Peter E. Simon is a stockholder. The
Company received $40,000 in management fees for the fiscal year 1994.
In 1991, the Company entered into an agreement with ShoLodge, a company
controlled by Leon Moore, a former director, whereby ShoLodge was appointed the
exclusive agent to develop and manage certain hotel properties. The Company
had loans payable to ShoLodge of $39,896,000 at December 31, 1994 related to
the development of hotels. The Company also uses the ShoLodge reservation
system for its Wellesley and AmeriSuites properties.
In February 1995, the Company entered into an agreement to acquire
ShoLodge's option to purchase a 50% interest in 11 of the Company's AmeriSuites
hotels and will also acquire the only AmeriSuites hotel not already owned by the
Company. The total consideration payable by the Company in this transaction is
$19,700,000 and is comprised of (i) $16,100,000 to be paid in three cash
installments during 1995 plus (ii) $18,500,000 which will be paid in notes
maturing in 1997 less (iii) $14,900,000 of existing debt on five hotels which
was forgiven at face value. As a result of this transaction, which
38
<PAGE> 40
closed on March 31, 1995, the Company assumed management of these hotels.
The Company has a note receivable from John H. Leavitt, Senior Vice
President - Sales and Marketing, with a balance of $39,163 at December 31,
1994. The note bears interest at 8.5% and is due in 2011.
The Company has retained Willkie Farr & Gallagher as its legal
counsel involving certain matters during its last fiscal year and anticipates
it will continue such relationship with the firm in this fiscal year. Mr.
Nusbaum, Director of the Company, is a Senior Partner and Co-Chairman of the
firm.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) 1. Financial Statements
The Financial Statements listed in the accompanying index to
financial statements are filed as part of this Annual Report.
2. Exhibits
(2) (a) Reference is made to the Disclosure Statement for
Debtors' Second Amended Joint Plan of Reorganization
dated January 16, 1992, which includes the Debtors'
Second Amended Plan of Reorganization as an exhibit
thereto filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is incorporated
herein by reference.
(3) (a) Reference is made to the Restated Certificate of
Incorporation of the Company dated June 5, 1992
filed as an Exhibit to the Company's Form 10-K
dated September 25, 1992, which is incorporated
herein by reference.
(b) Reference is made to the Restated Bylaws of the
Company filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is
incorporated herein by
39
<PAGE> 41
reference.
(4) (a) Reference is made to the Form of 8.20% Fixed Rate
Senior Secured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(b) Reference is made to the Form of Adjustable Rate
Senior Secured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(c) Reference is made to the Form of 9.20% Junior
Secured Note of the Company filed as an Exhibit to
the Company's Form 10-K dated September 25, 1992,
which is incorporated herein by reference.
(d) Reference is made to the Form of 8.20% Tax Note of
the Company filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(e) Reference is made to the Form of 10.20% Secured
UND Restructured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(f) Reference is made to the Form of 8% Secured UND
Restructured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(g) Reference is made to the Form of 9.20% OVR
Restructured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
40
<PAGE> 42
(h) Reference is made to the Collateral Agency
Agreement among the Company, U.S. Trust and the
Secured Parties, dated as of July 31, 1992 filed
as an Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein by
reference.
(i) Reference is made to the Security Agreement
between the Company and U.S. Trust, dated as of
July 31, 1992, filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(j) Reference is made to the Subsidiary Guaranty from
FR Delaware, Inc. to United States Trust Company of
New York, dated as of July 31, 1992, filed as an
Exhibit to the Company's Form 10-K dated September
25, 1992, which is incorporated herein by reference.
(k) Reference is made to the Security Agreement
between FR Delaware, Inc. and United States Trust
Company of New York, dated as of July 31, 1992,
filed as an Exhibit to the Company's Form 10-K
dated September 25, 1992, which is incorporated
herein by reference.
(l) Reference is made to the Subsidiary Guaranty from
Prime Note Collections Company, Inc. to United
States Trust Company of New York, dated as of
July 31, 1992, filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(m) Reference is made to the Security Agreement
between Prime Note Collections Company, Inc. and
United States Trust Company of New York, dated as
of July 31, 1992, filed as an Exhibit to the
Company's Form 10-K dated September 25, 1992, which
is incorporated herein by reference.
41
<PAGE> 43
(n) Reference is made to a Form 8-A of the Company as
filed on June 5, 1992 with the Securities and
Exchange Commission, as amended by Amendment No. 1
and Amendment No. 2, which is incorporated herein
by reference.
(10) (a) Reference is made to the Agreement of Purchase and
Sale between Flamboyant Investment Company, Ltd.
and VMS Realty, Inc. dated June 3, 1985, and its
related agreements, each of which was included as
Exhibits to the Form 8-K dated August 14, 1985 of
PMI, which are incorporated herein by reference.
(b) Reference is made to PMI's Flexible Benefit Plan,
filed as an Exhibit to the Form 10-Q dated
February 12, 1988 of PMI, which is incorporated
herein by reference.
(c) Reference is made to the Employment Agreement
dated as of July 31, 1992, between David A. Simon
and the Company filed as an Exhibit to the
Company's Form 10-K dated September 25, 1992,
which is incorporated herein by reference.
(d) Reference is made to the 1992 Performance Incentive
Stock Option Plan of the Company dated as of
July 31, 1992, filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(e) Reference is made to the 1992 Stock Option Plan of
the Company filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(f) Reference is made to the 1992 Non-Qualified Stock
Option Agreement between the Company and David A.
Simon filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is incorporated
herein by reference.
42
<PAGE> 44
(g) Reference is made to the 1992 Non-Qualified Stock
Option Agreement between the Company and David L.
Barsky filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is incorporated
herein by reference.
(i) Reference is made to the Employment Agreement dated
as of December 31, 1992 between John Elwood and the
Company filed as an Exhibit to the Company's Form
10-K dated March 26, 1993, which is incorporated
herein by reference.
(j) Reference is made to the 1992 Non-Qualified Stock
Option Agreement between the Company and John Elwood
filed as an Exhibit to the Company's Form 10-K
dated March 26, 1993, which is incorporated herein
by reference.
(k) Reference is made to the Employment Agreement dated
as of May 18, 1993 between Paul Hower filed as an
Exhibit to the Company's Form 10-K dated March 25,
1994, which is incorporated herein by reference.
(l) Reference is made to the Consolidated and Amended
Settlement Agreement dated as of October 12, 1993
between Allan V. Rose and the Company filed as an
Exhibit to the Company's Form 10-K dated March 25,
1994, which is incorporated herein by reference.
(m) Consent and Amendment to Prime Hospitality Corp.
9.20% Junior Secured Notes.
(n) Agreement dated February 6, 1995 among Suites of
America, Inc., ShoLodge, Inc. and the Company.
(o) Change of Control Agreement dated February 15, 1995
between David A. Simon
43
<PAGE> 45
and the Company.
(p) Change of Control Agreement dated February 15, 1995
between John M. Elwood and the Company.
(q) Change of Control Agreement dated February 15, 1995
between Paul H. Hower and the Company.
(r) Change of Control Agreement dated February 15, 1995
between John H. Leavitt and the Company.
(s) Change of Control Agreement dated February 15, 1995
between Denis W. Driscoll and the Company.
(t) Change of Control Agreement dated February 15, 1995
between Timothy E. Aho and the Company.
(u) Change of Control Agreement dated February 15, 1995
between Joseph Bernadino and the Company.
(v) Change of Control Agreement dated February 15,
1995 between Richard T. Szymanski and the Company.
(w) Change of Control Agreement dated February 15, 1995
between Douglas W. Vicari and the Company.
(x) Change of Control Agreement dated February 15, 1995
between Richard Moskal and the Company.
(11) Computation of Earnings Per Common Share.
(12) Computation of the Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the Company are as follows:
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
---- -------------
<S> <C>
A.J.& R. Motor Inns, Inc. North Carolina
Civic Motor Inns, Inc. Virginia
Coliseum Motor Inns, Inc. Maryland
Dynamic Marketing, Inc. Delaware
</TABLE>
44
<PAGE> 46
<TABLE>
<S> <C>
Fairfield Holding Corp. Delaware
Fairfield-Meridian Claims Service, Inc. Delaware
FR Delaware, Inc. Delaware
FR Management Corporation Virginia
Hartford Motor Inns, Inc. Virginia
Mahwah Holding Corp. Delaware
Market Segments, Incorporated Delaware
OP Hotel, Inc. Kansas
(subsidiary of Suites of America, Inc.)
PHC Construction Corp. Delaware
Prime-American Realty Corp. Delaware
Prime Hotel Real Estate
Investments, Inc. Delaware
Prime Note Collections Company, Inc. Delaware
Prime-O-Lene, Inc. New Jersey
Prime-Trevose Enterprises, Inc. Pennsylvania
Republic Motor Inns, Inc. Virginia
Suites of America, Inc. Delaware
York Motor Inns, Inc. Virginia
(23) (a) Consent of Arthur Andersen LLP
(b) Consent of J.H. Cohn & Company
</TABLE>
(b) Reports on Form 8-K: None
45
<PAGE> 47
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(ITEM 14(A))
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP....................................................... F-2
Consolidated:
Balance Sheets at December 31, 1993 and 1994..................................... F-3
Statements of Income for the Five Months Ended December 31, 1992 and the Years
Ended December 31, 1993 and 1994................................................ F-4
Statements of Stockholders' Equity for the Five Months Ended December 31, 1992
and the Years Ended December 31, 1993 and 1994.................................. F-5
Statements of Cash Flows for the Five Months Ended December 31, 1992 and the
Years Ended December 31, 1993 and 1994.......................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Report of Arthur Andersen LLP....................................................... F-20
Report of J.H. Cohn & Company....................................................... F-21
Consolidated:
Balance Sheets at June 30, 1992 and July 31, 1992................................ F-23
Statements of Operations for the Year Ended June 30, 1992 and the One Month Ended
July 31, 1992................................................................... F-25
Statements of Stockholders' Equity (Deficiency) for the Year Ended June 30, 1992
and the One Month Ended July 31, 1992........................................... F-26
Statements of Cash Flows for the Year Ended June 30, 1992 and the One Month Ended
July 31, 1992................................................................... F-27
Notes to Consolidated Financial Statements.......................................... F-29
</TABLE>
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
Separate financial statements of 50% or less owned entities accounted for
by the equity method have been omitted because such entities considered in the
aggregate as a single subsidiary would not constitute a significant subsidiary.
F-1
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Prime Hospitality Corp.:
We have audited the accompanying consolidated balance sheets of Prime
Hospitality Corp. (a Delaware corporation) and subsidiaries ("the Company") as
of December 31, 1994 and 1993 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended and the five months
ended December 31, 1992. 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 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 financial position of Prime Hospitality Corp. and
subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for the years then ended and the five months
ended December 31, 1992 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 2, 1995
F-2
<PAGE> 49
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 41,569 $ 12,524
Restricted cash...................................................... 10,993 9,725
Accounts receivable, net of reserves................................. 6,266 7,819
Current portion of mortgages and notes receivable.................... 2,275 1,925
Accrued interest receivable.......................................... 3,954 1,539
Other current assets................................................. 3,145 5,657
-------- --------
Total current assets......................................... 68,202 39,189
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization........................................ 172,786 299,291
Mortgages and notes receivable, net of current portion................. 163,033 81,260
Other assets........................................................... 6,664 15,192
-------- --------
TOTAL ASSETS................................................. $410,685 $434,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt.............................................. $ 19,282 $ 5,284
Other current liabilities............................................ 22,445 23,904
-------- --------
Total current liabilities.................................... 41,727 29,188
Long-term debt, net of current portion................................. 168,618 178,545
Other liabilities...................................................... 28,976 23,134
-------- --------
Total liabilities............................................ 239,321 230,867
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share; 20,000,000 shares
authorized;
none issued....................................................... -- --
Common stock, par value $.01 per share; 50,000,000 shares authorized
29,988,674 and 30,409,371 shares issued and outstanding in 1993
and 1994, respectively............................................ 300 304
Capital in excess of par value....................................... 157,507 171,774
Retained earnings.................................................... 13,557 31,987
-------- --------
Total stockholders' equity................................... 171,364 204,065
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $410,685 $434,932
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 50
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Room................................................ $ 24,639 $ 69,487 $ 88,753
Food and beverage................................... 4,598 12,270 18,090
Management and other fees........................... 5,000 10,831 10,021
Interest on mortgages and notes receivable.......... 6,335 14,765 15,867
Rental and other.................................... 762 1,507 1,572
------------ ------------ ------------
Total revenues.............................. 41,334 108,860 134,303
------------ ------------ ------------
Costs and expenses:
Direct hotel operating expenses:
Room............................................. 6,952 19,456 24,539
Food and beverage................................ 4,027 10,230 13,886
Selling and general.............................. 7,811 20,429 26,733
Occupancy and other operating....................... 4,351 11,047 11,261
General and administrative.......................... 5,929 15,685 15,089
Depreciation and amortization....................... 2,918 7,117 9,427
------------ ------------ ------------
Total costs and expenses.................... 31,988 83,964 100,935
------------ ------------ ------------
Operating income...................................... 9,346 24,896 33,368
Interest income on cash investments................... 693 1,267 1,966
Interest expense...................................... (7,718) (16,116) (13,993)
Other income.......................................... -- 3,809 9,089
------------ ------------ ------------
Income before income taxes and extraordinary items.... 2,321 13,856 30,430
Provision for income taxes............................ 928 5,681 12,172
------------ ------------ ------------
Income before extraordinary items..................... 1,393 8,175 18,258
Extraordinary items -- gains on discharges of
indebtedness (net of income taxes of $2,772 and
$120)............................................... -- 3,989 172
------------ ------------ ------------
Net income............................................ $ 1,393 $ 12,164 $ 18,430
========== ========== ==========
Net income per common share:
Income before extraordinary items................... $ .05 $ .27 $ .57
Extraordinary items................................. -- .13 .01
------------ ------------ ------------
Net income per common share........................... $ .05 $ .40 $ .58
========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 51
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance August 1, 1992........................ 29,912,794 $299 $ 135,301 $ -- $135,600
Net income.................................... -- -- -- 1,393 1,393
Utilization of net operating loss
carryforwards............................... -- -- 789 -- 789
---------- ------ ---------- -------- --------
Balance December 31, 1992..................... 29,912,794 299 136,090 1,393 137,782
Net income.................................... -- -- -- 12,164 12,164
Utilization of net operating loss
carryforwards............................... -- -- 4,525 -- 4,525
Federal income tax refund..................... -- -- 16,462 -- 16,462
Compensation expense related to stock option
plan........................................ -- -- 225 -- 225
Proceeds from exercise of stock options....... 30,000 -- 81 -- 81
Proceeds from exercise of stock warrants...... 45,880 1 124 -- 125
---------- ------ ---------- -------- --------
Balance December 31, 1993..................... 29,988,674 300 157,507 13,557 171,364
Net income.................................... -- -- -- 18,430 18,430
Utilization of net operating loss
carryforwards............................... -- -- 5,861 -- 5,861
Amortization of pre-fresh start tax
basis differences........................... -- -- 6,954 -- 6,954
Federal income tax refund..................... -- -- 200 -- 200
Compensation expense related to stock option
plan........................................ -- -- 60 -- 60
Proceeds from exercise of stock options....... 216,080 2 640 -- 642
Proceeds from exercise of stock warrants...... 204,617 2 552 -- 554
---------- ------ ---------- -------- --------
Balance December 31, 1994..................... 30,409,371 $304 $ 171,774 $ 31,987 $204,065
========= ====== ======== ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 52
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
DECEMBER YEAR ENDED YEAR ENDED
31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,393 $ 12,164 $ 18,430
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 2,918 7,117 9,427
Gain on settlement of note receivable................ -- -- (6,224)
Utilization of net operating loss carryforwards...... 789 4,525 5,861
Amortization of pre-fresh start tax basis
differences........................................ -- -- 6,954
Deferred income taxes................................ -- 1,541 (205)
Gains on discharges of indebtedness.................. -- (6,761) (292)
Gains on disposals of assets......................... -- (1,769) (1,099)
Compensation expense related to stock options........ -- 225 60
Increase (decrease) from changes in other operating
assets and liabilities:
Accounts receivable.................................. 320 269 (1,945)
Other current assets................................. (1,445) (1,791) 127
Other liabilities.................................... (248) 4,208 (2,422)
----------- ------------ ------------
Net cash provided by operating activities............ 3,727 19,728 28,672
----------- ------------ ------------
Cash flows from investing activities:
Proceeds from mortgages and other notes receivable...... 46,165 10,861 36,198
Disbursements for mortgages and other notes
receivable........................................... -- (515) (1,100)
Proceeds from sales of property, equipment and leasehold
improvements......................................... -- 3,715 1,480
Purchases of property, equipment and leasehold
improvements......................................... (1,803) (14,346) (63,360)
Decrease in restricted cash............................. 9,939 1,903 1,268
Proceeds from retirement of debt securities............. -- -- 1,116
Purchase of debt and other securities................... -- -- (5,885)
Other................................................... (506) 663 (3,965)
----------- ------------ ------------
Net cash provided by (used in) investing
activities......................................... 53,795 2,281 (34,248)
----------- ------------ ------------
Cash flows from financing activities:
Payments of debt........................................ (56,592) (30,890) (43,771)
Proceeds from issuance of debt.......................... -- 2,771 19,026
Proceeds from the exercise of stock options and
warrants............................................. -- 206 1,196
Principal proceeds from federal income tax refund....... -- 16,462 200
Reorganization items after emergence from bankruptcy.... (3,807) (5,605) (120)
----------- ------------ ------------
Net cash used in financing activities................ (60,399) (17,056) (23,469)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents...... (2,877) 4,953 (29,045)
Cash and cash equivalents at beginning of period.......... 39,493 36,616 41,569
----------- ------------ ------------
Cash and cash equivalents at end of period................ $36,616 $ 41,569 $ 12,524
========= ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 53
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES:
Prime Hospitality Corp. (the "Company") is a hotel owner/operator with
ownership or management of hotels in the United States and the U.S. Virgin
Islands. The Company's hotels primarily provide moderately priced, quality
accommodations in secondary markets, and operate under franchise agreements
with national hotel chains or under the Company's proprietary Wellesley
Inns or AmeriSuites brand names.
The Company emerged from the Chapter 11 reorganization proceeding of its
predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries
("PMI"), which consummated its Plan of Reorganization ("the Plan") on July
31, 1992 (the "Effective Date"). PMI and certain of its subsidiaries had
filed for protection under Chapter 11 of the United States Bankruptcy Code
in September of 1990. During the reorganization, PMI re-negotiated most of
its leases, management agreements and debt commitments, resulting in the
elimination of a substantial number of unprofitable contract relationships
and excessive debt obligations.
BASIS OF PRESENTATION:
Pursuant to the American Institute of Certified Public Accountant's
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted
fresh start reporting as of July 31, 1992. Under fresh start reporting, the
reorganization value of the entity was allocated to the reorganized
Company's assets on the basis of the purchase method of accounting. The
reorganization value (the approximate fair value) of the assets of the
emerging entity was determined by consideration of many factors and various
valuation methods, including discounted cash flows and price/earnings and
other applicable ratios believed by management to be representative of the
Company's business and industry. Liabilities were recorded at face values,
which approximate the present values of amounts to be paid determined at
appropriate interest rates. Under fresh start reporting, the consolidated
balance sheet as of July 31, 1992 became the opening consolidated balance
sheet of the emerging Company.
In accordance with SOP 90-7, financial statements covering periods prior to
July 31, 1992 are not presented because such statements have been prepared
on a different basis of accounting and are thus not comparable.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS:
Cash equivalents are highly liquid unrestricted investments with a maturity
of three months or less when acquired.
F-7
<PAGE> 54
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH:
Restricted cash consists primarily of highly liquid investments that serve
as collateral for debt obligations due within one year.
MORTGAGES AND NOTES RECEIVABLE:
Mortgages and notes receivable are reflected at their fair value as of
July 31, 1992, adjusted for payments and other advances since that date.
The amount of interest income recognized on mortgages and notes receivable
is generally based on the stated interest rate and the carrying value of
the notes. The Company has a number of subordinated or junior mortgages
which remit payment based on hotel cash flow. Because there was substantial
doubt that the Company would recover any of their value, these mortgages
were assigned no value in the Company's consolidated financial statements
when the Company adopted fresh start reporting on the Effective Date.
Interest on cash flow mortgages and delinquent loans is generally
recognized when cash is received.
In May 1993 and October 1994, the Financial Accounting Standards Board
issued SFAS 114, "Accounting by Creditors for Impairment of a Loan" and
SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures." As defined in SFAS 114 and SFAS 118, a loan
is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS 114 and SFAS 118 require that
the measurement of impairment of a loan be based on the present value of
expected future cash flows (net of estimated costs to sell) discounted at
the loan's effective interest rate. Impairment can also be measured based
on a loan's observable market price or the fair value of collateral, if the
loan is collateral dependent. If the measure of the impaired loan is less
than the recorded investment in the loan, the Company will be required to
establish a valuation allowance, or adjust existing valuation allowances,
with a corresponding charge or credit to operations.
The Company is required to adopt these new accounting rules effective
January 1, 1995. Management expects the effect of adopting these new
accounting standards will be immaterial based on the current net carrying
value of its mortgage and notes receivable portfolio.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Property, equipment and leasehold improvements that the Company intends to
continue to operate are stated at their fair market value as of July 31,
1992 plus the cost of acquisitions subsequent to that date less accumulated
depreciation and amortization from August 1, 1992. Provision is made for
depreciation and amortization using the straight-line method over the
estimated useful lives of the assets. Properties identified for disposal
are stated at their estimated net realizable value.
INCOME TAXES:
The Company and its subsidiaries file a consolidated Federal income tax
return. For financial reporting purposes, the Company follows Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
109 ("FAS 109"). In accordance with FAS 109, as well as SOP 90-7, income
taxes have been provided at statutory rates in effect during the period.
Tax benefits associated with net operating loss carryforwards and other
temporary differences that existed at the time fresh start reporting was
adopted are reflected as a contribution to stockholders' equity in the
period in which they are realized.
F-8
<PAGE> 55
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME PER COMMON SHARE:
Net income per common share is computed based on the weighted average
number of common shares and common share equivalents outstanding during
each period. The weighted average number of common shares used in computing
primary net income per share was 29,913,000 for the five months ended
December 31, 1992 and 30,721,000 and 32,022,000 for the years ended
December 31, 1993 and 1994, respectively. Net income per common shares was
restated for all periods to reflect a 9.4% reduction in the number of
shares distributed under PMI's Plan (See Note 10). The dilutive effect of
stock warrants and options during the five months ended December 31, 1992
and the years ended December 31, 1993 and 1994 was not material (see Note
10).
RECLASSIFICATIONS:
Certain reclassifications have been made to the December 31, 1992 and 1993
consolidated financial statements to conform them to the December 31, 1994
presentation.
NOTE 2 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
------- -------
<S> <C> <C>
Cash........................................................... $ 3,013 $ 5,953
Commercial paper and other cash equivalents.................... 38,556 6,571
------- -------
Totals............................................... $41,569 $12,524
======= =======
</TABLE>
NOTE 3 -- MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994
-------- -------
<S> <C> <C>
Properties operated by the Company(a)......................... $ 65,323 $60,609
Other(b)...................................................... 24,985 22,576
Frenchman's Reef resort hotel(c).............................. 50,000 --
Rose and Cohen entities(d).................................... 25,000 --
-------- -------
Total............................................... 165,308 83,185
Less current portion.......................................... (2,275) (1,925)
-------- -------
Long-term portion............................................. $163,033 $81,260
======== =======
</TABLE>
- ---------------
(a) The Company is the holder of mortgage notes receivable with a book value of
$46,497,000 secured primarily by 10 hotel properties operated by the Company
under management agreements and $14,112,000 in mortgages secured primarily
by 4 properties operated under lease agreements. These notes currently bear
interest at rates ranging from 8.5% to 13.5% and mature through 2017. The
mortgages were primarily derived from the sales of hotel properties. Many of
the managed properties were unable to pay in full the annual debt service
required under the terms of the original mortgages. The Company has
restructured approximately $33,000,000 of these loans to pay based upon
available cash and a participation in the future excess cash flow of such
hotel properties. The restructurings generally include a "senior portion"
featuring defined payment terms, and a "junior portion" payable annually
based on cash flow. The junior portion represents the difference between the
original mortgage and the new senior
F-9
<PAGE> 56
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portion and provides the Company the opportunity to recover that difference
if the hotel's performance improves. In addition to the junior portion of the
restructured mortgages, the Company holds junior or other cash flow
mortgages and subordinated interests in other hotel properties operated by
the Company under management agreements. Pursuant to these mortgage
agreements, the Company is entitled to receive the majority of excess cash
flow generated by these hotel properties. In total, the Company has junior
mortgages relating to 22 hotel properties which mature on various dates from
1999 through 2088. Due to the junior positions of these mortgages,
foreclosure rights are of limited value. However, these mortgages enable the
Company to participate in a substantial portion of the future sales proceeds
upon sales of the hotels after satisfying all obligations senior to these
junior mortgages.
Although these junior mortgages have an aggregate face value of approximately
$65,000,000, in accordance with the adoption of fresh start reporting under SOP
90-7, no value was assigned to the junior portions of the restructured notes
or the junior mortgages and subordinated interests on the other hotels as
there was substantial doubt at the time of valuation that the Company would
recover any of their value. As a result, interest income on these junior or
cash flow mortgages is recognized when cash is received. During 1993 and
1994, the Company recognized $976,000 and $2,000,000, respectively, of
interest income related to these mortgages. The hotels underlying these
mortgages are all managed by the Company. Future recognition of interest
income on these mortgages is dependent primarily upon the net cash flow of
the underlying hotels after debt service, which is senior to the Company's
junior positions.
(b) Other notes receivable currently bear interest at effective rates ranging
from 4% to 10.5%, mature through 2011 and are secured primarily by hotel
properties not currently managed by the Company.
(c) The mortgage notes secured by the Frenchman's Reef Resort Hotel
("Frenchman's Reef") consisted of first and second mortgages with face
values of $53,383,000 and $25,613,000, respectively, with final scheduled
principal payments of $51,976,000 and $25,613,000 due on July 31, 1995. In
connection with the adoption of fresh start reporting, the Company valued
the notes at $50,000,000.
During the five months ended December 31, 1992, and years ended December 31,
1993 and 1994 the Company recognized $1,770,000, $4,250,000 and $4,586,000
of interest income on these notes, respectively, based on the level of cash
flow generated from the hotel property available to service the notes.
Interest income of approximately $4,300,000, $10,300,000 and $9,800,000
would have been recorded for the five months ended December 31, 1992 and the
years ended December 31, 1993 and 1994 if the notes receivable had been
current in accordance with their original terms.
In December 1994, the Company obtained ownership of Frenchman's Reef in
satisfaction of the mortgage note receivable through a pre-negotiated plan
of reorganization. The Company had previously reached an agreement in 1993
to restructure its mortgage notes receivable secured by Frenchman's Reef
with the general partner of Frenchman's Reef Beach Associates ("FRBA"), the
owner of the hotel. In conjunction with the agreement, FRBA filed a
pre-negotiated chapter 11 petition in September 1993. During the
reorganization period, the Company continued to receive cash payments on its
mortgage notes receivable under a cash collateral order approved by the
Bankruptcy Court. Under the plan of reorganization, which was approved by
the Bankruptcy Court on December 16, 1994, the Company obtained ownership
and control of the hotel. The Company recorded the net assets of Frenchman's
Reef at their respective fair market values at the time of restructuring.
The fair market values were determined based on a recent appraisal of the
hotel and approximated the book value of the mortgage note receivable of
$50,000,000. Upon taking control of the property, the Company reallocated
its basis in the mortgage note receivable of $50,000,000 to the various
operating assets acquired (principally land, hotel building and furniture
and fixtures) and no gain or loss was recorded in the transaction.
(d) From 1988 through 1990, PMI loaned entities controlled by Allan Rose and
Arthur Cohen ("Rose and Cohen") an aggregate of $100,890,000 fully secured
by property and/or personal guarantees. Based on PMI's estimate of the value
of the collateral and the personal guarantees of Rose and Cohen and
discussions related to the possible early payment of the loan, PMI wrote
down the loan to $50,000,000 as
F-10
<PAGE> 57
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of June 30, 1990 and discontinued the accrual of interest. As a result of
further evaluation of the collateral and personal guarantees, the Company
valued the note at $25,000,000 in connection with the adoption of fresh
start reporting pursuant to SOP 90-7 as of July 31, 1992, the Effective
Date. During 1993, the Company reached a settlement with Rose and Cohen of
an adversary proceeding regarding a promissory note and personal guarantee,
commenced by a subsidiary of PMI during 1991. The settlement provided for
Rose or his affiliate to pay the Company the sum of $25 million, plus
proceeds from approximately 1.1 million shares of the Company's common stock
held by Rose.
Financial Security Assurance, Inc. ("FSA") asserted that it was entitled to
receive the settlement proceeds under the terms of a certain intercreditor
agreement. In April 1994, the Court approved the settlement and ruled that
the Company had an exclusive right to the settlement proceeds. Upon receipt
of the order, the Company used the $25 million of settlement proceeds to
retire certain senior secured notes (see Note 6). On April 21, 1994, FSA
filed its notice of appeal of the Court's order. During 1994, Rose sold
approximately 1.0 million shares of the Company's common stock under the
terms of the settlement for net proceeds of approximately $6.2 million.
Since the Rose and Cohen note had a book value of $25 million at the time of
the settlement, approximately $6.2 million was recorded as other income in
the Company's statement of operations.
All proceeds received pursuant to the settlement after April 21, 1994 have
been held in escrow until an order on the appeal is received. The Company
believes that FSA is unlikely to prevail on its claim, and as a result, does
not believe it will have a material impact on the accompanying consolidated
financial statements. Upon receipt of a favorable order from the Court,
substantially all of the net proceeds are required to be used to retire
additional debt (see Note 6).
NOTE 4 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- YEARS OF
1993 1994 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Land and land leased to others..................... $ 29,407 $ 49,438
Hotels............................................. 109,671 200,706 20 to 40
Furniture, fixtures and autos...................... 21,879 46,021 3 to 10
Leasehold improvements............................. 10,222 11,336 3 to 40
Construction in progress........................... 2,555 1,457
Properties held for sale........................... 8,355 8,898
-------- --------
Sub-total........................................ 182,089 317,856
Less accumulated depreciation and amortization... (9,303) (18,565)
-------- --------
Totals................................... $172,786 $299,291
======== ========
</TABLE>
At December 31, 1994, the Company was the lessor of land and certain
restaurant facilities in Company-owned hotels with an approximate aggregate book
value of $8,074,000 pursuant to noncancelable operating leases expiring on
various dates through 2013. Minimum future rentals under such leases are
$10,132,000, of which $3,961,000 is scheduled to be received in the aggregate
during the five-year period ending December 31, 1999.
Depreciation and amortization expense on property, equipment and leasehold
improvements was $2,784,000 for the five months ended December 31, 1992 and
$7,015,000 and $9,300,000 for the years ended December 31, 1993 and 1994,
respectively.
F-11
<PAGE> 58
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended December 31, 1993 and 1994, the Company capitalized
$0 and $836,000, respectively, of interest related to borrowings used to finance
hotel construction.
NOTE 5 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
------- -------
<S> <C> <C>
Accounts payable................................................. $ 2,025 $ 4,436
Interest......................................................... 4,454 3,115
Accrued payroll and related benefits............................. 2,190 2,490
Accrued expenses................................................. 1,592 4,182
Insurance reserves............................................... 6,206 5,123
Other............................................................ 5,978 4,558
------- -------
Totals................................................. $22,445 $23,904
======= =======
</TABLE>
NOTE 6 -- DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
-------- --------
<S> <C> <C>
Secured notes(a)............................................... $ 86,683 $ 52,580
Mortgages and other notes payable(b)........................... 99,946 131,249
Borrowings under credit agreement.............................. 1,271 --
-------- --------
Total debt..................................................... 187,900 183,829
Less current maturities........................................ (19,282) (5,284)
-------- --------
Debt, net of current portion.............................. $168,618 $178,545
======== ========
</TABLE>
- ---------------
(a) Pursuant to the Plan, the Company issued two classes of Secured Notes which
are identified as "Senior Secured Notes" and "Junior Secured Notes". The
aggregate principal amount of Senior Secured Notes issued under the Plan was
$91,300,000, comprised of $30,100,000 of 8.20% Fixed Rate Senior Secured
Notes and $61,200,000 of Adjustable Rate Senior Secured Notes. The aggregate
principal amount of Junior Secured Notes issued under the Plan was
approximately $70,000,000.
During 1994, the Company repurchased $6,527,000 of its Adjustable Rate
Senior Secured Notes, $217,000 of its 8.20% Senior Secured Notes and
$461,000 of its 9.20% Junior Secured Notes for an aggregate purchase price
of $7,018,000. The repurchases resulted in pretax extraordinary gains of
$187,000. In April 1994, the Company retired its Senior Secured Notes with a
pre-payment of $26,408,000.
In addition to the repurchases described above, during 1994 the Company
purchased through a third party agent approximately $5,200,000 of its Senior
Secured Notes and Junior Secured Notes for aggregate consideration of
approximately $4,800,000. These notes are currently held by the third party
agent and have not been retired due to certain restrictions under the note
agreements. The purchases were recorded as investments on the Company's
balance sheet and no gain will be recorded on these transactions until the
notes mature or are redeemed. In April 1994, approximately $1,100,000 of the
notes were retired from the proceeds of the Rose and Cohen settlement (See
Note 3) resulting in a pretax extraordinary gain of approximately $100,000.
In August 1994, approximately $37,000 was retired
F-12
<PAGE> 59
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulting in a pretax extraordinary gain of $5,000. As of December 31, 1994,
the Company had unrecognized holding gains of approximately $295,000 related
to these securities.
In 1994, the Company received consents from the required holders of its
Junior Secured Notes to remove certain debt covenants which placed
limitations on the Company's hotel development spending. In consideration of
the amendment consent, the Company agreed to increase the coupon interest
rate from 9.2% to 10.0% and to shorten the maturity by one year, from July
31, 2000 to July 31, 1999. In addition, the designation of these notes was
changed from Junior Secured Notes to Senior Secured Notes, as the original
Senior Secured Notes were retired.
The collateral for the Secured Notes consists primarily of mortgages and
notes receivable and real property, net of related liabilities (the "Secured
Note Collateral"), with a book value of $92,215,000 as of December 31, 1994.
Interest on the Secured Notes is payable semi-annually. The Secured Notes
require that 85% of the cash proceeds from the Secured Note Collateral be
applied first to interest then to prepayment of principal. Aggregate
principal payments on the Secured Notes are required in order that one-third
of the principal balance outstanding on December 31, 1996 is paid by July
31, 1998 and all of the balance is paid by July 31, 1999. To the extent the
cash proceeds from the Secured Note Collateral are insufficient to pay
interest or required principal payments on the Secured Notes, the Company
will be obligated to pay any deficiency out of its general corporate funds.
The Secured Notes contain covenants which, among other things, require the
Company to maintain a net worth of at least $100,000,000, and preclude cash
distributions to stockholders, including dividends and redemptions, until
the Secured Notes have been paid in full.
(b) The Company has mortgage and other notes payable of approximately
$74,713,000 that are secured by mortgage notes receivable and hotel
properties with a book value of $110,476,000. Principal and interest on
these mortgages and notes are generally paid monthly. At December 31, 1994
these notes bear interest at rates ranging from 6.6% to 12.45% and mature
through 2008.
At December 31, 1994, the Company has outstanding loans in the amount of
$39,896,000 payable to ShoLodge, Inc. ("ShoLodge"). The foregoing loans are
secured by AmeriSuites hotel properties with an aggregate book value of
$63,824,000. The notes bear interest at 10.25% and mature in April 1997. The
Company expects to incur an additional $3,600,000 of debt in the first
quarter of 1995 in connection with its purchase of ShoLodge's option to
acquire a 50% interest in Suites of America, Inc., a wholly owned subsidiary
of the Company (see Note 9).
The Company has $11,614,000 of notes restructured under the Plan which bear
interest at rates ranging from 8.00% to 9.20% per annum payable
semi-annually. Prior to maturity, principal amounts outstanding will be paid
semi-annually based on a thirty-year amortization schedule. Each note
matures on July 31, 2002 and is secured by a lien on mortgage notes
receivable and hotel properties with a book value of $11,129,000 at December
31, 1994.
The Company has other notes of $3,156,000, which bear interest at rates
ranging from 8.0% to 8.2% and mature through 1999.
In February 1995, the Company obtained $39 million of mortgage financing
secured by hotels under two separate loan agreements. Both loans bear
interest at variable rates (approximately 10.50% at December 31, 1994) and
mature in 2000.
F-13
<PAGE> 60
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt for the next five years ending December 31 are
as follows (in thousands):
<TABLE>
<S> <C>
1995...................................................... $ 5,284
1996...................................................... 41,073
1997...................................................... 45,687
1998...................................................... 3,617
1999...................................................... 54,717
Thereafter................................................ 33,451
--------
Total..................................................... $183,829
========
</TABLE>
NOTE 7 -- LEASE COMMITMENTS AND CONTINGENCIES
Leases
The Company leases various hotels under lease agreements with initial terms
expiring at various dates from 1995 through 2022. The Company has options to
renew certain of the leases for periods ranging from 1 to 99 years. Rental
payments are based on minimum rentals plus a percentage of the hotel properties'
revenues in excess of stipulated amounts.
The following is a schedule, by year, of future minimum lease payments
required under the remaining operating leases that have terms in excess of one
year as of December 31, 1994 (in thousands):
<TABLE>
<S> <C>
1995...................................................... $ 4,630
1996...................................................... 4,597
1997...................................................... 4,565
1998...................................................... 4,533
1999...................................................... 4,500
Thereafter................................................ 95,638
--------
Total..................................................... $118,463
========
</TABLE>
Rental expense for all operating leases, including those with terms of less
than one year, consist of the following for the five months ended December 31,
1992 and the years ended December 31, 1993 and 1994
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Rentals.................................................. $1,844 $5,009 $4,654
Contingent rentals....................................... 266 764 823
------ ------ ------
Rental expense................................. $2,110 $5,773 $5,477
====== ====== ======
</TABLE>
Employee Benefits
The Company does not provide any material post employment benefits to its
current or former employees.
Contingent Claims
The Company is involved in various other proceedings incidental to the
normal course of its business. The Company believes that the resolution of these
contingencies will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-14
<PAGE> 61
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Instruments and Concentration of Credit Risk
The Company's accounts receivable and mortgages and other notes receivable
(see Note 3) are derived primarily from and are secured by hotel properties,
which constitutes a concentration of credit risk. These notes are subject to
many of the same risks as the Company's operating hotel assets. A significant
portion of the collateral is located in the Northeastern and Southeastern United
States.
In addition to the hotel property related receivables referred to above,
the Company's financial instruments include (i) assets; cash and cash
equivalents and restricted cash investments and (ii) liabilities; trade and
notes payable and long-term debt (see Note 6). As described in Note 1, in
connection with the adoption of fresh start accounting as of July 31, 1992, the
Company revalued its assets and liabilities at amounts approximating fair market
value. Since there have been no substantive adverse changes in market conditions
since the date of the revaluation and on the basis of market quotes and
experience on recent redemption offers for the Company's long-term debt, the
Company believes that the carrying amount of these financial instruments
approximated their fair market value as of December 31, 1993 and 1994.
As a result of the reorganization proceedings and the rejection of certain
leases, management contracts and other guarantees, the Company has no other
material off-balance-sheet liabilities or credit risk as of December 31, 1994.
NOTE 8 -- INCOME TAXES
The provision for income taxes (including amounts applicable to
extraordinary items) consisted of the following for the five months ended
December 31, 1992 and the years ended December 31, 1993 and 1994
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1992 1993 1994
---- ------- --------
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ 2,167 $ 970
State................................................... 139 220 28
---- ------- --------
139 2,387 998
Deferred:
Federal................................................. 789 5,049 9,780
State................................................... -- 1,017 1,514
---- ------- --------
789 6,066 11,294
---- ------- --------
Total........................................... $928 $ 8,453 $ 12,292
==== ====== =======
</TABLE>
Income taxes are provided at the applicable federal and state statutory
rates.
F-15
<PAGE> 62
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the temporary differences in the areas listed below
resulted in deferred income tax provisions for the five months ended December
31, 1992 and the years ended December 31, 1993 and 1994
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1992 1993 1994
---- ------- -------
<S> <C> <C> <C>
Utilization of net operating loss......................... $789 $ 4,525 $ 5,861
Amortization of pre-fresh start basis
differences -- properties
and notes............................................... -- 1,322 5,632
Depreciation.............................................. -- 144 200
Leasehold reserves........................................ -- -- 450
Property transactions..................................... -- -- 320
Other..................................................... -- 75 (1,169)
---- ------- -------
Total........................................... $789 $ 6,066 $11,294
==== ====== =======
</TABLE>
At December 31, 1994, the Company had available federal net operating loss
carryforwards of approximately $117,500,000 which will expire beginning in 2005
and continuing through 2007. Of this amount, $104,800,000 is subject to an
annual limitation of $8,735,000 under the Internal Revenue Code due to a change
in ownership of the Company upon consummation of the Plan. The Company also has
potential state income tax benefits relating to net operating loss carryforwards
of approximately $9,262,000 which will expire during various periods from 1995
to 2006. Certain of these potential benefits are subject to annual limitations
similar to federal requirements due to factors such as the level of business
conducted in each state and the amount of income subject to tax within each
state's carryforward period.
In accordance with FAS 109, the Company has not recognized the future tax
benefits associated with the net operating loss carryforwards or with other
temporary differences. Accordingly, the Company has provided a valuation
allowance of approximately $41,000,000 against the deferred tax asset as of
December 31, 1994. To the extent any available carryforwards or other tax
benefits are utilized, the amount of tax benefit realized will be treated as
contribution to stockholders' equity and will have no effect on the income tax
provision for financial reporting purposes. For the five months ended December
31, 1992 and the years ended December 31, 1993 and 1994 the Company recognized
$789,000, $4,525,000 and $5,861,000, respectively, of such tax benefits as a
contribution to stockholders' equity. Additionally, the Company recognized
$6,954,000 as a contribution to stockholders' equity for the year ended December
31, 1994, which represents the amortization of pre-fresh start tax basis
differences related to properties and notes receivable. As a result of
reflecting substantially all of the deferred tax provisions as a contribution to
stockholders' equity, the Company had no material deferred tax assets or
liabilities as of December 31, 1993 and 1994.
F-16
<PAGE> 63
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- RELATED PARTY TRANSACTIONS
The following summarizes significant financial information with respect to
transactions with present and former officers, directors, their relatives and
certain entities they control or in which they have a beneficial interest for
the five months ended December 31, 1992 and the years ended December 31, 1993
and 1994
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993 1994
---- ---- -------
<S> <C> <C> <C>
Management and other fee income(a).......................... $312 $810 $ 1,165
Interest income(a).......................................... 72 14 1,283
Management fee expense(b)................................... 162 222 679
Interest expense(b)......................................... 332 475 461
Reservation fee expense(b).................................. 101 468 317
</TABLE>
- ---------------
(a) The Company manages 15 hotels for partnerships in which related parties own
various interests. The income amounts shown above primarily include
transactions related to these hotel properties.
(b) In 1991, the Company entered into an agreement with ShoLodge, a company
controlled by a former director, whereby ShoLodge was appointed the
exclusive agent to develop and manage certain hotel properties. The Company
had loans payable to ShoLodge of $39,896,000 at December 31, 1994 related to
the development of hotels. The Company also uses the ShoLodge reservation
system for its Wellesley and AmeriSuites properties.
In 1993, the Company and its wholly-owned subsidiary, Suites of America,
Inc. ("SOA") entered into agreements with ShoLodge designed to further the
growth of its AmeriSuites hotels from the six hotels owned by the Company at
that time. Pursuant to these agreements, (i) ShoLodge agreed to build and
finance six additional AmeriSuites hotels and received an option to purchase
a 50% interest in SOA and (ii) the Company received an option pursuant to
which it could require ShoLodge to purchase a 50% interest in SOA. By
December 1994, ShoLodge completed the development of these six hotels, five
of which SOA acquired during 1993 and 1994, subject to mortgages held by
ShoLodge. The Company recorded the assets and liabilities (including the
mortgages payable to ShoLodge) of the five hotels and consolidated their
results of operations from the date of acquisition. Upon completion of the
six new hotels and the exercise of the option by either ShoLodge or the
Company, ShoLodge was to forgive its mortgage interests on the five hotels
owned by the Company and contribute its ownership interest on the
remaining hotel and thereby acquire a 50% interest in SOA.
The exercise of the option by ShoLodge was scheduled to occur in January
1995, when the Company and ShoLodge began to negotiate the Company's buyout
of ShoLodge's option. In February 1995, the Company entered into an
agreement to acquire ShoLodge's option to purchase the 50% interest in SOA
and also acquired the ownership interest of the remaining AmeriSuites hotel
not already owned by the Company. The consideration payable by the Company
was determined on an arm's-length basis and was based upon the fair market
value of the properties. The consideration totals $19,700,000 and is
comprised of (i) $16,100,000, which will be paid in three cash installments
during 1995, plus (ii) $18,500,000, which will be paid in notes maturing
in 1997, less (iii) $14,900,000 of existing debt on five hotels, which will
be forgiven at face value. The transaction will result in a net increase of
approximately $3,600,000 of long-term debt, resulting in total debt of
$43,500,000 owed to ShoLodge. No gain or loss will be recorded on the
forgiveness of debt. As a result of this transaction, the Company assumed
management of these hotels.
NOTE 10 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS
Pursuant to the Plan, on July 31, 1992 the Company began distributing
shares of common stock to certain claimants and holders of PMI stock. The Plan
provided for issuance of up to 33,000,000 shares of common stock; however, the
number of shares ultimately distributed were 29,913,000. The consolidated
financial statements had previously given full effect to the issuance of the
maximum amount of 33,000,000 shares under the Plan. During 1994, when the
Company resolved the final share distribution, it restated net income for all
prior periods to reflect the 9.4% reduction in the number of shares. In addition
to the shares distributed under the Plan, warrants to purchase 2,106,000 shares
of the Company's common stock were issued to former
F-17
<PAGE> 64
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shareholders of the Company's predecessor, PMI, in partial settlement of their
bankruptcy interests. The warrants became exercisable on August 31, 1993 at an
exercise price of $2.71 per share and expire five years after the date of grant.
The exercise price was determined from the average per share daily closing price
of the Company's common stock during the year following its reorganization on
July 31, 1992. As of December 31, 1994 warrants to purchase 250,497 shares have
been exercised.
On July 31, 1992, the Company adopted various stock option and performance
incentive plans under which options to purchase up to 1,650,000 shares of common
stock may be granted to directors, officers or key employees under terms
determined by the Board of Directors. During 1992, options to purchase 350,000
shares were granted to officers and directors, 240,000 of which are exercisable
at December 31, 1994. In addition, options to purchase 330,000 shares were
granted to a former officer in 1992. Such options are currently exercisable and
expire on July 31, 1995. At December 31, 1994, 180,000 of these options were
exercised. The exercise prices of the above options are based on the average
market price one year from the date of grant which was determined to be $2.71
per share. Based on this exercise price, the amount of compensation expense
attributable to these options was $225,000 and $60,000 for the years ended
December 31, 1993 and 1994, respectively.
In June 1993, options to purchase 393,000 shares of common stock were
granted to employees under the Company's stock option plan. The options were
granted at $3.63, which approximates the fair market value at the date of grant.
Generally, options can be exercised during a participant's employment with the
Company in equal annual installments over a three-year period and expire six
years after the date of grant. During 1994, 41,080 shares were exercised.
In August 1993, options to purchase 315,000 shares of common stock were
granted to the members of the Company's Board of Directors. The options were
granted at $3.20, which approximates the fair market value at the date of grant.
One-third of these options became exercisable at the date of grant and the
remaining options can be exercised in equal annual installments over a two-year
period. The options expire six years after the date of grant. During 1994,
25,000 shares were exercised.
In January 1994, options to purchase 50,000 shares of common stock were
granted to a member of the Company's Board of Directors. The options were
granted at $7.375, which approximates the fair market value at the date of
grant. The options can be exercised in equal annual installments over a four
year period. The options expire six years after the date of grant.
In August 1994, options to purchase 317,100 shares of common stock were
granted to employees under the Company's performance incentive plan. The options
were granted at $7.625, which approximates the fair market value at the date of
grant. Generally, options can be exercised during a participant's employment
with the Company in equal annual installments over a three-year period and
expire six years after the date of grant.
In December 1994, options to purchase 30,000 shares of common stock were
granted to new members of the Company's Board of Directors. The options were
granted at $7.125, which approximates the fair market value at the date of
grant. One-third of these options became exercisable at the date of grant and
the remaining options can be exercised in equal annual installments over a two
year period. The options expire six years after the date of grant.
F-18
<PAGE> 65
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the various stock option plans:
<TABLE>
<CAPTION>
OPTION
NUMBER PRICE
OF SHARES PER SHARE
--------- -----------
<S> <C> <C>
Outstanding -- December 31, 1992............................ 680,000 $2.71
Granted..................................................... 728,000 $2.71-$3.63
Exercised................................................... (30,000) $2.71
Cancelled................................................... (77,000) $2.71-$3.63
---------
Outstanding at December 31, 1993............................ 1,301,000
---------
Granted..................................................... 397,000 $7.38-$7.63
Exercised................................................... (216,000) $2.71-$3.63
Cancelled................................................... (40,000) $3.63-$7.63
---------
Outstanding at December 31, 1994............................ 1,442,000
========
Exercisable at December 31, 1994............................ 700,000 $2.71-$7.63
========
</TABLE>
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes non-cash investing and financing activities for
the five months ended December 31, 1992 and the years ended December 31, 1993
and 1994 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1992 1993 1994
------ ------ -------
<S> <C> <C> <C>
Hotels acquired in exchange for the assumption of
mortgage
notes payable......................................... $ -- $9,161 $18,718
Hotels received in settlement of mortgage notes
receivable............................................ 7,800 3,500 54,521
Sale of hotel in exchange for a mortgage note
receivable............................................ $ -- $6,500 $ 1,497
</TABLE>
Cash paid for interest was $2,981,000 for the five months ended December
31, 1992 and $16,347,000 and $15,503,769 for the years ended December 31, 1993
and 1994, respectively.
Cash paid for income taxes was $0 for the five months ended December 31,
1992 and $2,697,000 and $1,900,000 for the years ended December 31, 1993 and
1994, respectively.
F-19
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Prime Hospitality Corp.:
We have audited the accompanying consolidated balance sheet of Prime Hospitality
Corp. (a Delaware corporation) and subsidiaries ("the Company") as of July 31,
1992 and the related consolidated statements of operations, stockholders' equity
and cash flows for the one month then ended. 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 Prime Hospitality Corp. and
subsidiaries as of July 31, 1992 and the results of their operations and their
cash flows for the one month then ended in conformity with generally accepted
accounting principles.
As discussed in Note 7, the Company held an investment in a mortgage note
receivable from certain entities with a face value of $100,890,000 that is
valued at $25,000,000 at July 31, 1992. The realization of this investment is
dependent primarily on the ability of the Company to recover such amount
pursuant to the personal guarantees provided by two individuals who control the
entities that are the obligors under the mortgage note and own the hotel
properties that serve as the underlying collateral for the note. The Company has
commenced a legal action to recover pursuant to such guarantees; however, the
financial statements do not include any adjustments that might result from the
outcome of this matter.
Roseland, New Jersey Arthur Andersen LLP
March 10, 1993
F-20
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Prime Motor Inns, Inc. (Debtor-in-Possession)
We have audited the consolidated balance sheet of Prime Motor Inns, Inc. and
Subsidiaries (Debtors-in-Possession) as of June 30, 1992, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the year then ended. 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 consolidated financial position of Prime Motor Inns,
Inc. and Subsidiaries (Debtors-in-Possession) as of June 30, 1992, and their
results of operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 7, the Company held an investment in a mortgage note
receivable from certain entities with a face value of $100,890,000 that had been
written down to $30,000,000 at June 30, 1992. The realization of the carrying
value is dependent primarily on the ability of the Company to recover such
amount pursuant to the personal guarantees provided by the two individuals who
control the entities that are the obligors under the mortgage note and the
owners of the hotel properties that serve as the underlying collateral for the
loan. The Company has commenced a legal action to recover pursuant to such
guarantees; however, the outcome of this action is not presently determinable.
As discussed in Note 11, the Company has reflected pre-petition and certain
post-petition claims in the consolidated balance sheet as of June 30, 1992 as
liabilities subject to compromise based on its estimate of the aggregate amount
that will ultimately be allowable for settlement upon consummation of the plan
of reorganization;
F-21
<PAGE> 68
however, the aggregate amount claimed by creditors is substantially in excess of
the liability recorded by the Company. The actual aggregate amount of allowable
pre and post-petition claims cannot presently be determined.
As discussed in Note 14, the Company and certain of its present and former
officers and directors are defendants in certain consolidated class action
complaints alleging federal securities law violations and other claims. The
ultimate outcome of such litigation cannot presently be determined.
The eventual outcome of the matters discussed in the three preceding paragraphs
is not presently determinable and the consolidated financial statements as of
June 30, 1992 and for the year then ended do not include any adjustments
relating to the resolution of those uncertainties.
As discussed in Note 2, the Company's plan of reorganization became effective on
July 31, 1992, and it will implement the guidance as to the accounting for
entities emerging from Chapter 11 set forth in Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("Fresh Start Reporting") as of that date. The Company has not presently
determined the amounts that will be recorded under Fresh Start Reporting.
However, the implementation of Fresh Start Reporting as a result of the
Company's emergence from Chapter 11 will materially change the amounts reported
in consolidated financial statements as of and for periods ending subsequent to
July 31, 1992. As a result of the reorganization and the implementation of Fresh
Start Reporting, assets and liabilities will be recorded at fair values and
outstanding obligations relating to the claims of creditors will be discharged
primarily in exchange for cash, new indebtedness and equity. The accompanying
consolidated financial statements as of June 30, 1992 and for the year then
ended do not give effect to any adjustments that will be made as a result of the
Company's reorganization and emergence from Chapter 11.
J.H. Cohn & Company
Roseland, New Jersey
September 24, 1992
F-22
<PAGE> 69
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FRESH START REPORTING WAS IMPLEMENTED AND THE PURCHASE METHOD OF ACCOUNTING
WAS APPLIED TO RECORD THE FAIR VALUE OF ASSETS AND ASSUMED LIABILITIES OF THE
REORGANIZED COMPANY AT JULY 31, 1992. ACCORDINGLY, THE ACCOMPANYING BALANCE
SHEET AS OF JULY 31, 1992 IS NOT COMPARABLE IN ALL MATERIAL RESPECTS TO SUCH
STATEMENT AS OF ANY DATE PRIOR TO JULY 31, 1992 SINCE THE BALANCE SHEET IS THAT
OF A NEW ENTITY.
<TABLE>
<CAPTION>
JUNE 30, | JULY 31,
1992 | 1992
-------- | --------
ASSETS |
<S> <C> | <C>
Current assets: |
Cash and cash equivalents.............................................. $ 60,142 | $ 39,493
Restricted cash........................................................ -- | 22,835
Accounts receivable, net of reserves................................... 7,962 | 9,115
Current portion of mortgages and |
other notes receivable............................................. 63,506 | 48,006
Other current assets................................................... 1,895 | 4,254
-------- | --------
Total current assets............................................... 133,505 | 123,703
|
Restricted cash............................................................. 43,947 | 1,232
Property, equipment and leasehold |
improvements, net of accumulated |
depreciation and reserves.............................................. 179,472 | 160,417
Mortgages and other notes receivable, |
net of current portion, writedowns |
and valuation reserves................................................. 194,443 | 178,543
Other assets................................................................ 2,751 | 4,755
-------- | --------
|
TOTAL ASSETS .......................................................... $554,118 | $468,650
======== | ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE> 70
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, | JULY 31,
1992 | 1992
-------- | --------
LIABILITIES AND STOCKHOLDERS' |
EQUITY (DEFICIENCY) |
<S> <C> | <C>
Current liabilities: |
Notes payable..................................................... $ 5,971 | $ 5,971
Current portion of long-term debt................................. 81 | 61,917
Other current liabilities......................................... 25,944 | 31,136
--------- | --------
Total current liabilities................................ 31,996 | 99,024
|
Long-term debt, net of current portion................................. 8,921 | 204,438
Deferred income........................................................ 36,243 | --
Other liabilities...................................................... -- | 29,588
--------- | --------
Total liabilities not |
subject to compromise.................................. 77,160 | 333,050
--------- | --------
|
Liabilities subject to compromise...................................... 706,250 | --
--------- | --------
Total liabilities........................................ 783,410 | 333,050
--------- | --------
|
Commitments and contingencies |
|
Stockholders' equity (deficiency): |
Preferred stock, par value $1.00 per |
share; 5,000,000 shares authorized; |
none issued; cancelled July 31, 1992.......................... -- | --
Preferred stock, par value $.10 per |
share; 20,000,000 shares authorized; |
none issued................................................... -- | --
Common stock; par value $.05 per |
share; 100,000,000 shares authorized; |
33,662,334 shares issued; cancelled |
July 31, 1992................................................. 1,683 | --
Common stock, par value $.01 per share; |
50,000,000 shares authorized; |
33,000,000 shares issued and |
outstanding................................................... -- | 330
Capital in excess of par value.................................... 311,355 | 135,270
Retained earnings (accumulated deficit)........................... (539,125) | --
Treasury stock, 634,535 shares at |
cost; cancelled July 31, 1992................................. (3,205) | --
--------- | --------
Total stockholders' equity |
(deficiency)......................................... (229,292) | 135,600
--------- | --------
TOTAL LIABILITIES AND |
STOCKHOLDERS' EQUITY |
(DEFICIENCY)......................................... $ 554,118 | $468,650
========= | ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-24
<PAGE> 71
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ONE MONTH
ENDED ENDED
JUNE 30, JULY 31,
1992 1992
-------- --------
<S> <C> <C>
Revenues:
Rooms..................................................... $ 75,082 $ 5,133
Food and beverage......................................... 20,841 693
Management and other fees................................. 11,031 785
Interest and dividend income.............................. 24,127 1,949
Other..................................................... 3,109 233
-------- --------
Total revenues................................... 134,190 8,793
-------- --------
Costs and expenses:
Direct operating expenses:
Rooms................................................. 21,692 1,421
Food and beverage..................................... 17,082 681
Other operating and general
expenses.............................................. 65,184 4,302
Depreciation and amortization............................. 7,635 680
Interest (contractual interest
of $36,252 for fiscal 1992 and
$3,079 for July 1992)................................. 8,245 779
Valuation writedowns and reserves......................... 62,123 13,000
-------- --------
Total costs and expenses......................... 181,961 20,863
-------- --------
Loss before reorganization items,
income taxes and extraordinary items...................... (47,771) (12,070)
Reorganization items.......................................... (23,194) 1,796
-------- --------
Loss before income taxes and
extraordinary items....................................... (70,965) (10,274)
Provision for income taxes.................................... 1,000 --
-------- --------
Loss before extraordinary items............................... (71,965) (10,274)
Extraordinary items:
Gain on discharge of indebtedness......................... -- 249,600
-------- --------
NET INCOME (LOSS)............................................. $(71,965) $239,326
======== ========
Income (loss) per common share:
Primary:
Operations............................................ $ (2.18) $ (.31)
Extraordinary items................................... -- 7.56
-------- --------
NET INCOME (LOSS)............................................. $ (2.18) $ 7.25
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-25
<PAGE> 72
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Capital
in Retained Total
Common Stock Excess Earnings Treasury Stock Stockholders'
-------------------- of Par (Accumulated) ----------------- Equity
Shares Amount Value Deficit) Shares Amount (Deficiency)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1991............... 33,662,334 $ 1,683 $ 311,355 $(467,160) (634,535) $(3,205) $(157,327)
Net loss............................ -- -- -- (71,965) -- -- (71,965)
---------- ------- --------- --------- -------- ------- ---------
Balance June 30, 1992............... 33,662,334 1,683 311,355 (539,125) (634,535) (3,205) (229,292)
Net income.......................... -- -- -- 239,326 -- -- 239,326
Cancellation of former
equity interests in
connection with emergence
from bankruptcy................. (33,662,334) (1,683) (311,355) -- 634,535 3,205 (309,833)
Issuance of new equity
interests in connection
with emergence from
bankruptcy...................... 33,000,000 330 135,270 -- -- -- 135,600
Elimination of accumulated
deficit in connection with
emergence from bankruptcy........ -- -- -- 299,799 -- -- 299,799
---------- ------- --------- --------- -------- ------- ---------
Balance July 31, 1992............... 33,000,000 $ 330 $ 135,270 $ -- -- $ -- $ 135,600
========== ======= ========= ========= ======== ======= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-26
<PAGE> 73
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ONE MONTH
ENDED ENDED
JUNE 30, JULY 31,
1992 1992
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(71,965) $ 239,326
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities before reorganization items:
Depreciation and amortization............................ 7,635 680
Valuation writedowns and reserves........................ 62,123 13,000
Provisions for lease rejection damages,
guarantees of third party debt and other
bankruptcy related claims............................ 6,017 --
Loss on disposal of assets............................... 2,307 --
Reorganization items..................................... 9,072 604
Gain on discharge of indebtedness........................ -- (249,600)
Increase (decrease) from changes in other
operating assets and liabilities:
Accounts receivable.................................. 2,200 (1,153)
Tax refund receivable................................ 30,874 --
Other operating assets............................... 5,075 (2,359)
Other operating liabilities.......................... (5,797) (4,857)
-------- ---------
Net cash provided by (used in) operating
activities before reorganization items............ 47,541 (4,359)
-------- ---------
Reorganization items:
Interest earned on accumulated cash resulting
from Chapter 11 proceedings.............................. 4,427 298
Decrease in liabilities subject to compromise............... (17,183) (677)
Professional fees and other expenses for
services rendered in connection with
Chapter 11 proceedings................................... (13,499) (902)
-------- ---------
Net cash used in reorganization
activities........................................ (26,255) (1,281)
-------- ---------
Net cash provided by (used in) operating
activities........................................ 21,286 (5,640)
-------- ---------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-27
<PAGE> 74
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ONE MONTH
ENDED ENDED
JUNE 30, JULY 31,
1992 1992
------- ---------
<S> <C> <C>
Cash flows from investing activities:
Proceeds from mortgages and other notes
receivable.................................................... 10,160 (70)
Disbursements for mortgages and other notes
receivable.................................................... (42) --
Sale of property, net............................................ 4,168 --
Purchases of property, equipment and
leasehold improvements........................................ (14,141) (692)
Additions to restricted cash..................................... (5,746) --
Decrease in restricted cash...................................... -- 19,880
Increase (decrease) in other assets.............................. -- 196
-------- --------
Net cash provided by (used in)
investing activities.................................... (5,601) 19,314
-------- --------
Cash flows from financing activities:
Proceeds from notes payable and
long-term debt................................................ 9,613 --
Payments of notes payable and
long-term debt................................................ (25,905) (34,323)
-------- --------
Net cash used in
financing activities.................................... (16,292) (34,323)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................... (607) (20,649)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD.............................................. 60,749 60,142
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................................... $ 60,142 $ 39,493
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-28
<PAGE> 75
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30 AND JULY 31, 1992
Note 1 - Reorganization and Emergence From Chapter 11
Prime Hospitality Corp. became the successor corporation to
Prime Motor Inns, Inc. on July 31, 1992. As used herein, the "Company"
refers to Prime Hospitality Corp. and subsidiaries, "PMI" refers to Prime
Motor Inns, Inc. and subsidiaries and "Prime Motor Inns" refers to Prime Motor
Inns, Inc., the parent company only. The accompanying consolidated financial
statements and notes thereto reflect the activities of the Company as of and
subsequent to July 31, 1992 and PMI prior to July 31, 1992.
On September 18, 1990, Prime Motor Inns (predecessor to and former
parent of the Company) and fifty of its subsidiaries (together with Prime Motor
Inns, the "Debtors") filed voluntary petitions under title 11 of the United
States Code ("Chapter 11") in the United States Bankruptcy Court, Southern
District of Florida, Miami Division (the "Bankruptcy Court") and began operating
as Debtors-In-Possession.
On September 23, 1991, the Debtors filed their Joint Plan of
Reorganization. The Debtors filed their Disclosure Statement for Debtors'
Amended Joint Plan of Reorganization and their Amended Joint Plan of
Reorganization on November 15, 1991. These plans and the disclosure statement
were further amended and restated by the Disclosure Statement and the Second
Amended Joint Plan of Reorganization of the Debtors dated January 16, 1992 (the
"Plan"). The Plan was confirmed by the Bankruptcy Court on April 6, 1992.
On July 31, 1992 (the "Effective Date"), the Debtors consummated the
Plan and emerged from bankruptcy. On the Effective Date, Prime Motor Inns merged
with and into the Company, which had been a wholly-owned subsidiary of Prime
Motor Inns. The Company was the surviving corporation in the merger. In
addition, certain of the Debtors and other subsidiaries of Prime Motor Inns that
did not file petitions under Chapter 11 merged, consolidated or contributed
substantially all of their assets to the Company or subsidiaries of the Company.
On the Effective Date, the Company assumed the obligations of each
combining Debtor under the Plan. The Company has distributed Secured Notes and
Restructured Notes and is in the process of distributing cash, Tax Notes, Common
Stock and Warrants in settlement of pre-petition claims and
F-29
<PAGE> 76
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
interests as such claims and interests are processed and settled.
The American Institute of Certified Public Accountants has issued
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), which provides guidance for financial
reporting by Chapter 11 debtors during and following their Chapter 11 cases. The
accompanying historical consolidated financial statements of PMI for the period
from September 18, 1990 to the Effective Date have been prepared in accordance
with SOP 90-7 on the following basis:
- - Liabilities subject to compromise are segregated.
- - Transactions and events directly associated with the reorganization
proceedings are reported separately.
- - Interest expense is reported only to the extent it will be paid.
Also pursuant to SOP 90-7, the Company implemented Fresh Start
Reporting (hereinafter defined) upon the emergence of the Debtors from
bankruptcy as of the Effective Date (see Note 2).
Note 2 - Fresh Start Reporting
SOP 90-7 provides for the implementation of Fresh Start Reporting upon
the emergence of debtors from bankruptcy if the reorganization value (the
approximate fair value) of the assets of the emerging entity immediately prior
to emergence is less than the total of all post-petition liabilities and allowed
pre-petition claims, and if the holders of existing voting shares immediately
before the emergence from bankruptcy receive less than 50% of the voting shares
of the emerging entity. A Fresh Start balance sheet reflects assets at their
estimated fair value upon the emergence from bankruptcy and liabilities, other
than deferred taxes, at the present value of amounts to be paid determined at
appropriate current interest rates. The Company met the criteria for
implementation of, and implemented Fresh Start Reporting as of the Effective
Date.
Under Fresh Start Reporting, the consolidated balance sheet as of July
31, 1992 became the opening consolidated balance sheet of the Company. Since
Fresh Start Reporting has been reflected in the accompanying consolidated
balance sheet as of July 31, 1992, this
F-30
<PAGE> 77
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
consolidated balance sheet is not comparable in all material respects to any
such financial statements as of any prior date or for any period prior to July
31, 1992, since the consolidated balance sheet as of July 31, 1992 is that of a
new entity.
The estimated reorganization value (the approximate fair value) of the
assets of the emerging entity was determined by consideration of many factors
and various valuation methods, including discounted cash flows and
price/earnings and other applicable ratios believed by management to be
representative of the Company's business and industry.
Reorganization liabilities, consisting of Tax Notes, Restructured and
Reinstated Notes, Senior Secured Notes and Junior Secured Notes distributed as
of the Effective Date, have been recorded based on face values, which
approximate the present values of amounts to be paid determined at appropriate
current interest rates. Common Stock has been valued at the excess of the fair
value of identifiable assets of the Company over the present value of
liabilities.
Other current liabilities, consisting of those arising from
post-petition operating and other expenses not paid as of the Effective Date and
obligations arising from certain loans to finance construction, will be paid in
full under their original terms and have been presented in the following balance
sheet at their historical carrying values.
The effects of consummating the Plan and implementing Fresh Start
Reporting are set forth on PMI's historical consolidated balance sheet as of
July 31, 1992 as follows:
F-31
<PAGE> 78
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONSOLIDATED FRESH START BALANCE SHEET
AS OF JULY 31, 1992
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD PLAN
-------------------------------------------------------------------
FRESH
HISTORICAL START
BALANCE BALANCE
SHEET EXCHANGE FRESH SHEET
7/31/92 DISTRIBUTIONS OF STOCK START 7/31/92
-------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . $ 39,500 $ -- $-- $ -- $ 39,500
Restricted cash . . . . . . . . . . . 27,800 (5,000)(a) -- -- 22,800
Accounts receivable, net . . . . . . . 9,100 -- -- -- 9,100
Current portion of mortgages
and other notes receivable . . . . . 64,000 (16,000)(b) -- -- 48,000
Other current assets . . . . . . . . . 4,300 -- -- -- 4,300
-------------------------------------------------------------------
144,700 (21,000) -- -- 123,700
Restricted cash . . . . . . . . . . . . 35,000 (33,800)(a) -- -- 1,200
Property,equipment and leasehold
improvements, net . . . . . . . . . . 179,400 (3,400)(b) -- (15,600)(f) 160,400
Mortgages and other notes
receivable, net . . . . . . . . . . . 180,600 (9,300)(b) -- 7,200 (f) 178,500
Other assets . . . . . . . . . . . . . . 2,500 -- -- 2,300 (f) 4,800
-------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . $542,200 ($67,500) $-- ($6,100) $468,600
===================================================================
</TABLE>
F-32
<PAGE> 79
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONSOLIDATED FRESH START BALANCE SHEET
AS OF JULY 31, 1992
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD PLAN
-------------------------------------------------------------------
FRESH
HISTORICAL START
BALANCE BALANCE
SHEET EXCHANGE FRESH SHEET
7/31/92 DISTRIBUTIONS OF STOCK START 7/31/92
-------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Notes payable and current
portion of long-term debt . . . . . $ 6,100 $ 61,800 (c) $ -- $ -- $ 67,900
Other current liabilities . . . . . . 24,600 (3,800)(a) -- 10,300 (f) 31,100
-------------------------------------------------------------------
Total current liabilities . . . . . 30,700 58,000 -- 10,300 99,000
Long-term debt, net of
current portion . . . . . . . . . . . 8,900 195,500 (c) -- -- 204,400
Deferred income . . . . . . . . . . . . 36,200 -- -- (36,200)(f) --
Other liabilities . . . . . . . . . . . -- 2,600 (c) -- 27,000 (f) 29,600
-------------------------------------------------------------------
Total liabilities not subject
to compromise . . . . . . . . . . 75,800 256,100 -- 1,100 333,000
Liabilities subject to compromise. . . . 706,000 (35,000)(a) -- -- --
(28,700)(b)
(266,400)(c)
(375,900)(d)
-------------------------------------------------------------------
Total liabilities . . . . . . . . . 781,800 (449,900) -- 1,100 333,000
-------------------------------------------------------------------
Stockholders' equity (deficiency):
Common stock (33,000,000 shares
issued; $0.05 par value)(old). . . . 1,700 -- (1,700)(e) -- --
Capital in excess of par
value (old) . . . . . . . . . . . . 311,300 -- (311,300)(e) -- --
Common stock (33,000,000 shares
issued and outstanding; $0.01
par value)(new) . . . . . . . . . . -- 300 (d) -- (e) -- (e) 300
Capital in excess of par
value (new) . . . . . . . . . . . . . -- 132,500 (d) 309,800 (e) (307,000)(e) 135,300
Retained earnings
(accumulated deficit). . . . . . . . . (549,400) 6,500 (c) -- 299,800 (f) --
243,100 (d)
Treasury stock . . . . . . . . . . . . . (3,200) -- 3,200 (e) -- --
-------------------------------------------------------------------
Total stockholders' equity
(deficiency) . . . . . . . . . . . (239,600) 382,400 -- (7,200) 135,600
-------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY) . . . . . . . . . . . . . $542,200 ($67,500) $ -- ($6,100) $468,600
===================================================================
</TABLE>
F-33
<PAGE> 80
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTES TO CONSOLIDATED FRESH START BALANCE SHEET
(a) Reflects cash payments of $38,800,000 to creditors on or after the
Effective Date in accordance with the terms of the Plan.
(b) Represents mortgage notes, other notes receivable and property, which
are offset against creditor claims on the Effective Date in accordance
with the terms of the Plan.
(c) Represents long-term debt in the principal amount of $257,300,000
distributed to creditors on or after the Effective Date in accordance
with the terms of the Plan and the recognition of $6,500,000 of related
gain on discharge of indebtedness. As part of the Plan, the Company
distributed approximately $1,400,000 of Tax Notes, approximately
$94,600,000 of Restructured and Reinstated Notes, approximately
$91,300,000 of Senior Secured Notes and approximately $70,000,000 of
Junior Secured Notes. Additionally, approximately $15,000,000 of
construction financing related to hotel property development
outstanding prior to consummation will be paid based on original terms.
(d) Represents 32,300,000 shares of Common Stock with an estimated fair
value of $132,800,000, which will be distributed to creditors on or
after the Effective Date in accordance with the terms of the Plan and
the recognition of $249,600,000 of related gain on discharge of
indebtedness.
(e) Represents 700,000 shares of Common Stock with an estimated fair value
of $2,800,000, which was exchanged for all of the shares of Prime's old
common stock outstanding on the Effective Date.
(f) Represents adjustments to: record at fair value operating property,
equipment and leasehold improvements, certain mortgages and other notes
receivable and certain other assets and related liabilities; eliminate
deferred income; and eliminate accumulated deficit in accordance with
the provisions of SOP 90-7 for Fresh Start Reporting.
The gain on discharge of indebtedness of $249,600,000 has been
presented as an "Extraordinary Item" in the accompanying
consolidated statement of operations for the one month ended July 31,
1992.
F-34
<PAGE> 81
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3 - Summary of Significant Accounting Policies
A summary of the significant accounting policies used by the Company
and PMI in the preparation of the accompanying consolidated financial statements
follows:
Business activities:
The Company focuses on three types of business activities: operation of
owned and leased hotel properties; management services provided to
hotel properties owned by third parties; and management of its
portfolio of mortgages, notes and other financial assets. The Company
retains all the revenues and pays all the expenses with respect to the
owned and leased hotel properties. The Company derives management fees
from the hotel properties it manages based on a fixed percentage of
gross revenues, fees for services rendered and performance-related
incentive payments. The Company's portfolio of mortgages, notes and
other assets primarily are associated with hotel properties currently
managed or formerly owned by the Company and PMI.
The majority of the Company's hotel properties are moderately priced
hotels comprised of 100 to 150 rooms primarily located in the Northeast
and Florida, which are designed to attract business and leisure
travelers desiring quality accommodations at affordable prices. The
Company operates or manages many of the restaurants and cocktail
lounges at its full service hotels. Its limited service hotels, such as
Wellesley Inns and AmeriSuites hotels, generally do not have
restaurants or cocktail lounges.
Most of the hotel properties are operated or managed by the Company in
accordance with franchise agreements with national hotel chains,
including Howard Johnson, Ramada, Marriott, Holiday Inn, Sheraton, Days
Inn and Radisson. Additionally, the Company operates or manages the
Wellesley hotel properties under its trademark "Wellesley Inns." The
Company owns the trademark "AmeriSuites", and all of these hotel
properties are managed for the Company by a related party.
Principles of consolidation:
The consolidated financial statements include the accounts of
F-35
<PAGE> 82
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the Company and PMI and all of their majority-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Cash equivalents:
Cash equivalents are highly liquid unrestricted investments with a
maturity of three months or less when acquired.
Restricted cash:
Restricted cash consists primarily of highly liquid investments that
serve as collateral for debt obligations included in liabilities
subject to compromise and is classified as either short-term or
long-term depending on the date the obligation is due.
Mortgages and other notes receivable:
Mortgages and other notes receivable are reflected at the lower of face
or market value at July 31, 1992. Generally, the carrying amount of the
portfolio of mortgages and other notes receivable is reduced through
write-offs and by maintaining an aggregate loan valuation reserve at a
level that, in the opinion of management, is adequate to absorb
potential losses in the portfolio. To determine the appropriate level
for the loan valuation reserve, management evaluates various factors
including: general and regional economic conditions; the credit
worthiness of the borrower; the nature and level of any delinquencies
in the payment of principal or interest; and the adequacy of the
collateral. Interest on delinquent loans (including impaired loans that
have required writedowns or specific reserves) is only recognized when
cash is received. The amount of interest income recognized on mortgages
and other notes receivable is generally based on the loan's effective
interest rate and adjusted carrying value of the note.
Property, equipment and leasehold improvements:
Property, equipment and leasehold improvements that the Company intends
to continue to operate are stated at cost less accumulated depreciation
and amortization at June 30, 1992 and at fair market value a of
July 31, 1992. Provision is made for depreciation and amortization
using the straight-line method over the estimated useful lives of the
assets.
F-36
<PAGE> 83
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company intends to sell or otherwise dispose of those remaining
operating and non-operating properties that have generated losses or
insufficient returns on investment. Properties identified for disposal
are stated at their estimated net realizable value through valuation
reserves or writedowns.
Income recognition on property sales and deferred income:
Income is generally recognized when properties used in the hotel
business are sold. However, income is deferred and recognized under
installment or other appropriate methods when collectibility of the
sales price is not reasonably assured or other criteria for immediate
profit recognition under generally accepted accounting principles are
not satisfied. Gains from sales of properties under sale and leaseback
transactions that are generally deferred pursuant to applicable
accounting rules are amortized over the lives of the related leases.
Gains from sales of properties and certain other assets acquired
through business combinations accounted for as purchases are generally
offset against the carrying value of the remaining purchased assets if
the sale takes place within the allocation period (generally a period
of one year or less) following the purchase.
Construction income recognition and deferred income:
Revenues under long-term construction contracts are generally
recognized under the percentage-of-completion method and include a
portion of the earnings expected to be realized on the contract in the
ratio of costs incurred to estimated total costs. Under certain
circumstances, the recognition of income is deferred until continuing
involvement, in the form of operating guarantees made to the owners of
the hotel property subject to the contract, has expired.
Income taxes:
The Company and its subsidiaries file a consolidated Federal income tax
return. PMI adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for
Income Taxes, " by applying FAS 109 to its consolidated financial
statements commencing July 1, 1991. Adoption of FAS 109 did
F-37
<PAGE> 84
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
not have a material effect on the consolidated financial statements.
Deferred taxes have not been provided as of June 30, 1992 and July 31,
1992 due to the availability of significant net operating loss
carryforwards and the uncertainty surrounding the ultimate realization
of the future benefits, if any, to be derived from the temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities.
Income (loss) per common share:
Primary net income (loss) per common share is computed based on the
weighted-average number of common shares and common share equivalents
(stock options) outstanding during each year. The weighted-average
number of common shares and common share equivalents used in computing
primary net income (loss) per share was 33,028,000 for the year ended
June 30, 1992 and the month ended July 31, 1992. Fully diluted net
income (loss) per common share includes, when dilutive, the effects of
the elimination of interest expense and the issuance of additional
common shares from the assumed conversion of the 6-5/8% convertible
subordinated debentures due 2011 and the 7% convertible subordinated
debentures due 2013 (collectively, the "Debentures"). The Debentures
are included in the consolidated balance sheet as of June 30, 1992 as
liabilities subject to compromise. The effects of assuming the
conversion of the Debentures were not dilutive for the year ended
June 30, 1992 and the one month ended July 31, 1992.
Reclassifications:
Certain reclassifications have been made to the consolidated financial
statements to conform them to the July 31, 1992 classifications.
Note 4 - Acquisitions and Dispositions
In December 1989, PMI consummated its agreement with New World
Development Co. Ltd. ("New World") to participate with and assist New World in
its acquisition of the hotel business of Ramada, Inc. ("Ramada"). Under the
agreement, PMI loaned approximately $58,000,000 to New World (see Note 7) and
acquired certain real estate, notes receivable, the Rodeway International
Franchise System ("Rodeway") and certain other assets, and assumed certain
F-38
<PAGE> 85
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
liabilities, for aggregate cash consideration of approximately $54,000,000 plus
closing adjustments. Such assets were sold in fiscal 1991. PMI entered into a
license agreement to operate the domestic Ramada franchise system and agreed to
indemnify New World for certain potential tax liabilities associated with the
license. The potential tax liabilities to New World, and all other claims by New
World and PMI against each other, were settled on August 4, 1992 (see Note 7).
Note 5 - Cash and Cash Equivalents
Cash and cash equivalents are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, July 31,
1992 1992
-------- | --------
<S> <C> | <C>
Cash ...................................... $ 1,744 | $10,479
Commercial paper and other |
cash equivalents...................... 58,398 | 29,014
------- | -------
|
TOTALS................................ $60,142 | $39,493
======= | =======
</TABLE>
Note 6 - Restricted Cash - Long Term
Restricted cash consists primarily of commercial paper of
$43,947,000 at June 30, 1992. Restricted cash consists of cash in bank of
$360,000 and commercial paper of $872,000 at July 31, 1992.
Note 7 - Mortgages and Other Notes Receivable
Mortgages and other notes receivable are comprised of the following and
are stated at face value, net of writedowns and valuation reserves as of June
30, 1992. As of July 31, 1992, these assets have been valued at their fair
market value (in thousands):
F-39
<PAGE> 86
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
June 30, | July 31,
1992 | 1992
-------- | --------
<S> <C> | <C>
Frenchman's Reef resort hotel (a)...................... $ 78,996 | $ 50,000
Rose and Cohen entities (b)............................ 100,890 | 25,000
FCD and Servico (c).................................... 29,899 | 19,756
New World (d).......................................... 58,000 | 42,000
Properties managed by the Company (e).................. 198,441 | 70,089
Other (f).............................................. 52,308 | 19,704
-------- | --------
Totals........................................ 518,534 | 226,549
|
Less writedowns and valuation reserves................. 260,585 | --
-------- | --------
Totals........................................ 257,949 | 226,549
Less current portion................................... 63,506 | 48,006
-------- | --------
|
LONG-TERM PORTION...................................... $194,443 | $178,543
======== | ========
</TABLE>
(a) The mortgage notes are secured by the Frenchman's Reef resort hotel,
which is managed by the Company, and consist of first and second
mortgages with face values of $53,383,000 and $25,613,000,
respectively, with final scheduled principal payments of $51,976,000
and $25,613,000 due on July 31, 1995. The notes bear interest at a
stated rate of 13%. Interest and principal payments on the first
mortgage are payable in monthly installments. Interest and scheduled
principal payments on the second mortgage note are payable only to the
extent of available cash flow, as defined, with any unpaid interest due
at maturity. Based on a valuation of the property, PMI wrote down the
second mortgage to $11,400,000 as of June 30, 1990 and discontinued the
accrual of interest. As a result of the continuing decline in economic
conditions and operating cash flows, the balance of the second mortgage
was written off in fiscal 1992. In connection with the adoption of
Fresh Start Reporting at July 31, 1992, the Company has valued these
notes at $50,000,000.
During the one month ended July 31, 1992, the Company recognized
$345,000 of interest income on these notes (an effective rate of
approximately 8.3%), based on the current levels of cash flows
generated from the property available to service the notes. The Company
is in the process of renegotiating the terms of these notes based on
the current
F-40
<PAGE> 87
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
level of cash flow generated by the property.
(b) From 1988 through 1990, PMI loaned entities controlled by Allan Rose
and Arthur Cohen (the "Rose and Cohen entities"), who at such time were
significant Howard Johnson franchisees, an aggregate of $100,890,000
fully secured initially by property and/or personal guarantees. PMI was
committed to make additional loans, also on a fully secured basis, to
the Rose and Cohen entities of up to an aggregate of $130,000,000 if
values of, and/or revenues generated by, certain hotel properties
controlled by the Rose and Cohen entities attained specified levels.
PMI was to receive a minimum annual return of 10% on all loans made to
the Rose and Cohen entities and a maximum return of 20%. All loans and
unpaid interest are payable on December 31, 1997.
Due to the decline in value of the hotel properties pledged as
collateral for the loan and the continuing decline in the hotel real
estate market, PMI discontinued funding additional loans in fiscal
1990. Further, based on PMI's estimate of the value of the collateral
and the personal guarantees of Rose and Cohen and discussions related
to the possible early payment of the loan, PMI wrote down the loan to
$50,000,000 as of June 30, 1990 and discontinued the accrual of
interest.
In 1992, certain of the Rose and Cohen entities owning a portion of
the collateral that secures the loans filed for Chapter 11 protection
in the United States Bankruptcy Court, Southern District of New York.
Also during 1992, the Company commenced an adversary proceeding
against Rose and Cohen. The complaint seeks to recover jointly and
severally on the personal guarantees of $50,000,000 given by Rose and
Cohen as part of the loan agreement. As a result of further evaluation
of the collateral and the personal guarantees, PMI wrote down the loan
to $30,000,000 as of June 30, 1992 and $25,000,000 as of July 31,
1992.
(c) In April 1989, PMI loaned FCD Hospitality, Inc. ("FCD"), an
unaffiliated company, approximately $74,000,000 in cash for the purpose
of financing FCD's acquisition of the outstanding common stock of
Servico, Inc. ("Servico"), an operator of hotels. The loan was secured
by the common stock of Servico,
F-41
<PAGE> 88
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FCD and certain FCD affiliates, and was originally due prior to June
30, 1990. Interest was due at the prime rate plus 1%. PMI also entered
into an agreement with FCD pursuant to which PMI would provide
management consulting services for approximately $63,000,000 through
June 1990. Additionally, in April 1989, PMI purchased approximately
$80,000,000 of Servico's outstanding 12-1/4% subordinated notes due
April 15, 1997 for approximately $64,000,000 (80% of par value).
Subsequent to April 1989, PMI entered into certain other transactions
including working capital loans and the sale of certain hotels to
Servico. Servico also pledged a substantial portion of its hotel
properties and mortgage notes receivable on hotel properties as
collateral and/or in satisfaction of its commitments on the loan to FCD
and the consulting agreement.
On September 18, 1990, Servico and certain of its subsidiaries filed
for Chapter 11 protection. After an extensive valuation and recovery
analysis performed by PMI and Servico, PMI agreed to settle all claims
and disputes with Servico and FCD in June 1991. Under the terms of the
agreement, which was approved by the Bankruptcy Court, the FCD loan,
the subordinated notes, loans related to sales of properties and
working capital and all accrued interest relating to these notes and
loans with a face value of $166,210,000 were forgiven. As part of the
settlement, PMI retained ownership of certain mortgage notes receivable
with a face value of approximately $30,000,000 that are secured by
three hotel properties. The entity that owns one of the properties
filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code in December 1990. Subsequent to July 31, 1992, the
Company has restructured the note receivable to receive payments based
on the property's available cash flow.
Based on the valuation of the mortgage notes on the three properties,
PMI wrote down the FCD Loan and Servico notes to $16,757,000 as of June
30, 1990 and discontinued the accrual of interest. In connection with
the adoption of Fresh Start Reporting, the Company has valued the notes
at $19,756,000 at July 31, 1992.
F-42
<PAGE> 89
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(d) In connection with the Ramada acquisition in December 1989, PMI agreed
to loan New World $58,000,000 (see Note 4). Interest was payable
quarterly at a rate of 11%. Principal was to be paid in installments
beginning in 1995 with a final scheduled payment of $55,499,000 due on
March 31, 2005. On August 4, 1992, after extensive negotiation and
approval of a settlement by the Bankruptcy Court, the Company collected
net proceeds of $42,000,000 plus accrued interest in full satisfaction
of the $58,000,000 loan balance offset by liabilities subject to
compromise related to the Ramada acquisition with a net carrying value
of $16,000,000. The net proceeds were used to prepay a portion of the
Senior Secured Notes issued on the Effective Date.
(e) At July 31, 1992, the Company held mortgages and other notes receivable
secured by 33 hotel properties operated by the Company under management
or lease agreements. These notes currently bear interest at rates
ranging from 8.5% to 14% and mature through 2014.
The mortgages were primarily derived from the sales of hotel
properties. Many of these properties had been unable to pay in full the
annual debt service required under the terms of the original mortgages.
The Company has restructured $33,530,000 of these mortgages to receive
the majority of available cash and to receive a participation in the
future excess cash flow of such hotel properties. The Company is also
in process of restructuring another $9,500,000 of these mortgages.
(f) Other notes receivable bear interest at effective rates ranging from 8%
to 12%, mature through 2001 and are secured primarily by hotel
properties.
Note 8 - Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the
following and are stated at cost (other than properties held for sale) at June
30, 1992 and at fair market value as of July 31, 1992 (in thousands):
F-43
<PAGE> 90
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
June 30, July 31 Years of Useful
1992 1992 Life
-------- | ------- ---------------
<S> <C> | <C> <C>
Land and land leased to |
others.......................................... $ 25,963 | $ 24,855
Hotels............................................. 116,192 | 95,942 20 to 45
Furniture, fixtures and |
autos........................................... 25,346 | 16,192 2 to 10
Leasehold improvements............................. 13,425 | 15,428 3 to 45
Property and equipment |
under capital leases............................ 93 | -- 2 to 33
-------- | --------
181,019 | 152,417
-------- | --------
Properties held for sale, at net realizable value: |
Development properties........................ 15,544 | 8,000
Non-core properties........................... 7,019 | --
Properties acquired |
for resale.................................. 248 | --
-------- | --------
22,811 | 8,000
-------- | --------
Less accumulated depreciation |
and amortization................................ (24,358) | --
-------- | --------
|
TOTALS.................................... $179,472 | $160,417
======== | ========
</TABLE>
At July 31, 1992, the Company was the lessor of land and certain
restaurant facilities in Company-owned hotels with an approximate aggregate book
value of $12,338,000 pursuant to noncancelable operating leases expiring on
various dates through 2013. Minimum future rentals under such leases are
$8,095,000, of which $3,449,000 is to be received during the five year period
ending June 30, 1997.
Depreciation and amortization expense on property, equipment and
leasehold improvements was $6,867,000 and $569,000 for the year ended
June 30, 1992 and for the one month ended July 31, 1992, respectively.
Capitalized interest was $139,000 and $0 for the year ended June 30,
1992 and for the one month ended July 31, 1992, respectively.
F-44
<PAGE> 91
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 9 - Other Current Liabilities
Other current liabilities consist of obligations for the following (in
thousands):
<TABLE>
<CAPTION>
June 30, | July 31,
1992 | 1992
-------- | --------
<S> <C> | <C>
Accounts payable........................................ $ 1,803 | $ 1,801
Bankruptcy claims reserve............................... -- | 6,591
Rent.................................................... 1,355 | 945
Interest................................................ 3,824 | 196
Accrued payroll and related benefits.................... 3,484 | 3,385
Managed property reserve................................ 2,042 | 3,333
Insurance reserve....................................... 1,732 | 756
Professional fees....................................... 4,798 | 6,522
Other................................................... 6,906 | 7,607
------- | -------
TOTALS......................................... $25,944 | $31,136
======= | =======
</TABLE>
Note 10 - Notes Payable
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, | July 31,
1992 | 1992
-------- | --------
<S> <C> | <C>
Notes payable to related party (a)...................... $ 5,706 | $ 5,706
Other notes payable (b)................................. 265 | 265
------- | -------
|
TOTALS......................................... $ 5,971 | $ 5,971
======= | =======
</TABLE>
(a) Notes payable to related party are payable to ShoLodge, Inc.
("ShoLodge"), a company controlled by a director. The notes are secured
by three hotel properties with a book value of $17,354,000 that were
constructed in 1992 and 1991. Interest is payable monthly at variable
rates ranging from the prime interest rate (6% at July 31, 1992) plus
1% to the prime rate plus 2%. One promissory note for $3,000,000 is due
in May 1993 and the remainder is due on demand (see Note 21).
(b) Other notes payable are secured by a hotel property. Interest is
payable at the prime rate plus 2%. The notes are due in
F-45
<PAGE> 92
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
May 1993.
Note 11 - Liabilities Subject to Compromise
As a result of the Chapter 11 filing (see Note 1), enforcement of
certain unsecured claims against the Debtors in existence prior to the petition
date were stayed while the Debtors continued business operations as
debtors-in-possession. These claims are reflected in the accompanying
consolidated balance sheets as of June 30, 1992, as liabilities subject to
compromise. Additional unsecured claims classified as liabilities subject to
compromise arose subsequent to the Petition Date resulting from rejection of
executory contracts, including lease, management and franchise agreements, and
from the determination by the Bankruptcy Court (or agreements by the parties in
interest) to allow claims for contingencies and other disputed amounts.
Enforcement of claims secured against the Debtors' assets ("secured claims")
were also stayed although the holders of such claims have the right to move the
Court for relief from the stay. Secured claims are secured primarily by liens on
the Debtors' property, equipment and leasehold improvements and certain
mortgages and other notes receivable.
Creditors have asserted pre- and post-petition claims against the
Debtors alleging liabilities of approximately $9 billion plus unliquidated
amounts. The Company projects that the claims asserted against the Debtors will
be resolved and reduced to an amount that approximates PMI's estimate of
$706,250,000 recognized as liabilities subject to compromise as of June 30,
1992. PMI has filed motions objecting to those claims that are: (a) duplicative;
(b) superseded by amended claims; (c) erroneously asserted against multiple
Debtors; (d) not obligations of any of the Debtors; or (e) filed after the Bar
Date (as hereinafter defined). Additionally, PMI otherwise has disputed a
substantial number of the claims asserted against the Debtors and has filed
objections to such claims. The Bankruptcy Court established May 15, 1991 (the
"Bar Date") as the deadline for filing proofs of claim, except certain specified
claims, against the Debtors.
A significant number of the bankruptcy claims have been resolved. As of
March 1, 1993, unresolved bankruptcy claims of approximately $1 billion have
been asserted against PMI.
F-46
<PAGE> 93
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Approximately $767 million of these unresolved claims were filed by entities
controlled by Allan Rose and Arthur Cohen (see Note 7).
The Company has disputed a substantial number of these unresolved
bankruptcy claims and has filed objections to such claims. In addition, a number
of these claims have been resolved with the claimant and are awaiting approval
by the Bankruptcy Court.
The Company believes that substantially all of these claims will be
dismissed, disallowed or deemed paid pursuant to the Plan and estimates that
unresolved bankruptcy claims will be allowed in the amount of approximately $27
million. These claims will be settled as follows: claims of $18 million will be
satisfied through the issuance of Secured Notes, Restructured Notes and Tax
Notes; claims of $8 million will be satisfied through the distribution of the
Company's Common Stock; and claims of $1 million will be satisfied through cash
payments.
In accordance with SOP 90-7, the July 31, 1992 consolidated financial
statements have given full effect to the issuance of these Secured Notes,
Restructured Notes and Tax Notes and the distribution of the Company's Common
Stock. Liabilities have been provided for the anticipated cash payments.
PMI's liabilities subject to compromise, stated at management's
estimate of the total amount of allowed claims and not at the amounts for which
claims will be settled, consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
1992
--------
<S> <C>
Estimated claims:
Trade accounts payable.......................... $ 28,858
Lease rejection damages......................... 97,856
Guarantees of third party debt.................. 30,529
Other liabilities .............................. 79,943
--------
Total estimated claims ..................... 237,186
Long-term debt (Note 12) .......................... 469,064
--------
TOTAL....................................... $706,250
========
</TABLE>
F-47
<PAGE> 94
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amounts listed above may be subject to future adjustments depending
on further developments with respect to disputes or unresolved claims.
Information as to the terms of the settlement of liabilities subject to
compromise under the Plan as of or subsequent to the Effective Date through the
distribution of cash, new indebtedness, new equity securities and/or offset
against certain assets reflected in the accompanying consolidated balance sheets
is set forth in Note 2.
PMI discontinued accruing interest on certain debt obligations as of
the date such obligations were determined to be subject to compromise.
Contractual interest not accrued and not reflected as an expense in the
consolidated statements of operations, as a result of the Debtors' Chapter 11
filing, amounted to approximately $28,000,000 for the year ended June 30,
1992 and $2,300,000 for the one month ended July 31, 1992. Total contractual
interest is disclosed in the accompanying consolidated statements of operations.
Note 12 - Long-term Debt
As a result of the Chapter 11 filing (see Notes 1 and 11), all
long-term obligations of the Debtors in existence prior to the Petition Date
were stayed and have been classified as liabilities subject to compromise at
June 30, 1992. Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION> |
June 30, | July 31,
1992 | 1992
-------- | --------
<S> <C> | <C>
Senior secured notes (a).............................. $ -- | $ 91,300
Junior secured notes (a).............................. -- | 69,999
Tax settlement notes (b).............................. -- | 1,422
Mortgage notes and bonds payable(c)................... -- | 94,639
Construction financing (d)............................ 9,002 | 8,995
-------- | --------
Total debt........................................ 9,002 | 266,355
|
Pre-petition liabilities: |
7% convertible subordinated |
debentures due 2013 (e)........................... 115,000 | --
6-5/8% convertible subordinated |
debentures due 2011 (e)........................... 115,000 | --
</TABLE>
F-48
<PAGE> 95
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
June 30, July 31,
1992 1992
-------- | --------
<S> <C> | <C>
Notes payable to banks under bank |
credit agreement (f): |
Tranche A and B............................... 31,848 | --
Tranche C..................................... 60,000 | --
Mortgage notes and bonds due |
through 2008 (g)................................ 143,676 | --
Other (h)......................................... 3,540 | --
------- | -------
Total debt.................................. 478,066 | 266,355
|
Less: Liabilities subject to |
compromise........................................ 469,064 | --
Current portion................................. 81 | 61,917
-------- | --------
|
Long-term debt.............................. $ 6,921 | $204,438
======== | ========
</TABLE>
(a) Pursuant to the Plan, the Company issued two classes of Secured
Notes which are identified as "Senior Secured Notes" and "Junior
Secured Notes". Senior Secured Notes were issued in two series of
notes which are identified as the "8.20% Fixed Rate Senior Secured
Notes" and the "Adjustable Rate Senior Secured Notes" (collectively,
the "Senior Secured Notes"). Each series is identical except that
the interest rate on the Adjustable Rate Senior Secured Notes will be
periodically adjusted to one-half of one percent over the daily
"prime rate" reported by Chemical Bank, with a maximum interest rate
of 10.0% per annum. The aggregate principal amount of Senior
Secured Notes issued under the Plan was $91,300,000, comprised of
$30,100,000 of 8.20% Fixed Rate Secured Notes and $61,200,000 of
Adjustable Rate Senior Notes. On August 11, 1992, the Company
prepaid $17,900,000 of the 8.20% Fixed Rate Senior Secured Notes and
$36,400,000 of the Adjustable Rate Senior Secured Notes from the
proceeds of collections of portions of the collateral for the Senior
Secured Notes. The prepaid amounts of $54,300,000 have been
classified as current at July 31, 1992.
The other class of Secured Notes issued to satisfy claims was comprised
of Junior Secured Notes that bear interest at a rate of 9.20% per annum
and will mature on July 31, 2000. The aggregate principal amount of
Junior Secured Notes issued
F-49
<PAGE> 96
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
under the Plan was $70,000,000.
The collateral for the Secured Notes consists primarily of mortgages
and other notes receivable and real property (the "Secured Note
Collateral") with a book value of $143,191,000 as of July 31, 1992.
Interest on the Secured Notes is payable semi-annually commencing
January 31, 1993. The Secured Notes require that 85% of the cash
proceeds from the Secured Note Collateral be applied first to interest,
second to prepayment of the Senior Secured Notes and third to
prepayment of the Junior Secured Notes. Any remaining principal balance
of the Senior Secured Notes is due July 31, 1997. Aggregate principal
payments on the Junior Secured Notes are required in order that
one-third of the principal balance outstanding on December 31, 1996 is
paid by July 31, 1998; two-thirds of that balance is paid by July 31,
1999; and all of that balance is paid by July 31, 2000. To the extent
the cash proceeds from the Secured Note Collateral are insufficient to
pay interest or required principal payments on the Secured Notes, the
Company will be obligated to pay any deficiency out of its general
corporate funds.
The Secured Notes contain covenants which, among other things, require
the Company to maintain a net worth of at least $100,000,000, limit
expenditures related to the development of hotel properties through
December 31, 1996 and preclude cash distributions to stockholders,
including dividends and redemptions, until the Secured Notes have been
paid in full.
During March 1993, the Company repurchased $9,500,000 of the Junior
Secured Notes for a purchase price of $7,400,000. The repurchase
resulted in an extraordinary gain of $2,100,000, which will be
reflected in the Company's first quarter 1993 consolidated financial
statements. These notes have been classified as long-term debt at July
31, 1992 in accordance with their terms, as repurchase was not
contemplated at the balance sheet date.
(b) Claims of taxing authorities were paid in Tax Notes or cash. Each Tax
Note is in a face amount equal to the allowed claim
F-50
<PAGE> 97
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
and provides for annual payments of principal and interest until
maturity on July 31, 1998. Such payments will be made in equal
principal installments, plus simple interest from July 31, 1992 at the
rate of 8.20% per annum, with payments to commence on July 31, 1993 and
with additional payments to be made on each July 31 thereafter.
(c) The Company has $20,734,000 of restructured notes issued to holders of
oversecured and undersecured bankruptcy claims. Each restructured note
matures on July 31, 2002 and is secured by a lien on the collateral
which secured the underlying claim prior to bankruptcy. The notes are
secured by mortgage notes receivable and hotel properties with a book
value of $16,981,000 at July 31, 1992.
The oversecured restructured notes bear interest at a rate of 9.20% per
annum payable semi-annually in cash. Prior to maturity, principal
amounts outstanding will be paid semi-annually based on a thirty-year
amortization schedule. The Company has approximately $7,173,000 of
these notes outstanding at July 31, 1992.
During January 1993, the Company repurchased $1,700,000 of the
oversecured restructured notes for a purchase price of $1,300,000. The
repurchase resulted in an extraordinary gain of $400,000, which will be
reflected in the Company's first quarter 1993 consolidated financial
statements. These notes have been classified as current at July 31,
1992.
The undersecured restructured notes bear interest at a rate of 8% per
annum with interest payable semi-annually in cash. Semi-annual
principal payments begin on July 31, 1996 based on a thirty-year
amortization schedule. The Company has approximately $13,561,000 of
these notes outstanding at July 31, 1992.
The Company has other mortgage notes and bonds payable of approximately
$73,905,000 which are due through April 1, 2008 and bear interest at
rates ranging from 4.68% to 10.5% at July 31, 1992. The notes are
secured by mortgage notes receivable and hotel properties with a book
value of $83,577,000 at July 31, 1992.
F-51
<PAGE> 98
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(d) Construction financing obligations primarily consist of two loans
payable to banks with an aggregate balance of $5,193,000 and a loan
payable to ShoLodge of $3,570,000 at July 31, 1992. The loans payable
to banks are secured by mortgages on two hotel properties with a book
value of $13,963,000 at July 31, 1992. Principal is payable in monthly
installments with the balances due by June 1994. Interest is payable
monthly at the prime rate plus 2%. The loan payable to ShoLodge is
secured by a hotel with a book value of $7,670,000 at July 31, 1992.
Principal is payable in September 1993. Interest is payable monthly at
the prime rate plus 2% (see Note 21).
(e) At June 30, 1992, PMI's 6-5/8% convertible subordinated debentures due
2011 and 7% convertible subordinated debentures due 2013 were
convertible at any time prior to maturity into common stock at $40.568
per share and $43.95 per share, respectively, and 5,451,342 shares of
common stock were reserved for issuance upon such conversion. Sinking
fund payments of $5,750,000 annually were required commencing April 1,
1997 for the 6-5/8% Debentures and June 1, 1999 for the 7% Debentures.
All Debentures were subordinated to all existing and future senior
indebtedness of PMI.
(f) In April 1989, PMI borrowed approximately $140,000,000 from Morgan Bank
pursuant to a demand note (the "Morgan Loan") with interest at the
prime rate. The note was secured by the notes receivable from FCD and
Servico and certain other assets.
In September 1989, PMI entered into a $263,000,000 secured bank credit
agreement (the "Credit Agreement"), expiring March 1991, in which
borrowings (the "Bank Group Loan") were fully utilized by December
1989. Borrowings bear interest at the prime rate plus 1/2%. The
borrowings were principally incurred to extinguish the Morgan Loan
issued in connection with the Servico transaction ("Tranche A") and to
finance PMI's portion of the Ramada acquisition ("Tranche B"). The Bank
Group Loan was secured by the notes receivable from FCD and Servico,
the net assets and common stock of subsidiaries acquired in the Ramada
acquisition, the New World note, certain other mortgage notes
receivable and certain other assets.
F-52
<PAGE> 99
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In March 1990, PMI prepaid $1,000,000 of the Bank Group Loan with the
proceeds of previously pledged mortgage notes receivable.
In May 1990, PMI prepaid $40,000,000 of the Bank Group Loan from
proceeds from the collection of a receivable related to the sale of a
hotel property in fiscal 1989. In June 1990, PMI prepaid $1,000,000 of
the Bank Group Loan with the proceeds of certain previously pledged
mortgage notes receivable.
In July 1990, PMI prepaid approximately $171,200,000 of the Bank Group
Loan from the proceeds of the sale of the Howard Johnson, Ramada and
Rodeway franchise businesses. In July 1990, the Credit Agreement was
amended to convert $60,000,000 of $65,000,000 of unsecured demand loans
then outstanding, which had been borrowed in fiscal 1990 to fund
construction, into secured term loans ("Tranche C"). In addition,
certain unsecured letter of credit reimbursement obligations were
converted into Tranche C secured obligations. PMI also pledged
additional collateral and certain then-existing defaults under the Bank
Credit Agreement were waived.
In July 1990, PMI paid the remaining $5,000,000 of unsecured demand
notes then outstanding.
(g) Other mortgage notes and bonds payable consist of debt secured by
properties operated by PMI or notes receivable held by PMI. Principal
is due in installments through 2009. Interest rates are generally
variable ranging from 5% to 15% at June 30, 1992.
(h) Other debt as of June 30, 1992 consists of an unsecured note bearing
interest at the rate of 17%.
At July 31, 1992, maturities of long-term debt for the next five years
ending July 31 are as follows (in thousands):
F-53
<PAGE> 100
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C>
1993 ............................................................... $ 61,917
1994 ............................................................... 13,849
1995 ............................................................... 3,429
1996 ............................................................... 8,010
1997 ............................................................... 72,285
Thereafter.......................................................... 106,865
--------
TOTAL...................................................... $266,355
========
</TABLE>
Note 13 - Lease Commitments
The Company leases various hotels under lease agreements with initial
terms expiring at various dates from 1998 through 2019. The Company has options
to renew certain of the leases for periods ranging from 1 to 94 years. Rental
payments are based on minimum rentals plus a percentage of the hotel's revenues
in excess of stipulated amounts. As a result of the Chapter 11 filing, all lease
contracts were reviewed during 1991 and a determination was made as to whether
to accept or reject these contracts. The commitments shown below reflect those
lease contracts which the Company has assumed.
The following is a schedule by year of future minimum lease payments
required under the remaining operating leases for core properties that have
terms in excess of one year as of July 31, 1992 (in thousands):
<TABLE>
<S> <C>
1993................................................................ $ 4,079
1994................................................................ 4,047
1995................................................................ 4,003
1996................................................................ 3,970
1997................................................................ 3,938
Thereafter.......................................................... 48,125
-------
TOTAL........................................................... $68,162
=======
</TABLE>
Rental expense for all operating leases, including those with terms of
less than one year, is comprised as follows (in thousands):
F-54
<PAGE> 101
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Rentals.................................................................. $6,866 $ 520
Contingent rentals....................................................... 814 53
------ ------
Gross rental expense..................................................... 7,680 573
Rental income from
subleases............................................................. (61) (6)
------ ------
NET RENTAL EXPENSE................................................ $7,619 $ 567
====== ======
</TABLE>
Note 14 - Contingencies
PMI and certain of its present and former officers and directors were
named as defendants in purported class action lawsuits on behalf of purchasers
of PMI's common stock and debentures. The lawsuits allege that PMI made
materially false and misleading statements and omissions regarding its financial
condition in violation of Federal securities laws and other claims. A settlement
was consummated in February 1993 which was funded through insurance proceeds.
The Company has responded to informal requests for information by the
Staff of the United States Securities and Exchange Commission's Division of
Enforcement relating to a number of significant transactions of PMI for the
years 1985 through 1991. However, no formal allegations have been made by the
Staff.
In addition to the foregoing legal proceedings, the Company is involved
in various other proceedings incidental to the normal course of its business.
The Company believes that the resolutions of these contingencies will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
F-55
<PAGE> 102
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 15 - Reorganization Expenses
The net expenses incurred as a result of the Debtors' Chapter 11
filing on September 18, 1990 and subsequent reorganization efforts have been
segregated from normal operating expenses and presented as reorganization
expenses in the accompanying consolidated statements of income for the year
ended June 30, 1992 and for the one month ended July 31, 1992.
Reorganization expenses are comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Professional fees and other
expenses............................................. $19,297 $ 902
Lease rejection damages................................ 981 --
Guarantees of third party debt......................... 3,250 --
Other claims arising from
bankruptcy........................................... 1,786 --
Loss on disposal of assets ............................ 2,307 --
Interest earned on accumulated
cash resulting from Chapter 11
proceedings.......................................... (4,427) (298)
Insurance recovery proceeds............................ -- (2,400)
------- -------
TOTALS............................................ $23,194 $(1,796)
======= =======
Note 16 - Valuation Writedowns and Reserves
Valuation writedowns and reserves have been recorded in order to adjust
the carrying value of assets and liabilities resulting from the restructuring of
PMI's business and general economic conditions and primarily consist of the
following (in thousands):
</TABLE>
F-56
<PAGE> 103
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year | One Month
Ended | Ended
June 30, | July 31,
1992 | 1992
-------- | ---------
<S> <C> | <C>
Accounts receivable.................................... $ 2,722 | $ --
Mortgages and notes |
receivable.......................................... 49,479 | 13,000
Property, equipment and |
leasehold improvements.............................. 9,000 | --
Other items............................................ 922 | --
------- | -------
|
TOTALS........................................... $62,123 | $13,000
======= | =======
</TABLE>
The valuation writedowns and reserves for the year ended June 30, 1992
shown above were all recognized in the fourth quarter.
In addition to the above, valuation writedowns and reserves
of $20,578,000 and $-0- were charged against deferred income for the year
ended June 30, 1992 and for the one month ended July 31, 1992, respectively.
Note 17 - Income Taxes
Income taxes have been provided as follows (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Current:
State................................................ $1,000 $ --
------ -------
Totals............................................. $1,000 $ --
====== =======
</TABLE>
The difference between total income taxes and the amount computed
by applying the Federal statutory income tax rate of 34% to income (loss)
from operations before income taxes are as follows (in thousands):
F-57
<PAGE> 104
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Federal income tax credit at
statutory rates.......................................................... $(24,128) $(3,493)
Increase in tax resulting from:
Accounting losses for which
deferred Federal income tax
cannot be recognized................................................... 24,468 3,493
State income taxes....................................................... 660 --
-------- -------
TOTALS............................................................. $ 1,000 $ --
======== =======
</TABLE>
The tax effects of the temporary differences in the areas listed below
resulted in deferred income tax provisions (credits) (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Reserve for doubtful accounts.............................................. $ (736) $ --
Reserve for property valuations............................................ (127) --
Net temporary differences
without tax benefit..................................................... 359 --
Lease rejection damages.................................................... 423 --
Depreciation and amortization.............................................. 14 --
Gains on property sales.................................................... (33) --
Other ..................................................................... 100 --
-------- ------
TOTALS............................................................ $ -- $ --
======== ======
</TABLE>
No Federal income tax was payable at July 31, 1992 due primarily to the
utilization of net operating loss carryforwards.
At July 31, 1992, the Company had net operating loss carryforwards of
approximately $347,000,000 for Federal income tax purposes. Such tax net
operating loss carryforwards, if not used as offsets to future taxable income,
will expire beginning in 2005 and continuing through 2007. The amount of net
operating loss carryforwards available for future utilization is limited to
F-58
<PAGE> 105
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
$130,500,000 during the carryforward period as a result of the change in
ownership of the Company upon consummation of the Plan.
In accordance with FAS 109, the Company has not recognized the future
tax benefits associated with the net operating loss carryforwards or with other
temporary differences. Accordingly, the Company has provided a valuation
allowance of approximately $44,000,000 against the deferred tax assets as of
June 30, 1992 and July 31, 1992. To the extent any available carryforwards or
other benefits are utilized in periods subsequent to July 31, 1992, the tax
benefit realized will be treated as a contribution to stockholders' equity and
will have no effect on the income tax provision for financial reporting
purposes.
PMI's Federal income tax returns for the years 1987 through 1991 are
currently under examination by the Internal Revenue Service. The Company does
not believe there will be any material adverse effects on the consolidated
financial statements as a result of this examination.
Note 18 - Common Stock and Common Stock Equivalents
Pursuant to the Plan, on July 31, 1992, the Company began distributing
33,000,000 shares of Common Stock to certain claimants and holders of PMI stock.
At March 2, 1993, 22,623,100 shares of Common Stock were distributed. The
remaining shares are to be distributed semi-annually to holders of previously
allowed claims and pending final resolution of disputed claims (see Note 11). In
addition, holders of PMI stock will receive Warrants to purchase Common Stock
exercisable into an aggregate of approximately 2,100,000 shares at an exercise
price equal to the average per share daily closing price during the year ending
July 31, 1993.
On July 31, 1992, the Company adopted a stock option plan under which
options to purchase up to 1,320,000 shares of Common Stock may be granted to
directors, officers or key employees under terms determined by the Board of
Directors. During 1992, options to purchase 350,000 shares were granted to
officers and directors none of which are exercisable at July 31, 1992. In
addition, options to purchase 330,000 shares were granted to a former officer.
Such options are currently exercisable and expire on July 31, 1995. The exercise
prices of the above options are dependent
F-59
<PAGE> 106
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
on the average market price one year from the date of grant and are, therefore,
currently undeterminable.
On July 31, 1992, the Company adopted a performance incentive plan
under which stock options covering an additional 330,000 shares of Common Stock
were reserved for grants to key employees at the discretion of management. No
options have been issued under this plan.
PMI had an employee incentive stock option plan which provided for
grants of stock options covering an aggregate of 3,520,000 shares of common
stock to officers and key employees. Under the terms of the plan, which expired
on November 23, 1991, options were granted at a price not less than 100% of fair
market value on the date of grant. Options generally were exercisable in
cumulative installments of 33-1/3% after the option has been outstanding 18, 32
and 46 months from the date of grant and expired five years after the date of
grant.
A summary of the transactions under this plan follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
--------- --------------
<S> <C> <C>
Outstanding - June 30, 1991..................................... 950,574 $8.25 - $40.45
Cancelled....................................................... (950,574) $8.25 - $40.45
---------
Outstanding and exercisable -
June 30, 1992.............................................. --
Outstanding and exercisable -
July 31, 1992.............................................. --
=========
</TABLE>
F-60
<PAGE> 107
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 19 - Interest and Dividend Income
Included in interest and dividend income are the following (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Interest on mortgages and
other notes receivable................................................ $24,117 $ 1,949
Dividend income........................................................... 10 --
------- -------
TOTALS............................................................. $24,127 $ 1,949
======= =======
</TABLE>
Note 20 - Other Revenues
Included in other revenues are the following (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Rentals of properties..................................................... $1,649 $ 144
Other 1,460 89
------ -------
TOTALS........................................................... $3,109 $ 233
====== =======
</TABLE>
Note 21 - Related Party Transactions
The following summarizes significant financial information with respect
to transactions with present and former officers, directors, their relatives and
certain entities they control or in which they have a beneficial interest (in
thousands):
F-61
<PAGE> 108
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Management and other fee
income (a).............................................................. $ 746 $ 56
Interest income (a)........................................................ 1,231 74
Rental income (a).......................................................... 657 --
Management fee expense (b)................................................. 216 37
Interest expense (b)....................................................... 250 66
Reservation fee expense (b)................................................ 10 20
</TABLE>
(a) During 1990, PMI sold eight hotel properties to partnerships controlled
by former officers and/or directors for aggregate consideration of
$52,500,000 resulting in deferred gains of $4,000,000. The Company held
mortgages and other notes receivable with a face value of $44,992,000
at July 31, 1992, which arose primarily from those hotel sales. The
mortgages mature through 2005 and bear interest at rates ranging from
9.5% to 12.5%. At July 31, 1992, the carrying value of those mortgages
was reduced to $6,081,000. The income amounts shown above primarily
include transactions related to these properties.
(b) In 1991, PMI entered into an agreement with ShoLodge, whereby Sholodge
was appointed the exclusive agent to develop and manage certain hotel
properties. Six hotels have been developed and opened to date.
Development fees earned by ShoLodge of $586,000 and $-0- have been
capitalized into property, equipment and leasehold improvements for the
year ended June 1992 and the one month ended July 1992, respectively.
The Company has demand notes and loans payable to ShoLodge of
$2,706,000 and $3,570,000, respectively, at July 31, 1992 concerning
the development of hotels.
Effective June 1992, the Company commenced using the ShoLodge
reservation system for its Wellesley and AmeriSuite hotels.
Note 22 - Supplemental Cash Flow Information
PMI generally received mortgages and other notes as a portion of the
total consideration paid by purchasers in connection with
F-62
<PAGE> 109
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
sales of hotel properties and as consideration for certain construction and
development activities. Such noncash consideration is not reflected in the
accompanying consolidated statements of cash flows. Investing activities
involving such noncash proceeds are summarized below (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Net book value of assets sold............................................. $1,539 $ --
Net realized gains on
property transactions.................................................. 15 --
Cash proceeds, net of
selling costs.......................................................... (249) --
------ ------
NONCASH PROCEEDS................................................... $1,305 $ --
====== ======
</TABLE>
Noncash proceeds consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year One Month
Ended Ended
June 30, July 31,
1992 1992
-------- ---------
<S> <C> <C>
Mortgage and other notes
receivable............................................................. $1,305 $ --
====== =======
</TABLE>
Cash paid for interest net of amounts capitalized, was $6,432,000 for
the year ended June 30, 1992 and $4,407,000 for the one month ended July 31,
1992.
Cash paid for income taxes was $1,460,000 for the year ended June 30,
1992 and $2,000 for the one month ended July 31, 1992.
F-63
<PAGE> 110
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
PRIME HOSPITALITY CORP.
DATE: April 18, 1995 By: /s/ DAVID A. SIMON
--------------------------------
David A. Simon, President
</TABLE>
<PAGE> 111
EXHIBIT INDEX
-------------
Exhibit
No. Description
-------- -----------
(2) (a) Reference is made to the Disclosure Statement for
Debtors' Second Amended Joint Plan of Reorganization
dated January 16, 1992, which includes the Debtors'
Second Amended Plan of Reorganization as an exhibit
thereto filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is incorporated
herein by reference.
(3) (a) Reference is made to the Restated Certificate of
Incorporation of the Company dated June 5, 1992
filed as an Exhibit to the Company's Form 10-K
dated September 25, 1992, which is incorporated
herein by reference.
(b) Reference is made to the Restated Bylaws of the
Company filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is
incorporated herein by reference.
(4) (a) Reference is made to the Form of 8.20% Fixed Rate
Senior Secured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(b) Reference is made to the Form of Adjustable Rate
Senior Secured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(c) Reference is made to the Form of 9.20% Junior
Secured Note of the Company filed as an Exhibit to
the Company's Form 10-K dated September 25, 1992,
which is incorporated herein by reference.
(d) Reference is made to the Form of 8.20% Tax Note of
the Company filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(e) Reference is made to the Form of 10.20% Secured
UND Restructured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
<PAGE> 112
EXHIBIT INDEX (continued)
-------------------------
Exhibit
No. Description
-------- -----------
(f) Reference is made to the Form of 8% Secured UND
Restructured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(g) Reference is made to the Form of 9.20% OVR
Restructured Note of the Company filed as an
Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein
by reference.
(h) Reference is made to the Collateral Agency
Agreement among the Company, U.S. Trust and the
Secured Parties, dated as of July 31, 1992 filed
as an Exhibit to the Company's Form 10-K dated
September 25, 1992, which is incorporated herein by
reference.
(i) Reference is made to the Security Agreement
between the Company and U.S. Trust, dated as of
July 31, 1992, filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(j) Reference is made to the Subsidiary Guaranty from
FR Delaware, Inc. to United States Trust Company of
New York, dated as of July 31, 1992, filed as an
Exhibit to the Company's Form 10-K dated September
25, 1992, which is incorporated herein by reference.
(k) Reference is made to the Security Agreement
between FR Delaware, Inc. and United States Trust
Company of New York, dated as of July 31, 1992,
filed as an Exhibit to the Company's Form 10-K
dated September 25, 1992, which is incorporated
herein by reference.
(l) Reference is made to the Subsidiary Guaranty from
Prime Note Collections Company, Inc. to United
States Trust Company of New York, dated as of
July 31, 1992, filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(m) Reference is made to the Security Agreement
between Prime Note Collections Company, Inc. and
United States Trust Company of New York, dated as
of July 31, 1992, filed as an Exhibit to the
Company's Form 10-K dated September 25, 1992, which
is incorporated herein by reference.
<PAGE> 113
EXHIBIT INDEX (continued)
-------------------------
Exhibit
No. Description
-------- -----------
(n) Reference is made to a Form 8-A of the Company as
filed on June 5, 1992 with the Securities and
Exchange Commission, as amended by Amendment No. 1
and Amendment No. 2, which is incorporated herein
by reference.
(10) (a) Reference is made to the Agreement of Purchase and
Sale between Flamboyant Investment Company, Ltd.
and VMS Realty, Inc. dated June 3, 1985, and its
related agreements, each of which was included as
Exhibits to the Form 8-K dated August 14, 1985 of
PMI, which are incorporated herein by reference.
(b) Reference is made to PMI's Flexible Benefit Plan,
filed as an Exhibit to the Form 10-Q dated
February 12, 1988 of PMI, which is incorporated
herein by reference.
(c) Reference is made to the Employment Agreement
dated as of July 31, 1992, between David A. Simon
and the Company filed as an Exhibit to the
Company's Form 10-K dated September 25, 1992,
which is incorporated herein by reference.
(d) Reference is made to the 1992 Performance Incentive
Stock Option Plan of the Company dated as of
July 31, 1992, filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(e) Reference is made to the 1992 Stock Option Plan of
the Company filed as an Exhibit to the Company's
Form 10-K dated September 25, 1992, which is
incorporated herein by reference.
(f) Reference is made to the 1992 Non-Qualified Stock
Option Agreement between the Company and David A.
Simon filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is incorporated
herein by reference.
(g) Reference is made to the 1992 Non-Qualified Stock
Option Agreement between the Company and David L.
Barsky filed as an Exhibit to the Company's Form
10-K dated September 25, 1992, which is incorporated
herein by reference.
<PAGE> 114
EXHIBIT INDEX (continued)
-------------------------
Exhibit
No. Description
-------- -----------
(i) Reference is made to the Employment Agreement dated
as of December 31, 1992 between John Elwood and the
Company filed as an Exhibit to the Company's Form
10-K dated March 26, 1993, which is incorporated
herein by reference.
(j) Reference is made to the 1992 Non-Qualified Stock
Option Agreement between the Company and John Elwood
filed as an Exhibit to the Company's Form 10-K
dated March 26, 1993, which is incorporated herein
by reference.
(k) Reference is made to the Employment Agreement dated
as of May 18, 1993 between Paul Hower filed as an
Exhibit to the Company's Form 10-K dated March 25,
1994, which is incorporated herein by reference.
(l) Reference is made to the Consolidated and Amended
Settlement Agreement dated as of October 12, 1993
between Allan V. Rose and the Company filed as an
Exhibit to the Company's Form 10-K dated March 25,
1994, which is incorporated herein by reference.
(m) Consent and Amendment to Prime Hospitality Corp.
9.20% Junior Secured Notes.**
(n) Agreement dated February 6, 1995 among Suites of
America, Inc., ShoLodge, Inc. and the Company.**
(o) Change of Control Agreement dated February 15, 1995
between David A. Simon and the Company.**
<PAGE> 115
EXHIBIT INDEX (continued)
-------------------------
Exhibit
No. Description
-------- -----------
(p) Change of Control Agreement dated February 15, 1995
between John M. Elwood and the Company.**
(q) Change of Control Agreement dated February 15, 1995
between Paul H. Hower and the Company.**
(r) Change of Control Agreement dated February 15, 1995
between John H. Leavitt and the Company.**
(s) Change of Control Agreement dated February 15, 1995
between Denis W. Driscoll and the Company.**
(t) Change of Control Agreement dated February 15, 1995
between Timothy E. Aho and the Company.**
(u) Change of Control Agreement dated February 15, 1995
between Joseph Bernadino and the Company.**
(v) Change of Control Agreement dated February 15, 1995
between Richard T. Szymanski and the Company.**
(w) Change of Control Agreement dated February 15, 1995
between Douglas W. Vicari and the Company.**
(x) Change of Control Agreement dated February 15, 1995
between Richard Moskal and the Company.**
(11) Computation of Earnings Per Common Share.**
(12) Computation of the Ratio of Earnings to Fixed Charges.**
(21) Subsidiaries of the Company are as follows:
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
---- -------------
<S> <C>
A.J.& R. Motor Inns, Inc. North Carolina
Civic Motor Inns, Inc. Virginia
Coliseum Motor Inns, Inc. Maryland
Dynamic Marketing, Inc. Delaware
</TABLE>
(23) (a) Consent of Arthur Andersen LLP.*
(b) Consent of J.H. Cohn & Company.*
(27) Financial Data Schedule.**
- ---------------------
* Filed herewith.
** Previously filed.
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders' of Prime Hospitality Corp.:
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K/A, into the Company's previously filed
Registration Statement No. 33-54995.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
April 17, 1995
<PAGE> 1
Exhibit 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (Registration No. 33-54995) previously filed by Prime Hospitality Corp.
(formerly Prime Motor Inns, Inc.) of our report dated September 24, 1992,
(appearing in this Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1994 of Prime Hospitality Corp.), on the consolidated financial
statements and the financial statement schedules of Prime Motor Inns, Inc. and
Subsidiaries (Debtors-in-Possession).
J.H. COHN & COMPANY
Roseland, New Jersey
April 17, 1995