January 15, 1998
To the owners of Units of
Limited Partnership Interest in
Prime Motor Inns Limited Partnership
You have recently received a letter and proxy solicitation from
Davenport Management Corporation ("DMC") seeking, among other things, to
remove Prime-American Realty Corp. ("PARC") as General Partner of Prime
Motor Inns Limited Partnership (the "Partnership"), to admit DMC as the
replacement General Partner of the Partnership, and to request that PARC
prepare and submit to the Limited Partners a proposal for the conversion of
the Partnership to a corporation.
In its Proxy Statement, DMC makes a number of statements about the
history and condition of the Partnership's properties and operations that are
either incomplete or inaccurate. In addition, DMC PROPOSES WHAT IT CALLS A
"PLAN OF ACTION" THAT WE THINK REFLECTS A LACK OF PREPARATION OR APPRECIATION
OF THE BUSINESS AND POSITION OF THE PARTNERSHIP AND IS POTENTIALLY DANGEROUS
TO THE PARTNERSHIP AND TO YOUR INTERESTS.
1. DMC'S INCOMPLETE DESCRIPTION OF THE PARTNERSHIP'S CONDITION.
DMC recounts at some length the "troubled history" and "extremely poor
condition of the Partnership's business, operations and financial
condition," which, DMC asserts, has resulted in "the diminishment of
Unitholder value." This, DMC suggests, is the fault of PARC. The facts
are quite different.
In 1990, PARC and Winegardner & Hammons, Inc. ("W&H") took over
operation of the sixteen motor hotels (the "Inns") owned by the
Partnership through its 99%-owned subsidiary, AMI Operating Partners,
L.P. ("AMI"). Inns. They found that the physical condition of the Inns,
and customer satisfaction, had deteriorated seriously. In addition,
approximately one-third of the Inns were older properties which, being
highway-oriented and having exterior corridors, had a dated appearance.
Most of these older Inns were also in less favorable highway locations
than many of their competitors, many of which were newer and more attractive.
As a result of the physical condition of the Inns; the depressed economy
in the Northeast; the depressed state of the travel and hospitality
industries; and the depressed state of the real estate markets, in 1991
AMI was required to write down the value of the Inns from more than $106
million to $55,270,000. The carrying value of the Inns after that write-down
was almost $10 million less than the $64,341,000 outstanding balance of
and accrued interest on AMI's mortgage loan at December 31, 1991. That
write-down reflected that the Unitholders did not have any remaining equity
in the Inns.
In early 1992, as part of its "pre-packaged" bankruptcy reorganization,
AMI restructured its existing mortgage loan (the "Mortgage Loan") and
arranged an additional loan (the "Priming Loan") to fund capital improvements
and provide working capital. Since that time, AMI has made more than $20
million of capital improvements and refurbishments to the Inns, in addition
to normal maintenance and repairs. AMI has been able to increase the average
room rate at the Inns each since 1991, from $54.81 in 1991 to $72.56 in 1997.
Revenues have increased each year, as have earnings before interest,
depreciation and amortization ("EBIDA"), a common measure of operating profit
in partnerships. AMI has had positive EBIDA every year since its
reorganization.
2. DMC'S INACCURATE STATEMENTS ABOUT THE "HOLIDAY INNS" FRANCHISES.
DMC asserts that Holiday Hospitality Corporation ("HHC") the franchisor of the
Inns, "has informed the Partnership that it might not renew the franchise
agreements for a majority of the Inns because the Inns no longer meet the
required standards under the franchise agreement." In fact, the Inns had
met, and continue to meet, all requirements under the franchise agreements.
HHC did determine that it did not want to include in the "Holiday Inn" system
five of the older, highway-oriented Inns, but had agreed to renew the
franchises of the remaining Inns whose franchises were to expire in 1997. (As
previously reported to you, even before HHC's determination the General
Partner had already listed for sale several Inns, including the Inns that HHC
did not want in the system, because those Inns were not sufficiently
profitable to justify the additional investment required to remain in the
"Holiday Inn" system).
3. THE DMC "PLAN OF ACTION". DMC's own description in its proxy
statement of its "Plan of Action" makes clear that DMC HAS NOT PERFORMED THE
ANALYSIS AND REVIEW OF THE OPERATIONS OF THE PARTNERSHIP SUFFICIENT TO
SUPPORT ITS ELECTION AS THE GENERAL PARTNER. DMC states:
"... Neither DMC nor any person acting on its behalf has performed
or caused to be performed any analysis of the extent to which
(Partnership) expense reduction and control could be effected."
"... DMC has not conducted such review (of the W&H Management
Agreement and the Consulting Services Agreement) and cannot
predict the outcome of the review, if conducted."
While DMC lists its "Plan of Action", it admits that "... there
can be no assurance that any of the objectives could be
attained."
4. DMC'S FINANCING PLANS. DMC proposes, as part of its "Plan of
Action," to refinance or restructure AMI's existing indebtedness and
anticipates that that restructuring or refinancing might include the
conversion of some of the existing indebtedness to equity. However,
DMC does not put before the Unitholders any actual financing proposal.
DMC does not even report having any indication of interest by any financing
source to provide such financing, nor does DMC indicate the terms on which
such financing might be arranged (or the effect on the Unitholders of such
arrangements--particularly the possible dilutive effect of the conversion
of debt to equity). DMC says only that "based on the tenor of (Jerome
Sanzo's) informal discussions and his knowledge of both the capital
markets and of the hotel industry and hotel finance, . . . obtaining
such financing might be possible..." (emphasis added).
PARC, however, has been in discussions with AMI's existing lenders and
other debt and equity investors since mid-1995 seeking to arrange financing
for the PIPs and franchise renewal fees and/or to refinance AMI's existing
indebtedness on terms that would provide financing for the franchise renewals
or would enable AMI to generate internally the required funding. AMI's
existing lenders have declined to provide additional financing, have refused
to convert any portion of the existing debt to equity or to sell the existing
debt at a discount, have refused to allow any of net proceeds of sale of Inns
to be applied to fund PIPs or other franchise renewal fees, and have not
agreed to permit any additional indebtedness.
Despite extensive efforts from 1995 through the end of September, 1997,
PARC did not receive any adequate financing proposals. While, PARC did
receive some financing proposals, those proposals were contingent upon the
existing debt being purchased at a discount (which the existing lenders have
said they will not consider) and required that the new lenders be given a
substantial equity interest in the Partnership or AMI. PARC believed that
such proposals did not provide sufficient financing and were disadvantageous
to the Unitholders. Based on its experience, PARC BELIEVES THAT IT IS
UNLIKELY THAT DMC WILL BE ABLE TO ARRANGE ADEQUATE FINANCING ON TERMS THAT
ARE NOT DISADVANTAGEOUS TO THE UNITHOLDERS. AND WITHOUT FINANCING, THE
UNITHOLDERS FACE THE IMMINENT LOSS OF THE INNS AND THEIR ENTIRE INVESTMENT.
DMC'S PLAN TO SELL AND REPLACE PROPERTIES. Though DMC states that the
replacement of underperforming Inns is "a key element of revamping the
Partnership's operations," DMC merely repeats PARC's existing plans for the
sale of underperforming Inns. However, DMC does not address the fact that
the net proceeds of the sale of Inns must be applied to the repayment of
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existing debt and cannot be used to acquire replacement properties. DMC
appears to assume that the Partnership, after being converted to a
corporation, could acquire additional properties either with additional debt
(leveraging the new property 100%) or simply by issuing additional equity in
the new corporation. Though DMC states that the Partnership is over-
leveraged, it does not give any indication of the impact of 100% leverage (if
that financing is in fact available) for its new acquisition. Nor does DMC
give any indication of how badly the existing Unitholders would be diluted
by the issuance of additional equity for acquisition (though common sense
suggests that the interests of existing Unitholder would probably be
substantially diluted).
6. DMC'S PLAN TO RENEGOTIATE "HOLIDAY INN" ARRANGEMENTS. DMC states
in its proxy statement that it will "attempt to negotiate appropriate
arrangements with (HHC)," including short-term franchise extensions for Inns
that will be sold, long-term extensions for the retained Inns and an agreement
regarding the PIPs. DMC never suggests what "appropriate arrangements"
it might negotiate or how those arrangements would differ from those that
PARC has already negotiated. HHC was willing to permit the Inns that are
to be sold to remain in the "Holiday Inn" system for a reasonable period,
not beyond June, 1998, in order to permit an orderly sale; HHC had agreed
to franchise renewals for the other Inns, subject to payment of renewal fees
and required product improvement programs ("PIPs"); HHC had reached
substantial agreement with PARC on the nature and magnitude of, and the
schedule for, the PIPs for the renewed Inns; and HHC granted AMI extensions
of the franchises to allow time for the Servico transaction to be
considered by the Unitholders.
Based on PARC's extensive negotiations with HHC and HHC's consistent
policies and practices, there is no reason to believe that DMC will be able
to negotiate terms different from those already negotiated by PARC. Further,
PARC believes, also based on its extensive negotiations with HHC and HHC's
consistent policies and practices, that if DMC is not able to demonstrate its
ability to provide assured financing for the PIPs and franchise renewal fees,
HHC will not grant further extensions of the expiring franchises. BASED ON
DMC'S APPARENT LACK OF ANY FIRM FINANCING PLAN, PARC BELIEVES THAT IF THE DMC
"PLAN OF ACTION IS IMPLEMENTED, THE UNITHOLDERS FACE THE VERY REAL RISK OF
THE LOSS OF THE "HOLIDAY INN" FRANCHISES (AND THE LOSS OF THE UNITHOLDERS'
EQUITY) IN THE NEAR TERM.
7. DMC'S PLAN TO REMOVE PARC AS GENERAL PARTNER. DMC proposes to
remove PARC as the general partner of the Partnership and AMI. Removal and
replacement of the general partner of either the Partnership or AMI requires
the consent of the Required Lenders under the Priming Loan and the Required
Holders under the Mortgage Loan. However, while DMC's proxy statement states
that "DMC anticipates that the requisite consents...would be sought" before
the replacement of PARC, DMC appears not to have discussed the matter with
the lenders or to have any sense as to whether the requisite lenders would
consent to DMC's being the general partner of the Partnership or AMI.
REPLACEMENT OF PARC WITHOUT THE REQUISITE CONSENT OF THE LENDERS WILL
CONSTITUTE AN EVENT OF DEFAULT UNDER THE PRIMING AND MORTGAGE LOANS AND COULD
RESULT IN ACCELERATION OF THOSE LOANS.
8. DMC'S PLAN FOR IMMEDIATE CONVERSION OF THE PARTNERSHIP TO A
CORPORATION. DMC recites at some length the desirability of converting the
Partnership to corporate form (in some measure merely repeating what PARC had
already reported to Unitholders in Quarterly Reports in 1997). However,
there is no tax benefit to the conversion and many of the purported benefits
(such as the statement that the new corporation would have greater access to
the capital markets) are asserted without support and appear intended merely
to provide a justification or basis for other elements of DMC's "Plan of
Action."
The formulation of the structure of the new corporation and the
development of the most tax-efficient mechanism for the conversion, and the
submission of the proposal to the Unitholders and the lenders for their
approval, will cost the Partnership time and money. However, as has been
reported to you, the Partnership has entered into an agreement with Servico,
Inc. to sell the Partnership's interest in AMI to a subsidiary of Servico
and to dissolve. If the Unitholders approve the sale and dissolution, there
would not be any purpose for expending Partnership funds to consider
conversion or in converting to corporate form.
9. WHO REALLY BENEFITS FROM DMC'S PLAN? DMC's proxy statement states
that, as part of DMC's plan to replace "underperforming Inns," Jerome Sanzo,
President of DMC, had "explored certain hotel properties ... as potential
acquisition candidates" and "has had discussions with Martin W. Field ...
concerning several profitable hotels owned or controlled by him." The proxy
statement indicates that certain of DMC's proxy solicitation expenses have
been advanced to DMC by Martin W. Field and that "DMC may seek reimbursement
from the Partnership for such fees and expenses, and ... does not intend to
seek limited partner approval for such reimbursement ... unless such approval
is required under Delaware law." In addition, the DMC proxy statement says
that "in view of Mr. Field's experience and his present ownership of hotels,
... DMC might consider engaging the services of Mr. Field either directly
or through entities controlled by Mr. Field, to manage or participate in the
management of the Partnership's Inns." Finally, DMC says in its proxy
statement that, if the Partnership converts to corporate form, "Mr. Field
may be considered as a potential candidate to serve on the Board of Directors
of (the new corporation) or as a consultant to (the new corporation)."
During the summer and early fall of 1997 Mr. Field and his wife acquired
an approximately 4% stake in the Partnership, and a trust established by
Mr. Field for his children acquired an approximately 3% stake in the
Partnership. All in all, it appears that A PRINCIPAL CONSEQUENCE OF THE
DMC "PLAN OF ACTION" IS THAT MR. FIELD AND HIS AFFILIATES WILL TAKE OVER
OPERATION OF THE PARTNERSHIP AND MANAGEMENT OF THE INNS, WITH THE PROSPECT
THAT THEY WILL SEEK TO SELL THEIR PROPERTIES TO THE PARTNERSHIP.
Unitholders should be aware that the judgment dockets of State and
Federal Courts in New York and Florida show that the Federal Deposit
Insurance Corporation recovered a judgment against Mr. Fields in the amount
of $6 million for loans on which Mr. Field defaulted in connection with
a real estate venture and that the New York City Department of Finance
obtained several judgments against Mr. Fields, totaling several hundred
thousands dollars, for occupancy taxes unpaid by a real estate venture.
10. WHAT ARE THE CONSEQUENCES TO THE UNITHOLDERS? DMC'S PROPOSAL TO
ACQUIRE PROPERTIES WILL SUBJECT THE UNITHOLDERS TO THE RISKS OF EXCESS
LEVERAGE AND/OR SUBSTANTIAL DILUTION OF THEIR INTERESTS. IF DMC DOES NOT
ARRANGE FINANCING IN TIME TO RETAIN THE "HOLIDAY INN" AFFILIATION (AND THERE
IS NO INDICATION THAT DMC WILL BE ABLE TO RAISE FINANCING ON A TIMELY BASIS,
IF AT ALL), NOT ONLY WILL THE LOSS OF THE "HOLIDAY INN" FRANCHISE HAVE AN
EXTREMELY ADVERSE IMPACT ON THE OPERATIONS AND VALUE OF THE AFFECTED INNS,
BUT THE LOSS WILL CONSTITUTE AN EVENT OF DEFAULT UNDER THE PRIMING AND
MORTGAGE LOANS.
IS THERE AN ALTERNATIVE? As reported to the Unitholders in the Quarterly
Report on Form 10-Q for the third quarter of 1997, PARC concluded that,
because AMI had been unable to raise the financing needed to finance the
renewal of the "Holiday Inn" franchises, there was an immediate risk of loss
of the "Holiday Inn" affiliation, decline in the value of the Inns and
default under the Priming and Mortgage Loans. In order to preserve
Unitholder value, the Partnership entered into an agreement to sell its
limited partnership interest in AMI to an affiliate of Servico, Inc for
$8,000,000 in cash. Immediately following that transaction (and as required
by the terms of the agreement with Servico), the Partnership would dissolve
and distribute the sale proceeds (net only of any taxes on the sale) to the
Unitholders. THE SALE OF THE PARTNERSHIP'S INTEREST IN AMI AND THE
PARTNERSHIP'S SUBSEQUENT DISSOLUTION BOTH ARE SUBJECT TO THE CONSENT OF THE
UNITHOLDERS. YOU WILL RECEIVE PROXY MATERIALS IN THE NEAR FUTURE WITH
RESPECT TO THE SOLICITATION OF YOUR CONSENT TO THAT SALE AND DISSOLUTION.
IF YOU HAVE ANY QUESTIONS OR NEED ADDITIONAL INFORMATION, PLEASE CALL ME
AT 201-791-6166 OR SEND ME A FAX TO 201-796-0900.
Sincerely,
Prime-American Realty Corp
By:
S. Leonard Okin, Vice President
