-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TxFT7GSdGmUU34dRQP7jEGdfBacnocd2H0lJZ10j1nvppbhZUWWfwZ5i67JhxDPA TRuSRZ3dAzyL8fevjoEO9g== 0000950123-03-003458.txt : 20030328 0000950123-03-003458.hdr.sgml : 20030328 20030328134018 ACCESSION NUMBER: 0000950123-03-003458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME HOSPITALITY CORP CENTRAL INDEX KEY: 0000080293 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 222640625 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06869 FILM NUMBER: 03624149 BUSINESS ADDRESS: STREET 1: 700 RTE 46 E CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 9738821010 MAIL ADDRESS: STREET 1: 700 RTE 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: PRIME EQUITIES INC DATE OF NAME CHANGE: 19731120 FORMER COMPANY: FORMER CONFORMED NAME: PRIME MOTOR INNS INC DATE OF NAME CHANGE: 19920609 10-K 1 y84868e10vk.txt PRIME HOSPITALITY CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K (MARK ONE) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-6869 ---------- 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 882-1010 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ------------------- Par Value $.01 Per Share, Common Stock New York Stock Exchange
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 | | 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| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No | | The aggregate market value of the registrant's stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of June 28, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, was $585,777,256 The Registrant had 45,083,503 shares of Common Stock outstanding as of March 14, 2003. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement prepared for the 2003 annual meeting of shareholders are incorporated by reference into Part III of this report. References in this report to the "Company" or "Prime" are to Prime Hospitality Corp. and its subsidiaries. EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by the Company for the purpose of analyzing its operating performance, leverage and liquidity. Hotel EBITDA represents EBITDA generated from the operations of owned hotels. Hotel EBITDA excludes management fee income, interest income from mortgages and notes receivable, general and administrative expenses and other revenues and expenses which do not directly relate to operations of owned hotels. EBITDA and Hotel EBITDA are not measures of financial performance under accounting principles generally accepted in the United States and should not be considered as alternatives to net income as an indicator of the Company's operating performance or as alternatives to cash flows as a measure of liquidity. Unless otherwise indicated, industry data is based on reports of Smith Travel Research. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES THE COMPANY Prime is an owner, manager and franchisor of hotels, with 245 hotels in operation containing 31,426 rooms located in 33 states (the "Portfolio") as of December 31, 2002. Prime controls three hotel brands -- AmeriSuites (R), Wellesley Inns & Suites (R) and Prime Hotels and Resorts (R) -- and operates a portfolio of full-service hotels under franchise agreements with national hotel chains. The Company operates and has ownership interests in 126 hotels (the "Owned Hotels"), operates 28 hotels under lease agreements primarily with real estate investment trusts (the "Leased Hotels"), manages 45 hotels for third parties (the "Managed Hotels"), and franchises 46 hotels which it does not operate (the "Franchised Hotels"). The Portfolio is comprised of 149 AmeriSuites hotels, 73 Wellesley Inns & Suites hotels, one Prime Hotels and Resorts hotel and 22 non-proprietary brand hotels. The Company's growth has been focused on the development of its proprietary brands. Through the development of its proprietary brands, Prime has transformed itself from an owner/operator into a more diversified company with ownership, franchise and management interests and has positioned itself to generate additional revenues with minimal capital investment. Prime's strategy is also focused on opportunistic hotel acquisitions to take advantage of depressed values while leveraging the Company's operating infrastructure. With approximately 200 hotels under management, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets. Prime's hotels can be categorized into three types: AmeriSuites, Wellesley Inns & Suites and full-service. AmeriSuites: As of December 31, 2002, there were 149 AmeriSuites in operation. Prime owns and operates 63 of these hotels, operates and leases 27 hotels from third parties and franchises the operation of the remaining 59 hotels, 28 of which are operated by Prime. As of December 31, 2002, there were also two AmeriSuites under construction, with an additional 20 1 signed franchise agreements for new AmeriSuites to be built. AmeriSuites are upscale, all-suite hotels containing approximately 128 suites and are located in 31 states. The hotels are situated primarily near suburban commercial centers, corporate office parks and other travel destinations, within close proximity to dining, shopping and entertainment amenities. In 2002, AmeriSuites contributed approximately 54% of the Company's Hotel EBITDA. Wellesley Inns & Suites: As of December 31, 2002, there were 73 Wellesley Inns & Suites in operation. Prime owns and operates 52 of these hotels and franchises 21 hotels, six of which are managed by Prime. There are also four Wellesley Inns & Suites under conversion. Wellesley Inns & Suites are mid-price limited service hotels containing between 100-130 rooms and are located in 23 states primarily in the Southeast, Northeast and Southwest. In 2002, Wellesley Inns & Suites contributed approximately 23% of the Company's Hotel EBITDA. Full-Service Hotels: As of December 31, 2002, the Company operated 23 full-service hotels, one under the Prime Hotels and Resorts flag and 22 under national franchises. Prime has ownership interests in 11 of these hotels (including one under a joint venture agreement), leases one hotel and manages eleven hotels for third parties. Prime has added two full-service hotels in 2003 with the acquisition of a 50% interest in the Quebec City Holiday Inn Select and a new management agreement for a Holiday Inn in Philadelphia, PA. The full-service hotels operate primarily in the upscale segment under national franchises such as Hilton, Radisson, Sheraton, Holiday Inn and Ramada and generally provide food and beverage service and banquet facilities. The hotels are primarily located in the Northeast. In 2002, the full-service hotels contributed approximately 23% of the Company's Hotel EBITDA. ASSET DIVESTITURES/FINANCIAL CONDITION As part of its strategy, the Company has undertaken an initiative to dispose of hotel real estate and to utilize proceeds to repurchase stock, retire debt or grow its hotel portfolio. During the past four years, the Company has sold approximately $400 million of assets including approximately $60 million in 2002. The Company retained the franchise rights on all of its sold AmeriSuites and Wellesley Inns, generally under 20 year franchise agreements. Prime utilized the proceeds from asset sales along with its cash flow from operations to reduce its debt balance since the beginning of the year by $35 million to approximately $285 million as of December 31, 2002. As of December 31, 2002, Prime's debt to EBITDA ratio was 3.9 times, its EBITDA to interest was 2.7 times and its debt to book capitalization percentage was 29%. INDUSTRY OVERVIEW In 2002, the combination of the soft economy and travel safety concerns resulted in demand for hotel rooms growing by just 0.8% compared to a 1.8% increase in hotel supply. This resulted in a decrease in overall occupancy levels from 59.8% in 2001 to 59.2% in 2002. In addition, due to the softness in demand, average daily rate ("ADR") decreased by 1.5% from $84.45 in 2001 to $83.15 in 2002, resulting in a revenue per available room ("REVPAR") decrease of 2.5%. Historical performance, however, may not be indicative of future results. 2 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; the South Atlantic region, which is comprised of Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware; and the West South Central Region which is composed of Texas, Oklahoma, Arkansas and Louisiana. The table also includes operating data concerning the two price levels (of the five price levels classified by Smith Travel Research) in which the Company competes: upscale and mid-price. REVPAR data was calculated by the Company based on occupancy and ADR data supplied by Smith Travel Research.
% CHANGE IN: ----------------------------------------------------------------------------------------- ROOM SUPPLY ROOM DEMAND REVPAR 2002 2001 2000 2002 2001 2000 2002 2001 2000 V. V. V. V. V. V. V. V. V. 2001 2000 1999 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- ---- ----- ---- United States 1.8% 2.4% 3.1% 0.8% -3.4% 3.7% -2.5% -6.9% 5.5% BY REGION: Middle Atlantic 1.9 2.3 2.8 1.5 -3.7 3.2 -2.4 -10.8 7.6 South Atlantic 1.8 2.6 3.3 1.2 -3.3 3.0 -1.2 -5.5 3.5 West South Central 2.4 3.5 3.9 0.0 0.0 5.4 -2.3 -3.5 5.3 BY SERVICE (PRICE LEVEL): Upscale 2.6 3.7 4.0 2.6 -1.7 4.3 -2.3 -6.4 4.2 Mid-Price 2.4 3.1 3.9 0.8 -2.5 4.6 -3.2 -4.9 5.8
3 PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Portfolio as of December 31, 2002:
DECEMBER 31, 2002 ----------------- NUMBER OF HOTELS ROOMS ------ ------ AMERISUITES Owned 63 8,153 Leased 27 3,291 Managed 28 3,629 Franchised 31 3,713 --- ------ Total 149 18,786 === ====== WELLESLEY INNS & SUITES Owned 52 6,190 Managed 6 668 Franchised 15 1,386 --- ------ Total 73 8,244 === ====== PRIME HOTELS & RESORTS Owned 1 240 --- ------ Total 1 240 === ====== NON-PROPRIETARY BRANDS Owned 9 1,683 Leased 1 160 Managed 11 1,886 Joint Venture 1 427 --- ------ Total 22 4,156 === ====== TOTAL PORTFOLIO Owned 125 16,266 Leased 28 3,451 Managed 45 6,183 Franchised 46 5,099 Joint Venture 1 427 --- ------ Total 245 31,426 === ======
(1) The Owned Hotels represent those hotels in which the Company has significant ownership interests. The Company owns the land and building on all but eleven hotels which are operated under ground or building lease agreements. The ground and building leases provide for fixed base rents and, in most instances, additional percentage rents based on a percentage of room revenues. (2) The managed hotels include 19 AmeriSuites hotels owned by Equity Inns, Inc. converted from lease agreements in January 2002. The management agreements require Prime to maintain a minimum level of cash flow. (3) In addition to the above, in 2003, Prime added two non-proprietary branded hotels, one through a joint venture and one through a management agreement, and one franchised Wellesley Inns & Suites. There are also two franchised AmeriSuites and three franchised Wellesley Inns & Suites under construction. 4 The following table sets forth the location of the Portfolio by ownership interest as of December 31, 2002:
OWNED (A) LEASED MANAGED FRANCHISED TOTAL HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Alabama 1 128 -- -- 1 128 1 65 3 321 Arizona 6 780 2 247 2 245 -- -- 10 1,272 Arkansas 1 129 -- -- -- -- 1 104 2 233 California 2 279 -- -- 1 96 2 256 5 631 Colorado 5 662 1 126 -- -- -- -- 6 788 Connecticut 2 261 -- -- -- -- 2 231 4 492 Florida 17 2,073 2 190 7 838 10 1,109 36 4,210 Georgia 9 1,123 3 374 1 189 6 647 19 2,333 Idaho 1 128 -- -- -- -- -- -- 1 128 Illinois 4 521 -- -- 3 384 4 625 11 1,530 Indiana 2 260 2 257 1 126 -- -- 5 643 Kansas 3 374 1 135 1 126 -- -- 5 635 Kentucky 2 251 -- -- -- -- -- -- 2 251 Louisiana -- -- -- -- 1 128 -- -- 1 128 Maine -- -- -- -- -- -- 1 130 1 130 Maryland 2 261 -- -- 1 128 -- -- 3 389 Massachusetts -- -- -- -- 1 158 -- -- 1 158 Michigan 4 518 -- -- -- -- 1 121 5 639 Minnesota 1 128 -- -- 1 128 -- -- 2 256 Missouri -- -- 1 134 -- -- -- -- 1 134 Nevada 1 125 -- -- 1 202 -- -- 2 327 New Jersey 13 2,509 2 285 8 1,355 -- -- 23 4,149 New Mexico 2 237 -- -- 1 128 1 125 4 490 New York 6 769 -- -- 2 255 1 82 9 1,106 North Carolina 5 648 2 235 1 75 1 94 9 1,052 Ohio 4 460 1 124 4 553 -- -- 9 1,137 Oklahoma 2 256 -- -- -- -- 2 208 4 464 Oregon 1 137 -- -- -- -- -- -- 1 137 Pennsylvania 2 256 -- -- 1 104 -- -- 3 360 South Carolina 4 455 -- -- -- -- -- -- 4 455 Tennessee 4 503 1 100 3 366 2 131 10 1,100 Texas 18 2,206 8 985 1 149 7 809 34 4,149 Virginia 2 256 2 259 2 322 4 362 10 1,199 --- ------ -- ----- -- ----- -- ----- --- ------ Total 126 16,693 28 3,451 45 6,183 46 5,099 245 31,426 === ====== == ===== == ===== == ===== === ======
(a) The Owned hotels include one hotel in which Prime owns a 50% interest. 5 The following table sets forth the location of the Portfolio by product type as of December 31, 2002:
WELLESLEY INNS AMERISUITES & SUITES FULL-SERVICE TOTAL HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- Alabama 2 256 1 65 -- -- 3 321 Arizona 6 748 4 524 -- -- 10 1,272 Arkansas 2 233 -- -- -- -- 2 233 California 4 535 1 96 -- -- 5 631 Colorado 4 510 2 278 -- -- 6 788 Connecticut 2 208 1 103 1 181 4 492 Florida 16 1,994 20 2,216 -- -- 36 4,210 Georgia 14 1,768 5 565 -- -- 19 2,333 Idaho 1 128 -- -- -- -- 1 128 Illinois 11 1,530 -- -- -- -- 11 1,530 Indiana 3 383 2 260 -- -- 5 643 Kansas 3 389 2 246 -- -- 5 635 Kentucky 2 251 -- -- -- -- 2 251 Louisiana 1 128 -- -- -- -- 1 128 Maine 1 130 -- -- -- -- 1 130 Maryland 2 252 1 137 -- -- 3 389 Massachusetts 1 158 -- -- -- -- 1 158 Michigan 4 501 1 138 -- -- 5 639 Minnesota 2 256 -- -- -- -- 2 256 Missouri 1 134 -- -- -- -- 1 134 Nevada 1 202 1 125 -- -- 2 327 New Jersey 4 552 6 673 13 2,924 23 4,149 New Mexico 3 381 1 109 -- -- 4 490 New York -- -- 4 370 5 736 9 1,106 North Carolina 7 839 1 138 1 75 9 1,052 Ohio 6 759 2 204 1 174 9 1,137 Oklahoma 4 464 -- -- -- -- 4 464 Oregon -- -- 1 137 -- -- 1 137 Pennsylvania 2 256 1 104 -- -- 3 360 South Carolina 3 368 1 87 -- -- 4 455 Tennessee 7 819 2 171 1 110 10 1,100 Texas 23 2,839 11 1,310 -- -- 34 4,149 Virginia 7 815 2 188 1 196 10 1,199 --- ------ -- ----- -- ----- --- ------ Total 149 18,786 73 8,244 23 4,396 245 31,426 === ====== == ===== == ===== === ======
6 The following table sets forth, for the years ended December 31, 2002 and 2001, operating data by product type for the comparable hotels in the Portfolio as of December 31, 2002.
TOTAL PORTFOLIO --------------- OCCUPANCY ADR REVPAR --------- --- ------ OWNED & LEASED 2002 60.2% $ 72.11 $ 43.38 2001 63.1% $ 75.68 $ 47.79 CHANGE (2.9pts.) (4.7%) (9.2%) AMERISUITES 2002 62.6% $ 73.91 $ 46.26 2001 64.2% $ 77.99 $ 50.05 CHANGE (1.6pts.) (5.2%) (7.6%) WELLESLEY INNS & SUITES 2002 56.0% $ 59.05 $ 33.06 2001 61.4% $ 60.49 $ 37.15 CHANGE (5.4pts.) (2.4%) (11.0%) FULL-SERVICE BRANDS 2002 64.8% $105.52 $ 68.40 2001 67.9% $113.02 $ 76.78 CHANGE (3.1pts.) (6.6%) (10.9%)
AMERISUITES AmeriSuites are positioned in the upscale segment of the lodging industry, competing predominantly with other upscale and mid-price brands such as Courtyard by Marriott, Hilton Garden Inns, Hampton Inns & Suites, Comfort Suites and Holiday Inn. While the majority of the current AmeriSuites hotels were developed with Prime's capital, the Company intends to grow AmeriSuites with the bulk of capital coming from franchisees. The average age of the AmeriSuites hotels is approximately 5.4 years. AmeriSuites are all-suite, upscale hotels which offer guests an attractively designed suite, a complimentary continental breakfast in a spacious lobby cafe, remote-control cable television, fitness centers and pool facilities. The hotels provide group meeting space, but do not include restaurant or lounge facilities. AmeriSuites attract customers principally because of the size and quality of the guest suites which contain approximately 420 square feet, approximately 30% larger than a standard hotel room. The suites offer distinct living, sleeping and kitchen areas with microwaves, refrigerators, in-room coffee makers, ironing boards and hair dryers. AmeriSuites hotels also offer business suites marketed under the name "TCB (Taking Care of Business) Suites". TCB Suites were developed specifically for the business traveler and feature a well-equipped, in-suite office, including an oversized desk with executive chair, easy chair and ottoman, in addition to technology features such as dual phone lines, voice mail, data ports, speakerphones and other amenities. The typical AmeriSuites contains approximately 128 suites, including 20-30 TCB Suites, and two to four meeting rooms. AmeriSuites are primarily located near suburban commercial centers, corporate office parks and other travel destinations, within close proximity to dining, shopping and entertainment facilities. The target customer is primarily 7 the business traveler, with an average length of stay of two to three nights, and leisure or weekend travelers. AmeriSuites are marketed primarily through direct local sales, national marketing programs and a central reservation system operated by Prime. WELLESLEY INNS & SUITES The Wellesley Inns & Suites brand is comprised of 31 Wellesley Inns and 42 Wellesley Inns & Suites which, in addition to Wellesley Inn features, also contain suite rooms. The Company intends to develop this brand primarily through franchisees and believes that conversion opportunities from other brands exist in this segment. In the past year, five hotels have been converted from other brands to the Wellesley Inns & Suites brand. Wellesley Inns & Suites are positioned in the mid-price segment of the industry and compete with other chains such as Hampton Inns, La Quinta Inn & Suites, Holiday Inn Express and Comfort Inns. The average age of the chain's hotels is 9.3 years. The target customer is the transient business traveler, although approximately 25% of the customers stay on an extended basis. Of the Company's 31 Wellesley Inns, 13 are located in Florida with the remainder primarily in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has approximately 100 rooms and is distinguished by a stucco exterior, spacious lobby and amenities such as pool facilities, complimentary continental breakfast, remote control cable television with free movie channels and in-room coffee makers. The Company's 42 Wellesley Inns & Suites were formed primarily from the conversion of 38 former HomeGate hotels in November 1999. Wellesley Inns & Suites are located primarily in the Southwest, Midwest and Southeast. The typical Wellesley Inns & Suites consists of approximately 110 to 130 rooms. In addition to the amenities of a typical Wellesley Inn, the Wellesley Inns & Suites hotels offer suite accommodations in approximately 60% of the guest rooms. The suites contain approximately 450 square feet offering separate living, sleeping and eating areas. The suite rooms also contain kitchenettes with stove tops, refrigerators and microwaves. Marketing efforts for the Wellesley Inns & Suites chain rely primarily on direct local marketing, but also include national programs and a central reservation system operated by Prime. PRIME HOTELS AND RESORTS Prime unveiled its new hotel brand, Prime Hotels & Resorts, with the conversion of the Sheraton Hotel Saratoga Springs to the Prime Hotel and Conference Center, Saratoga Springs, New York. Saratoga Springs is the first re-branded property in the company's plans to develop under the Prime Hotels & Resorts flag a portfolio of upscale, full-service hotels. Acquisitions from other chains or ownership groups will provide the foundation for brand expansion. Features of a Prime-branded hotel will include 200-500 guest rooms and suites, a selection of dining and entertainment venues, concierge-level services, automated check-in kiosks, swimming pool and fitness center, business center, and 10,000-50,000 square feet of meeting and banquet space. Prospective amenities include high-speed Internet access, in-room cordless phones, and 8 expanded cable television offerings including on-demand viewing services. The planned amenities are designed to provide the guest with timesaving conveniences. Additionally, the new brand provides flexibility to reduce franchise costs and add full-service hotels to the Prime Rewards program. NON-PROPRIETARY BRANDS The Company's non-proprietary brand hotels primarily operate in the upscale full-service segment. The full-service hotels provide food and beverage outlets, contain meeting and banquet facilities and are operated under franchise agreements primarily with Hilton, Radisson, Sheraton, Holiday Inn and Ramada. The full-service hotels are concentrated in the Northeast. 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 the full-service hotels consists primarily of business travelers. Sales and marketing efforts are concentrated at the local level where the Company's sales force markets its rooms and its meeting and banquet services to groups for seminars, business meetings and other events. The hotels are also marketed through national franchisor programs and central reservation systems. The Company's full-service hotels generally have between 150 and 300 rooms and pool, restaurant, lounge, banquet and meeting facilities. Other amenities include fitness rooms, room service, remote-control cable television and business centers. In order to enhance guest satisfaction, the Company also has theme concept lounges in a number of its hotels. BRAND INFRASTRUCTURE As Prime continues to evolve into a franchisor, it has undertaken a number of brand initiatives. These include the following: Central Reservation System - In November 2002, the Company opened and began operating a new reservation system in Fairfield, New Jersey. The cost of the system was approximately $5 million. Prime believes the new system will provide it with improved service quality, real time inventory synchronization between the system and the hotels, and enhanced customer data. Brand Advertising - Prime spent approximately $6.7 million on national brand advertising expenditures in 2002. The Company's efforts have focused primarily on print advertising both on a regional level and in national publications such as USA Today. In recent years, Prime has expanded its program to include national cable television advertisements for its AmeriSuites chain. National Accounts - Prime has approximately 200 national accounts comprised of leading companies throughout the country which list AmeriSuites and Wellesley Inns & Suites as preferred hotel providers. Rewards Program - On September 1, 2001, Prime implemented an expanded rewards program, covering its brands, designed to enhance its competitive position. The new program, entitled Prime Rewards, offers frequent guest members both points toward a free hotel stay and airline miles with partners such as American, Continental, Delta and America West with each 9 stay. Technology features such as paperless redemptions and online customer statements and profiles have also been incorporated into this program. Prime has increased its membership from approximately 90,000 members as of September 1, 2001 to approximately 275,000 members as of February 28, 2003. As a result, frequent guests contributed approximately 15% of brand revenues in 2002, up from 10% in 2001. E-Commerce - The Company's proprietary websites (www.amerisuites.com and www.wellesleyonline.com) provide customers with the ability to book reservations. The brands' hotel rooms can also be booked through wholesale travel websites such as TravelScape and Hotels.com and excess room inventory is distributed through discount websites such as Priceline and Hot Wire. Prime's rooms are also available on general travel websites such as Expedia and Travelocity. E-commerce related sites contributed approximately 10% of brand revenues in 2002. Management believes that the growing brand infrastructure, consisting of elements such as an improved frequent stay program, increased advertising and marketing programs, and e-commerce initiatives, are necessary for its brands to compete effectively with older, more established chains. FRANCHISING Prime intends to grow its brands primarily through franchising. The Company began its franchise sales efforts in mid-1998 when it obtained the necessary statutory approvals to begin franchising its AmeriSuites and Wellesley brands. Prime has a franchise sales team which, in addition to their direct sales effort, also develops the franchise marketing programs which include advertising in industry and business publications, attending various trade shows and producing brochures and other collateral material. Prime also has a franchise services team which has developed a variety of programs to guide its franchisees through the various phases of opening and operating a hotel. These include training, pre-opening, construction management and purchasing services. Prime also offers its franchisees an internet based communications system which provides brand updates, operating standards and manuals and other important communications. Prime performs quality control inspections of all of its proprietary brand hotels, including those owned and operated by Prime. The following table details the number of franchise agreements executed by Prime through December 31, 2002 since it began its franchising efforts in June 1998.
WELLESLEY INNS AMERISUITES & SUITES TOTAL ----------- -------------- ----- NEW OPENINGS/CONVERSIONS 22 7 29 UNDER CONSTRUCTION/CONVERSION 2 4 6 ASSET SALES 18 14 32 -- -- -- TOTAL 42 25 67 == == == PIPELINE OF EXECUTED AGREEMENTS 20 1 21 == == ==
Prime's AmeriSuites and Wellesley franchise agreements typically provide for terms of twenty years and require the franchisee to maintain certain operating and product standards. The franchise fees are generally comprised of an initial application fee, plus monthly fees based 10 on a percentage of hotel revenues. The monthly fees cover royalties and the cost of marketing and reservation services. Prime also offers additional services including purchasing and design services. The standard monthly fees as a percentage of room sales are as follows:
ROYALTY MARKETING RESERVATION FEE FEE FEE --- --- --- AmeriSuites .......................... 5.0% 2.0% 1.55% Wellesley Inns & Suites .............. 4.5% 1.5% 1.55%
CORPORATE DEVELOPMENT While the Company has developed the majority of its existing AmeriSuites and Wellesley Inns & Suites, it intends to rely on franchisees to develop its brands in the future. During 2002, Prime opened one owned AmeriSuites hotel located in Fremont, CA. Prime intends to focus any future development efforts in the Northeast and West Coast, or in other areas where the development process is more difficult, high barriers to entry exist and the location has strategic value. The Company's Wellesley Inns & Suites development effort will focus on the conversion of other limited-service hotels to its brands. OPERATIONS As a leading domestic hotel operating company, the Company believes that it enjoys a number of operating advantages over other lodging companies. With approximately 200 hotels under management covering a number of price points and broad geographic regions, the Company has the critical mass to support 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. 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 consist of a general manager and, depending on the hotel's size and market position, 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 a fair value. 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 and hiring decisions. 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. The central management team is located in Fairfield, New Jersey. Central management provides four major categories of services: (i) operations management, (ii) sales and marketing management, (iii) financial reporting and control and (iv) hotel support services. 11 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 15 to 20 hotels. They are supported by training and food and beverage departments, each staffed full-time by specialized professionals. The Company's training efforts focus on sales, housekeeping, food service, front desk services and leadership. Sales and Marketing Management. Sales and marketing management is directed by a corporate staff which includes regional marketing directors who are responsible for each hotel's sales and marketing strategies, and the Company's national sales group, which markets its brands to major companies which produce a high volume of bookings. In cooperation with the regional marketing 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. Complementing regional, national and on-site marketing efforts, the Company formed a sales group under a wholly-owned subsidiary, Market Segments, Inc. ("MSI"). 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 hotels 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 establishes human resources guidelines, 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, benefit programs and provides central legal services. CAPITAL IMPROVEMENTS The Company continuously refurbishes its Owned Hotels in order to maintain consistent quality standards. The Company generally spends between 3% 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 12 refurbishment and repair projects on its Managed Hotels and Leased Hotels, although spending amounts vary based on the plans of such hotels' owners and the Company's role as the franchisor. LEASED HOTELS The Company operates 28 hotels under lease agreements, primarily with REITs. These are comprised of 24 AmeriSuites owned by Hospitality Properties Trust (HPT), three AmeriSuites owned by Sholodge, Inc. ("Sholodge"), and one full-service hotel owned by Winston Hotels ("Winston"). The leases are with subsidiaries of Prime have terms ranging from 10 to 13 years expiring from 2007 to 2013 with certain renewal options. The 27 hotels leased from HPT and Sholodge provide for a fixed annual minimum rent plus eight percent of revenue in excess of a base year. The hotel leased from Winston provides for rent equal to the greater of base rent, which increases annually by the inflation rate, or percentage rent based on a percentage of room, food and beverage and other revenue. MANAGED HOTELS The Company provides hotel management services to third party hotel owners of 45 Managed Hotels (see below). Management fees are generally based on fixed percentages of the property's total revenues and incentive payments based on certain measures of hotel income. Additional fees are generated from the rendering of specific services such as accounting, construction, design and purchasing. The Company's fixed management fee percentages are generally 2.0% to 4.0% of total revenues before giving consideration to performance related incentive payments. Terms of the management agreements vary with expiration dates ranging from 2003 to 2014. The Company intends to pursue new management opportunities to capitalize on its management infrastructure, particularly in the full-service hotel segment. During 2002, the Company added four new full-service management agreements. On January 1, 2002, the Company converted its existing lease agreements on 19 AmeriSuites hotels with Equity Inns, Inc. ("Equity Inns") to management agreements. The management agreements provide for a subsidiary of Prime to share in the cash flow above and to fund deficits below certain thresholds. The agreements also require the Prime subsidiary to guarantee a minimum return to Equity Inns equal to the minimum rent under the prior lease agreement. AGREEMENTS AS FRANCHISEE The Company has entered into franchise licensing agreements with third party franchisors, primarily on its full-service hotels which agreements typically have a ten year term and allow the Company to benefit from franchise brand recognition and loyalty. The franchise agreements require the Company to pay monthly fees, to maintain certain standards and to implement certain capital programs. The payment of monthly fees, which typically total 8% to 9% of room revenues, cover royalties and the costs of marketing and reservation services provided by the franchisors. Franchise agreements, when initiated, generally provide for an initial fee in addition to monthly fees payable to the franchisor. The Company believes it currently enjoys generally good relationships with its franchisors. 13 WORKING CAPITAL The Company believes that its operating cash flow is sufficient to cover its current operational and capital needs. The Company also intends to generate proceeds from asset sales, to be utilized for hotel portfolio growth, repayment of debt and/or the repurchase of its common shares. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SEASONALITY As the majority of the Company's properties are focused on the business traveler, the second and third quarters of the year are generally the strongest due to business travel patterns. COMPETITION The Company operates hotel properties in areas that contain numerous other hotels, the majority 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, 2002, the Company employed approximately 6,700 full and part time employees. Certain of the Company's employees are covered by collective bargaining agreements. The Company believes that relations with its employees are generally good. ENVIRONMENTAL MATTERS The Portfolio is 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 environmental liability that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows. ADDITIONAL INFORMATION We maintain a website at http://www.primehospitality.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K and our web address is included as an inactive textual reference only. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. 14 ITEM 3. LEGAL PROCEEDINGS The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation, that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows. On August 18, 1999, plaintiff Nick Pourzal, a former employee of the Company, filed a complaint against the Company in the United States District Court for the Virgin Islands. The complaint alleges that the Company contracted in 1978 to pay plaintiff ten percent of the pre-tax earnings on any use or sale of a 16.354-acre property on St. Thomas, U.S. Virgin Islands known as the "Gilbert Land," and that the Company breached this contract by making commercial use of the Gilbert Land without paying the plaintiff. On January 13, 2003, plaintiff filed a motion for leave to file a second amended compliant, to add claims for (i) conspiracy to violate the Virgin Islands Plant Closing Act, (ii) prima facie tort and (iii) to confirm an arbitration award relating to the Company's termination of plaintiff's employment in 1999. The complaint seeks compensatory, incidental and consequential damages, interest and costs, a declaratory judgment that the Company is liable for payment of ten percent of pre-tax earnings on use or sale of the Gilbert Land, and attorneys' fees and expenses. Prime believes that the plantiff's action is without merit and intends to vigorously defend this case. In August 2002, the Company paid $8.9 million from cash on hand to Sholodge due in connection with a damage award decision by the American Arbitration Association rendered on June 26, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Company during the quarter ended December 31, 2002. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, par value $.01 per share, trades on the New York Stock Exchange (the "NYSE") under the symbol "PDQ." As of March 14, 2003 there were 45,083,503 shares of common stock outstanding. The following table sets forth the reported high and low closing sales prices of the common stock on the NYSE.
HIGH LOW ---- --- Year Ended December 31, 2002 First Quarter ................... $13.72 $10.52 Second Quarter .................. 13.66 11.90 Third Quarter ................... 12.30 8.20 Fourth Quarter .................. 9.40 7.55 Year Ended December 31, 2001 First Quarter ................... 14.00 10.50 Second Quarter .................. 12.16 9.43 Third Quarter ................... 12.30 7.86 Fourth Quarter .................. 11.50 8.60
As of March 14, 2003, the closing sales price of the common stock on the NYSE was $5.25 per share, and there were approximately 1,614 holders of record of common stock. The Company has not declared any cash dividends on its common stock during the two prior fiscal years 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. In addition, the Company is prohibited by the terms of certain debt agreements from paying cash dividends. 16 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The table below presents selected consolidated financial data derived from the Company's historical financial statements for the five years ended December 31, 2002. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Total revenues (a) ....................................... $ 398,963 $ 471,022 $ 541,764 $ 535,883 $ 455,686 Income from continuing operations before the cumulative effect of change in accounting principle, discontinued operations and extraordinary items (a) . 6,180 38,423 60,334 37,751 52,385 Cumulative effect of a change in accounting principle (net of income taxes) (b) ........................... -- -- -- (5,315) -- Discontinued operations (a): Income from discontinued operations, net of income tax ....................................... 422 1,846 2,480 2,446 1,462 Gain on disposal, net of income taxes ............... 1,328 -- -- -- -- Extraordinary items-gains/(losses) on discharge of indebtedness (net of income taxes) .................. (11,797) (76) (314) -- -- Net income (loss) ........................................ (3,867) 40,193 62,500 34,882 53,847 Pro-forma effect of change in accounting principle (net of income taxes) (c) ........................... -- -- -- -- (3,788) Pro-forma net income after taxes (c) ..................... $ (3,867) $ 40,193 $ 62,500 $ 34,882 $ 50,059 NET INCOME (LOSS) PER COMMON SHARE: Basic .................................................. (.09) $ .90 $ 1.37 $ .68 $ 1.04 Diluted ................................................ (.09) $ .88 $ 1.34 $ .67 $ 1.00 PRO-FORMA NET INCOME PER COMMON SHARE (b): Basic .................................................. -- -- -- -- $ .97 Diluted ................................................ -- -- -- -- $ .94 BALANCE SHEET DATA: Total assets ........................................... $ 1,119,649 $ 1,156,770 $ 1,165,872 $ 1,328,779 $ 1,408,398 Long-term debt, net of current portion ................. 284,017 309,736 340,987 543,485 582,031 Stockholders' equity ................................... 706,676 707,941 668,100 632,000 641,045
(a) During 2002, in compliance with SFAS 144 the Company has reported revenues and expenses from assets sold during 2002 as discontinued operations for each period presented in this Annual Report on Form 10-K. (b) Cumulative effect of a change in accounting principle of $5.3 million (net of income taxes) in 1999, relates to the adoption by the Company of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). The Company adopted SOP 98-5 on January 1, 1999, and was required to write-off any unamortized pre-opening costs that remained on the balance sheet. (c) Pro-forma amounts reflect the effect on net income and earnings per share had the Company written off pre-opening costs pursuant to SOP-98-5 in 1998. 17 Unaudited selected consolidated quarterly financial data for the years ending December 31, 2002 and 2001 follow (in thousands, except per share amounts):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, THREE MONTHS ENDED (A) 2002 2002 2002 2002 ----------- ----------- ------------- ------------ Total revenue ................................................... $ 96,451 $ 109,722 $ 103,373 $ 89,417 Operating income ................................................ 7,352 16,770 9,676 (191) Income (loss) before discontinued operations and extraordinary items (net of taxes) ......................................... 516 3,110 5,578 (3,024) Discontinued operations (net of taxes) .......................... 258 268 1,224 -- Extraordinary items (net of taxes) .............................. -- (7,863) (3,934) -- Net income (loss) ............................................... 774 (4,485) 2,868 (3,024) Earnings per common share: Basic: Income (loss) before discontinued operations and extraordinary items (net of taxes) ......................................... $ .01 $ .07 $ .11 $ (.06) Discontinued operations (net of taxes) .......................... .01 -- .03 -- Extraordinary items (net of taxes) .............................. -- (.17) (.09) -- Earnings (loss) per share ....................................... $ .02 $ (.10) $ .05 $ (.06) Diluted: Income (loss) before discontinued operations and extraordinary items (net of taxes) ......................................... $ .01 $ .07 $ .11 $ (.06) Discontinued operations (net of taxes) .......................... .01 -- .03 -- Extraordinary items (net of taxes) .............................. -- (.17) (.09) -- Earnings (loss) per share ....................................... $ .02 $ (.10) $ .05 $ (.06)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, THREE MONTHS ENDED (A) 2001 2001 2001 2001 ----------- ----------- ------------- ------------ Total revenue ................................................... $ 127,714 $ 130,248 $ 114,335 $ 98,725 Operating income ................................................ 22,921 25,848 15,284 7,561 Income before discontinued operations and extraordinary items (net of taxes) ............................................... 8,972 20,165 4,800 4,486 Discontinued operations (net of taxes) .......................... 634 567 334 311 Extraordinary items (net of taxes) .............................. -- (110) 34 -- Net income ...................................................... 9,606 20,622 5,168 4,797 Earnings per common share: Basic: Income before discontinued operations and extraordinary items (net of taxes) .............................................. $ .20 $ .45 $ .11 $ .10 Discontinued operations (net of taxes) .......................... .01 .01 .01 .01 Extraordinary items (net of taxes) .............................. -- -- -- -- Earnings per share .............................................. $ .21 $ .46 $ .12 $ .11 Diluted: Income before discontinued operations and extraordinary items (net of taxes) .............................................. $ .20 $ .44 $ .10 $ .10 Discontinued operations (net of taxes) .......................... .01 .01 .01 .01 Extraordinary items (net of taxes) .............................. -- -- -- -- Earnings per share .............................................. $ .21 $ .45 $ .11 $ .11
(a) Amounts were restated from previously reported amounts due to the accounting for discontinued operations in compliance with SFAS 144. 18 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 Prime is an owner, manager and franchisor of hotels, with 245 hotels in operation containing 31,426 rooms located in 33 states (the "Portfolio") as of December 31, 2002. Prime controls three hotel brands -- AmeriSuites (R), Wellesley Inns & Suites (R) and Prime Hotels and Resorts (R) -- and operates a portfolio of full-service hotels under franchise agreements with national hotel chains. The Company operates and has ownership interests in 126 hotels (the "Owned Hotels"), operates 28 hotels under lease agreements primarily with real estate investment trusts (the "Leased Hotels"), manages 45 hotels for third parties (the "Managed Hotels"), and franchises 46 hotels which it does not operate (the "Franchised Hotels"). The Portfolio is comprised of 149 AmeriSuites hotels, 73 Wellesley Inns & Suites hotels, one Prime Hotels and Resorts hotel and 22 non-proprietary brand hotels. The Company's growth has been focused on the development of its proprietary brands. Through the development of its proprietary brands, Prime has transformed itself from an owner/operator into a more diversified company with ownership, franchise and management interests and has positioned itself to generate additional revenues with minimal capital investment. Prime's strategy is also focused on opportunistic hotel acquisitions to take advantage of depressed values while leveraging the Company's operating infrastructure. With approximately 200 hotels under management, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets. Operating results for 2002 were impacted by the weakness in the economy which had a significant negative impact on business travel and the demand for hotel rooms. Results were further impacted by concerns about airline safety and inconvenience. As a result, for the year ended December 31, 2002, revenues from comparable Owned and Leased hotels declined by 9.2% and gross operating profits on these hotels declined by 16.7%. Overall, for the year ended December 31, 2002, revenue declined by 15.3% to $399.0 million and EBITDA decreased by 32.9% to $73.3 million due to the results of the comparable Owned and Leased hotels and the effect of asset sales and lease terminations. Certain statements in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information about Prime's possible or assumed future results of operations and statements preceded by, followed by or that include the words "believe," "except," "anticipate," "intend," "plan," "estimate," or similar expressions, or the negative thereof. 19 Actual results may differ materially from those expressed in these forward-looking statements. Readers of this Form 10-K are cautioned not to unduly rely on any forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Form 10-K or incorporated herein by reference, could cause results to differ materially from those expressed in such forward-looking statements: competition within each of the Company's business segments in areas such as access, location, quality or accommodations and room rate structures; the balance between supply of and demand for hotel rooms and accommodations; the Company's continued ability to obtain new operating contracts and franchise agreements; the Company's ability to develop and maintain positive relations with current and potential hotel owners and other industry participants; the level of rates and occupancy that can be achieved by such properties and the availability and terms of financing; the ability of the Company or its franchisees to maintain the properties in a first-class manner, including meeting capital expenditure requirements; changes in travel patterns, taxes and government regulations which influence or determine wages, prices, construction procedures and costs; the effect of international, national and regional economic conditions that will affect, among other things, demand for products and services at the Company's hotels; government approvals, actions and initiatives including the need for compliance with environmental and safety requirements, and change in laws and regulations or the interpretation thereof and the potential effects of tax legislative action; and other risks described from time to time in our filings with the SEC. Although the Company believes the expectations reflected in these forward-looking statements are based upon reasonable assumptions, no assurance can be given that Prime will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, the Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 20 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001 Hotel revenues consist of lodging revenues (which consist primarily of room, telephone and vending revenues) and food and beverage revenues. Hotel revenues for the year ended December 31, 2002 decreased by $73.1 million, or 16.1%, from $455.3 million in 2001 to $382.2 million in 2002. The decrease was due primarily to a 9.2% decline in revenues from comparable Owned and Leased hotels, and the impact of asset sales and lease terminations. The Company operates three product types: its proprietary AmeriSuites which are upscale all-suites hotels; its proprietary Wellesley Inns & Suites which are mid-price limited service hotels and its full-service hotels which are primarily upscale hotels operated under national franchises. The following table illustrates the REVPAR ("Revenue Per Available Room") change, by segment in 2002 for the Owned and Leased hotels, which were operated for comparable periods in 2002 and 2001.
YEARS ENDED DECEMBER 31, 2002 2001 % CHANGE ---- ---- -------- AMERISUITES Occupancy 61.8% 63.6% (1.8pts.) ADR $ 71.89 $ 76.03 (5.4%) REVPAR $ 44.44 $ 48.37 (8.1%) WELLESLEY INNS & SUITES Occupancy 54.7% 60.2% (5.5pts.) ADR $ 58.59 $ 59.99 (2.3%) REVPAR $ 32.06 $ 36.15 (11.3%) FULL-SERVICE HOTELS Occupancy 64.8% 67.9% (3.1pts.) ADR $105.52 $113.02 (6.6%) REVPAR $ 68.40 $ 76.78 (10.9%) TOTAL Occupancy 60.2% 63.1% (2.9pts.) ADR $ 72.11 $ 75.68 (4.7%) REVPAR $ 43.38 $ 47.79 (9.2%)
The REVPAR decreases reflect the weak economy compounded by the effects of travel safety concerns. The decline was comprised of a decrease in both occupancy and average daily rate ("ADR"). Key markets affected were Atlanta, Chicago, Dallas, the Northeast and South Florida. Management, franchise and other fees consist primarily of base and incentive fees earned under management agreements, royalties earned under franchise agreements and sales commissions earned by the Company's national sales group. Management, franchise and other fees increased by $1.3 million, or 9.8%, from $13.0 million in 2001 to $14.3 million in 2002. The increase was primarily due to an increase in franchise royalty fees derived from hotels sold 21 to franchisees and new hotel openings and an increase in management fees due to new management agreements. Rental and other consists of rental income, interest on mortgages and notes receivable and other miscellaneous operating income. Rental and other decreased by $0.2 million, or 9.0% from $2.7 million in 2001 to $2.5 million in 2002 due to reductions in miscellaneous income. Hotel operating expenses which consist of all direct costs related to the operation of the Company's properties (lodging, food & beverage, administration, selling & advertising, utilities and repairs & maintenance) decreased by $31.5 million or 12.8% in 2002 from $246.0 million to $214.5 million as a result of the decrease in hotel revenue. Hotel operating expenses, as a percentage of hotel revenues, increased from 54.0% in 2001 to 56.1% in 2002 due to the decline in revenues. Rent and other occupancy expenses consist primarily of rent expense, property insurance and real estate and other taxes. Rent and other occupancy expenses decreased by $4.8 million, or 5.5%, from $87.1 million in 2001 to $82.3 million in 2002 due primarily to the termination of leases on eight hotels with MeriStar Hospitality. General and administrative expenses consist primarily of centralized management expenses associated with operating the hotels, brand marketing expenses, franchise sales and support costs and general corporate expenses. General and administrative expenses were relatively stable increasing by just $0.1 million, from $28.8 million in 2001 to $28.9 million in 2002. Depreciation and amortization expense increased by $2.1 million, or 5.7%, from $37.5 million in 2001 to $39.7 million in 2002 primarily due to capital additions at existing hotels partially offset by the disposal of hotel properties during 2002. Investment income increased by $0.6 million, or 27.6%, from $2.2 million in 2001 to $2.9 million in 2002 primarily due to higher cash balances offset by lower interest rates. Interest expense decreased by $6.1 million, or 18.0%, from $33.6 million in 2001 to $27.6 million in 2002, primarily due to the paydowns of debt resulting from asset sales and operating cash flows, the refinancing of the 9 3/4% Notes with the new 8 3/8% Notes and the retirement of the 9 1/4% Notes funded primarily by the new credit facility. Other income consists of property transactions and other items which are not part of the Company's recurring operations. Other income for 2002 consisted of gains on property sales on hotels where the Company retained management partially offset by a $4.5 million litigation charge. Other income in 2001 consisted of net gains related to the disposition of properties and recognition of the remaining unamortized portion of the deferred gain related to the termination of the MeriStar hotel leases totaling $36.3 million, partially offset by losses of $4.3 million on the sale of marketable securities and valuation adjustments relating primarily to vacant land parcels of $6.7 million. 22 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 Hotel revenues consist of lodging revenues (which consist primarily of room, telephone and vending revenues) and food and beverage revenues. Hotel revenues for the year ended December 31, 2001 decreased by $66.6 million, or 12.8%, from $521.9 million in 2000 to $455.3 million in 2001. The decrease was due primarily to a 7.9% decline in revenues from comparable Owned and Leased hotels, and the impact of asset sales and lease terminations. The Company operates three product types: its proprietary AmeriSuites which are upscale all-suites hotels; its proprietary Wellesley Inns & Suites which are mid-price limited service hotels and its non-proprietary brand hotels which are primarily upscale full-service hotels. The following table illustrates the REVPAR ("Revenue Per Available Room") change, by segment in 2001 for the Owned and Leased hotels, which were operated for comparable periods in 2001 and 2000.
YEARS ENDED DECEMBER 31, 2001 2000 % CHANGE ---- ---- -------- AMERISUITES Occupancy 64.3% 68.3% (4.0 pts.) ADR $ 78.42 $ 80.20 (2.2)% REVPAR $ 50.42 $ 54.78 (7.9)% WELLESLEY INNS & SUITES Occupancy 60.6% 63.6% (3.0 pts.) ADR $ 60.11 $ 60.29 (0.3)% REVPAR $ 36.44 $ 38.35 (5.0)% NON-PROPRIETARY BRANDS Occupancy 66.6% 73.4% (6.8 pts.) ADR $110.91 $112.90 (1.8)% REVPAR $ 73.87 $ 82.87 (10.9)% TOTAL Occupancy 63.3% 67.4% (4.1 pts.) ADR $ 76.79 $ 78.32 (2.0)% REVPAR $ 48.61 $ 52.79 (7.9)%
The REVPAR decreases reflect the weak economy compounded by the effects of the September 11th terrorist attacks. The decline was comprised of a decrease in occupancy of 4.1 percentage points and a decrease in average daily rate ("ADR") of 2.0%. Management, franchise and other fees consist primarily of base and incentive fees earned under management agreements, royalties earned under franchise agreements and sales commissions earned by the Company's national sales group. Management, franchise and other fees decreased by $2.5 million, or 16.3%, from $15.5 million in 2000 to $13.0 million in 2001. The decrease was primarily due to decreased base and incentive management fees associated with the Managed Hotels partially offset by an increase in franchise royalty fees derived from hotels sold to franchisees and new hotel openings. 23 Rental and other consists of rental income, interest on mortgages and notes receivable and other miscellaneous operating income. Rental and other decreased by $1.6 million from $4.3 million in 2000 to $2.7 million in 2001. This decrease is primarily due to the settlement of various cash flow mortgages and notes receivable in 2000. Hotel operating expenses which consist of all direct costs related to the operation of the Company's properties (lodging, food & beverage, administration, selling & advertising, utilities and repairs & maintenance) decreased by $19.9 million during 2001 to $246.0 million as a result of the decrease in hotel revenue. Hotel operating expenses, as a percentage of hotel revenues, increased from 50.9% in 2000 to 54.0% in 2001 due to the decline in revenues at our hotels. Rent and other occupancy expenses consist primarily of rent expense, property insurance and real estate and other taxes. Rent and other occupancy expenses increased by $4.2 million, or 5.0%, from $82.9 million in 2000 to $87.1 million in 2001 due primarily to the impact of operating 27 leased properties for a full year in 2001 versus six months in 2000. 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 the hotels and general corporate expenses. General and administrative expenses increased by $344,000, or 1.2%, from $28.4 million in 2000 to $28.8 million in 2001, due primarily to increased brand advertising, which rose from $6.3 million in 2000 to $7.3 million in 2001 partially offset by decreases due to cost containment programs. Depreciation and amortization expense decreased by $2.6 million, or 6.4%, from $40.1 million in 2000 to $37.5 million in 2001. This decrease was primarily due to the disposal of five hotel properties during 2001 and the full year effect of the properties sold in 2000. Investment income increased by $308,000, or 15.9%, from $1.9 million in 2000 to $2.2 million in 2001 primarily due to higher cash balances and interest earned on security deposits on the leased hotels acquired from Sholodge in July 2000. Interest expense decreased by $7.7 million, or 18.6%, from $41.3 million in 2000 to $33.6 million in 2001, primarily due to the paydowns of debt resulting from asset sales and operating cash flows. The Company capitalized $1.6 million and $2.3 million of interest in 2001 and 2000, respectively. Excluding the impact of capitalized interest and the amortization of deferred loan fees, cash interest expense declined by $10.7 million, or 24.9%, from $43.0 million in 2000 to $32.3 million in 2001. Other income consists of property transactions and other items, which are not part of the Company's recurring operations. Other income in 2001 consisted of net gains related to the disposition of properties and recognition of the remaining unamortized portion of the deferred gain related to the termination of the MeriStar hotel leases totaling $36.3 million, partially offset by losses of $4.3 million on the sale of marketable securities and valuation adjustments relating primarily to vacant land parcels of $6.7 million. Other income in 2000 consisted of net gains on disposition of property of $13.9 million. 24 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2002, the Company had cash and cash equivalents of $25.9 million. The Company also had $46.9 million of availability under its credit facility. The Company intends to utilize its capacity to grow its brands and brand infrastructure and may consider acquiring full-service or limited service hotels or hotel brands. The Company's major sources of cash for 2002 were net borrowings of $303.6 million, cash flows from operations of $54.0 million and net proceeds from asset sales of $56.0 million. The Company's major uses of cash during the period were debt repayments of $345.0 million, capital expenditures of $33.6 million and an investment in a joint venture of $23.1 million. Sources of Capital. The Company has undertaken a strategic initiative to diversify its operations. As part of this strategy, the Company has disposed of certain hotel real estate while retaining the franchise rights and, in some cases, management rights. Prime has used the proceeds primarily to reduce debt and fund brand growth. At December 2002, the Company's debt to the last twelve months EBITDA ratio was 3.9 times and its debt to book capitalization was 29.0%. In 2002, the Company sold three AmeriSuites, three Wellesley Inns and a full-service hotel for gross proceeds of $60.0 million. The Company retained the franchise rights to the AmeriSuites and Wellesley Inns under 20-year franchise agreements. The Company also entered into agreements to manage two AmeriSuites hotels which were sold. On April 29, 2002, the Company completed the issuance of $200 million of the 8 3/8% Notes. The Company used the net proceeds of the issuance of the 8 3/8% Notes, together with available cash, to redeem all of its $190.0 million of outstanding 9 3/4% Notes. The redemption price was $1,050 per $1,000 principal amount of the 9 3/4% Notes plus accrued and unpaid interest. The 8 3/8% Notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The 8 3/8% Notes mature in April 2012. In July, 2002, Prime retired its $125 million revolving credit facility which was to expire in December 2002 and entered into a new $125 million credit facility with a syndicate of financial institutions (the "Credit Facility") which expires in August 2006. The Company had borrowings of $70.0 million under the Credit Facility at LIBOR +2.25%, or approximately 4.1%, as of December 31, 2002. The Credit Facility consists of a four year, $125 million revolving line of credit and is secured by the equity interests of certain of Prime's subsidiaries. In addition, under certain circumstances the Company has the right to increase the Credit Facility by an aggregate amount up to $100 million either through a term loan or an increase in the revolving line of credit. The Credit Facility contains loan covenants customary for a credit facility of this size and nature, including but not limited to, limitation on making capital expenditures, selling or transferring assets, making certain investments (including acquisitions), repurchasing shares and liens. In addition, the Company must maintain a debt to EBITDA ratio of 4.5 times (4.25 times after June 30, 2003) and an EBITDA to interest ratio of 2.35 times (2.50 times after June 30, 2003). The Company was in compliance with all covenants at December 31, 2002. However, 25 there can be no assurance that the Company will continue to be in compliance with these covenants. In August 2002, Prime redeemed all of its $103.5 million of outstanding 9 1/4% Notes. The redemption price was 103.083% of the principal amount of the 9 1/4% Notes, plus accrued and unpaid interest. Prime funded the redemption with borrowings under the Credit Facility plus cash on hand. Uses of Capital. During 2002, the Company retired $9.3 million of debt scheduled to mature in 2002. The Company has no significant maturities of debt until 2006. The Company intends to continue the growth of its brands primarily through franchising and, therefore, new construction spending will be limited. During 2002, the Company spent $5.1 million to complete the construction of an AmeriSuites hotel. There are currently no new construction projects underway. In addition, the Company also spent $28.5 million on other capital additions in 2002 which primarily consisted of capital improvements at its owned and leased hotels, a new reservation system for Prime's proprietary brands and a new purchasing and accounting system. The Company plans to fund capital improvements at existing hotels primarily with internally generated cash flow. As part of its growth, the Company will look to acquire hotels where values are temporarily depressed and potential upside exists. In December 2002, Prime Meadowlands, L.L.C., an entity in which Prime held a 50% interest, acquired the Sheraton Meadowlands Hotel and Conference Center in East Rutherford, NJ. The hotel is managed by Prime and will continue to operate under the Sheraton brand name. In January 2003, Nova Scotia Company, an entity in which Prime held a 50% interest, acquired the Quebec City Holiday Inn Select. Located in the Lower Town district of Quebec City, the hotel is managed by Prime and will continue to operate under the Holiday Inn brand name. Prime's partner in both acquisitions is United Capital Corp., an entity in which A.F. Petrocelli, Prime's chairman and chief executive officer, has a controlling ownership interest. Under the operating agreement, all significant operating and capital decisions are made jointly and operating profits and losses are allocated based on ownership interest. In March 2003, Ark Meadowlands, Inc., an unrelated third party, purchased a 20% interest at cost in Prime Meadowlands, LLC and Ark Quebec, Inc., an unrelated third party, purchased a 20% interest at cost in Nova Scotia Company. The purchase reduced Prime and United Capital's ownership interest to 40% each in both entities. Non-recourse mortgage debt may also be added to both entities. There is currently no debt in either joint venture. In August 2002, the Company paid $8.9 million from cash on hand to Sholodge due in connection with a damage award decision of the American Arbitration Association rendered on June 28, 2002. 26 CRITICAL ACCOUNTING POLICIES Prime's discussion and analysis of its financial condition and results of operations are based upon Prime's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Prime to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. Prime bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Prime believes the following critical accounting policies affect more significant judgements and estimates used in the preparation of its consolidated financial statements. 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. Expenditures for maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. Construction in progress represents costs incurred in the development of hotels. Such costs include construction costs and capitalized interest. The Company reviews each of its assets held for use for which indicators of impairment are present to determine whether the carrying amount of the asset will be recovered. The Company recognizes impairment if the future undiscounted cash flows (before interest charges) are less than the carrying amount. Assets held for sale are recorded at the lower of carrying value or fair value less costs to sell. LONG-LIVED ASSETS In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" SFAS 144, which supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". However it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used". In addition, the Statement provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset or asset group to be disposed of other than by sale (e.g. abandoned) be classified as "held 27 and used" until it is disposed of, and establishes more restrictive criteria to classify an asset or asset group as "held for sale". SFAS 144 superseded APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Transactions. SFAS 144 extended the reporting of a discontinued operation to a "component of an entity". Therefore, the operations of assets held for sale or assets sold are required to be presented as discontinued operations in the Company's statement of operations. The Company adopted this pronouncement on January 1, 2002. This resulted in the Company having to reclassify certain revenues and expenses to discontinued operations for sold properties where the Company did not retain management. This adoption had no impact on the Company's net income or financial position. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in earnings (loss) and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet of the Company and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 40 years. As of December 31, 2002, investments in unconsolidated joint ventures consisted of the Company's 50% ownership interest in one hotel. There is no joint venture debt as of December 31, 2002. INSURANCE PROGRAMS The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay. The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents, which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company. Provisions have been made in the consolidated financial statements which represent the expected future payments based on the estimated ultimate cost for incidents, less insured amounts, incurred through the balance sheet date and are included in other current and other long-term liabilities based on the expected payment dates. REVENUE RECOGNITION Room revenue and other revenues are recognized when earned. Management and franchise fee revenues are recognized when all material services or conditions relating to the respective property or franchisee have been substantially performed or satisfied by the Company. Such 28 revenues, when recognized, are included in management, franchise and other fees on the accompanying consolidated financial statements. Gains and losses resulting from sales of hotels are recorded in full when title is conveyed to the buyer and when various criteria are met relating to the buyer's financial commitment and any subsequent involvement by the Company with respect to the hotels being sold. The Company's sales of hotels are sometimes accompanied by a leaseback of the facilities under operating lease arrangements. Such sales are recognized when the above sales criteria are met and certain specific criteria are met relating to the lease terms. Related profit is deferred and is recognized as income over the remaining lease term. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November of 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Company's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently in the process of evaluating the impact that this Interpretation will have on its financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than September 30, 2003. The Company does not believe that this Interpretation will have a significant impact on the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates from its floating rate debt arrangements. At December 31, 2002, the Company had $285.1 million of debt outstanding of which $215.1 million bears interest at fixed rates. The interest rate on the Company's Credit Facility, under which $70 million was outstanding at December 31, 2002, is variable at a rate of LIBOR + 2.25%. A hypothetical 100 basis point adverse move (increase) on short-term interest rates on the floating rate debt outstanding at December 31, 2002 would adversely affect Prime's annual interest cost by approximately $0.7 million assuming borrowed amounts under the Credit Facility remained at $70 million. 29 SUMMARY OF INDEBTEDNESS Combined aggregate principal maturities of debt as of December 31, 2002, are as follows (in thousands):
8 3/8% CREDIT SCHEDULED NOTES FACILITY AMORTIZATION TOTAL -------- -------- ------------ -------- 2003 $ -- $ -- $ 1,052 $ 1,052 2004 -- -- 1,122 1,122 2005 -- -- 229 229 2006 -- 70,000 250 70,250 2007 -- -- 272 272 THEREAFTER 200,000 -- 12,144 212,144 -------- ------- -------- -------- $200,000 $70,000 $ 15,069 $285,069 ======== ======= ======== ========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements in Item 15. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of the Company:
NAME AGE POSITIONS ---- --- --------- A.F. Petrocelli ............ 59 President, Chief Executive Officer and Chairman of the Board of Directors Lawrence N. Friedland(1) ... 80 Director Allen Kaplan(1) ............ 53 Director Howard M. Lorber(1) ........ 54 Director Herbert Lust, II(1) ........ 76 Director Jack H. Nusbaum ............ 62 Director Douglas W. Vicari .......... 43 Director, Senior Vice President and Chief Financial Officer Stephen M. Kronick ......... 48 Senior Vice President/Hotel Operations Terry P. O'Leary ........... 47 Senior Vice President/Business Development Chester Reed ............... 49 Senior Vice President/Hotel Operations Vito Stellato .............. 50 Senior Vice President/Human Resources Jeffrey T. Williams ........ 56 Senior Vice President/Franchise Sales and Development John Capone ................ 51 Vice President/Hotel Operations Richard T. Szymanski ....... 45 Vice President/Finance
(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: A.F. Petrocelli has been a Director since 1992 and was a member of the Compensation and Audit Committee from 1993 to 1998. Mr. Petrocelli has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since 1998. Mr. Petrocelli has been 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., Boyar Value Fund, Inc. and Philips International Realty Corp. Lawrence N. Friedland has been a Director of the Company and a member of the Compensation and Audit Committee since 1998. Mr. Friedland has been of counsel to the law firm of Olshan Grundman Frome Rosenzweig and Wolosky since 2001. Prior to that he had been a partner in the law firm of Hoffinger Friedland Dobrish & Stern, P.C. for more than the past 25 years. He has been a director of the Apple Bank for Savings since 1990, a director of Lutron Electronics Co., Inc. since 1961, a member of the Advisory Committee of Brown Harris Stevens, LLC since 1995 and a general partner, manager or director of numerous real estate entities. Allen S. Kaplan has been a Director of the Company since February 2001 and a member of the Compensation and Audit Committee since 2002. Mr. Kaplan has been Vice President and Chief Operating Officer of Team Systems, Inc. for more than the past five years. He also is currently Vice President of the Metropolitan Taxicab Board of Trade and a director of Ameritrans Capital Corp. 31 Howard M. Lorber has been a Director of the Company and a member since 1994 and Chairman since 1998 of the Compensation and Audit Committee. Mr. Lorber has been Chairman of the Board and Chief Executive Officer of Nathan's Famous, Inc. for more than the past five years and Chairman of the Board of Directors and Chief Executive Officer of Hallman & Lorber Associates, Inc., for over five years. He has been a director, President and Chief Operating Officer of New Valley Corporation for more than five years. He has been a director of and member of the Audit Committee of United Capital Corp. for more than the past five years. Since 2001, he is a Director of and President and Chief Operating Officer of Vector Group Ltd. Mr. Lorber is also the Chairman of Ladenburg Thalmann Financial Services and serves as a member of the Compensation Committee of that company. Herbert Lust, II has been a Director since 1992 and a member of the Compensation and Audit Committee of the Company since 1993. 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. Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman of the law firm of Willkie Farr & Gallagher, where he has been a partner for more than twenty-five years. He also is a director of W.R. Berkley Corporation, Neuberger Berman, Inc., Strategic Distribution, Inc. and The Topps Company, Inc. Douglas W. Vicari has been a Director of the Company since 1999 and Senior Vice President and Chief Financial Officer of the Company since 1998. Stephen M. Kronick has been a Senior Vice President of the Company since 1999. Prior to that he held the position of Vice President of the Company for more than one year. Chester Reed became a Senior Vice President of the Company in 2002. From 2000 until joining the Company he served as President and Chief Operating Officer of Presidian Destinations, Ltd. From 1999 until 2000 he served as Vice President of Operations for Bristol Hotel & Resorts. Prior to that he served as a Regional Manager for LaQuinta Inns, Inc. for more than one year. Terry P. O'Leary has been a Senior Vice President of the Company since 1998. Vito Stellato became a Senior Vice President of the Company in 2003. In 2003, he was a business consultant with Turtle Creek Consulting Group, LLC from 1998 through 2001 he was the Senior Vice President of Human Resources for LaQuinta Inns, Inc. Jeffrey T. Williams became a Senior Vice President of the Company in 2001. From 2000 until joining the Company, he held the position of Senior Vice President of Global Development for Meineke. In June 1998, he founded JTW Global Franchise Systems and serves as its President. Prior to that he held the position of Senior Vice President and Managing Director of International development for Cendant Corporation (HFS, Inc.) for more than one year. 32 John Capone has been a Vice President of Hotel Operations since February 2003. Prior to that, he was a Regional Vice President of Operations from April of 1999 to February 2003, and Regional Vice President of Sales from March 1998 to April 1999. Richard T. Szymanski has been a Vice President of the Company for more than five years. ITEM 11. EXECUTIVE COMPENSATION There are incorporated in this Item 11 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Executive Compensation," "Compensation Pursuant to Plans," "Other Compensation," "Compensation of Directors," and "Termination of Employment and Change of Control Agreements". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There are incorporated in this Item 12 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Principal Shareholders" and "Security Ownership of Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are incorporated in this Item 13 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the caption "Certain Relationships and Related Transactions." ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this Annual Report on Form 10-K, the Company under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Exchange Act). Based upon that evaluation, the Company's Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in Company's Exchange Act filings. 33 PART IV ITEM 15. 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 Form 10-K. 2. Exhibits 2(a) Reference is made to the Contract of Purchase and Sale between Hillsborough Associates, Meriden Hotel Associates, L.P., Wellesley I, L.P., Multi-Wellesley Limited Partnership and the Company, dated March 6, 1996, filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference. (b) Reference is made to Consent of the Holders Thereof to the Purchase by the Company of the Outstanding First Mortgage Notes filed as an Exhibit to the Company's 8-K, dated March 21, 1996, which is incorporated herein by reference. (c) Reference is made to the Agreement and Plan of Merger as of July 25, 1997 by and among Prime Hospitality Corp., PH Sub Corporation and Homegate Hospitality, Inc. filed as an Exhibit to the Company's Form S-4, dated October 24, 1997, which is incorporated herein by reference. (d) Reference is made to the form of Amended and Restated Purchase and Sale Agreement between Prime Hospitality Corp., as seller and Equity Inns Partnership, L.P., as purchaser, dated December 2, 1997, filed as an Exhibit to the Company's Form 8-K dated December 11, 1997, which is incorporated herein by reference. (e) Reference is made to the form of Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and Equity Inns Partnership, L.P., as purchaser, dated June 26, 1998, filed as an Exhibit to Company's Form 10-Q, dated June 30, 1998, which is incorporated herein by reference. (f) Reference is made to the Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and Marriott International, Inc. as purchaser, dated September 15, 1999 which is incorporated herein by reference. (g) Reference is made to the First Amendment dated December 18, 1999, to Purchase and Sale Agreement between Prime Hospitality Corp. and Marriott International, Inc., dated September 15, 1999 which is incorporated herein by reference. (h) Reference is made to the Sale and Purchase Agreement between Prime Hospitality Inc. and Sholodge, Inc., dated March 16, 2000 which is incorporated herein by reference. (i) First Amendment to Sale and Purchase Agreement dated July 9, 2000, by and between Sholodge, Inc. and Prime Hospitality Corp. filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference. (j) Lease Agreement Dated as of November 19, 1997 by and between HPT Suite Properties Trust as Landlord, and Suite Tenant, Inc. as Tenant, filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference. 34 (k) First Amendment to Lease Agreement entered March 5, 1999 by and between HPT Suite Properties Trust as landlord and Suite Tenant, Inc. filed as an Exhibit to the Company's. Form 10-K dated March 28, 2000, which is incorporated herein by reference. (l) Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated June 29, 1999 by and between Hospitality Properties Trust as landlord HPT Suites Properties Trust and Sholodge, Inc., Suite Tenant, as tenant filed as an Exhibit to the Company's. Form 10-K, dated March 28, 2000, which is incorporated herein by reference. (m) Third Amendment to Lease Agreement dated March 3, 2000, by and between HPT Suite Properties Trust as Landlord, and Suite Tenant, Tenant, filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference. (n) Fourth Amendment to Lease Agreement and Amendment to Incidental Documents dated May 11, 2000 by and between HPT Suite Properties Trust as Landlord and Suite Tenant, Tenant, filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference. (o) Consent to Assignment, Fifth Amendment to Lease Agreement and Amendment to Incidental Documents dated July 9, 2000 by and among HPT Suites Properties, Suite Tenant, Inc. and Glen Rock Holding Corp. filed as an Exhibit to the Company's Form 10-K, dated March 28, 2000, which is incorporated herein by reference. (p) Operating Agreement of East Rutherford Group, L.L.C., dated as of December 19, 2002, by and among Prime-Meadowlands, L.L.C. and AFP Eighteen Corp. (q) Management Agreement for East Rutherford Sheraton dated December 19, 2002 by and between East Rutherford Group, L.L.C., Owner , and Prime Hospitality Corp., Manager (r) Assignment of Membership Interest dated March 14, 2003 by and between Prime-Meadowlands, L.L.C. and Ark-Meadowlands, Inc. (s) Agreement of Members of 3072929 Nova Scotia Company, dated as of January 8, 2003, by and among 3072929 Nova Scotia Company, Quebec City, Inc., and AFP Nineteen Corp. (t) Assignment of Membership Interest dated March 26, 2003 by and between Quebec City, Inc. and Ark Quebec, Inc. 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 Certificate of Incorporation, As Amended, filed as an Exhibit to the Company's Form 10-QA, dated April 30, 1996, which is incorporated herein by reference. (c) 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 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. (b) Reference is made to the 8 3/8% Senior Secured Subordinated Notes due 2012, dated April 21, 2002, filed as an exhibit to the Company's Form 10-Q, dated May 2002, which is incorporated herein by reference. (c) Reference is made to Credit Agreement, dated as of July 22, 2002, among the Prime Hospitality Corp., the Lenders and Canadian Imperial Bank of Commerce (Agent) filed as an Exhibit to Form 10-Q dated August 14, 2002. 35 10(a) 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. (b) 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. (c) Reference is made to an Amendment regarding the 1995 Employee and Non-Employee Stock Option Plans, incorporated in the Company's proxy statement dated April 13, 1998, whereby 1.8 million shares were made available for distribution which is incorporated herein by reference. (d) Reference is made to Change of Control Agreement, dated May 14, 1998, between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999 which is incorporated herein by reference. (e) Reference is made to Change of Control Agreement, dated May 14, 1998, between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999 which is incorporated herein by reference. (f) Reference is made to Employment Agreement, dated September 14, 1998, between Attilio F. Petrocelli and the Company which is incorporated herein by reference. (g) Reference is made to Change of Control Agreement, dated September 14, 1998, between Atillio F. Petrocelli and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999 which is incorporated herein by reference. (h) Reference is made to the Nonqualified Stock Option Agreement dated October 14, 1998 between A.F. Petrocelli and the Company which is incorporated herein by reference. (j) Reference is made to the Change in Control Agreement, dated October 25, 1999, between Stephen Kronick and the Company which is incorporated herein by reference. (k) Reference is made to the Amendment to Change in Control Agreement, dated March 18, 1999, between A.F. Petrocelli and the Company which is incorporated herein by reference. (l) Reference is made to the Nonqualified Stock Option Agreement dated October 23, 2001 between A.F. Petrocelli and the Company which is incorporated by reference. 36 (21) Subsidiaries of the Company are as follows:
JURISDICTION OF NAME INCORPORATION ---- --------------- AmeriSuites Franchising, Inc. ............... Delaware AmeriSuites Vacation Club, Inc. ............. Delaware Budd Holding Corp. .......................... Delaware Caldwell Holding Corp. ...................... Delaware Clifton Holding Corp. ....................... Delaware Dynamic Marketing Group, Inc. ............... Delaware Edison Holding Corp. ........................ Nevada Fairfield-Meridian Claims Service, Inc. ..... Delaware Flanders Holding Corp. ...................... Delaware Glen Rock Holding Corp. ..................... Delaware Glen Rock Liquor License, Inc. .............. Missouri Haledon Holding Corp. ....................... Delaware KSA Management, Inc. ........................ Kansas Landing Holding Corp. ....................... Delaware Mahwah Holding Corp. ........................ Delaware Market Segments, Incorporated ............... Delaware Maywood Holding Corp. ....................... Delaware Oradell Holding Corp. ....................... Delaware Parsippany Leasing Corp. .................... Delaware Prime Hospitality Franchising, Inc. ......... Delaware Prime Hospitality Management Company, Inc. .. Delaware Prime Hotels & Resorts, Inc. ................ Delaware Republic Motor Inns, Inc. ................... Virginia Ridgewood Holding Corp. ..................... Delaware Roxbury Holding Corp. ....................... Delaware Quebec City, Inc. ........................... Nevada Secaucus Holding Corp. ...................... Delaware Totowa Holding Corp. ........................ Delaware Wayne Holding Corp. ......................... Delaware Wellesley Inn & Suites Franchising, Inc. .... Delaware
(23) Consent of independent auditors. Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have not been filed in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish a copy of such instruments to the Commission upon request. 99.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Certification of VP-Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None 37 PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (ITEM 15(A))
PAGE ---- Report of Independent Auditors F-2 Consolidated Financial Statements: Balance Sheets at December 31, 2002 and 2001 F-3 Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 F-4 Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 F-5 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 F-6 Notes to Consolidated Financial Statements F-7
All 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. F-1 REPORT OF INDEPENDENT AUDITORS 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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Hospitality Corp. and Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". ERNST & YOUNG LLP New York, New York February 11, 2003, except for Note 21, as to which the date is March 26, 2003. F-2 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ........................................................ $ 25,850 $ 26,475 Accounts receivable, net of allowance of $611 and $1,065 in 2002 and 2001, respectively ................................................................ 18,178 19,486 Restricted cash .................................................................. 5,140 3,616 Hotel inventories ................................................................ 11,989 12,959 Income tax receivable ............................................................ 10,923 12,416 Other current assets ............................................................. 10,534 9,456 ----------- ----------- Total current assets ........................................................ 82,614 84,408 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization .................................................. 949,730 989,009 Investments in unconsolidated joint ventures ..................................... 23,140 -- Assets held for sale ............................................................. 8,787 32,106 Mortgages and notes receivable, net of current portion ........................... 13,021 11,953 Other assets ..................................................................... 42,357 39,294 ----------- ----------- Total assets ................................................................ $ 1,119,649 $ 1,156,770 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ............................................ $ 21,189 $ 22,168 Current portion of debt .......................................................... 1,052 10,296 Current portion of deferred income ............................................... 3,527 4,022 Other current liabilities ........................................................ 20,985 28,955 ----------- ----------- Total current liabilities ................................................... 46,753 65,441 Long-term debt, net of current portion ........................................... 284,017 309,736 Deferred income, net of current portion .......................................... 13,338 18,468 Deferred income taxes ............................................................ 61,362 44,620 Other liabilities ................................................................ 7,503 10,564 ----------- ----------- Total liabilities ........................................................... 412,973 448,829 Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued ..................................................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized; 56,606,381 and 56,221,567 shares issued and outstanding in 2002 and 2001, respectively ................................................................ 566 562 Capital in excess of par value ................................................... 527,787 525,068 Retained earnings ................................................................ 293,292 297,159 Accumulated other comprehensive loss, net of taxes .............................. -- (1) Treasury stock, at cost (11,522,878 and 11,507,078 shares in 2002 and 2001, respectively) .............................................................. (114,969) (114,847) ----------- ----------- Total stockholders' equity .................................................. 706,676 707,941 ----------- ----------- Total liabilities and stockholders' equity ............................. $ 1,119,649 $ 1,156,770 =========== ===========
See Accompanying Notes to Consolidated Financial Statements. F-3 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31 ------------------------------------- 2002 2001 2000 --------- --------- --------- Revenues: Hotel revenues ...................................................... $ 382,234 $ 455,325 $ 521,931 Management, franchise and other fees (Note 18) ...................... 14,272 12,996 15,529 Rental and other .................................................... 2,457 2,701 4,304 --------- --------- --------- Total revenues .............................................. 398,963 471,022 541,764 Costs and expenses: Hotel operating expenses ............................................ 214,485 246,027 265,878 Rent and other occupancy ............................................ 82,310 87,080 82,927 General and administrative .......................................... 28,888 28,774 28,430 Depreciation and amortization ....................................... 39,673 37,527 40,100 --------- --------- --------- Total costs and expenses .................................... 365,356 399,408 417,335 Operating income ...................................................... 33,607 71,614 124,429 Investment income ..................................................... 2,863 2,244 1,936 Interest expense ...................................................... (27,583) (33,643) (41,325) Other income .......................................................... 1,244 22,261 13,901 --------- --------- --------- Income before income taxes, discontinued operations and extraordinary items ................................................ 10,131 62,476 98,941 Provision for income taxes ............................................ 3,951 24,053 38,607 --------- --------- --------- Income before discontinued operations and extraordinary items ......... 6,180 38,423 60,334 Discontinued operations: Income from discontinued operations, net of income taxes of $270, $1,109 and $1,351, respectively .................................. 422 1,846 2,480 Gain on disposal, net of income taxes of $849 ....................... 1,328 -- -- --------- --------- --------- Income before extraordinary items ..................................... 7,930 40,269 62,814 Extraordinary items, net of income tax benefits of $7,542, $47 and $201 in 2002, 2001 and 2000, respectively ...................... (11,797) (76) (314) --------- --------- --------- Net income (loss) ..................................................... $ (3,867) $ 40,193 $ 62,500 ========= ========= ========= Basic earnings per common share: Income before discontinued operations and extraordinary items .............................................................. $ 0.13 $ 0.86 $ 1.32 Discontinued operations ............................................... 0.04 0.04 0.05 Extraordinary items ................................................... (0.26) -- -- --------- --------- --------- Net income (loss) per common share .................................... $ (0.09) $ 0.90 $ 1.37 ========= ========= ========= Diluted earnings per common share: Income before discontinued operations and extraordinary items ......... $ 0.13 $ 0.84 $ 1.30 Discontinued operations ............................................... 0.04 0.04 0.05 Extraordinary items ................................................... (0.26) -- (0.01) --------- --------- --------- Net income (loss) per common share .................................... $ (0.09) $ 0.88 $ 1.34 ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements. F-4 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK CAPITAL IN ------------------- EXCESS OF RETAINED SHARES AMOUNT PAR VALUE EARNINGS ------ ------ --------- -------- Balance December 31, 1999 ........................... 48,483,762 $557 $ 519,834 $ 194,466 Net income .......................................... -- -- -- 62,500 Utilization of net operating loss carryforwards ..... -- -- 3,057 -- Proceeds from exercise of stock options ............. 228,922 3 1,658 -- Unrealized loss on marketable securities available for sale (net of income taxes) ......... -- -- -- -- Treasury stock purchases ............................ (3,867,300) -- -- -- Comprehensive income ................................ -- -- -- -- ---------- ---- --------- --------- Balance December 31, 2000 ........................... 44,845,384 560 524,549 256,966 Net income .......................................... -- -- -- 40,193 Proceeds from exercise of stock options ............. 245,305 2 2,008 -- Unrealized gain on marketable securities available for sale (net of income taxes) ......... -- -- -- -- Treasury stock purchases ............................ (376,200) -- -- -- Amortization of pre-fresh start tax basis ........... -- -- (1,489) -- Comprehensive income ................................ -- -- -- -- ---------- ---- --------- --------- Balance December 31, 2001 ........................... 44,714,489 562 525,068 297,159 Net loss ............................................ -- -- -- (3,867) Proceeds from exercise of stock options ............. 384,814 4 2,719 -- Unrealized gain on marketable securities available for sale (net of income taxes) ......... -- -- -- -- Treasury stock purchases ............................ (15,800) -- -- -- Comprehensive loss .................................. ---------- ---- --------- --------- Balance December 31, 2002 ........................... 45,083,503 $566 $ 527,787 $ 293,292 ========== ==== ========= =========
ACCUMULATED OTHER COMPREHENSIVE TREASURY COMPREHENSIVE LOSS, NET OF TAXES STOCK TOTAL INCOME ------------------ ----- ----- ------ Balance December 31, 1999 ........................... $(2,694) $ (80,163) $ 632,000 $ -- Net income .......................................... -- -- 62,500 62,500 Utilization of net operating loss carryforwards ..... -- -- 3,057 -- Proceeds from exercise of stock options ............. -- -- 1,661 -- Unrealized loss on marketable securities available for sale (net of income taxes) ......... (144) -- (144) (144) Treasury stock purchases ............................ -- (30,974) (30,974) -- -------- Comprehensive income ................................ -- -- -- $ 62,356 ------- --------- --------- ======== Balance December 31, 2000 ........................... (2,838) (111,137) 668,100 -- Net income .......................................... -- -- 40,193 40,193 Proceeds from exercise of stock options ............. -- -- 2,010 -- Unrealized gain on marketable securities available for sale (net of income taxes) ......... 2,837 -- 2,837 2,837 Treasury stock purchases ............................ -- (3,710) (3,710) -- Amortization of pre-fresh start tax basis ........... -- -- (1,489) -- -------- Comprehensive income ................................ -- -- -- $ 43,030 ------- --------- --------- ======== Balance December 31, 2001 ........................... (1) (114,847) 707,941 -- Net loss ............................................ -- -- (3,867) (3,867) Proceeds from exercise of stock options ............. -- -- 2,723 -- Unrealized gain on marketable securities available for sale (net of income taxes) ......... 1 -- 1 1 Treasury stock purchases ............................ -- (122) (122) -- -------- Comprehensive loss .................................. $(3,866) ------- --------- --------- ======== Balance December 31, 2002 ........................... -- $(114,969) $ 706,676 ======= ========= =========
See Accompanying Notes to Consolidated Financial Statements. F-5 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31 ------------------------------------ Cash flows from operating activities: 2002 2001 2000 --------- -------- --------- Net income (loss) ............................................... $ (3,867) $ 40,193 $ 62,500 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................... 40,045 38,411 41,611 Valuation adjustments on non-hotel properties ............... -- 6,745 -- Amortization of deferred financing costs .................... 2,235 3,018 2,921 Utilization of net operating loss carryforwards ............. -- -- 3,057 Premium on early redemption of debt ......................... 12,705 -- -- Write-off of deferred financing fees ........................ 6,628 -- -- Net gains on sales of assets and lease terminations ......... (7,031) (36,329) (13,901) Net loss on sales of marketable securities .................. -- 4,346 -- Amortization of deferred income .............................. (7,792) (11,619) (9,984) Deferred income taxes ........................................ 6,594 27,218 20,744 Increase/(decrease) from changes in other operating assets and liabilities: Accounts receivable ........................................... 1,308 8,430 (6,537) Other current assets .......................................... 1,372 (10,594) (866) Other assets and liabilities .................................. 1,847 (6,608) (21,712) --------- -------- --------- Net cash provided by operating activities .................. 54,044 63,211 77,833 Cash flows from investing activities: Net proceeds from mortgages and notes receivable ............... 445 1,757 1,387 Disbursements for mortgages and notes receivable ............... (1,399) (469) (668) Proceeds from sales of property, equipment and leasehold improvements, net .......................................... 56,026 32,634 183,497 Purchases of property, equipment and leasehold improvements .... (28,513) (22,982) (19,702) Construction of new hotels ..................................... (5,084) (19,906) (19,312) Investments in unconsolidated joint ventures ................... (23,140) -- -- Decrease/(increase) in restricted cash ......................... (1,524) (3,616) 400 Proceeds from sales of marketable securities ................... -- 3,629 -- Security deposits on leased hotels ............................. -- -- (16,500) Other .......................................................... -- (1,795) (20) --------- -------- --------- Net cash (used in) provided by investing activities ......... (3,189) (10,748) 129,082 Cash flows from financing activities: Net proceeds from issuance of debt ............................. 303,586 12,626 30,820 Payments of debt ............................................... (344,962) (38,649) (213,927) Premium on early redemption of debt ............................ (12,705) -- -- Proceeds from the exercise of stock options and warrants ....... 2,723 2,010 1,661 Purchase of treasury stock ..................................... (122) (3,710) (30,974) --------- -------- --------- Net cash (used in) financing activities ..................... (51,480) (27,723) (212,420) Net increase/(decrease) in cash and cash equivalents ............. (625) 24,740 (5,505) Cash and cash equivalents at beginning of year ................... 26,475 1,735 7,240 --------- -------- --------- Cash and cash equivalents at end of year ......................... $ 25,850 $ 26,475 $ 1,735 ========= ======== =========
See Accompanying Notes to Consolidated Financial Statements. F-6 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES Prime Hospitality Corp. ("Prime" or "the Company") is an owner, manager and franchisor of hotels, with 245 hotels in operation containing 31,426 rooms located in 33 states (the "Portfolio") as of December 31, 2002. Prime controls three hotel brands -- AmeriSuites (R), Wellesley Inns & Suites (R) and Prime Hotels and Resorts (R). -- and operates a portfolio of full-service hotels under franchise agreements with national hotel chains. The Company operates and has ownership interests in 126 hotels (the "Owned Hotels"), operates 28 hotels under lease agreements primarily with real estate investment trusts (the "Leased Hotels"), manages 45 hotels for third parties (the "Managed Hotels"), and franchises 46 hotels which it does not operate (the "Franchised Hotels"). The Portfolio is comprised of 149 AmeriSuites hotels, 73 Wellesley Inns & Suites hotels, one Prime Hotels and Resorts hotel and 22 non-proprietary brand hotels. BASIS OF PRESENTATION 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. 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 approximated 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. 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. The Company's investment in a less than majority owned joint venture has been accounted for using the equity method. F-7 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents are highly liquid, unrestricted investments with a maturity of three months or less when acquired. At December 31, 2002 and 2001, cash and cash equivalents were comprised of approximately $25.9 million and $24.5 million, respectively, of cash and money market funds and $0.0 million and $2.0 million, respectively, of commercial paper. 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. Expenditures for maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. Construction in progress represents costs incurred in the development of hotels. Such costs include construction costs and capitalized interest. The Company reviews each of its assets held for use for which indicators of impairment are present to determine whether the carrying amount of the asset will be recovered. The Company recognizes impairment if the future undiscounted cash flows (before interest charges) are less than the carrying amount. Assets held for sale are recorded at the lower of carrying value or fair value less costs to sell. LONG-LIVED ASSETS In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", SFAS 144, which supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". However it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used". In addition, the Statement provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset or asset group to be disposed of other than by sale (e.g. abandoned) be classified as "held and used" until it is disposed of, and establishes more restrictive criteria to classify an asset or asset group as "held for sale". SFAS 144 superseded APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Transactions. SFAS 144 extended the reporting of a discontinued operation to a "component of an entity". Therefore, the operations of assets held for sale or assets sold are required to be presented as discontinued operations in the Company's statement of operations. F-8 The Company adopted this pronouncement on January 1, 2002. This resulted in the Company having to reclassify certain revenues and expenses to discontinued operations for sold properties where the Company did not retain management. This adoption had no impact on the Company's net income or financial position. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in earnings (loss) and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet of the Company and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 40 years. As of December 31, 2002, investments in unconsolidated joint ventures consisted of the Company's 50% ownership interest in one hotel. There is no joint venture debt as of December 31, 2002. MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are reflected at fair value as of July 31, 1992, plus the cost of 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. Interest income on delinquent notes receivable is generally recognized when cash is received. The Company measures impairment of its mortgages and notes receivable based on the present value of expected future cash flows discounted at the effective interest rate. Impairment can also be measured based on observable market price or the fair value of collateral, if the mortgages and notes receivable are collateral dependent. If the measure of the impaired mortgage or note receivable is less than the recorded investment, the Company will establish a valuation allowance, or adjust existing valuation allowances, with a corresponding charge or credit to operations. Based upon its evaluation, the Company determined that no impairment of the mortgage and notes receivable had occurred. OTHER ASSETS Other assets consist primarily of security deposits under the Company's operating lease agreements and deferred issuance costs related to the Company's debt obligations. Deferred issuance costs are amortized over the respective terms of the loans. INSURANCE PROGRAMS The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay. The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents, which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company. F-9 Provisions have been made in the consolidated financial statements which represent the expected future payments based on the estimated ultimate cost for incidents, less insured amounts, incurred through the balance sheet date and are included in other current and other long-term liabilities based on the expected payment dates. REVENUE RECOGNITION Room revenue and other revenues are recognized when earned. Management and franchise fee revenues are recognized when all material services or conditions relating to the respective property or franchisee have been substantially performed or satisfied by the Company. Such revenues, when recognized, are included in management, franchise and other fees on the accompanying consolidated financial statements. Gains and losses resulting from sales of hotels are recorded in full when title is conveyed to the buyer and when various criteria are met relating to the buyer's financial commitment and any subsequent involvement by the Company with respect to the hotels being sold. The Company's sales of hotels are sometimes accompanied by a leaseback of the facilities under operating lease arrangements. Such sales are recognized when the above sales criteria are met and certain specific criteria are met relating to the lease terms. Related profit is deferred and is recognized as income over the remaining lease term. ADVERTISING COSTS The Company expenses all costs, including production costs, of print, radio, television and other advertisements as incurred. Advertising expenses included in general and administrative expenses were $6.7 million, $7.3 million and $6.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. INCOME TAXES The Company files a consolidated Federal income tax return. In accordance with 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. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences of revenue and expense items for financial statement and income tax purposes. PRE-OPENING COSTS Under Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", all pre-opening costs are being expensed as incurred. DEFERRED INCOME Deferred income consists of gains on properties which were sold and where the Company has continuing involvement with regard to minimum cash flow returns to the buyers either in the form of a lease or management agreement. Deferred income is amortized over the life of the respective agreements, either F-10 as a reduction of rent or other funding expense or as an addition to management, franchise and other fees when such fees are below market levels. ACCOUNTING FOR STOCK-BASED COMPENSATION In December 2002, the Financial Accounting Standards Board issued Statement No. 148 to amend alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. However, the Company has continued to account for options in accordance with the provision of APB Opinion No. 25, "Accounting for Stock Issues to Employees" and related interpretations. Accordingly, no compensation expense has been recognized for stock option plans (See Note 11). The following table sets forth the Company's pro forma information for its common stockholders for the years ended December 31 (in thousands except earnings per share data):
2002 2001 2000 ---------- ---------- ---------- Net income (loss) as reported .............................. $ (3,867) $ 40,193 $ 62,500 Add: Stock option expense included in net income (loss) .... -- -- -- Less: Stock option expense determined under fair value recognition method for all awards ............... (3,815) (2,493) (5,300) ---------- ---------- ---------- Pro forma net income (loss) ................................ $ (7,682) $ 37,700 $ 57,200 ========== ========== ========== Net income (loss) per share as reported: Basic ................................................. $ (.09) $ .90 $ 1.37 ========== ========== ========== Diluted ............................................... $ (.09) $ .88 $ 1.34 ========== ========== ========== Pro forma net income (loss) per share: Basic ................................................. $ (.17) $ .84 $ 1.25 ========== ========== ========== Diluted ............................................... $ (.17) $ .82 $ 1.23 ========== ========== ==========
The fair value for those options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rate of 5%, 5.05% and 5.05%; dividend yields of 0% for 2002, 2001, and 2000; volatility factors of the expected market price of the Company's common stock of 46.6% in 2002 and a weighted-average expected life of the option of 6.5 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT In April 2002, the Financial Accounting Standards Board issued Statement No. 145 which rescinded Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt". The Statement requires, among other things, the reporting of gains and losses from the early extinguishments of debt as an addition to or a reduction of interest expense. The Statement will be effective for the Company in 2003 at which time the Company will reclassify extraordinary gains and losses from early extinguishments of debt to interest expense. F-11 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November of 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Company's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently in the process of evaluating the impact that this Interpretation will have on its financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the Company will need to apply its provisions to any existing variable interests in variable interest entities by no later than September 30, 2003. The Company does not believe that this Interpretation will have a significant impact on the Company's financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 2001 and 2000 consolidated financial statements to conform them to the December 31, 2002 presentation. NOTE 2 -- HOTEL ACQUISITIONS In December 2002, Prime Meadowlands, L.L.C., an entity in which Prime held a 50% interest, acquired the Sheraton Meadowlands Hotel and Conference Center in East Rutherford, NJ. The hotel is managed by Prime and will continue to operate under the Sheraton brand name. In January 2003, Nova Scotia Company, an entity in which Prime held a 50% interest, acquired the Quebec City Holiday Inn Select. The hotel is managed by Prime and will continue to operate under the Holiday Inn brand name. Prime's partner in both acquisitions is United Capital Corp., an entity in which A.F. Petrocelli, Prime's chairman and chief executive officer, has a controlling ownership interest. Under the operating agreement, all significant operating and capital decisions are made jointly and operating profits and losses are allocated based on ownership interest. There is currently no debt in either joint venture (See Note 21). On July 10, 2000, the Company acquired the leasehold interests in 24 Sumner Suites hotels owned by Hospitality Properties Trust ("HPT") from Sholodge, Inc. ("Sholodge") and subsidiaries of the Company entered into lease agreements on three additional Sumner Suites hotels owned by Sholodge for $1.6 million. On November 1, 2000, the Company converted all 27 hotels to its AmeriSuites brand. The leases provide for a fixed annual minimum rent of approximately $27 million plus 8% of revenues in excess of base levels. The leases with HPT and Sholodge expire in 2013 and 2011, respectively, and are renewable at the F-12 Company's option for various periods through 2048 and 2061, respectively. Under the terms of the lease with HPT, the Company posted a $16.5 million cash deposit which will be returned to the Company at the earliest of the end of the lease term or when the hotels achieve a 1.3 to 1.0 cash flow coverage. The Company also received the rights to $28.5 million of other security deposits due upon the expiration of the leases. These other security deposits are recorded at their present value on the Company's financial statements and are being accreted over the term of the lease. NOTE 3 -- HOTEL DISPOSITIONS SALE/LEASEBACK TRANSACTIONS In January 1998, the Company completed the sale/leaseback of eight full-service hotels to MeriStar Hospitality Corp. ("MeriStar") for total consideration of $138.4 million. The Company was operating the hotels under an operating lease agreement, which had a term of ten years. The transaction generated a net gain of approximately $64.9 million, which was deferred and was being recognized as a reduction of rent expense over the life of the lease. In 2001, MeriStar and Prime terminated the leases. The Company received a net termination fee of $1.0 million and recognized the remaining unamortized portion of the deferred gain of $36 million into income. Such amounts are included in other income in the accompanying consolidated financial statement. In 1997 and 1998, the Company entered into two separate transactions with Equity Inns, Inc. ("Equity Inns") for the sale and leaseback of 19 AmeriSuites hotels. The transactions generated gross proceeds of $184 million and all 19 hotels were operated by Prime under lease agreements with Equity Inns through December 2001. Effective January 1, 2002, the leases were converted into management agreements and Equity Inns also signed franchise agreements with Prime to license the AmeriSuites name. Both the management and franchise agreements expire on various dates in 2007 and 2008. The management agreements have terms similar to the lease agreements and provide for a subsidiary of Prime to share in the cash flow above and to fund deficits below certain thresholds. The agreements also require the Prime subsidiary to guarantee a minimum return to Equity Inns equal to the minimum rents under the prior lease agreements (approximately $20.7 million in aggregate in 2002). The Prime subsidiary's obligations under the management agreements are supported by a guarantee by Prime of approximately $4.0 million. The sales of the hotels in 1997 and 1998 generated gains of $36.0 million. Such gains were deferred and amortized over the life of the initial lease (ten years). As of December 31, 2002, approximately $16.9 million remained in deferred income. This amount will continue to be amortized over the remaining life of the management agreement due to Prime's continuing involvement under the management agreement. OTHER DISPOSITIONS In 2002, the Company sold three AmeriSuites, three Wellesley Inns and a full-service hotel for gross proceeds of $60.0 million. The Company retained the franchise rights to the AmeriSuites and Wellesley Inns under 20-year franchise agreements. The Company also entered into agreements to manage two of the AmeriSuites hotels which were sold. The gains on the sales of the hotels are recorded in discontinued operations, net of tax, except for the two hotels managed by Prime which are recorded in other income. During 2001, the Company sold one AmeriSuites hotel for $14.0 million, four Wellesley Inns for $15.4 million and two parcels of land for $5.1 million. The Company recognized a net gain of $3.1 million in these dispositions. The net gain is included in other income. The Company retained the franchise rights F-13 on the AmeriSuites and Wellesley Inns properties pursuant to 20-year franchise agreements. The Company also entered into an agreement to manage the AmeriSuites property it sold. During 2000, the Company sold five AmeriSuites hotels for $56.0 million, ten Wellesley Inns for $45.0 million, one full-service hotel for $18.2 million and five land parcels for $4.8 million. In addition, the Company sold its Frenchman's Reef hotel in St. Thomas, U.S.V.I. ("Frenchman's Reef") for $73.0 million. During 1999, the Company had reduced the carrying value of this asset by $24.5 million to reflect the estimated fair value less the costs to sell the hotel. In February 2000, the Company's five remaining HomeGate hotels and the Company's rights to the HomeGate brand name were also sold for approximately $17.7 million, including the assumption of debt by the purchaser of approximately $17.4 million related to these properties. During 1999, the Company had reduced the carrying value of the assets by $2.5 million to reflect the estimated fair value less the costs to sell the hotels. Asset sales generated net gains of approximately $13.9 million during 2000, which are included in other income in the accompanying consolidated financial statements. The Company also retained the franchise rights on the AmeriSuites and Wellesley Inns under 20-year franchise agreements. In addition, the Company entered into management agreements on one of the sold AmeriSuites and four of the sold Wellesley Inns. NOTE 4 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, YEARS OF 2002 2001 USEFUL LIFE ----------- ----------- ----------- Land and land leased to others $ 136,926 $ 140,497 Buildings and improvement 833,560 836,098 20 to 40 Furniture, fixtures and autos 174,498 169,745 3 to 10 Leasehold improvements 3,414 7,050 3 to 40 Construction in progress 1,956 11,151 ----------- ----------- Sub-total 1,150,354 1,164,541 Less accumulated depreciation and amortization (200,624) (175,532) ----------- ----------- Total property, equipment and leasehold improvements $ 949,730 $ 989,009 =========== ===========
At December 31, 2002, the Company is the lessor of land and certain restaurant facilities primarily in Company-owned hotels with an approximate aggregate book value of $6.5 million pursuant to noncancelable operating leases expiring on various dates through 2010. Minimum future rent under such leases for each of the next 5 years subsequent to December 31, 2002, and thereafter are as follows: 2003 .......... $ 754 2004 .......... 221 2005 .......... 223 2006 .......... 225 2007 .......... 225 Thereafter .... 202 ------ Total ......... $1,850 ======
Depreciation and amortization expense on property, equipment and leasehold improvements, including amounts for discontinued operations, was $40.0 million, $38.4 million and $41.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. F-14 During the years ended December 31, 2002, 2001 and 2000, the Company capitalized $1.3 million, $1.6 million and $2.3 million, respectively, of interest related to borrowings used to finance hotel construction. In order to facilitate future tax-deferred exchanges of hotel properties, the Company entered into arrangements with an unaffiliated third party under Section 1031 of the Internal Revenue Code of 1986, as amended. At December 31, 2002, the Company had loans of approximately $59.7 million to such third party, which represented the total costs to construct and furnish five AmeriSuites hotels. These loans are classified as property, equipment and leasehold improvements in the Company's accompanying financial statements. NOTE 5 -- ASSETS HELD FOR SALE As of December 31, 2002, assets held for sale consist of land parcels which the Company no longer intends to develop. These parcels are being actively marketed for sale and it is the Company's intention to dispose of these assets in the next year. At December 31, 2001, assets held for sale consisted of these land parcels and hotels which were sold in 2002. During 2001, the Company recorded a valuation allowance of $6.7 million against the land parcels held for sale. The adjustment represented the difference between the carrying cost of the assets and the fair market value, less the costs to sell the assets and is recorded in other income in the Company's consolidated statement of operations. Management estimated the fair market value based on comparative land sales in their respective markets. NOTE 6 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
DECEMBER 31, --------------------- 2002 2001 -------- -------- Properties leased by the Company (a) $ 9,113 $ 9,491 Other(b) 4,355 2,922 -------- -------- Total mortgages and notes receivable 14,468 12,413 Less current portion (447) (460) -------- -------- Long-term portion $ 13,021 $ 11,953 ======== ========
(a) At December 31, 2002, the Company is the holder of mortgage notes receivable with a book value of $9.1 million secured by the Company's leasehold positions in three hotels. These notes bear interest at rates ranging from 8.5% to 13.0% and mature on various dates from 2008 through 2015. The mortgages were derived from the sales of hotel properties. (b) Other notes receivable consist primarily of mezzanine loans issued to franchisees, secured by hotel properties managed by the Company and development loans to franchisees. Other notes receivable mature through 2012 and bear interest at an approximate effective rate of 8.3 %. F-15 NOTE 7 -- DEBT Debt consists of the following (in thousands):
DECEMBER 31, ----------------------- 2002 2001 --------- --------- 8 3/8% Senior Subordinated Notes(a) ...... $ 200,000 $ -- 9 3/4% Senior Subordinated Notes(a) ...... -- 190,000 Revolving Credit Facility(b) ............. 70,000 -- 9 1/4% First Mortgage Notes(c) ........... -- 103,970 Mortgages and other notes payable(d) ..... 15,069 26,062 --------- --------- Total debt ............................... 285,069 320,032 Less current maturities .................. (1,052) (10,296) --------- --------- Long-term debt, net of current portion ... $ 284,017 $ 309,736 ========= =========
(a) On April 29, 2002, the Company completed the issuance of $200 million of 8 3/8% Senior Subordinated Notes (the "8 3/8 Notes"). The Company used the proceeds of the issuance of the 8 3/8% Notes, together with available cash, to redeem all of its $190.0 million of outstanding 9 3/4% Notes. The redemption price was $1,050 per $1,000 principal amount of the 9 3/4% Notes plus accrued and unpaid interest (See Note 15). The 8 3/8% Notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The 8 3/8% Notes mature in April 2012. (b) In July, 2002, Prime retired its $125 million revolving credit facility which was to expire in December 2002 and entered into a new $125 million credit facility (the "Credit Facility") with a syndicate of financial institutions which is available until August 2006. The Company had borrowings of $70.0 million under the Credit Facility at LIBOR +2.25%, or approximately 4.1%, as of December 31, 2002. The Credit Facility consists of a four year, $125 million revolving line of credit and is secured by the equity interests of certain of Prime's subsidiaries. In addition, under certain circumstances the Company has the right to increase the Credit Facility by an aggregate amount up to $100 million either through a term loan or an increase in the revolving line of credit. The credit agreement contains loan covenants customary for a credit facility of this size and nature, including but not limited to, limitations on making capital expenditures, selling or transferring assets, making certain investments (including acquisitions), repurchasing shares and liens. In addition, the Company must maintain a debt to EBITDA ratio of 4.5 times (4.25 times after June 30, 2003) and an EBITDA to interest ratio of 2.35 times (2.50 times after June 30, 2003). The Company was in compliance with all covenants at December 31, 2002. However, there can be no assurance that the Company will continue to be in compliance with these covenants. (c) In August 2002, Prime redeemed all of its $103.5 million of outstanding 9 1/4% Notes. The redemption price was 103.083% of the principal amount of the 9 1/4% Notes, plus accrued and unpaid interest (See Note 15). Prime funded the redemption with borrowings under the Credit Facility plus cash on hand. (d) The Company has two mortgage notes payable that are secured by hotel properties with a book value of $33.0 million. At December 31, 2002 these notes bear interest at 6.7% and 8.6%, and mature in 2004 and 2009. F-16 Maturities of long-term debt subsequent to December 31, 2002 are as follows (in thousands): 2003 .......... $ 1,052 2004 .......... 1,122 2005 .......... 229 2006 .......... 70,250 2007 .......... 272 Thereafter .... 212,144 -------- Total ......... $285,069 ========
NOTE 8 -- OTHER CURRENT ASSETS/LIABILITIES Other current assets consist of the following (in thousands):
DECEMBER 31, ------------------ 2002 2001 ------- ------- Deferred tax asset .......................... $ 3,940 $ 5,591 Prepaid expenses ............................ 1,403 1,725 Other ....................................... 5,191 2,140 ------- ------- Total other current assets ........ $10,534 $ 9,456 ======= =======
Other current liabilities consist of the following (in thousands):
DECEMBER 31, ------------------ 2002 2001 ------- ------- Interest payable ............................ $ 2,550 $ 9,130 Accrued payroll and related benefits ........ 5,544 4,680 Accrued sales and use taxes ................. 2,333 2,585 Insurance reserves .......................... 4,709 4,694 Other ....................................... 5,849 7,866 ------- ------- Total other current liabilities ... $20,985 $28,955 ======= =======
NOTE 9 -- COMMITMENTS AND CONTINGENCIES LEASES The Company leases various hotels under lease agreements with initial terms expiring at various dates from 2003 through 2061. 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 Company operates 28 hotels under lease agreements, primarily with Real Estate Investment Trusts ("REITs"). These are comprised of 24 AmeriSuites owned by Hospitality Properties Trust (HPT), three AmeriSuites owned by Sholodge and one full-service hotel owned by Winston Hotels ("Winston"). The leases are with subsidiaries of Prime and have terms ranging from 10 to 13 years expiring from 2007 to 2013 with certain renewal options. The 27 hotels leased from HPT and Sholodge provide for a fixed annual minimum rent plus eight percent of revenue in excess of a base year. The hotel leased from Winston provides for rent equal to the greater of base rent, which increases annually by the inflation rate, or percentage rent based on a percentage of room, food and beverage and other revenue. All of the lease agreements related to the 27 AmeriSuites hotels contain restrictions which prevent the Company from operating an AmeriSuites hotel or similar type of hotel within a restricted area. F-17 On January 1, 2002, the Company converted its leases on 19 AmeriSuites it leased from Equity Inns into management agreements. These management agreements run for the unexpired term of the leases they replaced and require Prime to guarantee a certain minimum level of cash flow (See Note 3). Below is a schedule of the future guaranteed minimum cash flow levels (in thousands):
Operating Management Leases Agreements Total --------- ---------- -------- 2003 .......... $ 35,628 $ 20,717 $ 56,345 2004 .......... 35,381 20,717 56,098 2005 .......... 35,289 20,717 56,006 2006 .......... 35,224 20,717 55,941 2007 .......... 35,228 20,717 55,945 Thereafter .... 192,219 4,524 196,743 -------- -------- -------- Total ......... $368,969 $108,109 $477,078 ======== ======== ========
Rental expense for all operating leases, including those agreements with terms of less than one year, and owner's return for the Equity Inns management agreements consist of the following for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31, ----------------------------- 2002 2001 2000 ------- ------- ------- Rentals .................... $59,967 $65,709 $56,878 Contingent rentals ......... 1,501 5,738 14,859 ------- ------- ------- Rental expense .... $61,468 $71,447 $71,737 ======= ======= =======
Such amounts are included in occupancy and other operating expenses in the accompanying consolidated financial statements. EMPLOYEE BENEFITS The Company does not provide any material post employment benefits. LITIGATION The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation, that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows. On August 18, 1999, plaintiff Nick Pourzal, a former employee of the Company, filed a complaint against the Company in the United States District Court for the Virgin Islands. The complaint alleges that the Company contracted in 1978 to pay plaintiff ten percent of the pre-tax earnings on any use or sale of a 16.354-acre property on St. Thomas, U.S. Virgin Islands known as the "Gilbert Land," and that the Company breached this contract by making commercial use of the Gilbert Land without paying the plaintiff. On January 13, 2003, plaintiff filed a motion for leave to file a second amended compliant, to add claims for (i) conspiracy to violate the Virgin Islands Plant Closing Act, (ii) prima facie tort and (iii) to confirm an arbitration award relating to the Company's termination of plaintiff's employment in 1999. The complaint seeks compensatory, incidental and consequential damages, interest and costs, a declaratory judgment that the Company is liable for payment of ten percent of pre-tax earnings on use or sale of the Gilbert Land, and attorneys' fees and expenses. Prime believes that the plantiff's action is without merit and intends to vigorously defend this case. F-18 In August 2002, the Company paid $8.9 million from cash on hand to Sholodge due in connection with a damage award decision by the American Arbitration Association rendered on June 26, 2002. NOTE 10 -- INCOME TAXES (BENEFITS) The provision (benefit) for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31, --------------------------------- 2002 2001 2000 -------- -------- ------- Current: Federal ........... $ (9,627) $ (1,200) $14,913 State ............. 561 (903) 4,100 -------- -------- ------- $ (9,066) (2,103) 19,013 Deferred: Federal ........... 7,507 22,494 18,144 State ............. (913) 4,724 2,600 -------- -------- ------- 6,594 27,218 20,744 -------- -------- ------- Total ... $ (2,472) $ 25,115 $39,757 ======== ======== =======
Income taxes are provided at the applicable federal and state statutory rates. The tax effects of the changes in the temporary differences in the areas listed below resulted in deferred income tax provisions for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31, --------------------------------- 2002 2001 2000 ------- -------- -------- Utilization of net operating loss ..................... $ -- $ -- $ 3,057 Amortization of deferred gains ........................ 1,507 16,928 3,495 Change in accounting method for depreciation .......... -- 10,675 -- Depreciation .......................................... 352 (350) (268) Property valuation reserves ........................... 223 (1,131) (875) Property sales ........................................ 2,826 (546) 14,895 State income tax, net of federal income tax benefit ... (593) 3,070 1,690 Arbitration settlement ................................ 1,748 -- -- Other ................................................. 531 (1,428) (1,250) ------- -------- -------- Total ....................................... $ 6,594 $ 27,218 $ 20,744 ======= ======== ========
The following is a reconciliation of the statutory Federal tax (benefit) rate to the Company's effective income tax rate:
DECEMBER 31, ------------------------------ 2002 2001 2000 ------ ------ ------ Statutory Federal tax (benefit) rate ............ (35.0%) 35.0% 35.0% State income taxes, net of Federal tax (benefit) rate ............... (3.6%) 3.8% 4.3% Other, net ...................................... (0.4%) (0.3)% (0.3)% ------ ------ ------ Effective income tax (benefit) rate ... (39.0%) 38.5% 39.0% ====== ====== ======
At December 31, 2002, the Company had available federal net operating loss carry forwards related to PMI of approximately $52.4 million, which will expire in 2006. This amount is subject to an annual utilization limitation of $8.7 million under the Internal Revenue Code due to a change in ownership of the Company upon consummation of the Plan. The Company has not recognized the future tax benefits associated with the net operating loss carryforwards. Accordingly, the Company has provided a valuation allowance of approximately $18.3 million against the deferred tax asset at December 31, 2002. To the extent any available carry forwards or other tax benefits related to PMI are utilized, the amount of tax benefit realized will be treated as a contribution to stockholders' equity and will have no effect on the income tax provision for financial F-19 reporting purposes. For the year ended December 31, 2000, the Company recognized $3.1 million of such benefits as a contribution to stockholders' equity and a corresponding reduction of the valuation allowance associated with the net operating losses. At December 31, 2002, the Company had deferred tax liabilities of $57.3 million relating to the differences in the methods of accounting for the Company's fixed assets. NOTE 11 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS COMMON STOCK During 2002, 2001 and 2000, the Company repurchased approximately 15,800, 376,200 and 3.9 million shares of its common stock at average cost of $7.72, $9.86 and $8.00 per share, respectively. The Revolving Credit Facility contains covenants which limit the purchase of these shares to $25.0 million per year. STOCK OPTIONS The Company has adopted various stock option and performance incentive plans under which options to purchase shares of common stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. At December 31, 2002, a total of 6.4 million options were outstanding with another 2.6 million options available to be issued. At December 31, 2002, the weighted average contractual life remaining related to these options outstanding is approximately 7.5 years and the weighted average exercise price of the options outstanding is $8.50. In October 2001, the Company granted options to purchase 3,000,000 shares of common stock to the Company's president and CEO. These options vest ratably over a three year period. The options are priced at $9.12 per share, which reflects the market value at the date of grant, and expire in 2011. At December 31, 2002, all of these options were outstanding. In October 1998, the Board of Directors granted options to purchase 1,750,000 shares of common stock to the Company's president and CEO. These options vest ratably over a five-year period with respect to 1,000,000 of the options. The additional 750,000 options vest as certain performance criteria are met or, if the criteria are not met, the options vest eight years after the original grant date. At December 31, 2002, 1,750,000 options were outstanding under this plan. The options are priced at $5.91 per share, which reflects the market value at the date of grant, and expire in 2008. Under the 1995 Employee Stock Option Plan, options to purchase shares of common stock may be granted at the fair market value of the common stock at the date of grant. Options can generally be exercised during a participant's employment with the Company in equal annual installments over a three-year period from the date of grant and expire ten years from the date of grant. During 2002, 2001 and 2000, respectively, options to purchase 332,000, 268,000 and 454,000 shares of common stock, respectively, were granted under this plan. At December 31, 2002, 1,202,000 options were outstanding under this plan. The options are priced from $8.45 to $11.25 and expire from 2005 to 2012. Under the 1995 Non-Employee Director Stock Option Plan, options to purchase 10,000 shares of common stock are automatically granted to each non-employee director at the fair market value of the common stock at the date of grant. All options are fully vested and exercisable one year after the date of grant and expire ten years after the date of grant, or earlier if the non-employee director ceases to be a F-20 director. At December 31, 2002, 400,000 options were outstanding under this plan. The options are priced from $8.63 to $12.49 and expire from 2005 to 2012. Effective January 1, 1996, the Company adopted the provisions of FASB 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards, which was not significant. The following is a summary of the stock options outstanding:
NUMBER OPTION PRICE OF SHARES PER SHARE ---------- --------------- Outstanding at December 31, 1999 ... 3,989,000 Granted ............................ 454,000 $9.16-$10.41 Exercised .......................... (229,000) $4.72-$10.00 Canceled ........................... (367,000) $4.72-$11.25 ---------- --------------- Outstanding at December 31, 2000 ... 3,847,000 Granted ............................ 3,268,000 $8.60-$9.12 Exercised .......................... (245,000) $4.72 - $11.25 Canceled ........................... (263,000) $4.72 - $11.25 ---------- --------------- Outstanding at December 31, 2001 ... 6,607,000 Granted ............................ 332,000 $8.45 - $12.49 Exercised .......................... (385,000) $4.72 - $12.49 Canceled ........................... (202,000) $4.72 - $11.25 ---------- --------------- Outstanding at December 31, 2002 ... 6,352,000 $5.91 - $12.49 Exercisable at December 31, 2000 ... 1,705,000 $4.72 - $13.78 ========= Exercisable at December 31, 2001 ... 1,860,000 $4.72 - $11.25 ========= Exercisable at December 31, 2002 ... 2,845,000 $5.91 - $12.05 =========
NOTE 12 -- EARNINGS PER SHARE
FOR THE YEAR ENDED, DECEMBER 31, 2002 -------------------------------------- PER-SHARE INCOME SHARES AMOUNT -------- ------ --------- Basic Earnings (loss) per Share: Net income (loss) ............................ $ (3,867) 45,051 $(0.09) Diluted Earnings (loss) per Share: Common stock equivalents(a) .................. -- -- -- -------- ------ ----- Net income (loss) plus assumed conversions ... $ (3,867) 45,051 $(0.09) ======== ====== =====
FOR THE YEAR ENDED, DECEMBER 31, 2001 -------------------------------------- PER-SHARE INCOME SHARES AMOUNT -------- ------ --------- Basic Earnings per Share: Net income ................................... $ 40,193 44,740 $ .90 Diluted Earnings per Share: Common stock equivalents ..................... -- 1,138 (.02) -------- ------ ----- Net income plus assumed conversions .......... $ 40,193 45,878 $ .88 ======== ====== =====
FOR THE YEAR ENDED, DECEMBER 31, 2000 -------------------------------------- PER-SHARE INCOME SHARES AMOUNT -------- ------ --------- Basic Earnings per Share: Net income ................................... $ 62,500 45,718 $1.37 Diluted Earnings per Share: Common stock equivalents ..................... -- 806 (.03) -------- ------ ----- Net income plus assumed conversions .......... $ 62,500 46,524 $1.34 ======== ====== =====
F-21 (a) Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Dilutive earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year adjusted for the incremented shares attributed to dilutive outstanding options which represents common stock equivalents. Common stock equivalents outstanding for 2002 of 1.4 million were anti-dilutive and were not included in the calculation of diluted earnings per share. NOTE 13 - HOTEL REVENUES Hotel revenues consist of lodging revenues (which consist primarily of room, telephone, movies and vending revenues) and food and beverage revenues. For the years ended December 31, 2002, 2001 and 2000 hotel revenues were comprised of the following:
DECEMBER 31, -------------------------------- 2002 2001 2000 -------- -------- -------- Lodging revenues ............. $361,934 $427,394 $477,218 Food and beverage revenues ... 20,300 27,931 44,713 -------- -------- -------- Total hotel revenues .... $382,234 $455,325 $521,931 ======== ======== ========
NOTE 14 -- OTHER INCOME Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31, -------------------------------- 2002 2001 2000 ------- -------- ------- Gains on property sales and lease terminations ... $ 5,744 $ 36,329 $13,901 Valuation reserves - non-hotel assets ............ -- (6,745) -- Loss on the sale of marketable securities ........ -- (4,346) -- Contract termination litigation .................. (4,500) -- -- Other ............................................ -- (2,977) -- ------- -------- ------- Total .................................. $ 1,244 $ 22,261 $13,901 ======= ======== =======
NOTE 15 -- EXTRAORDINARY ITEMS In 2002, extraordinary items consisted of the impact, net of income taxes, of premiums paid in connection with the redemption of the 9 3/4% Notes and the 9 1/4% Notes and the write-off of unamortized deferred loan fees associated with the 9 3/4% Notes, the 9 1/4% Notes and the former revolving credit facility. NOTE 16 -- OTHER COMPREHENSIVE INCOME For the years ended December 31, 2002, 2001 and 2000, comprehensive income consisted of the following (in thousands):
DECEMBER 31, ------------------------------- 2002 2001 2000 ------- ------- -------- Net income (loss) ................................... $(3,867) $40,193 $ 62,500 Unrealized (loss) gain on marketable securities, (net of income taxes of $0, $1,814 and $(92), respectively for 2002, 2001 and 2000 ........... 1 2,837 (144) ------- ------- -------- Total ..................................... $(3,866) $43,030 $ 62,356 ======= ======= ========
F-22 NOTE 17 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The fair values of non-current financial assets and liabilities and other financial instruments are shown below (in thousands). The fair values of current assets and current liabilities approximate their reported carrying amounts.
DECEMBER 31, -------------------------------------------------- 2002 2001 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Mortgage and notes receivable ... $ 13,021 $ 13,021 $ 11,953 $ 11,953 Long-term debt .................. $284,017 $277,267 $309,736 $311,296
The fair value for mortgages and notes receivable is based on discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or current rates available to the Company for debt of the same maturities. The Company's mortgages and other notes receivable (See Note 6) 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 United States. NOTE 18 -- RELATED PARTY TRANSACTIONS The following summarizes significant financial information with respect to transactions with present officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31, -------------------- 2002 2001 2000 ---- ---- ---- Management and other fee income ... $117 $121 $165
The amounts above relate to two hotels managed by the Company for an entity controlled by the Company's chairman and chief executive officer. As disclosed in Note 2, the Company acquired a 50% interest in two hotels with United Capital Corp., an entity controlled by the Company's chairman and chief executive officer (one acquired in December 2002 and the other in January 2003). The impact on the statement of operations in 2002 was a loss of $2,000 (See Note 21). NOTE 19 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31, ----------------------- 2002 2001 2000 ---- ---- ------- Marketable securities exchanged in connection with the acquisition of hotels ... -- -- $ 1,652 Hotels sold in exchange for assumption of debt ................................. -- -- 17,364 Note receivable and equity interests received from the sale of hotels .......... -- -- 3,348
Cash paid for interest was $28.5 million, $32.3 million and $43.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. F-23 Cash paid for income taxes was $0.6 million, $12.5 million and $21.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. NOTE 20 -- GEOGRAPHIC AND BUSINESS INFORMATION The Company's hotels primarily operate in three major lodging industry segments: the all-suites segment, under its AmeriSuites brand; the limited-service segment, primarily under its Wellesley Inns & Suites brand and the full-service segment under major national franchises. The AmeriSuites are upscale, all-suite limited service hotels containing approximately 128 suites and are located in 31 states throughout the United States. The Wellesley Inns & Suites hotels compete in the mid-price segment, and are primarily located in the Northeast, Texas and Florida regions of the United States. A Wellesley Inn & Suites hotel has between 100 to 130 rooms and suites. Full-service hotels compete primarily in the upscale segment, with food and beverage service and banquet facilities under franchise agreements with national hotel brands. The Company's full-service hotels are primarily located in the northeastern region of the United States. The Company evaluates the performance of its segments based primarily on earnings before interest, taxes and depreciation and amortization ("EBITDA") generated by the operations of its Owned Hotels. Interest expense is primarily related to debt incurred by the Company through its corporate obligations and collateralized by certain of its hotel properties. The Company's taxes are included in the consolidated Federal income tax return of the Company and are allocated based upon the relative contribution to the Company's consolidated taxable income/losses and changes in temporary differences. Other income, net consist of property transactions, which are not part of the recurring operation of the Company. The allocation of interest expense, taxes and other income, are not evaluated at the segment level. The following table presents revenues and other financial information by business segment for the years ended December 31, 2002, 2001 and 2000 (in thousands):
LIMITED FULL DECEMBER 31, 2002 ALL-SUITES SERVICE SERVICE CORPORATE/ OTHER CONSOLIDATED ---------- ------- ------- ---------------- ------------ Revenues ................ $233,764 $ 73,241 $ 75,229 $ 16,729 $ 398,963 EBITDA .................. 30,591 13,862 18,393 10,434 73,280 Depreciation and Amortization .......... 19,422 12,565 5,900 1,786 39,673 Capital expenditures .... 13,876 3,363 2,355 14,003 33,597 Total Assets ............ 547,566 339,540 92,999 139,544 1,119,649
LIMITED FULL DECEMBER 31, 2001 ALL-SUITES SERVICE SERVICE CORPORATE/ OTHER CONSOLIDATED ---------- ------- ------- ---------------- ------------ Revenues ................ $258,118 $ 87,439 $109,768 $ 15,697 $ 471,022 EBITDA .................. 64,954 28,372 24,903 (9,088) 109,141 Depreciation and Amortization .......... 18,938 11,385 5,662 1,542 37,527 Capital expenditures .... 26,458 10,109 3,389 2,932 42,888 Total Assets ............ 597,780 363,802 107,828 87,360 1,156,770
LIMITED FULL DECEMBER 31, 2000 ALL-SUITES SERVICE SERVICE CORPORATE/ OTHER CONSOLIDATED ---------- ------- ------- ---------------- ------------ Revenues ................ $254,514 $104,389 $163,028 $ 19,833 $ 541,764 EBITDA .................. 78,179 40,503 38,814 7,033 164,529 Depreciation and Amortization .......... 19,528 12,412 6,984 1,175 40,099 Capital expenditures .... 20,039 8,351 6,381 4,243 39,014 Total Assets ............ 600,196 372,997 115,771 76,908 1,165,872
F-24 The following table reconciles income before discontinued operations and extraordinary items to EBITDA for the years ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31 ------------------------------------ 2002 2001 2000 -------- --------- --------- Income before discontinued operations and extraordinary items .............. $ 6,180 $ 38,423 $ 60,334 Provision for income taxes .............. 3,951 24,053 38,607 Other income ............................ (1,244) (22,261) (13,901) Interest expense ........................ 27,583 33,643 41,325 Investment income ....................... (2,863) (2,244) (1,936) Depreciation and amortization ........... 39,673 37,527 40,100 -------- --------- --------- EBITDA .................................. $ 73,280 $ 109,141 $ 164,529 ======== ========= =========
NOTE 21 - SUBSEQUENT EVENTS In March 2003, Ark Meadowlands, Inc, an unrelated third party, purchased a 20% interest at cost in Prime Meadowlands, LLC and Ark Quebec, Inc. an unrelated third party, purchased a 20% interest at cost in Nova Scotia Company. The purchases reduced Prime's and United Capital Corp's ownership to 40% each in both entities. F-25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRIME HOSPITALITY CORP. By: /s/ A.F. Petrocelli ------------------------------------- A.F. Petrocelli, Chairman of the Board of Directors, President and Chief Executive Officer DATE: March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2003.
Signature Title --------- ----- A.F. Petrocelli Chairman of Board of Directors, President and Chief Executive Officer Douglas Vicari Director, Senior Vice President and Chief Financial Officer Lawrence Friedland Director Allen Kaplan Director Howard M. Lorber Director Herbert Lust, II Director Jack H. Nusbaum Director
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Prime Hospitality Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, A.F. Petrocelli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ A.F. Petrocelli - ----------------------- A.F. Petrocelli Chief Executive Officer March 28, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Prime Hospitality Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas W. Vicari, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Douglas W. Vicari - ----------------------- Douglas W. Vicari Chief Financial Officer March 28, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Prime Hospitality Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas W. Vicari, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard T. Szymanski - ------------------------ Richard T. Szymanski Vice President - Finance March 28, 2003 EX-2.P 3 y84868exv2wp.txt OPERATING AGREEMENT EXHIBIT 2(p) OPERATING AGREEMENT OF EAST RUTHERFORD GROUP , L.L.C. DATED: DECEMBER 19, 2002 This Operating Agreement (the "Agreement") of EAST RUTHERFORD GROUP, L.L.C., a Delaware limited liability company (the "Company") dated as of December 19, 2002, is executed and agreed to, for good and valuable consideration, by and among PRIME-MEADOWLANDS, L.L.C., a Delaware limited liability company ("Prime"), and AFP EIGHTEEN CORP., a Nevada corporation ("AFP"), as members (collectively, the "Members"). RECITALS A. The parties to this Agreement are Prime, an owner and manager of hotels, and AFP, an entity experienced in the ownership and operation of real estate, including hotels. B. Prime and AFP wish to form a limited liability company for the purpose of acquiring certain real property and personal property located in East Rutherford, New Jersey, known as the Sheraton Hotel, 2 Meadowlands Plaza, East Rutherford, New Jersey 07073, which is more particularly described on Schedule A attached hereto and made a part hereof ( the "Hotel" or "hotel"). ARTICLE I DEFINITIONS 1.1 General Definitions. The following terms used in this Agreement shall have the following meanings (unless otherwise expressly provided herein): "Affiliate" shall mean, with respect to any Person, any other Person which directly or indirectly, controls, is controlled by, or is under common control with, such Person. For this purpose, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, or by contract, or otherwise. "Agreement" shall mean this Operating Agreement as originally executed and as amended from time to time. "Capital Account" shall mean the account to be maintained by the Company for each Interest Holder in accordance with the following provisions: (i) an Interest Holder's Capital Account is credited with the Interest Holder's Capital Contributions, the amount of any Company liabilities assumed by the Interest Holder (or which are secured by Company property distributed to the Interest Holder), the Interest Holder's allocable share of Profits and any item of income or gain specially allocated to the Interest Holder under the provisions of Article IX; (ii) an Interest Holder's Capital Account is debited with the amount of money and the fair market value of any Company property distributed to the Interest Holder, the amount of liabilities of the Interest Holder assumed by the Company (or which are secured by property contributed by the Interest Holder to the Company), the Interest Holder's allocable share of Losses and any item of expense or loss specially allocated to the Interest Holder under the provisions of Article IX; and (iii) Interest Holders' Capital Accounts will be maintained in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(l). "Capital Contribution" shall mean the total amount of cash and the fair market value of any other assets contributed, or deemed contributed under Treasury Regulations Section 1.704-1(b)(2)(iv)(d) to the Company by an Interest Holder, net of liabilities assumed or to which the assets are subject. "Capital Proceeds" shall mean the gross receipts received by the Company from a Capital Transaction. "Capital Transaction" shall mean any transaction, other than a Capital Contribution, not in the ordinary course of business which results in the Company's receipt of cash or other consideration, including but not limited to, sales, exchanges or other dispositions of property not in the ordinary course of business, financings, refinancings, condemnations, and the destruction of assets used in the trade or business of the Company. "Cash Flow" shall mean all cash funds derived from operations of the Company (including interest received on Reserves), less cash funds used to pay current operating expenses and to pay or establish reasonable Reserves for future expenses, debt payments, capital improvements, contingencies, and replacements as determined by the Members. Cash Flow does not include Capital Proceeds of Capital Transactions but is increased by the reduction of any Reserve previously established. Cash Flow is not reduced by non cash charges, including without limitation, depreciation and amortization. "Certificate of Formation" shall mean the Certificate of Formation of EAST RUTHERFORD GROUP, L.L.C. as filed with the Secretary of State of Delaware as the same may be amended from time to time. "Code" shall mean the Internal Revenue Code of 1986 as amended, and corresponding provisions of subsequent superseding federal revenue laws. "Company" shall refer to EAST RUTHERFORD GROUP, L.L.C. "Deciding Interest" shall mean Percentage Interests of Members which taken together exceed fifty percent (50%) of the Percentage Interests of Members. "Delaware Act" shall mean the Delaware Limited Liability company Act (6 Del. C. Section 18-101- et seq.). 2 "Entity" shall mean any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association, or any foreign trust, or foreign business organization. "Fiscal Year" shall mean the Company's fiscal year, which shall be the calendar year. "Franchise Agreement" shall mean the license agreement between The Sheraton Corporation and the Company dated December 2002 with respect to the operation of the Hotel. "Gross Asset Value" shall mean with respect to any asset, the asset's adjusted basis for federal income tax purposes, except that (i) the Gross Asset Value of any asset contributed to the Company shall be its gross fair market value (as agreed upon by the Members) at the time such asset is contributed or deemed contributed for purposes of computing Capital Accounts, (ii) upon a contribution of money or other property to the Company by a new or existing Member and upon a distribution of money or other property to a retiring or continuing Member, the Gross Asset Value of all of the assets of the Company shall be adjusted to equal their respective gross fair market values (as determined by the Managers), provided that adjustments pursuant to this clause (ii) shall be made only if and to the extent that the Managers reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company, (iii) the Gross Asset Value of any asset distributed in kind to any Member shall be the gross fair market value of such asset (as determined by the Managers) on the date of such distribution, and (iv) the Gross Asset Value of any asset determined pursuant to clauses (i) or (ii) above shall thereafter be adjusted from time to time by the depreciation taken into account with respect to such asset for purposes of determining Profits or Losses. "Interest" shall mean a Member's or Interest Holder's share of the Company's Profits, Losses, and distributions of the Company's assets pursuant to this Agreement and the Delaware Act, but shall not include any right to participate in the management or affairs of the Company, or the right to vote on, consent to, or otherwise participate in any decision of the Members. "Interest Holder" shall mean any Person who holds an Interest, whether as a Member or an unadmitted assignee of a Member. "Involuntary Withdrawal" shall mean, with respect to any Member, the occurrence of any of the following events: (i) the Member makes an assignment for the benefit of creditors; (ii) the Member files a voluntary petition in bankruptcy; (iii) the Member is adjudged bankrupt or insolvent or there is entered against the Member an order for relief in any bankruptcy or insolvency proceeding; 3 (iv) the Member files a petition seeking for the Member any bankruptcy reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law, or regulation; (v) the Member files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Member in any proceeding described in clauses (i) through (iv); (vi) the Member seeks, consents to, or acquiesces in the appointment of a trustee for, receiver for, or liquidation of the Member or of all or any substantial part of the Member's properties; (vii) any proceeding instituted against the Member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation, continues for one hundred twenty (120) days after the commencement thereof, or the appointment of a trustee, receiver, or liquidator for the Member or all or any substantial part of the Member's properties without the Member's agreement or acquiescence, which appointment is not vacated within or stayed for ninety (90) days or, if the appointment is stayed for ninety (90) days, after the expiration of the stay during which period the appointment is not vacated; (viii) if the Member is acting as a Member by virtue of being a trustee of a trust, the termination of the trust; (ix) if the Member is a partnership or limited liability company, the dissolution and commencement of winding up of the partnership or limited liability company; (x) if the Member is a corporation, the dissolution of the corporation or the revocation of its certificate of incorporation; or (xi) if the Member is an estate, the distribution by the fiduciary of the estate's entire interest in the Company. "Land" shall mean the Hotel. "Loan" shall have the meaning set forth in Section 8.8. "Management Agreement" shall mean the management agreement in the form attached hereto as Exhibit 3.3, which the Company will enter into with Prime Hospitality Corp., or its affiliate, pursuant to the terms of this Agreement and as may be amended and supplemented and be in effect from time to time.. "Managers" shall mean the Person or Persons charged with the rights and duties with respect to management of the Company set forth in Article V of this Agreement and in the Delaware Act. References to the Managers in the plural shall also, when the context so requires, be deemed to include the singular. 4 "Member" shall mean each of the parties who executes a counterpart of this Agreement as a Member and each of the parties who may hereafter become Members. "Membership Rights" shall mean all of the rights of a Member in the Company, including a Member's: (i) Interest; (ii) right to inspect the Company's books and records; and (iii) right to participate, subject to the provisions of this Agreement, in the management of the business and affairs of the Company, including the right to vote on, consent to, or otherwise participate in any decision or action of or by the Members granted pursuant to this Agreement and the Delaware Act. "Negative Capital Account" shall mean a Capital Account with a balance of less than zero. "Percentage Interest" shall mean the percentage interest herein of each Member, initially as stated in Subsection 8.1 (a), and as adjusted from time to time to correspond to such Member's Capital Account as a percentage of all Capital Accounts of the Company; and as to an Interest Holder who is not a Member, the Percentage of the Member whose Interest has been acquired by such Interest Holder, to the extent the Interest Holder has succeeded to that Member's Interest, likewise as so adjusted from time to time. "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of the Person when the context so permits. "Profits" and "Losses" shall mean, for each taxable year of the Company (or other period for which Profits or Losses must be computed), the Company's taxable income or loss determined in accordance with Code Section 703(a), with the following adjustments: (i) all items of income, gain, loss, deduction, or credit required to be stated separately under Code Section 703(a)(1) are included in computing taxable income or loss; and (ii) any tax-exempt income of the Company not otherwise taken into account in computing Profits or Losses, are included in computing taxable income or loss; (iii) any expenditures of the Company described in Code Section 705(a)(2)(B) [or treated as such under Treasury Regulations Section 1.704-1(b)(2)(iv)(i)] and not otherwise taken into account in computing Profits or Losses, are subtracted from taxable income or loss; (iv) gain or loss resulting from any taxable disposition of Company property is computed by reference to the adjusted book value of the property disposed of, determined in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(d) through (h), notwithstanding the fact that the adjusted book value differs from the adjusted basis of the property for federal income tax purposes; 5 (v) in lieu of depreciation, amortization, or cost recovery deductions allowable in computing taxable income or loss, there is taken into account the depreciation computed based upon the adjusted book value of the asset; (vi) notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Article IX hereof are not taken into account in computing Profits or Losses; and(vii) if property is sold or distributed to a Member and gain is recognized by the Member, the Company will make an election pursuant to Code Section 754. "Purchase Contract" shall mean that certain Purchase and Sale Agreement between Metropolitan Life Insurance Company and the Company dated as of December 4, 2002. "Reserves" shall mean, for any fiscal period, funds set aside or amounts allocated during such period in amounts deemed sufficient by the Managers for working capital and to pay taxes, insurance, debt service, or other costs or expenses incident to the ownership or operation of the Company's business. "Transfer", when used as a noun, shall mean any sale, assignment, exchange, pledge, encumbrance, gift, devise, bequest, or other transfer or relinquishment, and, when used as a verb, shall mean to sell, assign, exchange, pledge, encumber, give, devise, bequeath or otherwise transfer or relinquish. "Treasury Regulations" shall include proposed, temporary, and final regulations promulgated under the Code in effect as of the date of filing the Certificate of Formation, any regulations promulgated thereafter, and the corresponding sections of any regulations subsequently issued that amend or supersede those regulations. 1.2 Terms Elsewhere Defined. Those terms defined elsewhere in this Agreement with respect to particular provisions hereof shall have those meanings ascribed to them in the place in which they first appear, and such definitions shall apply wherever such terms are used in this Agreement unless the context clearly requires otherwise. ARTICLE II FORMATION OF COMPANY 2.1 Formation. The parties shall organize a limited liability company pursuant to the Delaware Act and the provisions of this Agreement and, for that purpose, shall cause a Certificate of Formation, in the form annexed hereto as Exhibit 2.1, to be executed and filed for record with the Delaware Secretary of State and the appropriate registration or qualification with the New Jersey Secretary of State. The parties hereto shall execute, file, record and publish such additional certificates and documents as may be necessary or desirable to form and operate a limited liability company under the laws of the State of Delaware, or under other applicable laws. 2.2 Name. The name of the Company shall be "EAST RUTHERFORD GROUP, L.L.C." The Company may do business under that name and any other name or names which the Managers select. If the Company does business under a name other than that set forth in its 6 Certificate of Formation, then the Company shall file a certificate of registration of alternate name as required by the Delaware Act. 2.3 Principal Place of Business. The principal place of business of the Company shall be 2 Meadowlands Plaza, East Rutherford, New Jersey. The Company may locate its places of business and registered office at any other place or places as the Managers may from time to time deem advisable. 2.4 Registered Office and Registered Agent. The Company's initial registered office shall be c/o Corporation Service Company, 830 Bear Tavern Road, West Trenton, New Jersey 08628, and the name of its initial registered agent at such address shall be Corporation Service Company. The registered office and registered agent may be changed from time to time by filing the address of the new registered office and/or the name of the new registered agent with the Delaware Secretary of State pursuant to the Delaware Act. 2.5 Term. The term of the Company shall be forty (40) years from the date of filing of the Certificate of Formation with the Secretary of State of the State of Delaware, unless the Company is earlier dissolved in accordance with either the provisions of this Agreement or the Delaware Act. 2.6 Purpose. The purposes of the Company shall be (i) to acquire, own, finance, improve, develop, maintain, manage, operate, lease, sell, assign, dispose of and otherwise deal with the Hotel; (ii) to undertake such other activities as may be necessary, desirable or appropriate to the business of the Company to effectuate the foregoing purposes; and (iii) to otherwise engage in any enterprise or business in which a limited liability company may engage or conduct under the Delaware Act. The Company shall have all powers necessary, desirable or appropriate to accomplish the purposes enumerated. ARTICLE III BUSINESS OF COMPANY 3.1 Permitted Businesses. The business of the Company shall be: (a) To purchase, acquire, own, and manage and operate the Hotel (b) To accomplish any lawful business related to the foregoing business which shall at any time appear conducive to or expedient for the benefit or protection of the Company and its assets. (c) To exercise all other powers necessary to or reasonably connected with the Company's business that may be legally exercised by limited liability companies under the Delaware Act. (d) To engage in all activities necessary, customary, convenient, or incident to any of the foregoing. 3.2 Intentionally Omitted. 7 3.3 Management of Completed Hotel. Prime will direct, supervise, manage and operate the Hotel in accordance with the terms of the Management Agreement, the form of which is set forth as Exhibit 3.3 hereto, which will be entered into between the Company and Prime on the date on which the Company acquires title to the Hotel. Prime's compensation for such services will be as set forth in the Management Agreement.. 3.4 Financing. (a) Upon the execution of this Agreement, the Members, for and on behalf of the Company, together shall attempt to arrange for permanent financing for the Hotel. The parties shall endeavor to negotiate on behalf of the Company to obtain such financing from one or more third party institutional lenders on commercially reasonable terms which will be subject to approval by Members holding a Deciding Interest. All costs and fees payable in connection with said financing (the "Financing Fees") will be paid by and on behalf of the Company from the initial capital contributions made to the Company pursuant to this Agreement. Notwithstanding anything in Article III hereof to the contrary, in the event that the lender will not permit all or any portion of the Financing Fees to be included as a cost to be financed by the Company, the Members each agree that it will be obligated to contribute to the Company in cash as an additional Capital Contribution each member's share of the funds necessary to pay such Financing Fees. If not available from Hotel cash flow, a Member's share of such funds shall be equal to the product obtained by multiplying the Member's Percentage Interest (expressed as a percentage) by the total amount of the Financing Fees at issue. (b) Inability to Obtain Agreement Upon Terms of Financing. In the event that financing cannot be obtained on terms which are satisfactory to Prime and AFP, the provision of Section 14.1 shall govern. (c) Nonrecourse. Notwithstanding anything in this Agreement, no indebtedness of the Company shall be recourse to any Member without the prior written consent of such Member; provided that the foregoing shall not apply to any guaranty or indemnity (a "Nonrecourse Carveout Guaranty") with respect to fraud, misappropriation of rents, misapplication of condemnation or casualty proceeds, intentional misrepresentation and other customary "carveouts" from a nonrecourse mortgage loan given by the Company in connection with the financing of the Hotel. ARTICLE IV NAMES AND ADDRESSES OF MEMBERS The names and addresses of the Members are as follows: Name Address ---- ------- AFP Eighteen Corp. c/o United Capital Corp. United Capital Building 9 Park Place Great Neck, New York 11021 8 c/o Prime Hospitality Corp. 700 Route 46 East Prime-Meadowlands L.L.C. Fairfield, New Jersey 07004 ARTICLE V MANAGEMENT 5.1 Managers; Number, Election & Tenure. Except as limited below, the business and affairs of the Company shall be managed by its Managers. The Company shall initially have two Managers, who shall be Douglas Vicari and Anthony Miceli. The number of Managers shall be fixed from time to time, at a number equal to the number of Members of the Company. Each Member shall have the right to designate for election one person as its representative Manager. The Managers in the aggregate shall hold 100 votes. Each Manager shall have the number of votes, including fractional votes, equal to 100 times the Percentage Interest of the Member appointing the Manager. Other than as otherwise expressly set forth in this Agreement, actions permitted to be taken by the Managers shall require approval by more than 50 votes, including fractional votes. Each Manager shall hold office until the next annual meeting of Members or special meeting of Members called to select Managers or until a successor shall have been appointed and qualified. The Managers need not be residents of the State of Delaware or Members of the Company. 5.2 Powers of Managers. Except for those situations in which the approval of the Members is expressly required by or the authority of the Managers is limited by any provision of this Agreement, or by non-waivable provisions of applicable law, the Managers shall have full and complete authority, power, and discretion to manage and control the business, affairs, and property of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business, including, but not limited to, the power and authority to: (a) acquire by purchase, lease, or otherwise any personal property, tangible or intangible; (b) sell, dispose of, trade, or exchange Company assets in the ordinary course of the Company's business; (c) open bank accounts in the name of the Company, collect and expend receipts in furtherance of the operation and management of the Company, keep all books of account and other records of the Company, and prepare and submit to the Members for approval an annual budget for the Company; (d) hire, discharge and supervise all labor and employees required for the operation and management of the Company, it being understood that all employees shall be deemed to be employees of the Company not of the Managers; (e) maintain physical properties, purchase supplies, and incur expenses for advertising, printing, travel, telephone and for such other services or things, whether 9 similar or dissimilar, as may be deemed by the Managers to be necessary, convenient or advisable for the management and operation of the Company; (f) obtain trade financing incurred in the ordinary course of the Company's business; (g) purchase liability and other insurance to protect the Company's property and business; (h) hold and own any Company real and/or personal property in the name of the Company; (i) invest any Company funds temporarily (by way of example but not limitation) in time deposits, short-term governmental obligations, commercial paper, or other investments; (j) execute on behalf of the Company all instruments and documents necessary to or advisable for the business of the Company; (k) employ accountants, legal counsel, managing agents, or other experts to perform services for the Company and to compensate them from Company funds; (l) enter into any and all other agreements on behalf of the Company, with any other Person for any purpose, in such forms as the Managers may approve; and (m) do and perform all other acts as may be necessary or appropriate to the conduct of the Company's business. 5.3 Extraordinary Transactions. Notwithstanding anything to the contrary in this Agreement, the Managers shall not have authority without the approval of Members holding a Deciding Interest to: (a) sell or otherwise dispose of the Land, the Hotel or all or substantially all of the assets of the Company as part of single transaction or plan or to engage in any other Capital Transaction; (b) incur lease obligations or indebtedness on behalf of the Company with a total liability per transaction in excess of $25,000, or in excess of $100,000 in the aggregate during any twelve month period; (c) purchase real property; (d) enter into any loan of the Company's money in excess of $25,000 on any one occasion; (e) materially alter the nature of the business of the Company; 10 (f) engage in business in any jurisdiction which does not provide for the registration of limited liability companies; (g) enter into, amend, or take an assignment of the Purchase Contract, and any construction contracts in excess of $25,000; (h) approve the Company's annual or other periodic operating or capital expenditure budgets; (i) permit Company expenditures to exceed the amounts budgeted therefor in the budgets which are from time to time approved by the Members; (j) terminate the Management Agreement; (k) terminate the Franchise Agreement, provided that with respect to the appointment or termination of any Franchise, such appointment or termination shall be within the sole discretion of AFP. Notwithstanding anything to the contrary in this Agreement, any amendment, modification or supplement to the Management Agreement, and any replacement management agreement entered into after the termination of the Management Agreement, shall contain terms no less favorable to the Company than could be obtained on an arm's length basis from an unrelated third party manager. 5.4 Agents and Members. Unless authorized to do so by this Agreement or by the Managers of the Company, no attorney-in-fact, employee, or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. No Member shall have any power or authority to bind the Company unless the Member has been authorized by this Agreement or by the Members holding a Deciding Interest in writing to act as an agent of the Company. For purposes of Section 5.02 of the Management Agreement, each Member shall be a representative of the Company with the right to examine, inspect and copy the books and records referred to therein. 5.5 Liability for Certain Acts. The Managers shall perform their managerial duties in good faith, in a manner which they reasonably believe to be in the best interests of the Company, with such care as an ordinarily prudent person in a like position would use under similar circumstances. Provided the Managers so perform the duties of Managers, they shall not have any liability by reason of being or having been a Manager of the Company. The Managers may perform any of their duties through the attorneys, agents or employees of the Company and shall not be personally responsible for their acts, defaults or negligence if reasonable care has been exercised in their appointment, supervision and retention. The Managers do not, in any way, guarantee the return of the Members' Capital Contributions or a profit for the Members from the operations of the Company. No Manager shall be liable to the Company or to either Member for any loss or damage sustained by the Company or such Member, unless the loss or damage shall have been the result of fraud, deceit, gross negligence, willful misconduct, or a wrongful taking by the Manager. 11 5.6 Indemnity of the Managers, Employees, and Other Agents. To the maximum extent permitted under Section 10 of the Delaware Act, but subject to the limitations contained in the Certificate of Formation, the Company shall indemnify the Managers and make advances for expenses. The Company may indemnify its employees and other agents other than the Managers to the fullest extent permitted by law, provided that the indemnification in any given situation is approved by Members owning a Deciding Interest. 5.7 Resignation. Any Manager of the Company may resign at any time by giving written notice to the Members of the Company. The resignation of a Manager shall take effect upon receipt of that notice or at such later time as shall be specified in the notice; and, unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective. 5.8 Removal. At a meeting called expressly for that purpose, all or any lesser number of the Managers may be removed at any time, with or without cause, by the affirmative vote of Members having at least a Deciding Interest; provided, however, a Manager who has been elected as the designated representative of a Member pursuant to Section 5.1 may be so removed only by the Member who has so designated the Manager. 5.9 Vacancies. Any vacancy occurring for any reason in the number of Managers of the Company shall be filled by an affirmative vote of Members holding at least a Deciding Interest at a meeting expressly called for that purpose; provided, however, if a Manager who has been elected as a designated representative of a Member pursuant to Section 5.1 ceases to serve as a Manager, such vacancy shall be filled by the election of another person designated by such Member as its representative. Managers elected to fill a vacancy shall hold office for the unexpired term of the Manager's predecessor in office, or until a successor shall have been designated and qualified. 5.10 No Manager shall receive a salary or other compensation from the Company. 5.11 Duty to Company; Dealings With Affiliates of Members. (a) Managers shall devote such time to the business and affairs of the Company as is necessary to carry out their duties set forth in this Agreement. (b) Managers shall not be required to manage the Company as their sole and exclusive function, and may have other business interests and may engage in other activities in addition to those relating to the Company. Neither the Company nor either of its Members shall have any right, by virtue of this Agreement, to share or participate in such other investments or activities of the Managers or to the income or proceeds derived therefrom. The Managers shall incur no liability to the Company or to either of the Members as a result of engaging in any other business or venture. Managers may have such business interests and engage in such other business activities notwithstanding that they may compete with the business and activities of the Company. (c) Each Member understands and acknowledges that the conduct of the Company's business may involve business dealings and undertakings with the Members and Persons which may be affiliated with one or both Members. In any of those cases, 12 those dealings and undertakings shall be at arm's length and on commercially reasonable terms. 5.12 Further Authority to Execute Certificates, Etc. Each Member authorizes the Managers for and on behalf of the Company and each Member and in the Member's name, place and stead, to make, execute, sign, acknowledge and file: (a) the Certificate of Formation or any amendment thereto; (b) all documents or instruments which are appropriate to reflect the admission to the Company of a substituted Member or the withdrawal of either Member in the manner prescribed in this Agreement; (c) all documents which are appropriate to reflect any amendment, change, or modification of this Agreement properly adopted by the Members; (d) any and all other certificates or other instruments required to be filed by the Company under the laws of the State of Delaware or of any other state or jurisdiction, including, but not limited to, any certificate or other instruments necessary in order for the Company to continue to qualify as a limited liability company under the laws of the State of Delaware; (e) one or more alternate name certificates; and (f) all documents which may be required to dissolve and terminate the Company and to cancel its Certificate of Formation upon the occurrence of such dissolution and termination in the manner prescribed in this Agreement. Each Member shall be bound by any representations made by the Managers acting in good faith pursuant to this grant of authority. ARTICLE VI RIGHTS AND OBLIGATIONS OF MEMBERS 6.1 Limitation of Liability/Indemnity. (a) Each Member's liability shall be limited as set forth in this Agreement, the Delaware Act, and other applicable law. (b) (i) The Company shall indemnify to the fullest extent permitted under and in accordance with the laws of the State of Delaware any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a Member or Manager of the Company, or is or was serving at the request of the Company as a Member or Manager in any other capacity with another corporation, partnership, joint venture, trust or other 13 enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (ii) Expenses incurred in defending a civil or criminal action, suit or proceeding shall (in the case of any action, suit or proceeding against a Member or Manager of the Company) or may (in the case of any action, suit or proceeding against an Member or Manager) be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Members upon receipt of an undertaking by or on behalf of the indemnified person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized in this Article VI. (iii) the indemnification and other rights set forth in this Article VI shall not be exclusive of any provisions with respect thereto in the bylaws or any other contract or agreement between the Company and any Member or Manager of the Company. (iv) neither the amendment nor repeal of subparagraphs (i) (ii), or (iii) of this Article VI, shall eliminate or reduce the effect of subparagraphs (i), (ii), and (iii) of this Article VI in respect of any matter occurring before such amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter which would have given rise to a right of indemnification or right to receive expenses pursuant to subparagraph (i), (ii), or (iii) of this Article VI, if such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. 6.2 Company Debt Liability. A Member shall not be personally liable for any debts or losses of the Company beyond the Member's respective Capital Contributions and any obligation of the Member under Sections 8.1 or 8.2 hereof to make Capital Contributions, except as provided in Section 6.6 hereof or as otherwise required by law. 6.3 List of Members. Upon written request of a Member, the Managers shall provide a list showing the names, addresses, and Membership Rights and Interests of the Members and Interest Holders. 6.4 Intentionally Omitted. 6.5 Priority and Return of Capital. Except as may be expressly provided in Article VIII or Article IX, no Member or Interest Holder shall have priority over any other Members or Interest Holder, either for the return of Capital Contributions or for Profits, Losses, or distributions; provided that this section shall not apply to Loans or to Guarantor Contributions as defined in Section 8.9 (as distinguished from Capital Contributions) which a Member has made to the Company. 14 6.6 Liability of a Member to the Company. A Member who rightfully receives the return in whole or in part of its contribution (as defined in Section 2 of the Delaware Act) is nevertheless liable to the Company only to the extent now or hereafter provided by the Delaware Act. A Member who receives a distribution made by the Company which is either in violation of this Agreement, or made when the Company's liabilities exceed its assets (after giving effect to the distribution) is liable to the Company for a period of six years after the distribution for the amount of the distribution. 6.7 No Authority to Act for Company. Except as may be otherwise expressly provided in this Agreement, no Member or Interest Holder, acting alone, shall have any authority to act for, bind, or undertake, assume, or assign any obligation or responsibility on behalf of, the other Members, Interest Holders, or the Company. 6.8 Restriction on Other Business Interests. Except as may be otherwise expressly provided in this Agreement, nothing herein shall be construed so as to prohibit a Member or Interest Holder from owning, operating, or investing in any real estate development not owned or operated by the Company, wherever located. Except as may be otherwise expressly provided in this Agreement, each Member and Interest Holder agrees that the other Members and Interest Holders, any Affiliate of same, or any related person or entity may engage in or possess an interest in another business venture or ventures of any nature and description, independently or with others, including but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real property, and neither the Company, the Members, nor any Interest Holder shall have any rights by virtue of this Agreement in and to said independent ventures or to the income or profits derived therefrom. 6.9 No Responsibility for Commitments of Others. Neither the Company nor a Member or Interest Holder shall be responsible or liable for any indebtedness or obligation or another Members or Interest Holder incurred before or after the execution of this Agreement, except as to those responsibilities, liabilities, indebtedness or obligations authorized pursuant to the terms of this Agreement, and each indemnifies and agrees to hold the others harmless from such obligations and indebtedness except as aforesaid. ARTICLE VII MEETINGS OF MEMBERS 7.1 Annual Meeting. The annual meeting of the Members shall be held on the first Monday in May or at such other time as shall be determined by resolution of the Members, commencing with the year 2003, for the purpose of the transaction of such business as may come before the meeting. 7.2 Special Meetings. Special meeting of the Members, for any purpose or purposes, unless otherwise prescribed by statute, may be called by any Member or Members holding at least 50% of the Percentage Interests. 7.3 Place of Meetings. Meetings will be held at 700 Route 46 East, Fairfield, New Jersey or as the Members holding a Deciding Interest shall determine. 15 7.4 Notice of Meetings. Except as provided in Section 7.5 below, written notice stating the place, day, and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered no fewer than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the Member or Members calling the meeting, to each Member entitled to vote at the meeting. If mailed, the notice shall be deemed to be delivered two (2) calendar days after being deposited in the United States mail, addressed to the Member at the Member's address as it appears on the books of the Company, with postage thereon prepaid. 7.5 Meeting of All Members. If all of the Members shall meet at any time and place, either within or outside of the State of New Jersey and consent to the holding of a meeting at that time and place, the meeting shall be valid without call or notice, and at the meeting lawful action may be taken. 7.6 Record Date. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment of the meeting, or Members entitled to receive payment of any distribution, or to make a determination of Members for any other purpose, the date on which notice of the meeting is mailed or the date on which the resolution declaring the distribution is adopted, as the case may be, shall be the record date for the determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Section, the determination shall apply to any adjournment of the meeting. 7.7 Quorum. Except as otherwise required by this Agreement, Members holding at least a Deciding Interest, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any meeting of Members, a majority of the Percentage Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty (60) days without further notice. However, if the adjournment is for more than sixty (60) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting. At an adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during the meeting of that number of Percentage Interests whose absence would cause less than a quorum. 7.8 Manner of Acting. If a quorum is present, the affirmative vote of Members holding at least a Deciding Interest shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Delaware Act, by the Certificate of Formation or by this Agreement. Unless otherwise expressly provided in this Agreement or required under applicable law, Members who have an interest (economic or otherwise) in the outcome of any particular matter upon which the Members vote or consent may vote or consent upon any such matter and their Percentage Interest, vote or consent, as the case may be, shall be counted in the determination of whether the requisite matter was approved by the Members. 7.9 Proxies. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. The proxy shall be 16 filed with the Managers of the Company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 7.10 Action by Members Without a Meeting. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Member entitled to vote, and delivered to the Managers of the Company for inclusion in the minutes or for filing with the Company records. Action taken under this Section is effective when all Members entitled to vote have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. 7.11 Waiver of Notice. When any notice is required to be given to any Member, a waiver of the notice in writing signed by the person entitled to the notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of the notice. ARTICLE VIII CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS 8.1 Initial Capital Contributions. Prior to the date of this Agreement, Prime incurred the costs in connection with the acquisition of the Hotel, including legal fees in negotiating the purchase contract and due diligence costs identified by amount or by description on Exhibit 8.1. The Members other than Prime shall reimburse Prime upon execution of this agreement 50% of such costs, or, (if there are Members in addition to AFP and Prime), in accordance with their Percentage Interest. From and after the date of this Agreement, the Members shall pay their proportionate share of all costs incurred by and on behalf of the Company in accordance with this Agreement, including the costs identified by amount or by description on Exhibit 8.1. The initial Percentage Interest of Prime is 50.00%, and the initial Percentage Interest of AFP is 50.00%. 8.2 Additional Capital Contributions. At any time and from time to time after the Initial Capital Contributions have been funded, the Members holding a Deciding Interest acting unanimously may call for additional Capital Contributions to the Company to pay for all Company and Hotel related expenses not otherwise covered by financing proceeds or operating income, including, without limitation, development costs, legal fees, land acquisition costs, financing costs, construction and purchasing costs, franchise fees, management fees, pre-opening expenses and operating expenses. Provided that the amount and timing of such call is reasonable in view of the current and reasonably foreseeable future needs of the Company, each Member shall be obligated to fund its share of such Capital Contribution no later than ten (10) business days following the date of such call. A Member's share of each such Capital Contribution shall be equal to the product obtained by multiplying the Member's Percentage Interest (expressed as a percentage) by such required Capital Contribution. A Member's share shall be payable in cash or by certified check. 17 8.3 Dilution. If a Member fails to make all or any portion of a Capital Contribution required to be made by such Member pursuant to Section 8.1 or Section 8.2 (such Member being hereinafter referred to individually as a "Failing Member" and the Capital Contribution, or portion thereof, not contributed by such Failing Member being referred to as the "Default Amount"), the other Members that have made the Capital Contribution (the "Non-Failing Members") shall have the right, at their option, to (i) receive a refund of their Capital Contribution as adjusted for gains or losses, (ii) make a loan to the Company in a amount not in excess of the Default Amount which, at the option of the Non-Failing Members, may be converted into a Capital Contribution equal to the outstanding balance of such loan, plus accrued interest, at any time from the date of such loan, provided that the Failing Member is given a Dilution Notice (as hereinafter defined) at such time; or (iii) give notice ("Dilution Notice") to the Failing Member of their intention to make a further additional Capital Contribution to the Company (or to convert a loan to the Company made in accordance with this Section 8.3 into an additional Capital Contribution) in an amount not in excess of the Default Amount. If the Failing Member has not made, within ten (10) days of the delivery to it of the Dilution Notice, an additional Capital Contribution to the Company in an amount equal to the Default Amount, then the Non-Failing Members may make an additional Capital Contribution to the Company in an amount not in excess of the Default Amount. Upon receipt by the Company of such additional Capital Contribution, the Non-Failing Members' Percentage Interest in the Company shall be increased to the percentage obtained by dividing (x) a sum equal to (i) two times any Default Amounts plus (ii) the sum of all other committed and additional Capital Contributions made by the Non-Failing Members by (y) the sum of all other committed and additional Capital Contributions made by all Members at any time. In turn, the Failing Member's Percentage Interest in the Company shall be decreased to a percentage equal to one hundred percent, less the Non-Failing Members' new Percentage Interest, as calculated pursuant to the preceding clause of this Section 8.3. In the event that there is more than one Non-Failing Member, the increase in the Non-Failing Member's Percentage Interest shall be allocated among the Non-Failing Members on the basis of the ratio of their contributions. 8.4 Capital Account. (a) A separate Capital Account shall be maintained for each Interest Holder, in accordance with Code Section 704(b) and Treasury Regulations Section 1.704-1(b). (b) In the event of a permitted sale or exchange of an Interest in the Company, the Capital Account of the transferor shall become the Capital Account of the transferee to the extent it relates to the transferred Interest in accordance with Treasury Regulations Section l.704-l(b)(2)(iv). (c) The manner in which Capital Accounts are to be maintained pursuant to this Section is intended to comply with the requirements of Code Section 704(b) and the Treasury Regulations promulgated thereunder. If, in the opinion of the Company's accountants, the manner in which Capital Accounts are to be maintained pursuant to the preceding provisions of this Section should be modified to comply with Code Section 704(b) and the Treasury Regulations thereunder, then notwithstanding anything to the contrary contained in the preceding provisions of this Section, the method in which Capital Accounts are maintained shall be so modified; provided, however, that any 18 change in the manner of maintaining Capital Accounts shall not materially alter the economic agreement between or among the Members. (d) Except as required in Sections 8.1 and 8.2, or by any of the special allocation provisions of Section 9.5, if applicable, no Interest Holder shall have any liability to restore all or any portion of a deficit balance in the Interest Holder's Capital Account. (e) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and the initial Gross Asset Value. In the event that the Gross Asset Value of any Company asset is adjusted pursuant to items (ii) or (iv) of the definition of the term Gross Asset Value contained in Article I hereof, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. 8.5 No Interest on Capital Contributions. Interest Holders shall not be paid interest on their Capital Contributions. 8.6 Return of Capital Contributions. Except as otherwise provided in this Agreement, no Interest Holder shall have the right to receive any return of any Capital Contribution and Capital Accounts. 8.7 Form of Distribution. If an Interest Holder is entitled to receive a return of a Capital Contribution or any other distribution, the Company, at the discretion of the Managers, may distribute cash, notes, property, or a combination thereof to the Interest Holder, but no Interest Holder shall have the right to demand that distributions be made in any form other than cash. 8.8 Loans by Members. No Member shall be obligated to lend any money to the Company. With the exception of the institutional borrowing allowed by Section 3.4, the borrowings which the Managers are authorized to incur by Sections 5.2 and 5.3 and a loan which a Member may make pursuant to Section 8.3 and 8.9, the Company shall not borrow any funds without the approval of the Members holding a Deciding Interest. If, pursuant to Section 8.3 or 8.9, one or more Members lend any money to the Company as a loan (a "Loan"), such Loan shall not increase the Capital Account of such Member or entitle such Member to any increase in its share of the distributions of the Company. Any Loan shall be an obligation of the Company, and no Member shall be personally obligated to repay the Loan and the Loan shall be payable or collectible only out of the assets of the Company. All Loans shall bear interest at a rate per annum equal to the sum of (x) five percent (5%) plus (y) the prime rate prevailing from time to time of PNC Bank, adjusted as of the date of each prime rate change at said bank, but in no event shall the rate of interest exceed the highest rate permitted by law which, if exceeded, could subject the lending Member to penalties. A loan made by a Non-Failing Member pursuant to 19 Section 8.3 and the interest thereon shall be payable on demand and shall be senior in right of payment to any loan which may be payable by the Company to the other Members, except for a loan made by the other Members pursuant to Section 8.3 or Section 8.9. A Guarantor Loan made pursuant to Section 8.3 or 8.9 shall be senior in right of payment to any loan which may be payable by the Company to the other Members, except for a loan made by the other Members pursuant to Section 8.9, but shall be junior in right of payment as to principal and interest to the debt which gave rise to the Guarantor Loan. The principal and interest on debt owed to a Member pursuant to Section 8.9 shall be payable on demand but shall be so payable only after all debt which gave rise to the Guarantor Loan and the interest thereon has been paid in full. 8.9 Payment by Member Under Guaranty of Company Debt. (a) Member as sole guarantor. In the event that the Company fails to make payment of principal or interest on any debt incurred pursuant to Section 3.4 of which less than all members are guarantors, those Members may effect payment of the amount owed by the Company by making payment thereof directly to the creditor (hereinafter referred to as a "Member Guaranty Payment"). Any Member who makes a Member Guaranty Payment (the "Paying Guarantor") shall be deemed to have made a payment to the Company in the amount of the Member Guaranty Payment which, at the election of the Paying Guarantor communicated to the Company and to the other Members and subject to any requirements which may be imposed by the holders of the Company's institutional debt, will be either a loan to the Company (a "Guarantor Loan") or a payment to the Company (a "Guarantor Contribution") which gives rise to the rights and privileges with respect to the Company described in paragraph (c) of this Section (a "Guarantor Claim"). A Guarantor Loan or a Guarantor Contribution may, at the option of the holder thereof, be converted into an additional Capital Contribution, equal to the outstanding balance of such Guarantor Loan, plus accrued interest, or the amount of the distribution which would then be payable on such Guarantor Claim, as applicable, at any time from the date of the relevant Member Guaranty Payment by giving notice of such election to the other Members and to the Company. Upon the giving of such notice, the Paying Guarantor's Percentage Interest in the Company with its corresponding voting rights shall be increased to the percentage obtained by applying the formula set forth in Section 8.3 in which application the amount of the converted Guarantor Loan and the interest thereon or the amount of the distribution which would then be payable on the converted Guarantor Claim, as applicable, will be considered an additional Capital Contribution. In turn, the other Members' Percentage Interest in the Company with its corresponding voting rights shall be decreased to a percentage equal to one hundred percent, less the Paying Guarantor's new Percentage Interest, as calculated pursuant to the preceding sentence of this paragraph (a). (b) Members as joint and several guarantors. (i) In the event that the Company fails to make a payment of principal or interest on any debt incurred pursuant to Section 3.4 of which all Members are joint and several guarantors, the Members shall effect payment of the amount owed by the Company by each making payment equal to its Percentage Interest thereof directly to the creditor. If each 20 Member makes such required payment, the Paying Guarantors, subject to any requirements which may be imposed by the holders of the Company's institutional debt, both will be deemed to have made a Guarantor Loan, or a Guarantor Contribution or a Capital Contribution in the amount of its Member Guaranty Payment as the Paying Guarantors shall both agree; provided, however, in the absence of such agreement, the Member Guaranty Payment will be considered to be an additional Capital Contribution. (ii) If a Member fails to make all of the payment required of it by subparagraph (b) (i) of this Section within fifteen days after the amount is due by the Company (the "Failing Guarantor"), the other Members who do not so fail (the "Non-Failing Guarantor") shall have the right to pay to the creditor the amount not so paid by the Failing Guarantor (a "Deficiency Payment"). Upon making a Deficiency Payment, the Non-Failing Guarantor may make a claim against the Failing Guarantor in the amount of the Deficiency Payment or part thereof and the remaining part of the Deficiency Payment not claimed against the Failing Guarantor will be considered a payment to the Company by the Non-Failing Guarantor to which all of the rights and privileges afforded to a Paying Guarantor making a Member Guaranty Payment pursuant to paragraph 8.9(a) shall apply. The Non-Failing Guarantor, and only the Non-Failing Guarantor, shall have the rights and privileges of a Paying Guarantor under paragraph 8.9(a). (c) Rights and Privileges related to a Guarantor Claim. For purposes of this Agreement and the relative rights of the parties hereto: (i) A Guarantor Contribution will not be deemed to be a Capital Contribution and will not, until converted to a Capital Contribution, result in an increase in the Paying Guarantor's voting rights, Capital Account, Interest in the Company or Percentage Interest therein. (ii) The holder of a Guarantor Claim will be entitled to payment by the Company of a percent per annum on the outstanding amount thereof equaling the sum of (x) five percent (5%) plus (y) the prime rate prevailing from time to time while such amount is outstanding at PNC Bank, adjusted as of the date of each prime rate change at said bank, but in no event shall the rate of interest exceed the highest rate permitted by law. The holder of a Guarantor Claim will be entitled to said payment out of Cash Flow, but only if at the time of such payment, the Company has then outstanding no debt or interest thereon other than trade debt or other debt incurred in the ordinary course of business which is not outstanding beyond the date when such debt is due. During such time as such payment on a Guarantor Claim is not payable out of Cash Flow because of the existence of outstanding debt, such payment will nevertheless accrue. If such payment on a Guarantor Claim is payable out of Cash Flow because 21 of the absence of outstanding debt, such payment will be made prior to any payment out of Cash Flow made to an Interest Holder. (iii) The holder of a Guarantor Claim will be entitled to payment by the Company of the amount thereof, plus the unpaid payments due thereon under paragraph (c)(ii), at such time that Interest Holders are entitled to receive a return of their Capital Contributions or a distribution of Capital Proceeds. The right of a holder of a Guarantor Claim to receive such payment is prior to the right of an Interest Holder to receive a return of its Capital Contribution or Capital Proceeds, but is junior to the right of creditors of the Company to receive payment of the amounts then due to them. (d) Nonrecourse Carveout Guaranty. Any liability under a Nonrecourse Carveout guaranty shall be paid by the Members in accordance with their respective Percentage Interests in the same manner as a Member Guaranty Payment under this Section 8.9 unless one or more Member(s) committed the acts giving rise to such liability, in which case such responsible Member(s) shall be solely responsible for such liability. 8.10 Right to Offset Damages. The Company may offset damages for breach of this Agreement by an Interest Holder, or of any other agreement between the Company and such Interest Holder by the Interest Holder, whose interest is liquidated (either upon the withdrawal of the Interest Holder or the liquidation of the Company) against the amount otherwise distributable to the Interest Holder. 8.11 Rights of Non-Guarantor Members. Notwithstanding any provision of this Article VIII to the contrary, in the event that any Member makes any payment of principal or interest on any debt incurred pursuant to Section 3.4 upon the failure of the Company to make such payment, such Member shall have the same rights as a Paying Guarantor under Section 8.9(a) above. ARTICLE IX PROFIT, LOSS, ALLOCATIONS, AND DISTRIBUTIONS 9.1 Added Definitions. "Adjusted Capital Account Deficit" shall mean, with respect to any Interest Holder, the deficit balance, if any, in the Interest Holder's Capital Account as of the end of the applicable taxable year, after giving effect to the following adjustments: (i) the deficit shall be decreased by the amounts which the Interest Holder is obligated to restore under this Agreement or is deemed obligated to restore under Treasury Regulations Section 1.704-2(g)(1) and (i)(5); and (ii) the deficit shall be increased by the items described in Treasury Regulations Section 1.704-1(b)(2)(ii)(c) and (d)(4), (5), and (6). 22 The foregoing definition is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Interest Holder Minimum Gain" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(2) and 2(d). "Interest Holder Nonrecourse Deduction" shall have the meaning set forth in Treasury Regulations Section 1.704-2(i)(1) and 2(i)(2). "Interest Holder Nonrecourse Liability" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Minimum Gain" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(2) and 1.704-2(d). "Net Capital Proceeds" shall mean the net cash proceeds received by the Company from a Capital Transaction, less any portion thereof used to establish Reserves for Company expenses, obligations, and contingencies as determined by the Managers. Net Capital Proceeds shall include all principal and interest payments on any debt obligation received by the Company in any Capital Transaction. "Nonrecourse Deductions" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(1). "Nonrecourse Liability" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(3). 9.2 Distribution of Cash Flow. Cash Flow, after any necessary set aside to maintain minimum working capital of the Company in an amount not less than $225,000, shall be distributed to the Interest Holders in accordance with their Percentage Interests within thirty (30) days after the end of each calendar quarter. 9.3 Distribution of Capital Proceeds. Net Capital Proceeds shall be distributed and applied by the Company in the following order and priority: (a) to the payment of debts and liabilities of the Company then due and outstanding (including all debts due to any Interest Holder); then (b) to the payment of Guarantor Claims, plus the unpaid payments due thereon pursuant to paragraph (c)(ii) of Section 8.9 (subject to any requirements which may be imposed by the holders of the Company's institutional debt, if any); then (c) the balance, to the Interest Holders in accordance with their Percentage Interests. 23 9.4 Allocation of Profits and Losses. (a) Profits. After giving effect to the special allocations set forth in Section 9.5, Profits shall be allocated to the Interest Holders in accordance with their Percentage Interests. (b) Losses. After giving effect to the special allocations set forth in Section 9.5, Losses shall be allocated to the Interest Holders in accordance with their Percentage Interests; provided, however, that no Interest Holder shall be allocated a Loss that creates or increases an Adjusted Capital Account Deficit for such Interest Holder. 9.5 Regulatory Tax Allocations. (a) Minimum Gain Chargeback. Except as set forth in Treasury Regulations Section 1.704-2(f), if, during any taxable year, there is a net decrease in Minimum Gain, each Interest Holder, prior to any other allocation under this Section 9.5, shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Interest Holder's share of the net decrease of Minimum Gain, computed in accordance with Treasury Regulations Section 1.704-2(g). Allocations of gross income and gain under this Section 9.5(a) shall be made first from gain recognized from the disposition of Company assets subject to Nonrecourse Liabilities, to the extent of the Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 9.5(a) shall constitute a "minimum gain chargeback" under Treasury Regulations Section 1.704-2(f), and this provision shall be interpreted consistently therewith. (b) Interest Holder Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), if, during any taxable year, there is a net decrease in Interest Holder Minimum Gain attributable to an Interest Holder Nonrecourse Liability during any taxable year, each Interest Holder who has a share of the Interest Holder Minimum Gain attributable to such Interest Holder Nonrecourse Liability shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Interest Holder's share of the net decrease in the Interest Holder Minimum Gain. This allocation shall be made after the allocation under Section 9.5(a) and prior to any other allocation under this Section 9.5. Allocations of gross income and gain under this Section 9.5(b) shall be made first from gain recognized from the disposition of Company assets subject to Interest Holder Nonrecourse Liabilities, to the extent of Interest Holder Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 9.5(b) shall constitute a "minimum gain chargeback" under Treasury Regulations Section 1.704-2(i), and this provision shall be interpreted consistently therewith. (c) Qualified Income Offset. If any Interest Holder unexpectedly receives any adjustments, allocation, or distributions described in Treasury Regulations Section 1.704- 24 1(b)(2)(ii)(d)(4), (5) or (6), items of gross income and gain shall be specially allocated to each such Interest Holder in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Interest Holder as quickly as possible. An allocation under this Section 9.5(c) shall be made only if and to the extent that such Interest Holder would have an Adjusted Capital Account Deficit after all other allocations provided for under this Section 9.5 have been tentatively made as if this Section 9.5(c) were not in this Agreement. (d) Nonrecourse Deductions. Nonrecourse Deductions for a taxable year or other period shall be specially allocated among the Interest Holders in accordance with their Percentage Interests. (e) Interest Holder Nonrecourse Deductions. Any Interest Holder Nonrecourse Deduction for any taxable year or other period shall be specially allocated to the Interest Holder who bears the risk of loss with respect to the Interest Holder Nonrecourse Liability to which the Interest Holder Nonrecourse Deduction is attributable, as determined in accordance with Treasury Regulations Sections 1.704-2(b) and 1.704-2(i)(1). (f) Code Section 754 Adjustment. To the extent an adjustment to the tax basis of any Company asset under Code Section 734(b) or Code Section 743(b) is required, under Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases basis), and the gain or loss shall be specially allocated to the Interest Holders in a manner consistent with the manner in which their Capital Accounts are required to be adjusted under that Section of the Treasury Regulations. (g) Contributed Property and Book-Ups. In accordance with Code Section 704(c) and the Treasury Regulations thereunder, as well as Treasury Regulations Section 1.704-1(b)(2)(iv)(d)(3), income, gain, loss, and deduction with respect to any property contributed (or deemed contributed) to the Company shall, solely for tax purposes, be allocated among the Interest Holders so as to take account of any variation between the adjusted basis of the property to the Company for federal income tax purposes and its fair market value at the date of contribution (or deemed contribution). If the adjusted book value of any Company asset is adjusted as provided herein, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall take account of any variation between the adjusted basis of the asset for federal income tax purposes and its adjusted book value in the manner required under Code Section 704(c) and the Treasury Regulations thereunder. Allocations under this Section 9.5(g) are solely for the purpose of federal, state, and local taxes, and shall not be taken into account in determining any Interest Holder's Capital Account and allocable share of Profits and Losses. (h) Withholding. All amounts required to be withheld under Code Section 1446 or any other provision of federal, state, or local law shall be treated as amounts actually distributed to the affected Interest Holders for all purposes under this Agreement. 25 9.6 Liquidation and Distribution. (a) If the Company is liquidated, the assets of the Company shall be distributed in accordance with Section 13.2. (b) No Interest Holder shall be obligated to restore a Negative Capital Account. 9.7 General. (a) Except as otherwise provided in this Agreement, the timing and amount of all distributions shall be determined by the Members. (b) If any assets are distributed in kind to the Interest Holders, those assets shall be valued at their fair market value, and any Interest holder entitled to any interest in those assets shall receive that interest as a tenant-in-common with all other Interest Holders so entitled. Unless the Members otherwise agree, the fair market value of the assets shall be determined by an independent appraiser who shall be selected by the Members. The Profit or Loss for each unsold asset shall be determined as if the asset had been sold at its fair market value, and the Profit or Loss shall be allocated as provided in Section 9.4 and shall be properly credited or charged to the Capital Accounts of the Interest Holders prior to the distribution of the assets. (c) All Profits and Losses shall be allocated, and all distributions shall be made to the Persons shown on the records of the Company to have been Interest Holders as of the last day of the taxable year for which the allocation or distribution is to be made. Notwithstanding the foregoing, unless the Company's taxable year is otherwise separated into two or more short years, if there is a Transfer or an Involuntary Withdrawal during the taxable year, the Profits and Losses shall be allocated between the original Interest Holder and the successor on the basis of the number of days each was an Interest Holder during the taxable year. (d) The Managers are hereby authorized, upon the advice of the Company's tax counsel, and with the concurrence of Members holding a Deciding Interest, to amend this Article IX to comply with applicable provisions of the Code and the Treasury Regulations promulgated under such applicable Code provisions, including but not limited to Code Section 704(b); provided, however, that no amendment shall materially affect distributions to an Interest Holder without the Interest Holder's prior written consent. ARTICLE X TRANSFER OF INTERESTS AND WITHDRAWAL 10.1 General. (a) No Member shall transfer any Membership Rights to any Person who is not an accredited investor as defined in Section 16.15. Each Member who transfers Membership Rights 26 shall obtain from the transferee a written confirmation with respect to the representations and warranties as set forth in Section 16.15. (b) If at any time AFP or Prime proposes to sell, dispose of or otherwise transfer, directly or indirectly, in one transaction or a series of related transactions, any Membership Rights in the Company to any Person other than to an Affiliate of such Member and upon such transfer the percentage of the combined Membership Rights held by AFP and Prime is reduced from 50% or greater to less than 50% of the total Membership Rights of all Members, then such transferring Member or Members, if both Prime and AFP are transferring, shall refrain from effecting such transaction unless, prior to the consummation thereof, (a) the other Members shall have been afforded the opportunity to join in such transaction on the same price and the same terms and conditions as given to such transferring Member or Members, and (b) the other Members shall have been given notice of the proposed transfer and the non-exclusive opportunity to negotiate with such transferring Member or Members to purchase or otherwise acquire the interest that such transferring Member or Members propose to sell, dispose of or otherwise transfer. It is the intention of the parties that this paragraph shall not be applicable if at the time of such proposed transfer the percentage of the combined Membership Rights of AFP and Prime and any of their Affiliates is less than 50%of the total Membership Rights of all Members. (c) No Member shall pledge, encumber or otherwise assign as collateral security any of its Membership Rights in the Company without the prior written consent of each other Member, provided that the foregoing shall not apply to any pledge, encumbrance or other assignment to an Affiliate of such pledging Member in which such pledging Member holds an equity interest of greater than 50%. (d) Other than for the limitation set forth in this Section 10.1, Membership Rights shall be freely transferable. (e) Each Member hereby acknowledges the reasonableness of the prohibition contained in this Section 10.1 in view of the purposes of the Company and the relationship of the Members. The Transfer of any Membership Rights in violation of the prohibition contained in this Section shall be deemed invalid, null and void, and of no force or effect. Any Person to whom Membership Rights are attempted to be transferred in violation of this Agreement shall not be entitled to vote on matters coming before the Members, participate in the management of the Company, receive distributions from the Company, or have any other rights in or with respect to the Membership Rights. 10.2 Involuntary Withdrawal. (a) Immediately upon the occurrence of an event of Involuntary Withdrawal, the successor of the withdrawn Member shall thereupon become an Interest Holder but shall not become a Member, nor succeed to any Membership Rights other than those rights pertaining to the owner of an Interest. In addition, the withdrawn Member shall be deemed as of the date of the occurrence of the event, to have made an offer to sell, and to have granted a Purchase Option for, his entire Interest in the Company to the Company and the other Members (the "Non-Withdrawn Members"), as follows: 27 (i) The Company shall have the first option (the "Purchase Option") to purchase such Interest for a price (the "Purchase Price") equal to the amount the transferor would receive if the Company were liquidated and an amount equal to the lesser of (A) the fair market value of the equity in the Company, as determined by an appraiser selected by the Company or the Member(s) exercising the Purchase Option, and (B) the Book Value (as hereinafter determined) were available for distribution to the Members. (ii) The Purchase Option shall be and remain irrevocable for a period (the "Option Period") ending at 11:59 P.M., local time at the Company's principal office on the thirtieth (30th) day following the date the Non-Withdrawn Members receive notice of the occurrence of an event of Involuntary Withdrawal. (iii) At any time during the Option Period, the Company may elect to exercise the Purchase Option by giving written notice of its election to the withdrawn Member. The withdrawn Member shall not be deemed a Member for the purpose of voting on whether the Company shall elect to exercise the Purchase Option. If the Company elects to exercise the Purchase Option, the Company's notice of its election shall fix a closing date (the "Transfer Closing Date") for the purchase, which shall not be earlier than five (5) days after the date of the notice of election or more than thirty (30) days after the expiration of the Option Period. If the Company determines not to exercise the Purchase Option, the Company shall give notice of its determination to each Member before the expiration of the Option Period. (iv) If the Company fails to exercise the Purchase Option, then the Non-Withdrawn Members shall have the right to exercise the Purchase Option for the Purchase Price and the Option Period shall be automatically extended to 11:59 P.M., local time at the Company's principal office on the later of the forty-fifth (45th) day following the date the Non-Withdrawn Members receive notice of the occurrence of an event of Involuntary Withdrawal and the thirtieth (30th) day following receipt of the Company's notice of its determination not to exercise the Purchase Option.. (v) At any time during the Option Period as so extended, each Non-Withdrawn Member may elect to exercise the Purchase Option in the proportion in which the Percentage Interest then held by such Non-Withdrawn Member bears to all of the Percentage Interests in the Company excluding the Percentage Interest of the withdrawn Member, by giving written notice of the election to the withdrawn Member and to the Company. If the Non-Withdrawn Member elects to exercise the Purchase Option, the Non-Withdrawn Member's notice of its election shall fix the Transfer Closing Date, which shall not be earlier than five (5) days after the date of the notice of election or more than thirty (30) days after the expiration of the Option Period. (vi) If the Company or any Non-Withdrawn Member(s) exercises the Purchase Option, the Company or such Non-Withdrawn Member(s), as the case may be, 28 shall pay to the withdrawn Member on the Transfer Closing Date cash or other immediately available funds in the amount of the Purchase Price. (vii) In the event the Company purchases the withdrawn Member's Interest, then the Non-Withdrawn Members shall be deemed to have acquired 100% of the Membership Rights acquired by the Company. (viii) In the event the withdrawn Member fails to timely execute and deliver the assignment or other documentation reasonably required to transfer its Interest to the Company or the Non-Withdrawn Member(s) on the Transfer Closing Date for any reason, then the Company or the Non-Withdrawn Members, as the case may be, shall at all times on and after such date have the right and power to take all steps and execute all assignments and other documents necessary to transfer such Interest without the signature of the withdrawn Member being required on any such assignment or document in connection therewith, and the withdrawn Member hereby grants the Company and the Non-Withdrawn Member(s) an irrevocable power attorney, coupled with an interest, to take such steps or execute such assignments or other documents on its behalf if such withdrawn Member fails to timely do so. (b) Book Value. The term "Book Value" for purposes of Subsection 10.2(a) shall mean the book value, computed in accordance with generally accepted accounting principles, of the equity in the Company as of the end of the last full calendar month immediately preceding the month in which the event giving rise to the payment for the Interest occurred. Notwithstanding anything contained in this Agreement to the contrary, the computation of Book Value shall be subject to the following provisions: (i) No additional allowance of any kind shall be made for the goodwill, trade names, or any other intangible asset or assets (the "Intangible Assets") of the Company other than the aggregate dollar amount for any of those Intangible Assets appearing on the most recent balance sheet of the Company prior to the date on which Book Value is to be determined. (ii) Reserves for contingent liabilities shall not be treated as a liability for purposes of determining Book Value. (iii) No adjustment shall be made to Book Value as a result of any event occurring subsequent to the date as of which Book Value is to be determined. Book Value shall be determined by the accountants regularly employed by the Company. The determination of the accountants shall, for the purposes of this Agreement, be binding and conclusive upon all parties. 10.3 Voluntary Withdrawal. No Member shall have the right or power to voluntarily withdraw from the Company. 10.4 Indemnification by Transferor. An Interest Holder shall indemnify the Company and the remaining Members against any and all loss, damage, or expense (including, without 29 limitation, tax liabilities or loss of tax benefits) arising directly or indirectly from any Transfer or purported Transfer in violation of this Article X. 10.5 Disposition of Other Membership Rights On Transfer of Interest. Upon and contemporaneously with any transfer of an Interest of a transferor who is a Member which does not at the same time transfer the other rights associated with the Interest transferred by the transferor (including, without limitation, the rights of the transferor to participate in the management of the business and affairs of the Company), the Company shall purchase from the transferor, and the transferor shall sell to the Company for a purchase price of $100, all remaining rights and interests retained by the transferor that immediately before the sale or gift were part of the transferor's Membership Rights and associated with the transferred Interest. ARTICLE XI ADDITIONAL MEMBERS 11.1 Admission to Membership. New Members shall be admitted only upon the transfer of the interest of an existing Member in whole or in part. 11.2 Financial Adjustments. New Members shall be entitled to allocation of losses, income, or expense deductions incurred by the Company as agreed to between the new Member and the transferring Member. The Managers may, at their option, at the time a Member is admitted, close the Company books (as though the Company's tax year had ended) or make pro rata allocations of loss, income, and expense deductions to a new Member for that portion of the Company's tax year in which a Member was admitted in accordance with the provisions of Code Section 706(d) and the Treasury Regulations promulgated thereunder. ARTICLE XII BOOKS, RECORDS, ACCOUNTING AND TAX ELECTIONS 12.1 Bank Accounts. All funds of the Company shall be held in a bank account or accounts, or other appropriate investment account or accounts, opened in the Company's name. The Managers shall determine the institution or institutions at which the accounts will be opened and maintained, the types of accounts, and the Persons who will have authority with respect to the accounts and the funds therein. 12.2 Books and Records. (a) At the expense of the Company, the Managers shall keep and maintain records and accounts of all operations and expenditures of the Company, which shall include, but not be limited to, the following records: (i) complete and accurate information regarding the state of the business and financial condition of the Company; (ii) a current list of the full name and last known business, residence, or mailing address of each Member, Interest Holder, and Manager both past and present, and the date on which each became a Member, Interest Holder or Manager; (iii) a copy of the certificate of formation and operating agreement of the Company, all amendments thereto, and all executed copies of any powers of attorney pursuant to which the operating agreement, any certificate, and all amendments thereto have been executed; (iv) copies of all of the Company's federal, state, and local income tax returns and reports, and copies of all 30 financial statements of the Company, for the four most recent years; (v) true and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each Member and which each Member has agreed to contribute in the future; (vi) minutes of every annual meeting, special meeting and court-ordered meeting; and (vii) all written consents obtained from Members for actions taken by Members without a meeting. (b) The books and records shall be maintained in accordance with sound accounting practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours. (c) Any request for information shall be in writing, and shall state the purpose therefor. Each Member shall reimburse the Company for all reasonable costs and expenses incurred by the Company in connection with the Member's inspection and copying of the Company's books and records. 12.3 Accounting Period. The Company's accounting period shall be the calendar year. 12.4 Tax Returns and Elections. (a) The Managers shall cause the preparation and timely filing of all tax returns required to be filed by the Company pursuant to the Code and all other tax returns deemed necessary and required in each jurisdiction in which the Company does business. Copies of those returns, or pertinent information from the returns, shall be furnished to the Members within a reasonable time after the end of the Company's Fiscal Year. (b) For Delaware tax purposes, each Member and Interest Holder which is a nonresident of Delaware shall execute and deliver to the Managers such form or forms (the "Nonresident Tax Forms") as may be required by the taxing authorities of the state of Delaware no later than sixty (60) days after the later of becoming a Member or Interest Holder, as the case may be. The Managers shall timely file said Nonresident Tax Forms for each nonresident Member and Interest Holder with the appropriate taxing authorities of the State of Delaware, together with the Company's annual Delaware return. (c) The Members having a Deciding Interest shall have the authority to make all elections permitted under the Code, including, without limitation, elections or methods of depreciation and elections under Code Section 754. (d) The Company shall take all appropriate steps to be (i) ignored for federal and state income tax purposes or (ii) if appropriate, treated as a partnership for tax purposes. 12.5 Reports. Within seventy-five (75) days after the end of each taxable year of the Company, the Managers shall cause to be sent to each Person who was a Member at any time during the accounting year then ended a balance sheet and a profit and loss statement certified by a Manager or an officer of Prime Hospitality Corp. In addition, within seventy-five (75) days after the end of each taxable year of the Company, the Managers shall cause to be sent to each 31 Person who was an Interest Holder at any time during the taxable year then ended, that tax information concerning the Company which is necessary for preparing the Interest Holder's income tax returns for that year. At the request of any Member, and at the Member's expense, the Managers shall cause an audit of the Company's books and records to be prepared by independent accountants for the period requested by the Member. 12.6 Tax Matters Member. Prime shall be the tax matters member ("TMM"), as defined in Section [6231 (a)(7)] of the Code, with respect to operations conducted by the Company during the period that Prime is a Member. The TMM shall comply with the requirements of Section [6221 through 6232] of the Code. The TMM shall retain a qualified accounting firm (the "Accountants") to prepare tax returns, annual reviewed financial statements for the Company, and any other financial statements or data requested by the Members. Notwithstanding anything to the contrary in this Section 12.6, the TMM, in its capacity as such, shall take no position with respect to the Company absent the prior consent of the Members holding a Deciding Interest. ARTICLE XIII DISSOLUTION AND TERMINATION OF THE COMPANY 13.1 Dissolution. (a) The Company shall be dissolved upon the earliest occurrence of any of the following events (each, a "Dissolution Event"): (i) when the period fixed for the duration of the Company shall expire pursuant to Section 2.5 hereof; (ii) by the written agreement of the Members holding a Deciding Interest; (iii) upon the occurrence of an Involuntary Withdrawal, unless the remaining Members, within ninety (90) days after the occurrence of the Involuntary Withdrawal, by the affirmative vote of Members holding a Deciding Interest (determined without regard to the Percentage Interest of the withdrawn Member), elect to continue the business of the Company pursuant to the terms of this Agreement; or (iv) should an event occur upon the occurrence of which the Members have agreed in this Agreement to dissolve the Company. (b) Upon the occurrence of a Dissolution Event, the Company shall cease to carry on its business, except insofar as may be necessary for the winding up of its business, but its separate existence shall continue until a Certificate of Cancellation has been filed with the Secretary of State or until a decree dissolving the Company has been entered by a court of competent jurisdiction. 32 13.2 Winding Up, Liquidations, and Distribution of Assets. Upon dissolution, an accounting shall be made by the Company's independent accountants of the accounts of the Company and of the Company's assets, liabilities, and operations, from the date of the last previous accounting until the date of dissolution. The Managers shall immediately proceed to wind up the affairs of the Company. If the Company is dissolved and its affairs are to be wound up, the Managers shall: (a) sell or otherwise liquidate all of the Company's assets as promptly as practicable (except to the extent the Members may determine to distribute any assets to the Interest Holders in kind), which sale may be to one of the Members pursuant to the buy-out procedures of Article XIV; (b) allocate Profit and Loss resulting from such sales or liquidations to the Interest Holders' Capital Accounts in accordance with this Agreement; (c) if any assets of the Company are to be distributed in kind, take those actions with respect to appraisal and allocation of Profit and Loss required under Section 9.7(b) of this Agreement; and (d) distribute the assets of the Company in the following order: (i) first, to creditors, including Members, Interest Holders and Managers who are creditors, in satisfaction of liabilities of the Company, other than liabilities for which reasonable provision has been made, and liabilities to Interest Holders and former Members described in clauses (ii) and (iii) below; (ii) second, to holders of Guarantor Claims, the amount of their Guarantor Claim plus the unpaid payments due thereon under paragraph (c)(ii) of Section 8.9; (iii) third, to Interest Holders and former Members who have resigned, unpaid distributions to which they became entitled prior to dissolution or resignation, as applicable; (iv) fourth, to Interest Holders in proportion to their remaining Capital Account balances after taking into account all contributions, distributions and allocations for all periods. 13.3 Certificate of Cancellation. When all debts, liabilities, and obligations have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets have been distributed to the Members, a Certificate of Cancellation shall be executed in duplicate and verified by the person signing the Certificate, which Certificate shall set forth the information required by the Delaware Act. Duplicate originals of the Certificate of Cancellation shall be delivered to the Delaware Secretary of State. 13.4 Termination of Existence. Upon the filing of the Certificate of Cancellation, the existence of the Company shall cease, except for the purpose of suits, other proceedings, and appropriate action as provided in the Delaware Act. The Managers shall have authority to 33 distribute any Company property discovered after dissolution, convey real estate, and take such other action as may be necessary on behalf of and in the name of the Company. 13.5 Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of his Capital Contribution. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the cash contribution of one or more Members, the Members shall have no recourse against any other Members. ARTICLE XIV DEADLOCKS 14.1 Deadlocks (a) Dispute. If at any time, a unanimous consent of Members or the consent of Members holding a Deciding Interest cannot be reached or an approval of Prime or AFP cannot be obtained on any matter requiring such a consent or approval (a "Dispute") any Member (the "Offeror Member") shall have the right any time exercisable by written notice (the "Offeror Notice") to all Members voting against the Offeror Member in connection with the Dispute to (the "Offeree Member or Members") to offer to buy (the "Offer") such other Members' interest in the Company at a purchase price and upon other terms specified in the Offer. Any Member who is not within the definition of "Offeree Member" shall have no rights or obligations under this Section 14.1. (b) Offeree Member Election. The Offeree Members must elect by sending written notice (the "Notice of Election") to the Offeror Member thirty days after receipt of the Offer, either: (i) to Sell their interest in the Company at the purchase price and on other terms specified in the Offer, or (ii) to offer to purchase the Offers' interest in the Company at a purchase price equal to the price and on other terms specified in the Offer. (c) Conflict among Offeree Members. In the event that some Offeree Members chose to buy and other Offeree Members chose to sell, the Offeree Members choosing to buy shall purchase the interests of the Offeror Member and the Offeree Members choosing to sell. The interests purchased and the purchase price shall be allocated so as to maintain the existing proportionality in ownership. (d) Conflict among Offeror Members. In the event that two offers are made, the first in time shall control. In the event that any of the Offeree Members fails to deliver its Notice of Election in accordance with the terms of Subsection 14.1within such thirty day period, the Offeree Member shall be deemed to have elected clause (i). (e) Purchase by Offeror Member. Upon the election referred to in subsection (b) above, the Member or Members who are purchasing (the "Purchasing Members"), within three (3) business days following delivery of the Notice of Election, shall pay into escrow a 34 deposit (the "Offeror Deposit") equaling five percent (5%) of the Offer purchase price, and on or before the date (the "Outside Closing Date") which is the earlier to occur of 60 days after the execution of a formal purchase and sale agreement (the "Sale Contract") or 90 days after receipt of the Notice of Election, the Purchasing Members, the Members selling their interest (the "Selling Members") and the other Members shall execute such Members' consents and such documents and instruments reasonably required by the Purchasing Members to sell and transfer their interests to the Purchasing Members at the purchase price and other terms specified in the Offer and the Sale Contract. The Sale Contract shall contain such terms as are consistent with the terms of this Section 14.1 and as are otherwise reasonably acceptable to the Purchasing Members and the Selling Members. The closing of such sale (the "Sale Closing") shall take place as soon as practicable but in any event on or before the Outside Closing Date. At the Sale Closing, the Selling Members shall sell and transfer their interests free and clear of encumbrances,. In the event that the Purchasing Members default in their obligation to close in accordance with the terms of this Section 14.1 on or before the Outside Closing Date, the Purchasing Members' right to purchase the Selling Members' interest pursuant to the Offer shall terminate and the Offeror Deposit shall be paid to the Selling Members as liquidated damages. Upon such default the Selling Members shall have the right, exercisable within 30 days following the Outside Closing Date, to elect to purchase the Purchasing Members' interest at a purchase price equal to that set forth in the Offer. In the event that the Selling Members so elect to purchase the Purchasing Members interest in the Company, the closing thereof will be conducted in accordance with the terms of this Section 14.1 ARTICLE XV DEFAULT 15.1 Rights After Default. After the date hereof, if any Member fails to perform any of its obligations hereunder or breaches or defaults under any of the terms, conditions or covenants of this Agreement including those specified in Section 8.1 or 8.2 or paragraph 8.9(b)(i) or breaches or defaults under any of the terms, conditions or covenants of any other agreement between the Company and such Member (a "Default"), then the other Members that are parties to this Agreement (the "Nondefaulting Members"), shall have the right to give such party (the "Defaulting Members") a Notice of Default (a "Notice of Default"). The Notice of Default shall set forth the nature of the obligation which the Defaulting Members have not performed. (a) If a Default is not a failure to pay money and if, within the thirty (30) day period following receipt of the Notice of Default, the Defaulting Members in good faith commences to perform such obligation and either cures the Default or thereafter prosecutes to completion with diligence and continuity the curing thereof and cures the Default within a reasonable time, it shall be deemed that the Notice of Default was not given and the Defaulting Members shall lose no rights hereunder. If, within such thirty (30) day period, the Defaulting Member does not commence in good faith the curing of the Default or does not thereafter prosecute the completion with diligence and continuity the curing hereof, then the Nondefaulting Members shall have the rights set forth in Subsection 15.1(c). (b) If a Default is a failure to pay money including a default described in Sections 8.1 or 8.2 or paragraph 8.9(b)(i), and if such sums of money shall be paid by or 35 on behalf of the Defaulting Members within fifteen (15) days after receipt of the Notice of Default with respect thereto, then it shall be deemed that such Notice of Default was not given and the Defaulting Members shall lose no rights hereunder. If such sums are not so paid within such fifteen (15) day period, then the NonDefaulting Members shall have the rights set forth in Subsection 15.1 (c). (c) If any Default which materially affects the operation of the Company or any Default which is a failure to pay money is not cured as set forth in Subsections 15.1 (a) or 15.1 (b), the Nondefaulting Members holding more than fifty (50%) percent of the total Percentage Interest held by all Nondefaulting Members shall have the right to terminate this Agreement unilaterally by giving the Defaulting Members written notice thereof, whereupon such Default will be treated as an Involuntary Withdrawal of the Defaulting Members under Subsection 10.2. 15.2 No Waiver. Failure of the Nondefaulting Members to give any Notice of Default, or any failure by the Nondefaulting Members to insist upon strict performance of any of the terms of this Agreement or of any other agreement between the Company and the Defaulting Members, shall not constitute a waiver of any such breach or any of the terms of this Agreement or such other Agreement. No breach shall be waived nor shall any duty be performed, or altered or modified except by written instrument. One or more waivers or failures to give Notice of Default shall not be construed as a waiver of a subsequent or continuing breach of the same covenant. 15.3 Estoppel Certificate. Any Member shall at any time and from time to time upon not less than twenty (20) days prior written notice from any other Members, acknowledge and send to the other Members a statement in writing certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the Agreement is in full force and effect as modified and stating the modifications) and stating whether or not as to all Members there exists any default in keeping, observing or performing any of the terms contained in this Agreement or in any agreement between a Member and the Company and, if a default shall exist, specifying each such default (limited, as regards the other Members' defaults, to those defaults of which the certifying Member has knowledge). 15.4 Negation of Right to Dissolve by Will of Member. Except as otherwise specifically set forth in this Agreement, no Member shall have the right to terminate this Agreement or dissolve the Company by its express will or by withdrawal without the consent of the Members holding a Deciding Interest. 15.5 Not Exclusive Remedy. The rights granted in Section 15.1 shall not be deemed an exclusive remedy of the Nondefaultings Member and the Company, but all other rights and remedies, legal and equitable, shall be available to the Nondefaulting Members and to the Company. 36 ARTICLE XVI MISCELLANEOUS PROVISIONS 16.1 Notices. Any notice, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an executive officer of the party to whom the same is directed or, if sent by registered or certified mail, postage and charges prepaid, addressed to the Member's and/or Company's address, as appropriate, which is set forth below or to such other address as may have been communicated, from time to time, to the Members or to the Company in a notice that complies with the provision of this Section. Except as otherwise provided in this Agreement, any such notice shall be deemed to be given three (3) business days after the date on which the same was held in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid: To Prime: Prime-Meadowlands, L.L.C. c/o Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 With a copy to: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 To AFP: AFP EIGHTEEN CORP. c/o United Capital Corp. United Capital Building 9 Park Place Great Neck, New York 11021 With a copy to: Samuel Ross, Esq. c/o Olshan Grundman 505 Park Avenue New York, New York 10022 16.2 Waiver of Action for Partition. Each Member and Interest Holder irrevocably waives during the term of the Company any right that it may have to maintain any action for partition with respect to the property of the Company. 16.3 Amendments. This Agreement may not be amended except by the unanimous written agreement of all of the Members. 16.4 Execution of Additional Instruments; Estoppel Certificate. Each Member hereby agrees to execute such other and further statements of interest and holdings, designations, powers of attorney, and other instruments necessary to comply with any laws, rules, or regulations. Each Member shall, within ten (10) days after written request by any Member or the Managers, deliver to the requesting Person a certificate stating, to the Member's knowledge, that: (a) this Agreement is in full force and effect; (b) this Agreement has not been modified except by an 37 instrument or instruments identified in the certificate; and (c) there is no default hereunder by the requesting Person, or if there is such a default, the nature and extent thereof. 16.5 Terms. Common nouns and pronouns shall be deemed to refer to the masculine, feminine, neuter, singular, and plural, as the identity of the Person may in the context require. 16.6 Section Headings. The section headings in this Agreement are for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any of its provisions. 16.7 Waivers. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not prevent a subsequent act that would have originally constituted a violation from having the effect of an original violation. 16.8 Rights and Remedies Cumulative. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive the right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance, or otherwise. 16.9 Severability. If any provision of this Agreement or its application to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement and its application shall not be affected and shall be enforceable to the fullest extent permitted by law. 16.10 Heirs, Successors, and Assigns. Each and all of the covenants, terms, provisions, and agreements contained in this Agreement shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, successors, and assigns. 16.11 Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company. 16.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 16.13 Application of Delaware Law. This Agreement shall be governed exclusively by its terms and by the laws of the State of Delaware, and specifically the Delaware Act. 16.14 Jurisdiction and Venue. Any suit involving any dispute or matter arising under this Agreement may only be brought in the United States District Court for the District of Delaware or any Delaware State Court having jurisdiction over the subject matter of the dispute or matter. All Members hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding. 16.15 Investment Representations. Each Member hereby represents and warrants to the Company and the other Members that such Member: 38 (a) is an "accredited investor" within the meaning of rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"); (b) understands that the Member's Interest has not been registered under the Securities Act, nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon such Member's representations contained herein; (c) has such knowledge and experience in financial and business matters that the Member is capable of evaluating the merits and risks of the investment contemplated by this Agreement; and the Member is able to bear the economic risk of this investment in the Company (including a complete loss of this investment); (d) recognizes that no public market exists for the Member's Interest, and none will exist in the future; that it must bear the economic risk of this investment indefinitely unless the Member's Interest is registered pursuant to the Securities Act or an exemption from such registration is available, and unless the disposition of such Member's Interest is qualified under applicable state securities laws or an exemption from such qualification is available, and that the Company has no obligation or present intention of so registering the Member's Interest; understands that there is no assurance that any exemption from the Securities Act will be available, or, if available, that such exemption will allow the member to transfer any or all the Member's Interest, in the amounts, or at the times the Member might propose; understands at the present time that Rule 144 ("Rule 144') promulgated under the Securities Act by the Securities and exchange Commission is not applicable to sales of the Member's Interest because they are not registered under Section 12 of the Securities Exchange Act of 1934 as amended (the "Exchange Act") and there is not publicly available the information concerning the Company specified in rule 144; acknowledges that the Company is not presently under any obligation to register under Section 12 of the Exchange Act or to make publicly available the information specified in Rule 144 and that it may never be required to do so; (e) is acquiring the Member's Interest solely for its own account for investment and not with a view toward the resale, transfer, or distribution thereof, nor with any present intention of distributing the Securities. Except as specifically provided herein, no other person has any right with respect to, or interest in, the Member's Interest to be purchased by the Member, nor has the Member agreed to give any person any such interest or right in the future; (f) except as specifically provided herein, has no contract, undertaking, understanding, agreement or arrangement, formal or informal, with any person to sell, transfer or pledge all or any portion of his, her or its Member Interest, and has no current plans to enter into any such contract, undertaking, understanding, agreement or arrangement; (g) has not seen, received, been presented with, or been solicited by any leaflet, public promotional meeting, article or any other form of advertising or general solicitation as to the Company's sale to such Member of his, her or its Member Interest; and (h) is familiar with the business and operations of the Company and has been afforded full and complete access to the books, financial statements, records, contracts, been 39 afforded an opportunity to ask such questions of the Company's agents, accountants and other representatives concerning the Company's proposed business, operations, financial condition, assets, liabilities and other relevant matters as he has deemed necessary or desirable, and has been given all such information as has been requested, in order to evaluate the merits and risks of the investment contemplated herein. 16.16 Limitation of Transfer. No Member shall transfer any Member Interest to any Person who is not an accredited investor as defined in Section 16.15. Each Member who transfers a Member Interest shall obtain from the transferee a written confirmation with respect to the representations and warranties as set forth in Section 16.15. [BALANCE OF PAGE LEFT BLANK INTENTIONALLY] 40 CERTIFICATE The undersigned, being all the initial Members as specified in this Agreement, hereby agree, acknowledge, and certify that the foregoing Agreement constitutes the Operating Agreement of East Rutherford Group, L.L.C. adopted by the Members of the Company and effective as of December 19, 2002. MEMBERS: PRIME-MEADOWLANDS, L.L.C. By: /S/ Douglas Vicari ------------------------------------ Douglas Vicari, Manager AFP EIGHTEEN CORP. By: /S/ Anthony Miceli ------------------------------------ Anthony Miceli, Manager 41 EXHIBIT 8.1 COSTS IN CONNECTION WITH HOTEL ACQUISITION Survey * Title Insurance * Outside Legal $30,000.00 (Estimated) Environmental Seller provided Engineering Seller provided Feasibility/Appraisal Seller provided Architectural $ 6,125.00 (Estimated) Travel (out of pocket) Due Diligence Permits/Licenses $ 1,359.60 Escrow Fees * State, City County Recordation Fees & Taxes * Transfer Taxes * Other *See attached closing statement Estimated costs are based on current billing and will be adjusted. EX-2.Q 4 y84868exv2wq.txt MANAGEMENT AGREEMENT . . . EXHIBIT 2(q) MANAGEMENT AGREEMENT --------------------
ARTICLE NO. DESCRIPTION OF ARTICLE PAGE NO. - ----------- ---------------------- -------- 1. Appointment and Term 1 2. Hotel Operation 2 3. Annual Plan 3 4. Hotel Accounts; Maintenance of Minimum Balance 5 5. Books and Records 5 6. Management Fees and Expenses 7 7. Disbursements 9 8. Insurance 10 9. Indemnities 12 10. Condemnation 13 11. Casualty 13 12. Termination for Cause 13 13. Termination Fee 14 14. Definitions 14 15. General Provisions 19
SCHEDULE DESCRIPTION OF SCHEDULE - -------- ----------------------- I Terms of Agreement II Management Services Included in Base Management Fee III Sample Statement of Profit and Loss
MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (this "Agreement") is made on the date specified on Schedule I, by and between Owner identified on Schedule I and PRIME HOSPITALITY CORP., having offices at 700 Route 46 East, Fairfield, New Jersey 07004 (hereinafter referred to as "Manager"). PREAMBLE Owner is the owner of the Hotel described on Schedule I. Owner and Manager have entered into this Management Agreement to provide for the management and operation of the Hotel. Definitions for the capitalized words contained throughout the Management Agreement are found in Article 14. 1. APPOINTMENT AND TERM. 1.01 APPOINTMENT. Owner hereby appoints Manager as manager of the Hotel with the exclusive right to direct, supervise, manage and operate the Hotel, subject to Owner's obligations under New Jersey law as holder of a plenary retail consumption license with respect to the sale and consumption of alcoholic beverages (the "Alcohol Beverage License"). Owner acknowledges its obligations as holder of the Alcoholic Beverage License pursuant to the rules and regulations of the New Jersey Division of Alcoholic Beverage Commission. Owner will not employ any other manager to manage the Hotel during the periods Manager is to manage the Hotel pursuant to the terms of this Agreement. 1.02 OPERATING TERM. The initial operating term of this Agreement will commence at 12:01 A.M. on the date identified on Schedule I (the "Commencement Date") and terminate at 11:59 on the expiration date identified on Schedule I (the "Expiration Date"). 1.03 MANAGEMENT PROCEDURES. Manager will consult with Members of Owner on a periodic and regular basis with respect to the management of the Hotel. Manager on behalf of Owner may take all actions it deems appropriate for the operation of the Hotel. For purposes of communications between Manager and Owner, Owner's authorized representatives will be those individuals identified in writing by Owner. 1.04 DEALINGS WITH AFFILIATES. Manager may purchase products or services from affiliates of Manager provided that all such transactions and dealings shall be arms length and on commercially reasonable terms. 2. HOTEL OPERATIONS. 2.01 HOTEL MANAGEMENT SERVICES. A. Manager will manage the Hotel in accordance with standards and policies appropriate for the operation of comparable facilities, including the standards and policies of the franchisor, if any, and with respect to operations subject to the Alcoholic Beverage License in accordance with the rule and regulations of the New Jersey Division of Alcoholic Beverage Control. Manager will perform the activities contained on Schedule II, but only to the extent that sufficient funds are available to Manager to perform those activities. B. Manager's services do not include design and purchasing services for new construction or renovations of the public areas or of three or more guest rooms ("Major Construction"). At Owner's request, Manager will provide design and purchasing services for Major Construction for a fee as set forth on Schedule I. 2.02 EMPLOYEES. A. Manager will select a general manager and the department heads for the Hotel and all personnel which Manager determines to be necessary for the operation of the Hotel (collectively "Employees"). All Employees will be employed at Owner's cost and expense, but will be employees of Manager, provided that the Owner shall have the right to direct the actions of and terminate, if required, the employment of any Employee engaged directly or indirectly in the operation of the Owner's alcohol beverage service to the fullest extent required by the rules and regulations of the New Jersey Division of Alcoholic Beverage Control.. B. Subject to Owner's obligations as holder of the Alcoholic Beverage License, all decisions with regard to the terms of employment of Employees not engaged wholly or in part in the service of alcoholic beverages , including but not limited to compensation, bonuses, fringe benefits, discharge and replacement of all Employees, will be made and implemented directly by Manager or through the general manager, department heads or any of their designees under the supervision of Manager. 2 C. All decisions with regard to the terms of employment of Employees engaged wholly or in part in the service of alcoholic beverages , including but not limited to compensation, bonuses, fringe benefits, discharge and replacement of all Employees, will be made by Owner through the general manager, department heads or any of their designees. D. Manager will enroll the Employees in Manager's employee benefits program (the "Benefits Program"). Manager will administer the Benefits Program in the same manner that it administers the Benefits Program at other hotels it operates. The Hotel will be charged as an Operating Expense the cost of such Benefits Program under the same formula used to calculate the cost charged to other hotels Manager operates. E. Manager will assist Owner in responding to organizational efforts by unions and in negotiating and implementing union agreements. With respect to Manager's employees, Manager will control the terms of any union contract and will not be required to take actions which will unreasonably increase Manager's liabilities pursuant to the union contract. Upon termination of this Agreement, Owner will assume Manager's obligations under the union contact with respect to any employees hired by Owner at that time. 2.03 CAPITAL REPLACEMENTS. A. An independent and segregated replacement reserve account will be created in the name of Owner (the "Capital Replacement Reserve Account.") The Capital Replacement Reserve Account will be funded by transferring on the tenth (10th) of each month a sum equal to the percentage identified on Schedule I of the Gross Revenue of the preceding month. All funds will be held in an interest bearing account. B. Proceeds (insurance or otherwise) received in reimbursement for expenditures previously charged to the Capital Replacement Reserve Account for Capital Replacements and all proceeds from the sale of any capital items determined by Manager to no longer be needed or appropriate for the operation of the Hotel or to be replaced, will be added to the Capital Replacement Reserve Account. C. Manager will administer the Capital Replacement Reserve Account on behalf of Owner. The proceeds of the Capital Replacement Reserve Account will be applied to Capital Replacements in accordance with the Annual Plan or with Owner's approval. 3. ANNUAL PLAN. 3.01 PREPARATION AND SUBMISSION. Owner and Manager acknowledge that the budgeting process is a critical factor to the successful operation of the Hotel and also a key communication link between the parties. Following the Commencement Date, Manager will submit to Owner, for its approval, an operating budget for the initial Operating Year. For purposes of this Article 3, the operating budget for the initial Operating Year will be deemed the annual plan for that year. Thereafter, Manager will submit to Owner, for its approval, not later than thirty (30) days before the beginning of each Operating Year the proposed annual plan for the Hotel (the "Annual Plan") comprised of the following: (a) a statement of the estimated income and expenses for the Operating Year, including assumptions as to payroll costs, room rates and occupancies, which will reflect the estimated results of the operation during each month of the Operating Year; (b) either as part of the statement of the estimated income and expenses referred to in the preceding clause (a), or separately, budgets covering proposed expenditures for the coming Operating Year for (i) Capital Replacements and (ii) Operating Equipment; (c) a marketing plan. Owner acknowledges that Manager's budgets and forecasts are management tools to be used solely for internal management purposes and do not represent performance standards or warranties of performance by Manager. In preparing all budgets and forecasts and the estimated profit and loss statements comprising the Annual Plan, Manager will base its estimates upon the most recent and reliable information available taking into account the location of the Hotel and Manager's experience in Hotel operations. Manager expressly disclaims any warranty of or representations as to results of operations of the Hotel. 3.02 OWNER'S APPROVAL. Owner will review the Annual Plan within fifteen (15) days after receiving the Plan. Within fifteen (15) days after Owner completes its review, Owner and Manager will meet to discuss Owner's comments and to review Manager's financial and operational analysis. If an agreement is not reached by the first day of the Operating Year, the Annual Plan will be based on actual results of the previous Operating Year. 3.03 COMPLIANCE WITH ANNUAL PLAN. Manager will use reasonable efforts to comply with the Annual Plan and will not incur any material additional expense or change materially the manner of operation of the Hotel without the written approval of Owner. 3.04 AGREEMENT LIMITATION. Manager will not enter into any commitment on behalf of Owner requiring payments of amounts in excess of the amount set forth on Schedule I or requiring performance over a time period in excess of the period set forth on Schedule I without the written approval of Owner. 3.05 EMERGENCIES. The limitations of Sections 3.03 and 3.04 do not apply to emergency repairs or emergency actions. For the purposes of this Section 3.05, an emergency means an unforeseen circumstance that in the opinion of Manager requires immediate action which cannot be delayed in order to minimize injury to the Hotel or injury to any person or property. 4. HOTEL ACCOUNTS; MAINTENANCE OF MINIMUM BALANCE. 4.01 HOTEL BANK ACCOUNTS. All funds received in the operation of the Hotel, including the proceeds from credit cards and direct-bill clients, will be deposited into one or more special accounts bearing the name of the Hotel (the "Hotel Accounts") or the Capital Replacement Reserve Account, as appropriate, in the banks selected by Manager. Manager will control all Hotel accounts to ensure the orderly receipt, disbursement, and accounting of funds. Manager will have no liability for any loss to Owner as a result of any bank insolvency or failure or as a result of any negligence or misconduct of the Bank or its employees. The Owner's funds will not be co-mingled with funds of the Manager or funds of other hotels managed by Manager, except that all of the Hotel's disbursements may be made out of Manager's common corporate disbursement account along with disbursements for other hotels. To the extent practicable, all funds will be held in an interest bearing account. 4.02 MINIMUM BALANCE. Upon establishment of the Hotel Accounts and at Manager's direction, Owner will deliver to Manager for deposit in the Hotel Accounts the sum set forth on Schedule I (the "Minimum Balance") and will advance additional funds from time to time at Manager's request to maintain the Minimum Balance. Owner will at all times provide Manager with funds sufficient to manage and operate the Hotel in accordance with the terms of this Agreement and all such funding will be the sole responsibility of the Owner. Manager will have no responsibility to make any payment if funds are not available or if in Manager's discretion, such payment would result in an insufficient balance. 5. BOOKS AND RECORDS. 5.01 MAINTENANCE OF BOOKS AND RECORDS.. Manager will keep complete and adequate books of account and such other records as are necessary to reflect the results of the operation of the Hotel on a calendar year basis. Manager will keep the books and records for the Hotel in all material respects in accordance with the Uniform System of Accounts, on an accrual basis, in accordance with generally accepted accounting principles consistently applied. 5.02 LOCATION; EXAMINATION AND INSPECTION. All personnel records shall be the property of Manager and shall not be available to the Owner. All software and the data with respect to the operation and accounts of the Hotel on such software shall be the property of Manager and Owner shall not be entitled to copies of such software, provided, Owner shall be entitled to receive printed extracts of such data. Except as set forth above, the books of account and all other records relating to or reflecting the operation of the Hotel will be the property of Owner and will be kept at the Hotel or at Manager's home office. All books and records will be available to Owner and its representatives upon reasonable request for examination, inspection and transcription. 5.03 OWNER TO RECEIVE ALL BOOKS AND RECORDS UPON TERMINATION. Upon any termination of this Agreement, all original books and records of all books and records not kept at the Hotels, will be turned over to Owner forthwith so as to ensure the orderly continuance of the operation of the Hotel, provided, however, Manager will at its expense be entitled to retain copies of all books and records wherever located. 5.04 REPORTS TO OWNER. A. Manager will deliver not later than the twentieth (20th) day of the month, a detailed (i) profit and loss statement showing the results of operation of the Hotel for the prior month and the year to date, with a comparison to the budgets contained in the then current Annual Plan; (ii) market segmentation report; and (iii) accounts receivable aging report as of the end of the previous month. B. Within ninety (90) days after the end of each Operating Year, Manager will deliver a balance sheet and a profit and loss statement certified by an officer of the Manager. Costs of a certified audit or any other reports by an independent certified public accountant, if and when requested by Owner, will be an Operating Expense borne by Owner and will be directed as to scope and content by Manager. C. At Owner's request, Manager will further deliver financial reports required by third parties. All costs in producing these reports, will constitute an Operating Expense to be borne by Owner. 5.05 FINAL ACCOUNTING. Upon termination of this Agreement, for any reason, Manager will promptly deliver to Owner, but will be permitted to retain a copy of, the following: (a) a final accounting, reflecting the balance of income and expenses of the Hotel as of the date of termination; (b) any balance or moneys in the Hotel Accounts, or elsewhere, held by Manager with respect to the Hotel (after payment or reservation with respect to all committed obligations); and (c) all books and records of the Hotel (including those stored on computerized software), and all contracts, bookings, reservations, leases, receipts for deposits, unpaid bills and other records, papers or documents which pertain to the Hotel, and duplicate copies of personnel records of employees employed directly by Owner (provided Manager will not be required to turn over computer software, but will provide all printouts from the software related to the Hotel). 5.06 FORM OF REPORTS. All reports will be in Manager's customary detail and form for managed properties in accordance with the standard profit and loss statement currently used by Manager. 6. MANAGEMENT FEES AND EXPENSES. 6.01 MANAGEMENT FEES. Owner will pay to Manager a base management fee (the "Base Management Fee"), together with any sales and use taxes. The Base Management Fee will be equal to the percentage of Gross Revenues set forth on Schedule I with respect to each separate, full or partial month during the term of this Agreement. The Base Management Fee will be payable no later than the tenth (10th) day of the month immediately succeeding the month for which the Base Management Fee is earned. 6.02 ACCOUNTING SERVICES FEE. Manager will charge an accounting services fee as set forth on Schedule I. 6.03 REIMBURSEMENT OF COSTS AND EXPENSES. Manager shall not be reimbursed for any portion of its overhead, provided that Owner will reimburse Manager for all costs and expenses incurred by Manager for Owner's account in the ordinary course of business under the terms and provisions of this Agreement and will include, but not be limited to the following: (a) the salaries and wages, including costs of payroll taxes, bonuses, retirement plan contributions, fringe benefits, and related payroll items incurred with respect to Manager's employees assigned to the Hotel; (b) Expenses for shared services and purchases (equitably allocated to each hotel benefiting from the shared services or purchases in a manner consistent with Manager's allocation policy uniformly applied to all managed hotels;) (c) All taxes, including sales and use taxes and similar assessments levied against all fees and reimbursements payable by Owner to Manager or Manager's affiliates under this Agreement. 6.04 REBATES AND DISCOUNTS. Because of its purchasing power derived through its operations of its proprietary hotels, its management of hotels, and its franchising of hotels, Manager may from time to time negotiate rebates and discounts from the vendors of certain products and services comprising Manager's vendor network. Manager will be entitled to retain such rebates and discounts. Any discounts and rebates from local vendors not comprising Manager's vendor network but serving the Hotel shall be credited to the Hotel. 6.05 SUBORDINATION OF THE BASE MANAGEMENT FEE. Manager agrees to subordinate this Agreement to the First Mortgage, provided such subordination is on commercially reasonable terms and provided further that the subordination shall not cause the Manager to be responsible for the payment of or suffer any loss with respect to any costs of the operation of the Hotel. 7. DISBURSEMENTS. 7.01 PRIORITY OF PAYMENTS. All Gross Revenues will be deposited in the Hotel Accounts as and when received. Manager is authorized to and will disburse on a current basis, on behalf of Owner, funds from the Hotel Accounts (to the extent available) in the following order of priority: (a) Payment of payroll and payroll taxes and other employment costs identified in Section 6.03(a), including any sales and use taxes imposed on such costs; (b) Payment of all remaining sales and use taxes, including sales and use taxes on fees and reimbursements to Manager; (c) Payment to Manager of all other amounts due under Article 6 ; (d) Payment of any Operating Expenses (i) payable to Manager, or (ii) with respect to which Manager has pledged its credit; (e) Payment of all other Operating Expenses; (f) Transfers pursuant to Section 2.03; (g) Payment (as allocated by Owner to the extent of available cash) of real estate and personal property taxes, debt service on the First Mortgage, rents and other sums due under the Ground Lease and Fixed Charges (not otherwise provided for in this schedule of priorities; (h) Other Cash Flow Expenditures (not otherwise provided for in this schedule of priorities); (i) Payment of the balance to Owner. Manager may reserve funds in the Hotel Accounts each month (i) for any of the above items that are not paid on a monthly basis for a period of up to twelve (12) months in advance and (ii) for cash deficiencies anticipated to occur at the Hotel during the ninety (90) day period following any monthly disbursement date. 7.02 REMITTANCES TO OWNER. Concurrently with delivery of the monthly statements required pursuant to Section 5.04A., Manager, upon Owner's request, will remit to Owner all sums in the Hotel Accounts (except the Capital Replacement Reserve Account) in excess of the Minimum Balance plus reserve funds. 8. INSURANCE. 8.01 MAINTENANCE OF INSURANCE. Owner will maintain at Owner's cost and expense all risk property insurance and boiler and machinery valued at replacement cost and endorsed for business interruption coverage inclusive of ordinary payroll for a period of 12 months. The Owner will use any claim related insurance recovery to respectively repair/replace any damaged Hotel property or as contribution to Gross Revenue. Manager will maintain with respect to Manager's operations at Owner's cost and expense: (a) commercial general liability, including but not limited to products, contractual, personal/advertising injury and liquor liability with a limit of $10,000,000; (b) comprehensive auto liability including non-owned and rental vehicles with a limit of $5,000,000; (c) workers' compensation & employers' liability with a limit of $100,000; and (d) fidelity (crime) with limit sufficient to cover operational exposures. 8.02 OWNER METHODS OF OBTAINING INSURANCE. At its option, Owner may procure and obtain the property insurance by (i) undertaking of the insurance directly in its own name and behalf or (ii) agreeing to coverage under Manager's blanket policy in accordance with Manager's proposal at a price proposed by the Manager. Manager's price shall not include any profit markup. 8.03 PARTIES INSURED, AMOUNT OF COVERAGE, ETC. All insurance policies in article 8.01 will be endorsed to provide: (a) property insurance - Manager as named insured as respects their interests in the business interruption portion of coverage with claim settlement rights and insurer's waiver of subrogation against Manager; (b) property insurance - policy will have coverage for demolition and increased cost of construction off premises utility interruption , debris removal, and flood and earthquake. Deductibles will be reasonably agreed to from time to time by Owner and Manager. Hotel will absorb insurance policy deductible for each loss. The deductible will be allocated between property damage and business interruption in proportion to the total loss; (c) a requirement that all insurers will provide at least thirty (30) days notice of cancellation or material change in the terms and provisions of the policies. (d) general and automobile liability insurance - Owner as additional insured as regards the Manager's liability arising from the management of the Hotel; (e) coverage and deductibles as will be reasonably agreed to from time to time by Manager and Owner; (f) a requirement that all insurers will provide at least thirty (30) days notice of cancellation or material change in the terms and provisions of the policies; and (g) all carriers should have a minimum rating of "A 8." 8.04 EVIDENCE OF INSURANCE. At least thirty (30) days prior to the expiration date of all insurance policies, the party maintaining the insurance will provide the other party evidence of insurance in the form of certificates of insurance evidencing renewal and coverage for the above endorsements. 8.05 LIMITATION ON SCOPE OF SERVICES. Manager is not advising the Owner as to insurance coverage and Owner will seek independent advice. Manager is not responsible for the solvency of any insurance carrier. Owner acknowledges that Manager's insurance set forth in Section 8.01 insures Owner with respect to Manager's negligence in connection with the operation of the Hotel and not with respect to Owner's negligence. Owner may wish to consider separate coverage for Owner's negligence. 9. INDEMNITIES. 9.01 INDEMNIFICATION TO MANAGER. To the fullest extent permitted by law, the Owner will defend, indemnify and hold Manager harmless from and against all actions, suits, penalties, claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from Manager's performance of this Agreement provided that any such claim, damage, loss or expense is not attributable to Manager's breach of this Agreement, gross negligence, willful misconduct, failure to act in good faith or action beyond the authority granted to the Manager by this Agreement. 9.02 INDEMNIFICATION TO OWNER. To the fullest extent permitted by law, the Manager will defend, indemnify and hold Owner harmless from and against all actions, suits, penalties, claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from Manager's breach of this Agreement, gross negligence, willful misconduct, failure to act in good faith or action beyond the authority granted to the Manager by this Agreement. Notwithstanding the above, Manager shall not be responsible for any liabilities, costs and expenses resulting from (i) isolated acts of Hotel employees unless those acts are directly attributable to Manager's substantial deviation from Manager's standard operating procedures, and (ii) errors in judgment made in good faith unless such errors are repeated after notice and result in liabilities not normally incurred in the ordinary course of a hotel business. 9.03 INDEMNIFIED PARTIES. The parties indemnified contained in this Article 9 will run to the benefit of both Manager and Owner, and the directors, officers, subsidiaries, assigns, agents and employees of Manager and Owner and affiliates. 9.04 CERTAIN CLAIMS TO BE OPERATING EXPENSES. All costs and expenses including attorney's fees arising out of (i) claims of negligence against Hotel Employees or (ii) any proceeding before any state or federal employment commission, wages and hours commission, and union grievance committee, or any similar proceeding will be deemed an Operating Expense. 10. CONDEMNATION. 10.01 FULL TAKING. If (i) the entire hotel is condemned, or (ii) only a portion is condemned but it is unreasonable to or Owner elects not to continue operating the remainder of the Hotel, this Agreement will terminate on the date when the ownership of the Hotel or condemned portion is transferred to the condemning authority. For purposes of this Article 10, a "condemnation" is any exercise of the power of eminent domain by any governmental authority, including a voluntary conveyance in lieu of judicial proceedings. 10.02 PARTIAL TAKING. Upon any condemnation not covered by Section 10.01, unless Owner elects to terminate this Agreement as a result of its election not to restore the building and continue the operation of a hotel, Owner will promptly repair the Hotel and restore it to operating condition. 11. CASUALTY. 11.01 DAMAGE BY FIRE AND OTHER CAUSES. If all or any part of the Hotel is damaged or destroyed by fire or other casualty, unless Owner elects to terminate this Agreement as a result of its election not to restore the building and continue the operation of a hotel, Owner promptly will repair the Hotel and restore it to operating condition. 12. TERMINATION FOR CAUSE. 12.01 TERMINATION BY MANAGER. Manager may terminate this Agreement upon the occurrence of any of the following: (a) Owner defaults in its performance of any obligation of the Agreement and (i) fails to cure the default within thirty (30) days after written notice or (ii) if the default is susceptible to cure but cannot be cured in thirty (30) days, then fails to commence within thirty (30) days and to diligently pursue the cure. (b) Manager notifies Owner that it has insufficient funds to repair or correct any condition at the Hotel which is in violation of any Legal Requirement or insurance requirement or presents a threat to life safety and Owner fails to provide sufficient funds to repair or correct the condition within seven days of the notice. 12.02 TERMINATION BY OWNER. Owner may terminate this Agreement if Manager defaults in its performance of any term of the Agreement and (i) fails to cure the default within thirty (30) days after written notice, or (ii) if the default is susceptible to cure but cannot be cured in thirty (30) days, then fails to commence within such thirty (30) days and to diligently pursue the cure. In addition, Owner may terminate this Agreement if the Members of the Owner are deadlocked and the interest of Prime-Meadowlands, L.L.C. in the Owner is purchased pursuant to Article XIV of the Operating Agreement between Prime-Meadowlands, L.L.C. and AFP Eighteen Corp. dated December 19, 2002. 12.03 REMEDIES RESERVED. Termination of this Agreement will not constitute the exclusive remedy of either Manager or Owner. Both Manager and Owner will retain all other remedies provided for in this Agreement and by law. 13. TERMINATION FEE. 13.01 TERMINATION FEE. Owner may terminate this Agreement at any time by giving Manager sufficient notice to comply with all applicable laws, including laws governing notification to employees (but not less than thirty (30) days notice in any event) including with its notice payment of the termination fee (the "Termination Fee") set forth on Schedule I, together with the balance due of any and all amounts due Manager, including the Base Fee earned through the date of termination. Notwithstanding anything herein to the contrary, (i) a termination under Sections 10.01, 10.02 (provided that Owner elects not to restore the building and continue the operation of a hotel), and 11.01 (provided that Owner elects not to restore the building and continue the operation of a hotel), (ii) or a termination in connection with a sale of the Hotel in an arms length transaction, (iii) or a termination as a result of a default by Manager under Section 12.02, (iv) or a termination pursuant to the second sentence of Section 12.02 shall be without the payment of a Termination Fee. 13.02 ADDITIONAL CONSIDERATION. Owner acknowledges that Manager will suffer damage and be entitled to compensation if as a result of Owner's breach of this Agreement, this Agreement terminates or Manager is otherwise unable to continue managing the Hotel. Accordingly, Owner, as additional consideration, agrees to pay to Manager at the termination of this Agreement upon Owner's breach the amounts set forth in Section 13.01, together with amounts sufficient to indemnify Manager against liability arising under any law governing notification to employees. 14. DEFINITIONS. 14.01 "ACCOUNTING SERVICES FEE" has the meaning contained in Section 6.02. 14.02 "ANNUAL PLAN" has the meaning contained in Section 3.01. 14.03 "BASE MANAGEMENT FEE" has the meaning contained in Section 6.01. 14.04 "BASE YEAR" means the twelve full calendar months preceding the Commencement Date. 14.05 "CAPITAL REPLACEMENT RESERVE ACCOUNT" has the meaning contained in Section 2.03A. 14.06 "CAPITAL REPLACEMENTS" means the furnishings and equipment and other items, the cost of which for accounting purposes may not be expensed but must be capitalized over a useful life of greater than one year according to generally acceptable accounting principles. 14.07 "COMMENCEMENT DATE" means the date contained on Schedule I. 14.08 "EMPLOYEES" has the meaning contained in Section 2.02. 14.09 "EXCLUDED REVENUES" means (i) any gratuity or sales charges added to a customer's bill, which are payable to Hotel employees, (ii) sales taxes, excise taxes, gross receipt taxes, admission taxes, entertainment taxes, tourist taxes or other similar taxes, (iii) proceeds from the sale or refinancing of the Hotel, (iv) abatement of taxes and refunds, and (v) proceeds of insurance, except business interruption insurance. 14.10 "EXPIRATION DATE" has the meaning contained in Section 1.02. 14.11 "FIRST MORTGAGE" means the mortgage described on Schedule I. 14.12 "FIXED CHARGES" means any and all amounts paid or expenses incurred in connection with the following: (a) Rental and other charges imposed under any lease for the use, possession or operation of the Hotel, including Fixed Expense Leases; (b) Taxes (other than income and payroll taxes), including, without limitation, real and personal property taxes, business and occupation taxes, and utility taxes such as sewer taxes; (c) Insurance (other than employee benefit insurance such as workers' compensation insurance and health or life insurance); (d) Transfers to the Capital Replacement Reserve Account. 14.13 "FIXED EXPENSE LEASE" means any lease of real property and of furnishings and equipment, which if not leased would be purchased and capitalized as fixed assets. 14.14 "FRANCHISE COSTS" means expenditures for compliance with the requirements of the Franchisor of the Hotel, including without limitation payment of royalties, marketing contributions, and reservation system fees, but excluding the cost of compliance with Franchisor's operating standards requiring Capital Replacements. 14.15 "FRANCHISOR" means the hotel franchise company licensing the use of the Hotel name, if any. 14.16 "FURNISHINGS AND EQUIPMENT" means all furniture, furnishings, equipment, fixtures, apparatus and other personal property used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Hotel, other than Operating Equipment and Operating Supplies. 14.17 "GROSS REVENUES" means all revenues of the Hotel and all its uses of every nature and kind regardless of source, excluding Excluded Revenues. By way of illustration but not limitation, Gross Revenues will include: (a) The amount received as payment for the use and occupancy of all guest rental units; (b) The amount received as payment for the use and occupancy of all meeting rooms, banquet function rooms, and public areas; (c) All revenues derived from the sale of food and other edibles in restaurants, lounges, meeting rooms, banquets, guest rooms and any other location at the Hotel; (d) All revenues derived from the sale of liquor, beverages, and other potables in restaurants, lounges, meeting rooms, banquets, guest rooms, and any other location at the Hotel; (e) All revenues derived from the use of telephone in guest rooms or in public areas; (f) All revenues derived from leases, subleases, concessions, vending, valet services, swimming pool memberships, banquet extras, movies or income of a similar or related nature; and (g) Proceeds of business interruption insurance. 14.18 "GROUND LEASE" means the lease described on Schedule I. 14.19 "HOTEL" means the hotel described on Schedule I. 14.20 "HOTEL ACCOUNT(S)" has the meaning contained in Section 4.01. 14.21 "HOUSE PROFIT" OR "GROSS OPERATING PROFIT" means Gross Revenues less Operating Expenses. 14.22 "LEGAL REQUIREMENTS" means all laws, statutes, ordinances, orders, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and governmental authorities, which now or hereafter may be applicable to the Hotel and its operation. 14.23 "MANAGER" means Prime Hospitality Corp., or its successor. 14.24 "MINIMUM BALANCE" has the meaning contained in Section 4.02. 14.25 "NET OPERATING INCOME" means House Profit less the Base Management Fee, the Fixed Charges and Other Cash Flow Expenditures. 14.26 "OPERATING EQUIPMENT" means all china, glassware, linens, silverware and uniforms used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Hotel. 14.27 "OPERATING EXPENSES" means any and all amounts paid or expenses incurred in connection with the operation of the Hotel, as determined in accordance with the Uniform System of Accounts for Hotels, in accordance with generally accepted accounting principles consistently applied, but excluding the Base Management Fee, Accounting Services Fee, expenses paid from Excluded Revenues, Fixed Charges, Other Cash Flow Expenditures and non-cash items such as depreciation. By way of illustration but not limitation, Operating Expenses include: (a) Salaries, wages, payroll taxes, bonuses and employee benefits, including sales and use taxes imposed thereon, and payroll processing fees. (b) Legal, accounting and other professional fees. (c) Fees for licenses and permits. (d) Costs of Operating Supplies. (e) Costs of Operating Equipment. (f) Rentals under Operating Leases. (g) Franchise Costs. (h) Expenses allocated by Manager in the ordinary course as department expenses not otherwise itemized above directly related to rooms, food, beverage, telephone, and other segregated outlets. (i) Expenses not allocated by Manager to a specific department in the ordinary course and not otherwise itemized above including administrative and general; advertising, sales and promotion; heat, light and power; and repairs and maintenance (but not of Capital Replacements). 14.28 "OPERATING LEASE" means leases of personal property, which are not Fixed Expense Leases. 14.29 "OPERATING SUPPLIES" means consumable items used in or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Hotel, including but not limited to food and beverages, fuel, soap, cleaning material, matches, stationery and other similar items. 14.30 "OPERATING YEAR" means each twelve month period commencing on the first day of January (except for the first year, which will commence on the Commencement Date), and ending on the subsequent December 31 (except for the last year which will end on the date of termination, whether by expiration of the term of the Agreement or otherwise). 14.31 "OTHER CASH FLOW EXPENDITURES" means any and all expenses incurred in connection with the following: (a) Interest, principal, and other payments on any debt or other obligation for borrowed money, including debt service on any mortgage debt and rents and other charges of Fixed Expense Leases; and (b) Payments and distributions to Owner, excepting the distribution required pursuant to Section 7.01(j). 14.32 "OWNER" means the entity identified on Schedule I or its successors. 14.33 "TERMINATION FEE" has the meaning contained in Section 13.01. 14.34 "UNIFORM SYSTEM OF ACCOUNTS" means the Uniform System of Accounts for Hotels (Eighth Revised Edition, 1986) as revised from time to time; but not any subsequent revisions unless approved by both Owner and Manager in writing. 15. GENERAL PROVISIONS. 15.01 ESTOPPEL CERTIFICATES. Owner and Manager each, upon at least ten (10) days' notice, will execute and deliver to the other, and to any third party having, or about to have a bona fide interest in the Hotel, a written certificate stating that this Agreement is unmodified and in full force and effect, or if not, stating the details of any modification, and stating that as modified it is in full force and effect, the date to which payments have been paid, and whether there is any existing default on the part of the other. 15.02 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in this Agreement will be construed to be or create a partnership or joint venture between Owner, any affiliate of Owner, its successors or assigns, on the one part, and Manager, any affiliate of Manager, its successors and assigns, on the other part. 15.03 MODIFICATIONS AND CHARGES. This Agreement cannot be changed or modified except by another agreement in writing signed by the party sought to be charged therewith, or by its duly authorized agent. 15.04 UNDERSTANDINGS AND AGREEMENTS. This Agreement constitutes all of the understandings and agreements of whatsoever nature or kind existing between the parties with respect to Manager's management of the Hotel. 15.05 HEADINGS. The article and Section headings contained herein are for convenience or reference only and are not intended to define, limit or describe the scope or intent of any provisions of this Agreement. 15.06 SURVIVAL OF COVENANTS. Any covenant, term or provision of this Agreement which, in order to be effective, must survive the termination of this Agreement, will survive any such termination. 15.07 THIRD PARTIES. None of the obligations of this Agreement of either party will run to or be enforceable by any party other than the party to this Agreement or its assignee pursuant to the terms of this Agreement. Owner is expressly authorized to assign its rights under this Agreement to any mortgagee of the Hotel. 15.08 WAIVERS. No failure by Manager or Owner to insist upon the strict performance of any covenant, agreement, term or condition of this Agreement, or to exercise any right or remedy consequent upon the breach of this Agreement will constitute a waiver of any breach or any subsequent breach of the covenant, agreement, term or conditions. No covenant, agreement, term or condition of this Agreement and no breach of this Agreement will be waived, altered or modified, except by written instrument. No waiver of any breach will affect or alter this Agreement, but each and every covenant, agreement, term and condition of this Agreement will continue in full force and effect with respect to any other then existing or subsequent breach. 15.09 APPLICABLE LAW. This Agreement will be construed and interpreted by, and be governed by, the laws of the State of New Jersey. Owner agrees that the federal and state courts of the State of New Jersey shall have exclusive jurisdiction over any proceeding arising out of or with respect to this Agreement and further consents to the jurisdiction of such federal and state courts of the State of New Jersey and to the removal of any such proceeding brought in any other jurisdiction. 15.10 NOTICES. Except as otherwise provided in this Agreement, all notices required or permitted to be given hereunder, or which are to be given with respect to this Agreement, will be in writing sent by registered or certified mail, postage prepaid, return receipt requested, addressed to the party to be so notified as set forth on Schedule I. Any notice will be deemed delivered when received or receipt rejected. Notices may also be delivered by hand, or by special courier, if, in either case, receipt is acknowledged by the addressee. Any notice delivered by hand, or by special courier, will be deemed delivered when received. Either party may at any time change the addresses for notices by written notice to the other party. 15.11 BINDING EFFECT. This Agreement will be binding upon and will inure to the benefit of the successors in interest and the assigns of the parties hereto, provided that no assignment, transfer, sale, pledge, encumbrance, mortgage, lease or sublease by or through Manager or by or through Owner, as the case may be, in violation of the provisions of this Agreement, will vest any rights relative to this Agreement in the assignee, transferee, purchaser, secured party, mortgagee, pledgee, lessee, sublessee or occupant, or will diminish, reduce or release the obligations of the parties hereto. 15.12 CONFIDENTIALITY. Manager and Owner agree that the contents of this Agreement will not be disclosed to any other individual or entity (except as directed by law or judicial order), provided, Owner may disclose the contents of this Agreement to (i) its partners and limited partners, or shareholders and directors, if a corporate partner, and (ii) individuals or entities providing, or proposing to provide, financing to Owner. 15.13 NON-SOLICITATION OF MANAGER'S EMPLOYEES. Owner agrees that it will not for a period of two (2) years from the date of expiration or earlier termination of this Agreement, directly or indirectly (i) solicit (other than general solicitations made to the public at large) the employment of any key employee, officer or senior or regional director or manager of the Manager or (ii) hire any key employee, officer or senior and regional directors and managers employed by the Manager or any former key employee, officer or senior manager whose employment with the Manager has ceased within 180 days of such solicitation or hire. The term "key employee" includes regional and on-site hotel employees such as the regional vice presidents, regional directors of sales, district managers, hotel general managers and assistant general managers, hotel directors of sales, hotel food and beverage managers and assistant food and beverage managers, and executive housekeepers. Owner and Manager agree that Manager will suffer substantial damage as the result of the loss of trained, experienced, supervisory personnel and that Owner's agreement contained in this Section 15.13 is a material consideration. Further, Owner and Manager acknowledge that Manager's damages as a result of Owner's breach of this provision are substantial but are difficult to ascertain. Therefore, Owner and Manager agree to provide for liquidated damages in the sum of $100,000.00, representing Owner's and Manager's best estimate as to the damages arising from each separate breach of this Section by Owner, and not as a penalty or forfeiture. Owner and Manager agree that such liquidated damages are in lieu of any other remedy and that the solicitation and/or employment of each individual in violation of this Section 15.13 will constitute a separate breach and give rise to a separate damage award. Owner will cause its affiliates to comply with the provisions of this Section 15.13. 15.14 REPRESENTATION BY COUNSEL. The parties acknowledge that they have had the opportunity to review the terms of this Agreement with counsel of their choice and to negotiate its terms and provisions. No principal of law construing this Agreement against the preparing party will be applied to this Agreement. 15.15 TRIAL BY JURY. Due to the high cost and time involved in commercial litigation before a jury, the parties waive all right to a jury trial on all issues in any action or proceeding relating to this Agreement, the transaction contemplated by this Agreement, or any documents executed in connection with the contemplated transaction. IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year specified on Schedule I. OWNER: EAST RUTHERFORD GROUP, L.L.C. By: /s/ Anthony Miceli ----------------------------------- Anthony Miceli, Manager PRIME HOSPITALITY CORP. By: /s/ Douglas Vicari ----------------------------------- Douglas Vicari, Sr. V. P. SCHEDULE I TERMS OF AGREEMENT 1. DATE OF AGREEMENT: December 19, 2002 2. DESCRIPTION OF HOTEL (PREAMBLE): Sheraton Plaza Drive Two Meadowlands Plaza East Rutherford, New Jersey 07073 3. COMMENCEMENT DATE (SECTION 1.02): December 19, 2002 4. EXPIRATION DATE (SECTION 1.02): December 18, 2007. 5. DESIGN AND PURCHASING SERVICES (SECTION 2.01B): For design services previously authorized by Owner in writing, Manager will charge a fee of five (5%) percent of the invoice cost of the Major Construction. For purchasing services, Manager will charge five (5%) percent of the invoice cost of each capital item purchased. 6. CAPITAL REPLACEMENT RESERVE ACCOUNT (SECTION 2.03): 4% of Gross Revenue 7. AGREEMENT LIMITATIONS (SECTION 3.04): Manager will not enter into any agreement for the acquisition of goods and services other than standard maintenance agreements, repair agreements and agreements for the purchase of operating supplies without the written consent of the Owner. 8. MINIMUM BALANCE(SECTION 4.02): $225,000 plus an amount sufficient to cover one month's debt service. 9. BASE MANAGEMENT FEE (SECTION 6.01): 2% of Gross Revenue 10. N/A 11. ACCOUNTING SERVICES FEE (SECTION 6.02): $1,000 per month. 12. TERMINATION FEE (SECTION 13.01): The Termination Fee will be a sum equal to (a) the monthly average of the Base Management Fee paid or payable for the twelve (12) full calendar months immediately preceding the date of termination times (b) the lesser of sixty (60) or such number of full or partial months left in the term of this Agreement. If less than twelve (12) full months have elapsed since the Commencement Date, the Base Management Fee will be determined by annualizing Gross Revenues . Gross Revenues will be annualized by multiplying the average monthly Gross Revenues for the period of management times twelve (12). 13. FIRST MORTGAGE (SECTION 14.11): 14. GROUND LEASE (SECTION 14.18): 15. OWNER (SECTION 14.33): East Rutherford Group, L.L.C. c/o Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 16. NOTICES (SECTION 15.10): Manager: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 (973) 882-1010 Attention: President With a copy to: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: Law Department Owner AFP Eighteen Corp. c/o United Capital Corp. United Capital Building Nine Park Place Great Neck, NY 11021 With a copy to: Samuel Ross, Esq. c/o Olshan Grundman 505 Park Avenue New York, New York 10022 SCHEDULE II MANAGEMENT SERVICES INCLUDED IN BASE MANAGEMENT FEE AND ACCOUNTING SERVICES FEE PROPERTY LEVEL 1. Establish staffing requirements 2. Establish employment policies such as hiring policies, terms of employment, wage scales, and vacation and benefit packages 3. Select key employees and department heads 4. Provide property level training 5. Establish rates and charges for the goods and services to be sold by the Hotel 6. Implement sales and marketing strategies 7. Supervise property operations 8. Negotiate and sign purchase orders and service agreements HOME OFFICE 1. Provide a regional director of operations to supervise property activities 2. Provide a regional sales director 3. Provide human resources management 4. Provide management information systems 5. Make available Manager's legal staff to provide assistance in day-to-day property operations. 6. Negotiate national vending contracts 7. Purchase all Operating Supplies and Operating Equipment 8. Pay all expenses incurred in the operation of the Hotel 9. Maintain the Hotel in good order, repair, and condition 10. Prepare a schedule of suggested insurance coverages and administer the purchase of insurance, if requested by Owner. 11. Implement Manager's standard administrative, accounting, budgeting, marketing, and operational policies and practices ACCOUNTING SERVICES 1. Prepare sales and use tax returns 2. Process accounts payable 3 Prepare monthly and yearly financial statements 4. Provide cash management services 5. Process payroll and related payroll items SCHEDULE III SAMPLE STATEMENT OF PROFIT AND LOSS Standard Prime Hospitality Corp. Profit and Loss Statement currently in use. EX-2.R 5 y84868exv2wr.txt ASSIGNMENT OF MEMBERSHIP EXHIBIT 2(R) ASSIGNMENT OF MEMBERSHIP INTEREST Assignment made this 14th day of March, 2003, by and between PRIME-MEADOWLANDS, LLC (hereinafter "Prime"), a Delaware limited liability company and ARK MEADOWLANDS, INC. (hereinafter "Purchaser"). R E C I T A L S: A. Prime is the holder of 50% interest of East Rutherford Group, L.L.C., a Delaware limited liability company (the "Company"), owner of the Sheraton Hotel, 2 Meadowlands Plaza, East Rutherford, New Jersey 07073 (the "Hotel"), pursuant to an operating agreement dated December 19, 2002 by and among the Company, Prime, and AFP Eighteen Corp. (the "Agreement"). B. Purchaser wishes to purchase a ten (10%) percent interest in the Company. NOW, THEREFORE, in consideration of ten dollars and other good and valuable considerations the receipt and sufficiency of which the parties acknowledge, the parties agree as follows: 1. Prime hereby assigns to Purchaser, as of the Effective Date (as hereinafter defined), so much of its interest (including its "Membership Rights" as defined in the Agreement) in the Company such that Purchaser has a resulting interest of ten (10%) percent and Prime has a resulting interest of forty (40%) percent in the Company. The purchase price for such interest is $4,625,514.00 (or 10% (rounded) of the $46,255,136.00 acquisition cost of the Hotel set forth on Schedule 8.1 of the Agreement), payable $2,000,000.00 on the date hereof and the balance of $2,625,514.00 on or before March 31, 2003, in each case by wire transfer to the account of Prime pursuant to the instructions attached hereto as Exhibit A. By accepting this Assignment, Purchaser acknowledges that its interest is subject to and agrees to be bound by all of the terms and conditions of the Agreement. The foregoing assignment and acceptance is first effective as of the date (the "Effective Date") that the purchase price shall have been paid in full by wire transfer as described above. If the balance of $2,625,514.00 is not paid by March 31, 2003, this Assignment shall be null and void and of no further effect and Prime shall return the initial payment of $2,000,000.00, without interest, at Purchaser's written direction. 2. Prime warrants and represents to Purchaser, on the date hereof and on the Effective Date, that it is the sole owner of the interest conveyed by this assignment, that it has full power and authority to make this assignment, and that the interest assigned is not subject to any liens or other encumbrances. 3. The Hotel is operated under the Sheraton brand under a franchise agreement with the Sheraton Corporation. If the Company is unable to obtain the consent of the Sheraton Corporation to this Assignment within 90 days of the date hereof, Prime agrees to repurchase so much of the interest conveyed under this Assignment so that Purchaser's interest is nine and 99/100 (9.99%) percent. The purchase price shall be $4,626.00. 4. Purchaser warrants and represents to Prime and to the Company, on the date hereof and on the Effective Date, that Purchaser: (a) is an "accredited investor" within the meaning of rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"); (b) understands that the interest in the Company that the Purchaser will receive (the "Interest") has not been registered under the Securities Act, nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon such Purchaser's representations contained herein; (c) has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of the investment contemplated by this Assignment; and the Purchaser is able to bear the economic risk of this investment in the Company (including a complete loss of this investment); (d) recognizes that no public market exists for the Interest, and none will exist in the future; that it must bear the economic risk of this investment indefinitely unless the Interest is registered pursuant to the Securities Act or an exemption from such registration is available, and unless the disposition of such Interest is qualified under applicable state securities laws or an exemption from such qualification is available, and that the Company has no obligation or present intention of so registering the Interest; understands that there is no assurance that any exemption from the Securities Act will be available, or, if available, that such exemption will allow the Purchaser to transfer any or all the Interest, in the amounts, or at the times the Purchaser might propose; understands at the present time that rule 144 ("Rule 144") promulgated under the Securities Act by the Securities and exchange Commission is not applicable to sales of the Interest because they are not registered under Section 12 of the Securities Exchange Act of 1934 as amended (the "Exchange Act") and there is not publicly available the information concerning the Company specified in Rule 144; acknowledges that the Company is not presently under any obligation to register under Section 12 of the Exchange Act or to make publicly available the information specified in Rule 144 and that it may never be required to do so; (e) is acquiring the Interest solely for its own account for investment and not with a view toward the resale, transfer, or distribution thereof, nor with any present intention of distributing the Securities. Except as specifically provided herein, no other person has any right with respect to the Interest to be purchased by the Purchaser, nor has the Purchaser agreed to give any person any such interest or right in the future; (f) except as specifically provided herein, has no contract, undertaking, understanding, agreement or arrangement, formal or informal, with any person to sell, transfer or pledge all or any portion of his, her or its Interest, and has no current plans to enter into any such contract, undertaking, understanding, agreement or arrangement; 2 (g) has not seen, received, been presented with, or been solicited by any leaflet, public promotional meeting, article or any other form of advertising or general solicitation as to the Company's sale to such Purchaser of his, her or its Interest; and (h) is familiar with the business and operations of the Company and has been afforded full and complete access to the books, financial statements, records, contracts, been afforded an opportunity to ask such questions of the Company's agents, accountants and other representatives concerning the Company's proposed business, operations, financial condition, assets, liabilities and other relevant matters as he has deemed necessary or desirable, and has been given all such information as has been requested, in order to evaluate the merits and risks of the investment contemplated herein. 5. Prime hereby consents to the admission of Purchaser as a Member in the Company. 6. For purposes of the Agreement, notices shall be addressed as follows If to Purchaser: Ark Meadowlands, Inc. c/o Ark Finance, Inc. 590 Madison Avenue 38th Floor New York, New York 10022 IN WITNESS WHEREOF, the parties hereto have caused this document to be signed the day and year first above written. PRIME-MEADOWLANDS, LLC By: /s/ Douglas Vicari -------------------------- Douglas Vicari, Manager ARK MEADOWLANDS, INC. By: /s/ Brad Reiss -------------------------- 3 EXHIBIT A WIRING INSTRUCTIONS PNC Bank Two Tower Center East Brunswick, NJ ABA No.: 031 207 607 Account Number: 801 263 6256 Account Name: Prime Hospitality Corp. Please contact: Theresa Marich at 732-220-3592 Reference: East Rutherford Group, L.L.C. 2 EX-2.S 6 y84868exv2ws.txt AGREEMENT OF MEMBERS exhibit 2(s) AGREEMENT OF MEMBERS OF 3072929 NOVA SCOTIA COMPANY DATED: JANUARY 8, 2003 This Agreement of Members (the "Agreement") dated as of January 8, 2003, is executed and agreed to, for good and valuable consideration, by and among 3072929 NOVA SCOTIA COMPANY, a Nova Scotia unlimited liability company (the "Company") and QUEBEC CITY, INC., a Nevada corporation ("Quebec"), and AFP NINETEEN CORP., a Nevada corporation ("AFP"), as Members (collectively, the "Members"). RECITALS A. The parties to this Agreement are Quebec, an owner and manager of hotels, and AFP, an entity experienced in the ownership and operation of real estate, including hotels, and the Company. B. The Company is the owner of the hotel known as the Holiday Inn Select, 395, rue de la Couronne, Quebec, Canada, which is more particularly described on Schedule A attached hereto and made a part hereof ( the "Hotel" or "hotel"). C. The Hotel is operated by 3072930 Nova Scotia Company, a Nova Scotia unlimited liability company, which is a wholly-owned subsidiary of the Company. D. Quebec and AFP wish to invest in the Company for the purpose of acquiring the Hotel. E. Quebec and AFP acknowledge that for purposes of United States income taxes, they intend to have this investment treated as a partnership, that the provisions of the Internal Revenue Code concerning partnership income are applicable and that Company shall maintain accounts to facilitate partnership tax treatment. ARTICLE I Definitions 1.1 General Definitions. The following terms used in this Agreement shall have the following meanings (unless otherwise expressly provided herein): "Affiliate" shall mean, with respect to any Person, any other Person which directly or indirectly, controls, is controlled by, or is under common control with, such Person. For this purpose, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, or by contract, or otherwise. "Agreement" shall mean this Agreement of Members as originally executed and as amended from time to time. "Capital Account" shall mean the account to be maintained by the Company for each Member in accordance with the following provisions: (i) a Member's Capital Account is credited with the Member's Capital Contributions, the amount of any Company liabilities assumed by the Member (or which are secured by Company property distributed to the Member), the Member's allocable share of Profits and any item of income or gain specially allocated to the Member under the provisions of Article IX; (ii) a Member's Capital Account is debited with the amount of money and the fair market value of any Company property distributed to the Member, the amount of liabilities of the Member assumed by the Company (or which are secured by property contributed by the Member to the Company), the Member's allocable share of Losses and any item of expense or loss specially allocated to the Member under the provisions of Article IX; and (iii) Members' Capital Accounts will be maintained in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(l). "Capital Contribution" shall mean the total amount of cash and the fair market value of any other assets contributed, or deemed contributed under Treasury Regulations Section 1.704-1(b)(2)(iv)(d) to the Company by a Member, net of liabilities assumed or to which the assets are subject. "Capital Proceeds" shall mean the gross receipts received by the Company from a Capital Transaction. "Capital Transaction" shall mean any transaction, other than a Capital Contribution, not in the ordinary course of business which results in the Company's receipt of cash or other consideration, including but not limited to, sales, exchanges or other dispositions of property not in the ordinary course of business, financings, refinancings, condemnations, and the destruction of assets used in the trade or business of the Company. "Cash Flow" shall mean all cash funds derived from operations of the Company (including interest received on Reserves), less cash funds used to pay current operating expenses and to pay or establish reasonable Reserves for future expenses, debt payments, capital improvements, contingencies, and replacements as determined by the Members. Cash Flow does not include Capital Proceeds of Capital Transactions but is increased by the reduction of any Reserve previously established. Cash Flow is not reduced by non cash charges, including without limitation, depreciation and amortization. "Certificate of Formation" shall mean the Certificate of 3072929 Nova Scotia Company filed with the Register of Joint Stock Companies, Province of Nova Scotia, Canada, as the same may be amended from time to time. "Code" shall mean the Internal Revenue Code of 1986 as amended, and corresponding provisions of subsequent superseding federal revenue laws. "Company" shall refer to 3072929 Nova Scotia Company. "Deciding Interest" shall mean the stockholdings of the Members which taken together exceed fifty percent (50%) of the issued and outstanding stock of the Company. 2 "Director" shall mean the Person or Persons charged with the rights and duties with respect to management of the Company set forth in Article V of this Agreement and in the Nova Scotia Act. References to the Directors in the plural shall also, when the context so requires, be deemed to include the singular. "Entity" shall mean any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association, or any foreign trust, or foreign business organization. "Fiscal Year" shall mean the Company's fiscal year, which shall be the calendar year. "Franchise Agreement" shall mean the license agreement between Holiday Hospitality Franchising, Inc. and the Company dated January 8, 2003 with respect to the operation of the Hotel. "Gross Asset Value" shall mean with respect to any asset, the asset's adjusted basis for federal income tax purposes, except that (i) the Gross Asset Value of any asset contributed to the Company shall be its gross fair market value (as agreed upon by the Members) at the time such asset is contributed or deemed contributed for purposes of computing Capital Accounts, (ii) upon a contribution of money or other property to the Company by a new or existing Member and upon a distribution of money or other property to a retiring or continuing Member, the Gross Asset Value of all of the assets of the Company shall be adjusted to equal their respective gross fair market values, provided that adjustments pursuant to this clause (ii) shall be made only if and to the extent that the Director reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company, (iii) the Gross Asset Value of any asset distributed in kind to any Member shall be the gross fair market value of such asset on the date of such distribution, and (iv) the Gross Asset Value of any asset determined pursuant to clauses (i) or (ii) above shall thereafter be adjusted from time to time by the depreciation taken into account with respect to such asset for purposes of determining Profits or Losses. "Hotelco" shall refer to 3072930 Nova Scotia Company. "Interest" shall mean a Member's or Interest Holder's share of the Company's Profits, Losses, and distributions of the Company's assets pursuant to this Agreement and its ownership of the Company stock, but shall not include any right to participate in the management or affairs of the Company, or the right to vote on, consent to, or otherwise participate in any decision of the Members. "Interest Holder" shall mean a Member. 3 "Involuntary Withdrawal" shall mean, with respect to any Member, the occurrence of any of the following events: (i) a Member makes an assignment for the benefit of creditors; (ii) a Member files a voluntary petition in bankruptcy; (iii) a Member is adjudged bankrupt or insolvent or there is entered against the Member an order for relief in any bankruptcy or insolvency proceeding; (iv) a Member files a petition seeking for the Member any bankruptcy reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law, or regulation; (v) the Member files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Member in any proceeding described in clauses (i) through (iv). (vi) a Member seeks, consents to, or acquiesces in the appointment of a trustee for, receiver for, or liquidation of the Member or of all or any substantial part of the Member's properties; (vii) any proceeding instituted against the Member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation, continues for one hundred twenty (120) days after the commencement thereof, or the appointment of a trustee, receiver, or liquidator for the Member or all or any substantial part of the Member's properties without the Member's agreement or acquiescence, which appointment is not vacated within or stayed for ninety (90) days or, if the appointment is stayed for ninety (90) days, after the expiration of the stay during which period the appointment is not vacated; (viii) if the Member is a corporation, partnership or limited liability company, the dissolution and commencement of winding up of the corporation, partnership or limited liability company; (ix) if the Member is an estate, the distribution by the fiduciary of the estate's entire interest in the Company. "Land" shall mean the Hotel. "Loan" shall have the meaning set forth in Section 8.8. "Member" shall mean any Person who holds the stock of the Company. "Membership Rights" shall mean all of the rights of a Member as a stockholder in the Company, including a Member's: (i) Interest; (ii) right to inspect the Company's books and records; and (iii) right to participate, subject to the provisions of this Agreement, in the management of the business and affairs of the Company, including the right to vote on, consent to, or otherwise participate in any decision or action of or by the Members granted pursuant to this Agreement. 4 "Negative Capital Account" shall mean a Capital Account with a balance of less than zero. "Nova Scotia Act" shall mean the Company's Act of the Province of Nova Scotia, Canada. "Percentage Interest" shall mean the percentage interest herein of each Member in the issued and outstanding stock of the Company. "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of the Person when the context so permits. "Profits" and "Losses" shall mean, for each taxable year of the Company (or other period for which Profits or Losses must be computed), the Company's taxable income or loss determined in accordance with Code Section 703(a), with the following adjustments: (i) all items of income, gain, loss, deduction, or credit required to be stated separately under Code Section 703(a)(1) are included in computing taxable income or loss; and (ii) any tax-exempt income of the Company not otherwise taken into account in computing Profits or Losses, are included in computing taxable income or loss; (iii) any expenditures of the Company described in Code Section 705(a)(2)(B) [or treated as such under Treasury Regulations Section 1.704-1(b)(2)(iv)(i)] and not otherwise taken into account in computing Profits or Losses, are subtracted from taxable income or loss; (iv) gain or loss resulting from any taxable disposition of Company property is computed by reference to the adjusted book value of the property disposed of, determined in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(d) through (h), notwithstanding the fact that the adjusted book value differs from the adjusted basis of the property for federal income tax purposes; (v) in lieu of depreciation, amortization, or cost recovery deductions allowable in computing taxable income or loss, there is taken into account the depreciation computed based upon the adjusted book value of the asset; (vi) notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Article IX hereof are not taken into account in computing Profits or Losses; and (vii) if property is sold or distributed to a Member and gain is recognized by the Member, the Company will make an election pursuant to Code Section 754. "Purchase Contract" shall mean that certain Purchase and Sale Agreement between 1312316 Ontario Inc. and 1413922 Ontario Inc., Vendor, and 3082930 Nova Scotia Company, as assignee of Prime Hospitality Corp., Vendee, dated as of November 15, 2002. 5 "Reserves" shall mean, for any fiscal period, funds set aside or amounts allocated during such period in amounts sufficient for working capital and to pay taxes, insurance, debt service, or other costs or expenses incident to the ownership or operation of the Company's business. "Transfer", when used as a noun, shall mean any sale, assignment, exchange, pledge, encumbrance, gift, devise, bequest, or other transfer or relinquishment, and, when used as a verb, shall mean to sell, assign, exchange, pledge, encumber, give, devise, bequeath or otherwise transfer or relinquish. "Treasury Regulations" shall include proposed, temporary, and final regulations promulgated under the Code in effect as of the date of filing the Certificate of Formation, any regulations promulgated thereafter, and the corresponding sections of any regulations subsequently issued that amend or supersede those regulations. 1.2 Terms Elsewhere Defined. Those terms defined elsewhere in this Agreement with respect to particular provisions hereof shall have those meanings ascribed to them in the place in which they first appear, and such definitions shall apply wherever such terms are used in this Agreement unless the context clearly requires otherwise. ARTICLE II FORMATION OF COMPANY 2.1 Formation. The parties have organized the Company as a Nova Scotia unlimited liability company pursuant to the Nova Scotia Act and have filed the requisite certificates with the Registrar of Joint Stock Companies, Province of Nova Scotia, Canada. 2.2 Name. The name of the Company is "3072929 Nova Scotia Company" The Company may do business under that name.. If the Company does business under a name other than that set forth in its Certificate of Formation, then the Company shall file a certificate of registration of alternate name as required by the Nova Scotia Act. 2.3 Principal Place of Business. The principal place of business of the Company shall be 395, rude de la Couronne, Quebec, Canada. 2.4 Registered Office and Registered Agent. The Company's initial registered office shall be McInnes Cooper, Barristers Solicitors & Trade Mark Agents, 1601 Lower Water Street, P.O. Box 730, Halifax, N.S. B3J 2V1, and the name of its initial registered agent at such address shall be Barry Horne. 2.5 Term. The term of the Company shall be perpetual unless the Company is earlier dissolved in accordance with either the provisions of this Agreement or the Nova Scotia Act. 2.6 Purpose. The purposes of the Company shall be (i) to acquire, own, finance, improve, develop, maintain, manage, operate, lease, sell, assign, dispose of and otherwise deal with the Hotel; (ii) to undertake such other activities as may be necessary, desirable or appropriate to the business of the Company to effectuate the foregoing purposes; and (iii) to otherwise engage in any enterprise or business in which a Nova Scotia unlimited liability company may engage or conduct under the Nova Scotia Act with respect to the Hotel. The Company shall have all powers necessary, desirable or appropriate to accomplish the purposes enumerated. 6 2.7 Legends. The certificates evidencing the stock acquired by the Members will bear the following legend: The securities evidenced hereby are subject to the terms of that certain Members Agreement dated as of January 8, 2003 by and among the Company and certain holders of the Company's Stock. ARTICLE III Business of Company 3.1 Permitted Businesses. The business of the Company shall be: To purchase, acquire, own, and manage and operate the Hotel To accomplish any lawful business related to the foregoing business which shall at any time appear conducive to or expedient for the benefit or protection of the Company and its assets. To exercise all other powers necessary to or reasonably connected with the Company's business that may be legally exercised by a Nova Scotia unlimited liability companies under the Nova Scotia Act. To engage in all activities necessary, customary, convenient, or incident to any of the foregoing. 3.2 Intentionally Omitted. 3.3 Management of Hotel (a) The day to day operations of the Hotel will be conducted by Hotelco in accordance with appropriate operating agreements with the Company. (b)(i) Quebec will provide the following asset management services: 1. Take all actions as the "tax matters member" pursuant to Section 12.6, including without limitation the preparation of all tax returns (other than the income tax returns of the Members), the maintenance of all account records called for in this Agreement, and the filing of all U.S. and Canadian corporate tax returns for Hotelco and the Company. 2. Maintain the corporate books and records of Hotelco and the Company and take all actions necessary to maintain their corporate existence and good standing. 3. Supervise the operations of Hotelco and the Company, including providing direction as to the preparation of annual budgets, the hiring and termination of employees, the maintenance of the Hotel, and the conduct of business. 7 4. Supervise the accounting for Hotelco and the Company and conduct periodic reviews of the operations of Hotelco and the Company by Quebec's internal audit department. 5. Advise the Members of the capital requirements of the Hotel and supervise the implementation of capital programs. 6. Arrange for insurance for the Hotel. 7. Provide financial and operational advice and meet periodically with the Members to review the operations of the Hotel. (ii) For its asset management services Quebec shall receive a fee equal to one (1%) percent of the gross revenues of the Hotel. Quebec's fee shall be payable on the 15th day of each month based on gross revenues for the immediately preceding calendar month. Quebec shall be reimbursed for out-of-pocket costs and other reasonable expenses incurred in providing the asset management services. 3.4 Financing. (a) Upon the execution of this Agreement, the Members, for and on behalf of the Company, together shall attempt to arrange for permanent financing for the Hotel. The parties shall endeavor to negotiate on behalf of the Company to obtain such financing from one or more third party institutional lenders on commercially reasonable terms which will be subject to approval by Members holding a Deciding Interest. All costs and fees payable in connection with said financing (the "Financing Fees") will be paid by and on behalf of the Company from the initial capital contributions made to the Company pursuant to this Agreement. Notwithstanding anything in Article III hereof to the contrary, in the event that the lender will not permit all or any portion of the Financing Fees to be included as a cost to be financed by the Company, the Members each agree that it will be obligated to contribute to the Company in cash as an additional Capital Contribution each Member's share of the funds necessary to pay such Financing Fees. If not available from Hotel cash flow, a Member's share of such funds shall be equal to the product obtained by multiplying the Member's Percentage Interest (expressed as a percentage) by the total amount of the Financing Fees at issue. (b) Inability to Obtain Agreement Upon Terms of Financing. In the event that financing cannot be obtained on terms which are satisfactory to Quebec and AFP, the provision of Section 14.1 shall govern. (c) Nonrecourse. Notwithstanding anything in this agreement, no indebtedness of the Company shall be recourse to any Member without the prior written consent of such member; provided that the foregoing shall not apply to any guaranty or indemnity (a Nonrecourse Carveout Guaranty") with respect to fraud, misappropriation of rents, misapplication of condemnation or casualty proceeds, intentional misrepresentation and other customary "carveouts" from a nonrecourse mortgage loan given by the Company in connection with the financing of the Hotel. ARTICLE IV Names and Addresses of Members The names and addresses of the Members are as follows: 8 Name Address ---- ------- AFP Nineteen Corp. c/o United Capital Corp. United Capital Building 9 Park Place Great Neck, New York 11021 Quebec City, Inc. c/o Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 ARTICLE V MANAGEMENT 5.1 Director; Number, Election & Tenure. Except as limited below, the business and affairs of the Company shall be managed by its Director. The Company shall have one Director. The Director shall hold office until the next annual meeting of Members or special meeting of Members called to select a Director or until a successor shall have been appointed and qualified. The Director shall be a resident of Canada. The initial Director of the Company shall be Jean M. Gagne, pursuant to the engagement letter attached to this Agreement as Exhibit 5.1. Future Directors of the Company, if any, shall be engaged on substantially the same terms as set forth in Exhibit 5.1. 5.2 Powers of Director. The Director shall have full and complete authority to maintain the corporate books and register of the Company, including the signature of all documents concerning filings with the appropriate governmental authorities in Canada to keep the Company in good standing, provided that the Director shall not have the power and authority to do the following without the written direction of Members holding a Deciding Interest or with respect to (j) below, without the written direction of AFP. (a) acquire by purchase, lease, or otherwise any personal property, tangible or intangible; (b) acquire by purchase, lease or otherwise, any real property; (c) sell, dispose of, lease, trade, or exchange the Company assets; (d) open bank accounts in the name of the Company; (e) hire, discharge or supervise labor and employees; (f) purchase liability and other insurance to protect the Company's property and business; (g) invest any of the Company's funds temporarily (by way of example but not limitation) in time deposits, short-term governmental obligations, commercial paper, or other investments; (h) employ accountants, legal counsel, managing agents, or other experts to perform services for the Company and to compensate them from the company's funds; (i) incur lease obligations or indebtedness on behalf of the company; 9 (j) terminate the Holiday Inn Franchise Agreement; (k) enter into any and all agreements on behalf of the Company, for any purpose; (l) adopt, amend, or rescind the corporate charter or bylaws of the Company or amend or rescind any corporate resolutions of the Company properly adopted; and (m) dissolve the Company. Quebec City shall undertake to have the corporate charter and bylaws of the Company and the corporate charter and bylaws of Hotelco amended to reflect the limitations set forth in this Section 5.2. 5.3 Agents and Members. Unless authorized to do so by this Agreement, no attorney-in-fact, employee, or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. No Member shall have any power or authority to bind the Company unless the Member has been authorized by this Agreement or by the Members holding a Deciding Interest in writing to act as an agent of the Company. 5.4 Liability for Certain Acts. The Director shall perform his Directorial duties in good faith, in accordance with his written engagement in a manner which he reasonably believes to be in the best interests of the Company, with such care as an ordinarily prudent person in a like position would use under similar circumstances. Provided the Director so performs the duties of Director, he shall not have any liability by reason of being or having been a Director of the Company. 5.5 Indemnity of the Director, Employees, and Other Agents. To the maximum extent permitted under the Nova Scotia Act, the Company shall indemnify the Director, other than for matters arising out of the Director's breach of his engagement agreement, negligence, willful misconduct or bad faith, and make advances for expenses. The Company may indemnify its employees and other agents other than the Director to the fullest extent permitted by law, provided that the indemnification in any given situation is approved by Members owning a Deciding Interest. 5.6 Resignation. Any Director of the Company may resign at any time by giving written notice to the Members of the Company. The resignation of a Director shall take effect upon receipt of that notice or at such later time as shall be specified in the notice; and, unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective. 5.7 Removal. At a meeting called expressly for that purpose, all or any lesser number of the Directors may be removed at any time, with or without cause, by the affirmative vote of Members having at least a Deciding Interest. 5.8 Vacancies. Any vacancy occurring for any reason shall be filled by an affirmative vote of Members holding at least a Deciding Interest at a meeting expressly called for that purpose. The Director elected to fill a vacancy shall hold office for the unexpired term of the Director's predecessor in office, or until a successor shall have been designated and qualified. ARTICLE VI Rights and Obligations of Members 6.1 Limitation of Liability/Indemnity. 10 (a) Each Member's liability shall be limited as set forth in this Agreement, the Nova Scotia Act, and other applicable law. (b) (i) The Company shall indemnify to the fullest extent permitted under and in accordance with the laws of the Province of Nova Scotia any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a Member or Director of the Company, or is or was serving at the request of the Company as a Member or Director in any other capacity with another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (ii) Expenses incurred in defending a civil or criminal action, suit or proceeding shall (in the case of any action, suit or proceeding against a Member or Director of the Company) or may (in the case of any action, suit or proceeding against a Member or Director) be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Members upon receipt of an undertaking by or on behalf of the indemnified person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized in this Article VI. (iii) the indemnification and other rights set forth in this Article VI shall not be 11 exclusive of any provisions with respect thereto in the bylaws or any other contract or agreement between the Company and any Member or Director of the Company. (iv) neither the amendment nor repeal of subparagraphs (i) (ii), or (iii) of this Article VI, shall eliminate or reduce the effect of subparagraphs (i), (ii), and (iii) of this Article VI in respect of any matter occurring before such amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter which would have given rise to a right of indemnification or right to receive expenses pursuant to subparagraph (i), (ii), or (iii) of this Article VI, if such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. 6.2 Company Debt Liability. A Member shall not be personally liable for any debts or losses of the Company beyond the Member's respective Capital Contributions and any obligation of the Member under Sections 8.1 or 8.2 hereof to make Capital Contributions, except as provided in Section 6.6 hereof or as otherwise required by law. 6.3 List of Members. Upon written request of a Member, the Director shall provide a list showing the names, addresses, and holdings of all Members. 6.4 Conflicts. Each Member understands and acknowledges that the conduct of the Company's business may involve business dealings and undertakings with the Members and Persons which may be affiliated with one or both Members. In any of those cases, those dealings and undertakings shall be at arm's length and on commercially reasonable terms. 6.5 Priority and Return of Capital. Except as may be expressly provided in Article VIII or Article IX, no Member shall have priority over any other Members, either for the return of Capital Contributions or for Profits, Losses, or distributions; provided that this section shall not apply to Loans or to Guarantor Contributions as defined in Section 8.9 (as distinguished from Capital Contributions) which a Member has made to the Company. 6.6 Liability of a Member to the Company. A Member who rightfully receives the return in whole or in part of its contribution is nevertheless liable to the Company only to the extent now or hereafter provided by the Nova Scotia Act. A Member who receives a distribution made by the Company which is either in violation of this Agreement, or made when the Company's liabilities exceed its assets (after giving effect to the distribution) is liable to the Company for a period of six years after the distribution for the amount of the distribution. 6.7 No Authority to Act for Company. Except as may be otherwise expressly provided in this Agreement, no Member acting alone, shall have any authority to act for, bind, or undertake, assume, or assign any obligation or responsibility on behalf of, the other Members or the Company. 6.8 Restriction on Other Business Interests. Except as may be otherwise expressly provided in this Agreement, nothing herein shall be construed so as to prohibit a Member from owning, operating, or investing in any real estate development not owned or operated by the Company, wherever located. Except as may be otherwise expressly provided in this Agreement, each Member agrees that the other Members, any Affiliate of same, or any related person or entity may engage in or possess an interest in another business venture or ventures of any nature and description, independently or with others, including but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real 12 property, and neither the Company, nor any Member shall have any rights by virtue of this Agreement in and to said independent ventures or to the income or profits derived therefrom. 6.9 No Responsibility for Commitments of Others. Neither the Company nor a Member shall be responsible or liable for any indebtedness or obligation of another Member incurred before or after the execution of this Agreement, except as to those responsibilities, liabilities, indebtedness or obligations authorized pursuant to the terms of this Agreement, and each indemnifies and agrees to hold the others harmless from such obligations and indebtedness except as aforesaid. ARTICLE VII Meetings of Members 7.1 Annual Meeting. The annual meeting of the Members shall be held on the first Monday in May or at such other time as shall be determined by resolution of the Members, commencing with the year 2003, for the purpose of the transaction of such business as may come before the meeting. 7.2 Special Meetings. Special meeting of the Members, for any purpose or purposes, unless otherwise prescribed by statute, may be called by any Member holding at least 50% of the Percentage Interests. 7.3 Place of Meetings. Meetings will be held at 700 Route 46 East, Fairfield, New Jersey or as the Members holding a Deciding Interest shall determine. 7.4 Notice of Meetings. Except as provided in Section 7.5 below, written notice stating the place, day, and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered no fewer than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the Member calling the meeting, to each Member entitled to vote at the meeting. If mailed, the notice shall be deemed to be delivered two (2) calendar days after being deposited in the United States mail, addressed to the Member at the Member's address as it appears on the books of the Company, with postage thereon prepaid. 7.5 Meeting of All Members. If all of the Members shall meet at any time and place, either within or outside of the State of New Jersey and consent to the holding of a meeting at that time and place, the meeting shall be valid without call or notice, and at the meeting lawful action may be taken. 7.6 Record Date. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment of the meeting, or Members entitled to receive payment of any distribution, or to make a determination of Members for any other purpose, the date on which notice of the meeting is mailed or the date on which the resolution declaring the distribution is adopted, as the case may be, shall be the record date for the determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Section, the determination shall apply to any adjournment of the meeting. 7.7 Quorum. Except as otherwise required by this Agreement, Members holding at least a Deciding Interest, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any meeting of Members, a majority of the Percentage Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty (60) days without further notice. However, if the adjournment is for more than sixty (60) days, or if after the adjournment a new record date is 13 fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting. At an adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during the meeting of that number of Percentage Interests whose absence would cause less than a quorum. 7.8 Manner of Acting. If a quorum is present, the affirmative vote of Members holding at least a Deciding Interest shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Nova Scotia Act, by the Certificate of Formation or by this Agreement. Unless otherwise expressly provided in this Agreement or required under applicable law, Members who have an interest (economic or otherwise) in the outcome of any particular matter upon which the Members vote or consent may vote or consent upon any such matter and their Percentage Interest, vote or consent, as the case may be, shall be counted in the determination of whether the requisite matter was approved by the Members. 7.9 Proxies. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. The proxy shall be filed with the Director of the Company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 7.10 Action by Members Without a Meeting. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Member entitled to vote, and delivered to the Director of the Company for inclusion in the minutes or for filing with the Company records. Action taken under this Section is effective when all Members entitled to vote have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. 7.11 Waiver of Notice. When any notice is required to be given to any Member, a waiver of the notice in writing signed by the person entitled to the notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of the notice. ARTICLE VIII Contributions to the Company and Capital Accounts 8.1 Initial Capital Contributions. Prior to the date of this Agreement, Quebec incurred the costs in connection with the acquisition of the Hotel, including legal fees in negotiating the purchase contract and due diligence costs identified by amount or by description on Exhibit 8.1. The Members other than Quebec shall reimburse Quebec upon execution of this agreement 50% of such costs, or, (if there are Members in addition to AFP and Quebec), in accordance with their Percentage Interest. From and after the date of this Agreement, the Members shall pay their proportionate share of all costs incurred by and on behalf of the Company in accordance with this Agreement, including the costs identified by amount or by description on Exhibit 8.1. 8.2 Additional Capital Contributions. At any time and from time to time after the Initial Capital Contributions have been funded, the Members holding a Deciding Interest may call for additional Capital Contributions to the Company to pay for all Company and Hotel related expenses not otherwise covered by 14 financing proceeds or operating income, including, without limitation, development costs, legal fees, land acquisition costs, financing costs, construction and purchasing costs, franchise fees, management fees, pre-opening expenses and operating expenses. Provided that the amount and timing of such call is reasonable in view of the current and reasonably foreseeable future needs of the Company, each Member shall be obligated to fund its share of such Capital Contribution no later than ten (10) business days following the date of such call. A Member's share of each such Capital Contribution shall be equal to the product obtained by multiplying the Member's Percentage Interest (expressed as a percentage) by such required Capital Contribution. A Member's share shall be payable in cash or by certified check. 8.3 Dilution. If a Member fails to make all or any portion of a Capital Contribution required to be made by such Member pursuant to Section 8.1 or Section 8.2 (such Member being hereinafter referred to individually as a "Failing Member" and the Capital Contribution, or portion thereof, not contributed by such Failing Member being referred to as the "Default Amount"), the other Members that have made the Capital Contribution (the "Non-Failing Members") shall have the right, at their option, to (i) receive a refund of their Capital Contribution as adjusted for gains or losses, (ii) make a loan to the Company in a amount not in excess of the Default Amount which, at the option of the Non-Failing Members, may be converted into a Capital Contribution equal to the outstanding balance of such loan, plus accrued interest, at any time from the date of such loan, provided that the Failing Member is given a Dilution Notice (as hereinafter defined) at such time; or (iii) give notice ("Dilution Notice") to the Failing Member of their intention to make a further additional Capital Contribution to the Company (or to convert a loan to the Company made in accordance with this Section 8.3 into an additional Capital Contribution) in an amount not in excess of the Default Amount. If the Failing Member has not made, within ten (10) days of the delivery to it of the Dilution Notice, an additional Capital Contribution to the Company in an amount equal to the Default Amount, then the Non-Failing Members may make an additional Capital Contribution to the Company in an amount not in excess of the Default Amount. Upon receipt by the Company of such additional Capital Contribution, the Non-Failing Members shall be issued additional shares so that (1) the Non-Failing Members' Percentage Interest in the Company is increased to the percentage obtained by dividing (x) a sum equal to (i) two times any Default Amounts plus (ii) the sum of all other committed and additional Capital Contributions made by the Non-Failing Members by (y) the sum of all other committed and additional Capital Contributions made by all Members at any time. In turn, the Failing Member's Percentage Interest in the Company is decreased to a percentage equal to one hundred percent, less the Non-Failing Members' new Percentage Interest, as calculated pursuant to the preceding clause of this Section 8.3. In the event that there is more than one Non-Failing Member, the increase in the Non-Failing Member's Percentage Interest shall be allocated among the Non-Failing Members on the basis of the ratio of their contributions. 8.4 Capital Account. (a) A separate Capital Account shall be maintained for each Member, in accordance with Code Section 704(b) and Treasury Regulations Section 1.704-1(b). (b) In the event of a permitted sale or exchange of the stock in the Company, the Capital Account of the transferor shall become the Capital Account of the transferee to the extent it relates to the transferred stock in accordance with Treasury Regulations Section l.704-l(b)(2)(iv). (c) The manner in which Capital Accounts are to be maintained pursuant to this Section is intended to comply with the requirements of Code Section 704(b) and the Treasury Regulations promulgated thereunder. If, in the opinion of the Company's accountants, the manner in which Capital Accounts are to be maintained pursuant to the preceding provisions of this Section should be 15 modified to comply with Code Section 704(b) and the Treasury Regulations thereunder, then notwithstanding anything to the contrary contained in the preceding provisions of this Section, the method in which Capital Accounts are maintained shall be so modified; provided, however, that any change in the manner of maintaining Capital Accounts shall not materially alter the economic agreement between or among the Members. (d) Except as required in Sections 8.1 and 8.2, or by any of the special allocation provisions of Section 9.5, if applicable, no Member shall have any liability to restore all or any portion of a deficit balance in the Member's Capital Account. (e) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and the initial Gross Asset Value. In the event that the Gross Asset Value of any Company asset is adjusted pursuant to items (ii) or (iv) of the definition of the term Gross Asset Value contained in Article I hereof, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. 8.5 No Interest on Capital Contributions. Members shall not be paid interest on their Capital Contributions. 8.6 Return of Capital Contributions. Except as otherwise provided in this Agreement, no Member shall have the right to receive any return of any Capital Contribution and Capital Accounts. 8.7 Form of Distribution. If a Member is entitled to receive a return of a Capital Contribution or any other distribution, the Company, may distribute cash, notes, property, or a combination thereof to the Member, but no Member shall have the right to demand that distributions be made in any form other than cash. 8.8 Loans by Members. No Member shall be obligated to lend any money to the Company. With the exception of the institutional borrowing allowed by Section 3.4 and a loan which a Member may make pursuant to Section 8.3 and 8.9, the Company shall not borrow any funds without the approval of Members holding a Deciding Interest. If, pursuant to Section 8.3 or 8.9, one or more Members lend any money to the Company as a loan (a "Loan"), such Loan shall not increase the Capital Account of such Member or entitle such Member to any increase in its share of the distributions of the Company. Any Loan shall be an obligation of the Company, and no Member shall be personally obligated to repay the Loan and the Loan shall be payable or collectible only out of the assets of the Company. All Loans shall bear interest at a rate per annum equal to the sum of (x) five percent (5%) plus (y) the prime rate prevailing from time to time of PNC Bank, adjusted as of the date of each prime rate change at said bank, but in no event shall the rate of interest exceed the highest rate permitted by law which, if exceeded, could subject the lending Member to penalties. A loan made by a Non-Failing Member pursuant to Section 8.3 and the interest thereon shall be payable on demand and shall be senior in right of payment to any loan which may be payable by the Company to the other Members, except for a loan made by the other Members pursuant to Section 8.3 or Section 8.9. A Guarantor Loan made pursuant to Section 8.3 or 8.9 shall be senior in right of payment to any loan which may be payable by the Company to the other Members, except for a loan made by the other Members pursuant to Section 8.9, but shall be junior in right of payment as to principal and interest to the 16 debt which gave rise to the Guarantor Loan. The principal and interest on debt owed to a Member pursuant to Section 8.9 shall be payable on demand but shall be so payable only after all debt which gave rise to the Guarantor Loan and the interest thereon has been paid in full. 8.9 Payment by Member Under Guaranty of Company Debt. (a) Member as sole guarantor. In the event that the Company fails to make payment of principal or interest on any debt incurred pursuant to Section 3.4 of which less than all Members are guarantors, those Members may effect payment of the amount owed by the Company by making payment thereof directly to the creditor (hereinafter referred to as a "Member Guaranty Payment"). Any Member who makes a Member Guaranty Payment (the "Paying Guarantor") shall be deemed to have made a payment to the Company in the amount of the Member Guaranty Payment which, at the election of the Paying Guarantor communicated to the Company and to the other Members and subject to any requirements which may be imposed by the holders of the Company's institutional debt, will be either a loan to the Company (a "Guarantor Loan") or a payment to the Company (a "Guarantor Contribution") which gives rise to the rights and privileges with respect to the Company described in paragraph (c) of this Section (a "Guarantor Claim"). A Guarantor Loan or a Guarantor Contribution may, at the option of the holder thereof, be converted into an additional Capital Contribution, equal to the outstanding balance of such Guarantor Loan, plus accrued interest, or the amount of the distribution which would then be payable on such Guarantor Claim, as applicable, at any time from the date of the relevant Member Guaranty Payment by giving notice of such election to the other Members and to the Company. Upon the giving of such notice, the Paying Guarantor's Percentage Interest in the Company with its corresponding voting rights shall be increased to the percentage obtained by applying the formula set forth in Section 8.3 in which application the amount of the converted Guarantor Loan and the interest thereon or the amount of the distribution which would then be payable on the converted Guarantor Claim, as applicable, will be considered an additional Capital Contribution. In turn, the other Members' Percentage Interest in the Company with its corresponding voting rights shall be decreased to a percentage equal to one hundred percent, less the Paying Guarantor's new Percentage Interest, as calculated pursuant to the preceding sentence of this paragraph (a). (b) Members as joint and several guarantors. In the event that the Company fails to make a payment of principal or interest on any debt incurred pursuant to Section 3.4 of which all Members are joint and several guarantors, the Members shall effect payment of the amount owed by the Company by each making payment equal to its Percentage Interest thereof directly to the creditor. If each Member makes such required payment, the Paying Guarantors, subject to any requirements which may be imposed by the holders of the Company's institutional debt, each will be deemed to have made a Guarantor Loan, or a Guarantor Contribution or a Capital Contribution in the amount of its Member Guaranty Payment as the Paying Guarantors shall agree; provided, however, in the absence of such agreement, the Member Guaranty Payment will be considered to be an additional Capital Contribution. If a Member fails to make all of the payment required of it by subparagraph (b) (i) of this Section within fifteen days after the amount is due by the Company (the "Failing Guarantor"), the other Members who do not so fail (the "Non-Failing Guarantor") shall have the right to pay to the creditor the amount not so paid by the Failing Guarantor (a "Deficiency Payment"). Upon making a Deficiency Payment, the Non-Failing Guarantor may make a claim against the Failing Guarantor in the amount of the Deficiency Payment or part thereof and the remaining part of the Deficiency Payment not 17 claimed against the Failing Guarantor will be considered a payment to the Company by the Non-Failing Guarantor to which all of the rights and privileges afforded to a Paying Guarantor making a Member Guaranty Payment pursuant to paragraph 8.9(a) shall apply. The Non-Failing Guarantor, and only the Non-Failing Guarantor, shall have the rights and privileges of a Paying Guarantor under paragraph 8.9(a). (c)Rights and Privileges related to a Guarantor Claim. For purposes of this Agreement and the relative rights of the parties hereto: (i) A Guarantor Contribution will not be deemed to be a Capital Contribution and will not, until converted to a Capital Contribution, result in an increase in the Paying Guarantor's voting rights, Capital Account, stock in the Company or Percentage Interest therein. (ii) The holder of a Guarantor Claim will be entitled to payment by the Company of a percent per annum on the outstanding amount thereof equaling the sum of (x) five percent (5%) plus (y) the prime rate prevailing from time to time while such amount is outstanding at PNC Bank, adjusted as of the date of each prime rate change at said bank, but in no event shall the rate of interest exceed the highest rate permitted by law. The holder of a Guarantor Claim will be entitled to said payment out of Cash Flow, but only if at the time of such payment, the Company has then outstanding no debt or interest thereon other than trade debt or other debt incurred in the ordinary course of business which is not outstanding beyond the date when such debt is due. During such time as such payment on a Guarantor Claim is not payable out of Cash Flow because of the existence of outstanding debt, such payment will nevertheless accrue. If such payment on a Guarantor Claim is payable out of Cash Flow because of the absence of outstanding debt, such payment will be made prior to any payment out of Cash Flow made to a Member. (iii) The holder of a Guarantor Claim will be entitled to payment by the Company of the amount thereof, plus the unpaid payments due thereon under paragraph (c)(ii), at such time that Members are entitled to receive a return of their Capital Contributions or a distribution of Capital Proceeds. The right of a holder of a Guarantor Claim to receive such payment is prior to the right of a Member to receive a return of its Capital Contribution or Capital Proceeds, but is junior to the right of creditors of the Company to receive payment of the amounts then due to them. (d) Nonrecourse Carveout Guaranty. Any liability under a Nonrecourse Carveout Guaranty shall be paid by the Members in accordance with their respective Percentage Interests in the same manner as a Member Guaranty Payment under this Section 8.9 unless one or more Member(s) committed the acts giving rise to such liability, in which case such responsible Member(s) shall be solely responsible for such liability. 8.10 Right to Offset Damages. The Company may offset damages for breach of this Agreement by a Member, or of any other agreement between the Company and such Member by the Member, whose interest is liquidated (either upon the withdrawal of the Member or the liquidation of the Company) against the amount otherwise distributable to the Member. 8.11 Rights of Non-Guarantor Members. Notwithstanding any provision of this Article VIII to the contrary, in the event that any Member makes any payment of principal or interest on any debt incurred 18 pursuant to Section 3.4 upon the failure of the Company to make such payment, such Member shall have the same rights as a Paying Guarantor under Section 8.9(a) above. ARTICLE IX Profit, Loss, Allocations, and Distributions 9.1 Added Definitions. "Adjusted Capital Account Deficit" shall mean, with respect to any Member, the deficit balance, if any, in the Member's Capital Account as of the end of the applicable taxable year, after giving effect to the following adjustments: (i) the deficit shall be decreased by the amounts which the Member is obligated to restore under this Agreement or is deemed obligated to restore under Treasury Regulations Section 1.704-2(g)(1) and (i)(5); and (ii) the deficit shall be increased by the items described in Treasury Regulations Section 1.704-1(b)(2)(ii)(c) and (d)(4), (5), and (6). The foregoing definition is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Interest Holder Minimum Gain" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(2) and 2(d). "Interest Holder Nonrecourse Deduction" shall have the meaning set forth in Treasury Regulations Section 1.704-2(i)(1) and 2(i)(2). "Interest Holder Nonrecourse Liability" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Minimum Gain" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(2) and 1.704-2(d). "Net Capital Proceeds" shall mean the net cash proceeds received by the Company from a Capital Transaction, less any portion thereof used to establish Reserves for Company expenses, obligations, and contingencies. Net Capital Proceeds shall include all principal and interest payments on any debt obligation received by the Company in any Capital Transaction. "Nonrecourse Deductions" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(1). "Nonrecourse Liability" shall have the meaning set forth in Treasury Regulations Section 1.704-2(b)(3). 9.2 Distribution of Cash Flow. Cash Flow, after any necessary set aside to maintain minimum working capital of the Company in an amount not less than $$100,000 cdn, shall be distributed to the 19 Members in accordance with their Percentage Interests within thirty (30) days after the end of each calendar quarter. 9.3 Distribution of Capital Proceeds. Net Capital Proceeds shall be distributed and applied by the Company in the following order and priority: (a) to the payment of debts and liabilities of the Company then due and outstanding (including all debts due to any Member); then (b) to the payment of Guarantor Claims, plus the unpaid payments due thereon pursuant to paragraph (c)(ii) of Section 8.9 (subject to any requirements which may be imposed by the holders of the Company's institutional debt, if any); then (c) the balance, to the Members in accordance with their Percentage Interests. 9.4 Allocation of Profits and Losses. (a) Profits. After giving effect to the special allocations set forth in Section 9.5, Profits shall be allocated to the Members in accordance with their Percentage Interests. (b) Losses. After giving effect to the special allocations set forth in Section 9.5, Losses shall be allocated to the Members in accordance with their Percentage Interests; provided, however, that no Member shall be allocated a Loss that creates or increases an Adjusted Capital Account Deficit for such Member. 9.5 Regulatory Tax Allocations. (a) Minimum Gain Chargeback. Except as set forth in Treasury Regulations Section 1.704-2(f), if, during any taxable year, there is a net decrease in Minimum Gain, each Member, prior to any other allocation under this Section 9.5, shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Member's share of the net decrease of Minimum Gain, computed in accordance with Treasury Regulations Section 1.704-2(g). Allocations of gross income and gain under this Section 9.5(a) shall be made first from gain recognized from the disposition of Company assets subject to Nonrecourse Liabilities, to the extent of the Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 9.5(a) shall constitute a "minimum gain chargeback" under Treasury Regulations Section 1.704-2(f), and this provision shall be interpreted consistently therewith. (b) Interest Holder Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), if, during any taxable year, there is a net decrease in Interest Holder Minimum Gain attributable to a Interest Holder Nonrecourse Liability during any taxable year, each Member who has a share of the Interest Holder Minimum Gain attributable to such Interest Holder Nonrecourse Liability shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Member's share of the net decrease in the Interest Holder Minimum Gain. This allocation shall be made after the allocation under Section 9.5(a) and 20 prior to any other allocation under this Section 9.5. Allocations of gross income and gain under this Section 9.5(b) shall be made first from gain recognized from the disposition of Company assets subject to Interest Holder Nonrecourse Liabilities, to the extent of Interest Holder Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 9.5(b) shall constitute a "minimum gain chargeback" under Treasury Regulations Section 1.704-2(i), and this provision shall be interpreted consistently therewith. (c) Qualified Income Offset. If any Member unexpectedly receives any adjustments, allocation, or distributions described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of gross income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible. An allocation under this Section 9.5(c) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for under this Section 9.5 have been tentatively made as if this Section 9.5(c) were not in this Agreement. (d) Nonrecourse Deductions. Nonrecourse Deductions for a taxable year or other period shall be specially allocated among the Members in accordance with their Percentage Interests. (e) Interest Holder Nonrecourse Deductions. Any Member Nonrecourse Deduction for any taxable year or other period shall be specially allocated to the Member who bears the risk of loss with respect to the Interest Holder Nonrecourse Liability to which the Interest Holder Nonrecourse Deduction is attributable, as determined in accordance with Treasury Regulations Sections 1.704-2(b) and 1.704-2(i)(1). (f) Code Section 754 Adjustment. To the extent an adjustment to the tax basis of any Company asset under Code Section 734(b) or Code Section 743(b) is required, under Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases basis), and the gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted under that Section of the Treasury Regulations. (g) Contributed Property and Book-Ups. In accordance with Code Section 704(c) and the Treasury Regulations thereunder, as well as Treasury Regulations Section 1.704-1(b)(2)(iv)(d)(3), income, gain, loss, and deduction with respect to any property contributed (or deemed contributed) to the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of the property to the Company for federal income tax purposes and its fair market value at the date of contribution (or deemed contribution). If the adjusted book value of any Company asset is adjusted as provided herein, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall take account of any variation between the adjusted basis of the asset for federal income tax purposes and its adjusted book value in the manner required under Code Section 704(c) and the Treasury Regulations thereunder. Allocations under this Section 9.5(g) are solely for the purpose of federal, state, and local taxes, and shall not be taken into account in determining any Member's Capital Account and allocable share of Profits and Losses. 21 (h) Withholding. All amounts required to be withheld under Code Section 1446 or any other provision of federal, state, or local law shall be treated as amounts actually distributed to the affected Members for all purposes under this Agreement. 9.6 Liquidation and Distribution. (a) If the Company is liquidated, the assets of the Company shall be distributed in accordance with Section 13.2. (b) No Member shall be obligated to restore a Negative Capital Account. 9.7 General. (a) Except as otherwise provided in this Agreement, the timing and amount of all distributions shall be determined by the Members. (b) If any assets are distributed in kind to the Members, those assets shall be valued at their fair market value, and any Member entitled to any interest in those assets shall receive that interest as a tenant-in-common with all other Members so entitled. Unless the Members otherwise agree, the fair market value of the assets shall be determined by an independent appraiser who shall be selected by the Members. The Profit or Loss for each unsold asset shall be determined as if the asset had been sold at its fair market value, and the Profit or Loss shall be allocated as provided in Section 9.4 and shall be properly credited or charged to the Capital Accounts of the Members prior to the distribution of the assets. (c) All Profits and Losses shall be allocated, and all distributions shall be made to the Persons shown on the records of the Company to have been Members as of the last day of the taxable year for which the allocation or distribution is to be made. Notwithstanding the foregoing, unless the Company's taxable year is otherwise separated into two or more short years, if there is a Transfer or an Involuntary Withdrawal during the taxable year, the Profits and Losses shall be allocated between the original Member and the successor on the basis of the number of days each was a Member during the taxable year. (d) The Members agree, upon the advice of the Company's tax counsel, and with the concurrence of Members holding a Deciding Interest, to amend this Article IX to comply with applicable provisions of the Code and the Treasury Regulations promulgated under such applicable Code provisions, including but not limited to Code Section 704(b); provided, however, that no amendment shall materially affect distributions to a Member without the Member's prior written consent. ARTICLE X 10.1 General. (a) No Member shall transfer any Membership Rights to any Person who is not an accredited investor as defined in Section 16.15. Each Member who transfers Membership Rights shall obtain from the transferee a written confirmation with respect to the representations and warranties as set forth in Section 16.15. 22 (b) If at any time AFP or Prime proposes to sell, dispose of or otherwise transfer, directly or indirectly, in one transaction or a series of related transactions, any Membership Rights in the Company to any Person other than to an Affiliate of such Member and upon such transfer the percentage of the combined Membership Rights held by AFP and Prime is reduced from 50% or greater to less than 50% of the total Membership Rights of all Members, then such transferring Member or Members, if both Prime and AFP are transferring, shall refrain from effecting such transaction unless, prior to the consummation thereof, (a) the other Members shall have been afforded the opportunity to join in such transaction on the same price and the same terms and conditions as given to such transferring Member or Members, and (b) the other Members shall have been given notice of the proposed transfer and the non-exclusive oppor-tunity to negotiate with such transferring Member or Members to purchase or otherwise acquire the interest that such transferring Member or Members propose to sell, dispose of or otherwise transfer. It is the intention of the parties that this paragraph shall not be applicable if at the time of such proposed transfer the percentage of the combined Membership Rights of AFP and Prime and any of their Affiliates is less than 50%of the total Membership Rights of all Members. (c) No Member shall pledge, encumber or otherwise assign as collateral security any of its Membership Rights in the Company without the prior written consent of each other Member, provided that the foregoing shall not apply to any pledge, encumbrance or other assignment to an Affiliate of such pledging Member in which such pledging Member holds an equity interest of greater than 50%.. (d) Other than for the limitation set forth in this Section 10.1, Membership Rights shall be freely transferable. (e) Each Member hereby acknowledges the reasonableness of the prohibition contained in this Section 10.1 in view of the purposes of the Company and the relationship of the Members. The Transfer of any Membership Rights in violation of the prohibition contained in this Section shall be deemed invalid, null and void, and of no force or effect. Any Person to whom Membership Rights are attempted to be transferred in violation of this Agreement shall not be entitled to vote on matters coming before the Members, participate in the management of the Company, receive distributions from the Company, or have any other rights in or with respect to the Membership Rights. 10.2 Involuntary Withdrawal. (a) Immediately upon the occurrence of an event of Involuntary Withdrawal, the successor of the withdrawn Member shall thereupon become an Interest Holder but shall not become a Member, nor succeed to any Membership Rights other than those rights pertaining to the owner of an Interest. In addition, the withdrawn Member shall be deemed as of the date of the occurrence of the event, to have made an offer to sell, and to have granted a Purchase Option for, his entire Interest in the Company to the Company and the other Members (the "Non-Withdrawn Members"), as follows: (i) The Company shall have the first option (the "Purchase Option") to purchase such Interest for a price (the "Purchase Price") equal to the amount the transferor would receive if the Company were liquidated and an amount equal to the lesser of (A) the fair market value of the equity in the Company, as determined by an appraiser selected by the Company or the Member(s) exercising the Purchase Option, and (B) the Book Value (as hereinafter determined) were available for distribution to the Members. 23 (ii) The Purchase Option shall be and remain irrevocable for a period (the "Option Period") ending at 11:59 P.M., local time at the Company's principal office on the thirtieth (30th) day following the date the Non-Withdrawn Members receive notice of the occurrence of an event of Involuntary Withdrawal. (iii) At any time during the Option Period, the Company may elect to exercise the Purchase Option by giving written notice of its election to the withdrawn Member. The withdrawn Member shall not be deemed a Member for the purpose of voting on whether the Company shall elect to exercise the Purchase Option. If the Company elects to exercise the Purchase Option, the Company's notice of its election shall fix a closing date (the "Transfer Closing Date") for the purchase, which shall not be earlier than five (5) days after the date of the notice of election or more than thirty (30) days after the expiration of the Option Period. If the Company determines not to exercise the Purchase Option, the Company shall give notice of its determination to each Member before the expiration of the Option Period. (iv) If the Company fails to exercise the Purchase Option, then the Non-Withdrawn Members shall have the right to exercise the Purchase Option for the Purchase Price and the Option Period shall be automatically extended to 11:59 P.M., local time at the Company's principal office on the later of the forty-fifth (45th) day following the date the Non-Withdrawn Members receive notice of the occurrence of an event of Involuntary Withdrawal and the thirtieth (30th) day following receipt of the Company's notice of its determination not to exercise the Purchase Option. (v) At any time during the Option Period as so extended, each Non-Withdrawn Member may elect to exercise the Purchase Option in the proportion in which the Percentage Interest then held by such Non-Withdrawn Member bears to all of the Percentage Interests in the Company excluding the Percentage Interest of the withdrawn Member, by giving written notice of the election to the withdrawn Member and to the Company. If the Non-Withdrawn Member elects to exercise the Purchase Option, the Non-Withdrawn Member's notice of its election shall fix the Transfer Closing Date, which shall not be earlier than five (5) days after the date of the notice of election or more than thirty (30) days after the expiration of the Option Period. (vi) If the Company or any Non-Withdrawn Member(s) exercises the Purchase Option, the Company or such Non-Withdrawn Member(s), as the case may be, shall pay to the withdrawn Member on the Transfer Closing Date cash or other immediately available funds in the amount of the Purchase Price. (vii) In the event the Company purchases the withdrawn Member's Interest, then the Non-Withdrawn Members shall be deemed to have acquired 100% of the Membership Rights acquired by the Company. (viii) In the event the withdrawn Member fails to timely execute and deliver the assignment or other documentation reasonably required to transfer its Interest to the Company or the Non-Withdrawn Member(s) on the Transfer Closing Date for any reason, then the Company or the Non-Withdrawn Members, as the case may be, shall at all times on and after such date have the right and power to take all steps and execute all assignments and other documents necessary to transfer such Interest without the signature of the withdrawn Member being required on any such assignment or document in connection therewith, and the withdrawn 24 Member hereby grants the Company and the Non-Withdrawn Member(s) an irrevocable power attorney, coupled with an interest, to take such steps or execute such assignments or other documents on its behalf if such withdrawn Member fails to timely do so. (b) Book Value. The term "Book Value" for purposes of Subsection 10.2(a) shall mean the book value, computed in accordance with generally accepted accounting principles, of the equity in the Company as of the end of the last full calendar month immediately preceding the month in which the event giving rise to the payment for the Interest occurred. Notwithstanding anything contained in this Agreement to the contrary, the computation of Book Value shall be subject to the following provisions: (i) No additional allowance of any kind shall be made for the goodwill, trade names, or any other intangible asset or assets (the "Intangible Assets") of the Company other than the aggregate dollar amount for any of those Intangible Assets appearing on the most recent balance sheet of the Company prior to the date on which Book Value is to be determined. (ii) Reserves for contingent liabilities shall not be treated as a liability for purposes of determining Book Value. (iii) No adjustment shall be made to Book Value as a result of any event occurring subsequent to the date as of which Book Value is to be determined. Book Value shall be determined by the accountants regularly employed by the Company. The determination of the accountants shall, for the purposes of this Agreement, be binding and conclusive upon all parties. 10.3 Voluntary Withdrawal. No Member shall have the right or power to voluntarily withdraw from the Company. 10.4 Indemnification by Transferor. An Interest Holder shall indemnify the Company and the remaining Members against any and all loss, damage, or expense (including, without limitation, tax liabilities or loss of tax benefits) arising directly or indirectly from any Transfer or purported Transfer in violation of this Article X. 10.5 Disposition of Other Membership Rights On Transfer of Interest. Upon and contemporaneously with any transfer of an Interest of a transferor who is a Member which does not at the same time transfer the other rights associated with the Interest transferred by the transferor (including, without limitation, the rights of the transferor to participate in the management of the business and affairs of the Company), the Company shall purchase from the transferor, and the transferor shall sell to the Company for a purchase price of $100, all remaining rights and interests retained by the transferor that immediately before the sale or gift were part of the transferor's Membership Rights and associated with the transferred Interest. ARTICLE XI Additional Members 11.1 New Members. New Members shall be admitted only upon the transfer of the stock of an existing Member in whole or in part. 11.2 Financial Adjustments. New Members shall be entitled to allocation of losses, income, or expense deductions incurred by the Company as agreed to between the new Member and the transferring 25 Member. The Company may, at its option, at the time a Member is admitted, close the Company books (as though the Company's tax year had ended) or make pro rata allocations of loss, income, and expense deductions to a new Member for that portion of the Company's tax year in which a Member was admitted in accordance with the provisions of Code Section 706(d) and the Treasury Regulations promulgated thereunder. ARTICLE XII Books, Records, Accounting and Tax Elections 12.1 Bank Accounts. All funds of the Company shall be held in a bank account or accounts, or other appropriate investment account or accounts, opened in the Company's name. 12.2 Books and Records. (a) At the expense of the Company, the Company shall keep and maintain records and accounts of all operations and expenditures of the Company, which shall include, but not be limited to, the following records: (i) complete and accurate information regarding the state of the business and financial condition of the Company; (ii) a current list of the full name and last known business, residence, or mailing address of each Member, Member, and Director both past and present, and the date on which each became a Member, Member or Director; (iii) a copy of the certificate of formation and operating agreement of the Company, all amendments thereto, and all executed copies of any powers of attorney pursuant to which the operating agreement, any certificate, and all amendments thereto have been executed; (iv) copies of all of the Company's federal, state, and local income tax returns and reports, and copies of all financial statements of the Company, for the four most recent years; (v) true and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each Member and which each Member has agreed to contribute in the future; (vi) minutes of every annual meeting, special meeting and court-ordered meeting; and (vii) all written consents obtained from Members for actions taken by Members without a meeting. (b) The books and records shall be maintained in accordance with sound accounting practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours. For purposes of United States income taxes, the Company shall maintain partnership accounts in accordance with this Agreement. (c) Any request for information shall be in writing, and shall state the purpose therefor. Each Member shall reimburse the Company for all reasonable costs and expenses incurred by the Company in connection with the Member's inspection and copying of the Company's books and records. 12.3 Accounting Period. The Company's accounting period shall be the calendar year. 12.4 Tax Returns and Elections. (a) The Company shall cause the preparation and timely filing of all tax returns required to be filed by the Company pursuant to the Code and all other tax returns deemed necessary and required in each jurisdiction in which the Company does business. Copies of those returns, or pertinent information from the returns, shall be furnished to the Members within a reasonable time after the end of the Company's Fiscal Year. 26 (b) The Members having a Deciding Interest shall have the authority to make all elections permitted under the Code, including, without limitation, elections or methods of depreciation and elections under Code Section 754. (c) The Company shall take all appropriate steps to be (i) ignored for federal and state income tax purposes or (ii) if appropriate, treated as a partnership for tax purposes. 12.5 Reports. Within seventy-five (75) days after the end of each taxable year of the Company, the Company shall cause to be sent to each Person who was a Member at any time during the accounting year then ended a balance sheet and a profit and loss statement certified by a Director or an officer of Prime Hospitality Corp. In addition, within seventy-five (75) days after the end of each taxable year of the Company, the Company shall cause to be sent to each Person who was a Member at any time during the taxable year then ended, that tax information concerning the Company which is necessary for preparing the Member's income tax returns for that year. At the request of any Member, and at the Member's expense, the Company shall cause an audit of the Company's books and records to be prepared by independent accountants for the period requested by the Member. 12.6 Tax Matters Member. Quebec shall be the "tax matters member" ("TMM"), as defined in Section [6231 (a)(7)] of the Code, with respect to operations conducted by the Company during the period that Quebec is a Member. The TMM shall comply with the requirements of Section [6221 through 6232] of the Code. The TMM shall retain a qualified accounting firm (the "Accountants") to prepare tax returns, annual reviewed financial statements for the Company, and any other financial statements or data requested by the Members. The cost to retain the Accountants shall be borne by the Company. Notwithstanding anything to the contrary in this Section 12.6, the TMM, in its capacity as such, shall take no position with respect to the Company absent the prior consent of the Members holding a Deciding Interest. ARTICLE XIII Dissolution and Termination of the Company 13.1 Dissolution. (a) The Company shall be dissolved upon the earliest occurrence of any of the following events (each, a "Dissolution Event"): (i) by the written agreement of the Members holding a Deciding Interest; (ii) upon the occurrence of an Involuntary Withdrawal, unless the remaining Members, within ninety (90) days after the occurrence of the Involuntary Withdrawal, by the affirmative vote of Members holding a Deciding Interest (determined without regard to the Percentage Interest of the withdrawn Member), elect to continue the business of the Company pursuant to the terms of this Agreement; or (iii) should an event occur upon the occurrence of which the Members have agreed in this Agreement to dissolve the Company. (b) Upon the occurrence of a Dissolution Event, the Company shall cease to 27 carry on its business, except insofar as may be necessary for the winding up of its business, but its separate existence shall continue until a Certificate of Cancellation has been filed with the Secretary of State or until a decree dissolving the Company has been entered by a court of competent jurisdiction. 13.2 Winding Up, Liquidations, and Distribution of Assets. Upon dissolution, an accounting shall be made by the Company's independent accountants of the accounts of the Company and of the Company's assets, liabilities, and operations, from the date of the last previous accounting until the date of dissolution. The Company shall immediately proceed to wind up the affairs of the Company. If the Company is dissolved and its affairs are to be wound up, the Company shall: (a) sell or otherwise liquidate all of the Company's assets as promptly as practicable (except to the extent the Members may determine to distribute any assets to the Members in kind), which sale may be to one of the Members pursuant to the buy-out procedures of Article XIV; (b) allocate Profit and Loss resulting from such sales or liquidations to the Members' Capital Accounts in accordance with this Agreement; (c) if any assets of the Company are to be distributed in kind, take those actions with respect to appraisal and allocation of Profit and Loss required under Section 9.7(b) of this Agreement; and (d) distribute the assets of the Company in the following order: (i) first, to creditors, including Members, who are creditors, in satisfaction of liabilities of the Company, other than liabilities for which reasonable provision has been made, and liabilities to Members and former Members described in clauses (ii) and (iii) below; (ii) second, to holders of Guarantor Claims, the amount of their Guarantor Claim plus the unpaid payments due thereon under paragraph (c)(ii) of Section 8.9; (iii) third, to Members unpaid distributions to which they became entitled prior to dissolution , as applicable; and (iv) fourth, to Members in proportion to their remaining Capital Account balances after taking into account all contributions, distributions and allocations for all periods. 13.3 Certificate of Cancellation. When all debts, liabilities, and obligations have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets have been distributed to the Members, the Director shall arrange for the dissolution of the company. 13.4 Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of his Capital Contribution. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the cash contribution of one or more Members, the Members shall have no recourse against any other Members. 28 ARTICLE XIV DEADLOCKS 14.1 Deadlocks (a) Dispute. If at any time, a unanimous consent of Members or the consent of Members holding a Deciding Interest cannot be reached or an approval of Quebec or AFP cannot be obtained on any matter requiring such a consent or approval (a "Dispute") any Member (the "Offeror Member") shall have the right any time exercisable by written notice (the "Offeror Notice") to all Members voting against the Offeror Member in connection with the Dispute to (the "Offeree Member or Members") to offer to buy (the "Offer") such other Members' stock in the Company at a purchase price and upon other terms specified in the Offer. Any Member who is not within the definition of "Offeree Member" shall have no rights or obligations under this Section 14.1. (b) Offeree Member Election. The Offeree Members must elect by sending written notice (the "Notice of Election") to the Offeror Member thirty days after receipt of the Offer, either: (i) to Sell their stock in the Company at the purchase price and on other terms specified in the Offer, or (ii) to offer to purchase the Offers' stock in the Company at a purchase price equal to the price and on other terms specified in the Offer. (c) Conflict among Offeree Members. In the event that some Offeree Members chose to buy and other Offeree Members chose to sell, the Offeree Members choosing to buy shall purchase the stock of the Offeror Member and the Offeree Members choosing to sell. The stock purchased and the purchase price shall be allocated so as to maintain the existing proportionality in ownership. (d) Conflict among Offeror Members. In the event that two offers are made, the first in time shall control. In the event that any of the Offeree Members fails to deliver its Notice of Election in accordance with the terms of Subsection 14.1 within such thirty day period, the Offeree Member shall be deemed to have elected clause (i). (e) Purchase by Offeror Member. Upon the election referred to in subsection (b) above, the Member or Members who are purchasing (the "Purchasing Members"), within three (3) business days following delivery of the Notice of Election, shall pay into escrow a deposit (the "Offeror Deposit") equaling five percent (5%) of the Offer purchase price, and on or before the date (the "Outside Closing Date") which is the earlier to occur of 60 days after the execution of a formal purchase and sale agreement (the "Sale Contract") or 90 days after receipt of the Notice of Election, the Purchasing Members, the Members selling their interest (the "Selling Members"), and the other Members shall execute such Members' consents and such documents and instruments reasonably required by the Purchasing Members to sell and transfer their stock to the Purchasing Members at the purchase price and other terms specified in the Offer and the Sale Contract. The Sale Contract shall contain such terms as are consistent with the terms of this Section 14.1 and as are otherwise reasonably acceptable to the Purchasing Members and the Selling Members . The closing of such sale (the "Sale Closing") shall take place as soon as practicable but in any 29 event on or before the Outside Closing Date. At the Sale Closing, the Selling Members shall sell and transfer their stock free and clear of encumbrances. In the event that the Purchasing Members default in their obligation to close in accordance with the terms of this Section 14.1 on or before the Outside Closing Date, the Purchasing Members' right to purchase the stock pursuant to the Offer shall terminate and the Offeror Deposit shall be paid to the Selling Members as liquidated damages. Upon such default the Selling Members shall have the right, exercisable within 30 days following the Outside Closing Date, to elect to purchase the Purchasing Members' stock at a purchase price equal to that set forth in the Offer. In the event that the Selling Members so elect to purchase the Purchasing Members' stock in the Company, the closing thereof will be conducted in accordance with the terms of this Section 14.1. ARTICLE XV DEFAULT 15.1 Rights After Default. After the date hereof, if any Member fails to perform any of its obligations hereunder or breaches or defaults under any of the terms, conditions or covenants of this Agreement including those specified in Section 8.1 or 8.2 or paragraph 8.9(b)(i) or breaches or defaults under any of the terms, conditions or covenants of any other agreement between the Company and such Member (a "Default"), then the other Members that are parties to this Agreement (the "Nondefaulting Members"), shall have the right to give such party (the "Defaulting Members") a Notice of Default (a "Notice of Default"). The Notice of Default shall set forth the nature of the obligation which the Defaulting Members have not performed. (a) If a Default is not a failure to pay money and if, within the thirty (30) day period following receipt of the Notice of Default, the Defaulting Members in good faith commences to perform such obligation and either cures the Default or thereafter prosecutes to completion with diligence and continuity the curing thereof and cures the Default within a reasonable time, it shall be deemed that the Notice of Default was not given and the Defaulting Members shall lose no rights hereunder. If, within such thirty (30) day period, the Defaulting Members do not commence in good faith the curing of the Default or does not thereafter prosecute the completion with diligence and continuity the curing hereof, then the Nondefaulting Members shall have the rights set forth in Subsection 15.1(c). (b) If a Default is a failure to pay money including a default described in Sections 8.1 or 8.2 or paragraph 8.9(b)(i), and if such sums of money shall be paid by or on behalf of the Defaulting Members within fifteen (15) days after receipt of the Notice of Default with respect thereto, then it shall be deemed that such Notice of Default was not given and the Defaulting Members shall lose no rights hereunder. If such sums are not so paid within such fifteen (15) day period, then the Defaulting Members shall have the rights set forth in Subsection 15.1 (c). (c) If any Default which materially affects the operation of the Company or any Default which is a failure to pay money is not cured as set forth in Subsections 15.1 (a) or 15.1 (b), the Nondefaulting Members holding more than fifty (50%) percent of the total Percentage Interest held by all Nondefaulting Members shall have the right to terminate this Agreement unilaterally by giving the Defaulting Members written notice thereof whereupon such Default will be treated as an Involuntary Withdrawal of the Defaulting Members under Section 10.2. 15.2 No Waiver. Failure of the Nondefaulting Members to give any Notice of Default, or any failure by the Nondefaulting Members to insist upon strict performance of any of the terms of this Agreement or of any other agreement between the Company and the Defaulting Members, shall not 30 constitute a waiver of any such breach or any of the terms of this Agreement or such other Agreement. No breach shall be waived nor shall any duty be performed, or altered or modified except by written instrument. One or more waivers or failures to give Notice of Default shall not be construed as a waiver of a subsequent or continuing breach of the same covenant. 15.3 Estoppel Certificate. Any Member shall at any time and from time to time upon not less than twenty (20) days prior written notice from any other Members, acknowledge and send to the other Members a statement in writing certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the Agreement is in full force and effect as modified and stating the modifications) and stating whether or not as to all Members there exists any default in keeping, observing or performing any of the terms contained in this Agreement or in any agreement between a Member and the Company and, if a default shall exist, specifying each such default (limited, as regards the other Members' defaults, to those defaults of which the certifying Member has knowledge). 15.4 Negation of Right to Dissolve by Will of Member. Except as otherwise specifically set forth in this Agreement, no Member shall have the right to terminate this Agreement or dissolve the Company by its express will or by withdrawal without the consent of the Members holding a Deciding Interest. 15.5 Not Exclusive Remedy. The rights granted in Section 15.1 shall not be deemed an exclusive remedy of the Nondefaulting Members and the Company, but all other rights and remedies, legal and equitable, shall be available to the Nondefaulting Members and to the Company. ARTICLE XVI CONTROL OF HOTELCO 16.1 Control Provisions. The Members acknowledge that the Company is the sole shareholder of Hotelco and that the operations of Hotelco will be directed by the Members through the Company and its officers and directors. The Members agree that the terms and provisions of this Agreement concerning the control and management of the Company apply equally to the control and management of Hotelco. Further, the Members agree that the limitations of Article V shall apply to the director of Hotelco. Quebec City shall undertake to have the corporate charter and bylaws of Hotelco amended to reflect the limitations set forth in Article V. ARTICLE XVII MISCELLANEOUS PROVISIONS 17.1 Notices. Any notice, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an executive officer of the party to whom the same is directed or, if sent by registered or certified mail, postage and charges prepaid, addressed to the Member's and/or Company's address, as appropriate, which is set forth below or to such other address as may have been communicated, from time to time, to the Members or to the Company in a notice that complies with the provision of this Section. Except as otherwise provided in this Agreement, any such notice shall be deemed to be given three (3) business days after the date on which the same was held in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid: 31 To Quebec: Quebec City, Inc. c/o Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 With a copy to: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 To AFP: AFP Nineteen Corp. c/o United Capital Corp. United Capital Building 9 Park Place Great Neck, New York 11021 With a copy to: Samuel Ross, Esq. c/o Olshan Grundman 505 Park Avenue New York, New York 10022 17.2 Waiver of Action for Partition. Each Member irrevocably waives during the term of the Company any right that it may have to maintain any action for partition with respect to the property of the Company. 17.3 Amendments. This Agreement may not be amended except by the unanimous written agreement of all of the Members. 17.4 Execution of Additional Instruments; Estoppel Certificate. Each Member hereby agrees to execute such other and further statements of interest and holdings, designations, powers of attorney, and other instruments necessary to comply with any laws, rules, or regulations. Each Member shall, within ten (10) days after written request by any Member or the Director, deliver to the requesting Person a certificate stating, to the Member's knowledge, that: (a) this Agreement is in full force and effect; (b) this Agreement has not been modified except by an instrument or instruments identified in the certificate; and (c) there is no default hereunder by the requesting Person, or if there is such a default, the nature and extent thereof. 17.5 Terms. Common nouns and pronouns shall be deemed to refer to the masculine, feminine, neuter, singular, and plural, as the identity of the Person may in the context require. 17.6 Section Headings. The section headings in this Agreement are for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any of its provisions. 17.7 Waivers. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not prevent a subsequent act that would have originally constituted a violation from having the effect of an original violation. 17.8 Rights and Remedies Cumulative. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive the right to use 32 any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance, or otherwise. 17.9 Severability. If any provision of this Agreement or its application to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement and its application shall not be affected and shall be enforceable to the fullest extent permitted by law. 17.10 Heirs, Successors, and Assigns. Each and all of the covenants, terms, provisions, and agreements contained in this Agreement shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, successors, and assigns. 17.11 Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company. 17.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 17.13 Application of Law. This Agreement shall be governed exclusively by its terms and by the laws of the State of New York. 17.14 Jurisdiction and Venue. Any suit involving any dispute or matter arising under this Agreement may only be brought in the United States District Court for the Southern District of New York having jurisdiction over the subject matter of the dispute or matter. All Members hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding. 17.15 Investment Representations. Each Member hereby represents and warrants to the Company and the other Members that such Member: (a) is an "accredited investor" within the meaning of rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"); (b) understands that the stock in the Company that the Member has received or will received (the "Stock") has not been registered under the Securities Act, nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon such Member's representations contained herein; (c) has such knowledge and experience in financial and business matters that the Member is capable of evaluating the merits and risks of the investment contemplated by this Agreement; and the Member is able to bear the economic risk of this investment in the Company (including a complete loss of this investment); (d) recognizes that no public market exists for the Stock, and none will exist in the future; that it must bear the economic risk of this investment indefinitely unless the Stock is registered pursuant to the Securities Act or an exemption from such registration is available, and unless the disposition of such Stock is qualified under applicable state securities laws or an exemption from such qualification is available, and that the Company has no obligation or present intention of so registering the Stock; understands that there is no assurance that any exemption from the Securities Act will be available, or, if available, that such exemption will allow the Member to transfer any or all the Stock, in the amounts, or at the times the 33 Member might propose; understands at the present time that rule 144 ("Rule 144') promulgated under the Securities Act by the Securities and exchange Commission is not applicable to sales of the Stock because they are not registered under Section 12 of the Securities Exchange Act of 1934 as amended (the "Exchange Act") and there is not publicly available the information concerning the Company specified in rule 144; acknowledges that the Company is not presently under any obligation to register under Section 12 of the Exchange Act or to make publicly available the information specified in Rule 144 and that it may never be required to do so; (e) is acquiring the Stock solely for its own account for investment and not with a view toward the resale, transfer, or distribution thereof, nor with any present intention of distributing the Securities. Except as specifically provided herein, no other person has any right with respect to, or stock in, the Stock to be purchased by the Member, nor has the Member agreed to give any person any such interest or right in the future; (f) except as specifically provided herein, has no contract, undertaking, understanding, agreement or arrangement, formal or informal, with any person to sell, transfer or pledge all or any portion of his, her or its Member Stock, and has no current plans to enter into any such contract, undertaking, understanding, agreement or arrangement; (g) has not seen, received, been presented with, or been solicited by any leaflet, public promotional meeting, article or any other form of advertising or general solicitation as to the Company's sale to such Member of his, her or its Member's Stock; and (h) is familiar with the business and operations of the Company and has been afforded full and complete access to the books, financial statements, records, contracts, been afforded an opportunity to ask such questions of the Company's agents, accountants and other representatives concerning the Company's proposed business, operations, financial condition, assets, liabilities and other relevant matters as he has deemed necessary or desirable, and has been given all such information as has been requested, in order to evaluate the merits and risks of the investment contemplated herein. 17.16 Limitation on Transfer. No Member shall transfer any Stock to any Person who is not an accredited investor as defined in Section 17.15. Each Member who transfers Stock shall obtain from the transferee a written confirmation with respect to the representations and warranties as set forth in Section 17.15. 34 IN WITNESS WHEREOF, the parties hereto have caused this document to be signed the day and year first above written 3072929 NOVA SCOTIA COMPANY, INC. By: /S/ Douglas Vicari ------------------------------- Douglas Vicari, V.P. QUEBEC COMPANY, INC. By: /S/ Douglas Vicari ------------------------------- Douglas Vicari, President AFP NINETEEN CORP. By: /S/ Anthony Miceli ------------------------------- Anthony Miceli, President 35 EXHIBIT 8.1 COSTS IN CONNECTION WITH HOTEL ACQUISITION Survey * Title Insurance * Outside Legal See attached Environmental * Engineering See attached Feasibility/Appraisal * Architectural * Travel (out of pocket) * Due Diligence * Permits/Licenses * Escrow Fees * State, City County Recordation Fees & Taxes * Transfer Taxes * Other * Not yet invoiced S EX-2.T 7 y84868exv2wt.txt ASSIGNMENT OF MEMBERSHIP INTEREST Exhibit 2(t) ASSIGNMENT OF MEMBERSHIP INTEREST Assignment made this 26th day of March, 2003, by and between QUEBEC CITY, INC. (hereinafter "Quebec"), a Nevada corporation and ARK QUEBEC, INC. (hereinafter "Purchaser"). R E C I T A L S: A. Quebec is the holder of 50% interest of 3072929 Nova Scotia Company., a Nova Scotia unlimited liability company (the "Company"), owner of the Holiday Inn Select, 395 rue de la Cournne, Quebec City, Quebec, Canada G1K 7X4 (the "Hotel"), pursuant to an agreement of members dated January 8, 2003 by and among the Company, Quebec, and AFP Nineteen Corp. (the "Agreement"). B. Purchaser wishes to purchase a ten (10%) percent interest in the Company. NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable considerations the receipt and sufficiency of which the parties acknowledge, the parties agree as follows; 1. Quebec hereby assigns and sells to Purchaser, effective as of the date hereof, so much of its interest (including its stock and "Membership Rights" as defined in the Agreement) in the Company such that Purchaser has a resulting interest of ten (10%) percent and Quebec has a resulting interest of forty (40%) percent in the Company. The purchase price for such interest is $1,232,773 (or 10% rounded) of the $12,237,726 acquisition cost of the Hotel set forth on Exhibit 8.1 of the Agreement), payable in full on the date hereof by wire transfer to the account of Quebec pursuant to the instructions attached hereto as Exhibit A. By accepting this Assignment, Purchaser acknowledges that its interest is subject to and agrees to be bound by all of the terms and conditions of the Agreement. Quebec agrees to cause the Company to issue such evidence of ownership as provided under Nova Scotia law. 2. Quebec warrants and represents to Purchaser that it is the sole owner of the interest conveyed by this assignment, that it has full power and authority to make this assignment, and that the interest assigned is not subject to any liens or other encumbrances. To the extent that such interest constitutes stock, such stock is duly authorized, validly issued, outstanding, fully paid and nonassessable. 3. Purchaser warrants and represents to Quebec and to the Company on the date hereof that Purchaser: (a) is an "accredited investor" within the meaning of rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"); (b) understands that the interest in the Company that the Purchaser will receive (the "Interest") has not been registered under the Securities Act, nor qualified under any state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon such Purchaser's representations contained herein; (c) has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of the investment contemplated by this Assignment; and the Purchaser is able to bear the economic risk of this investment in the Company (including a complete loss of this investment); (d) recognizes that no public market exists for the Interest, and none will exist in the future; that it must bear the economic risk of this investment indefinitely unless the Interest is registered pursuant to the Securities Act or an exemption from such registration is available, and unless the disposition of such Interest is qualified under applicable state securities laws or an exemption from such qualification is available, and that the Company has no obligation or present intention of so registering the Interest; understands that there is no assurance that any exemption from the Securities Act will be available, or, if available, that such exemption will allow the Purchaser to transfer any or all the Interest, in the amounts, or at the times the Purchaser might propose; understands at the present time that rule 144 ("Rule 144') promulgated under the Securities Act by the Securities and Exchange Commission is not applicable to sales of the Interest because they are not registered under Section 12 of the Securities Exchange Act of 1934 as amended (the "Exchange Act") and there is not publicly available the information concerning the Company specified in Rule 144; acknowledges that the Company is not presently under any obligation to register under Section 12 of the Exchange Act or to make publicly available the information specified in Rule 144 and that it may never be required to do so; (e) is acquiring the Interest solely for its own account for investment and not with a view toward the resale, transfer, or distribution thereof, nor with any present intention of distributing the Securities. Except as specifically provided herein, no other person has any right with respect to the Interest to be purchased by the Purchaser, nor has the Purchaser agreed to give any person any such interest or right in the future; (f) except as specifically provided herein, has no contract, undertaking, understanding, agreement or arrangement, formal or informal, with any person to sell, transfer or pledge all or any portion of his, her or its Interest, and has no current plans to enter into any such contract, undertaking, understanding, agreement or arrangement; (g) has not seen, received, been presented with, or been solicited by any leaflet, public promotional meeting, article or any other form of advertising or general solicitation as to the Company's sale to such Purchaser of his, her or its Interest; and (h) is familiar with the business and operations of the Company and has been afforded full and complete access to the books, financial statements, records, contracts, been afforded an opportunity to ask such questions of the Company's agents, accountants and other representatives concerning the Company's proposed business, operations, financial condition, 2 assets, liabilities and other relevant matters as he has deemed necessary or desirable, and has been given all such information as has been requested, in order to evaluate the merits and risks of the investment contemplated herein. 4. Quebec hereby consents to the admission of Purchaser as a Member in the Company. 5. For purposes of the Agreement, notices shall be addressed as follows If to Purchaser: Ark Quebec, Inc. c/o Ark Finance, Inc. 590 Madison Avenue 38th Floor New York, New York 10022 IN WITNESS WHEREOF, the parties hereto have caused this document to be signed the day and year first above written. QUEBEC CITY, INC. By: /s/ Douglas Vicari ------------------------- Douglas Vicari, President ARK QUEBEC, INC. By: /s/ Brad Reiss -------------------------- Brad Reiss, President 3 EX-23 8 y84868exv23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8, file number 333-03361 of Prime Hospitality Corp. pertaining to the 1995 Employee Stock Option Plan and the 1995 Non-employee Director Stock Option Plan; Form S-8, file number 333-44287 pertaining to the Prime Hospitality Corp. 1995 Employee Stock Option Plan and the 1995 Non-employee Director Stock Option Plan; and Form S-8, file number 333-60911, pertaining to the Prime Hospitality Corp. 1995 Employee Stock Option Plan) of Prime Hospitality Corp. of our report dated February 11, 2003, except for note 21, as of which the date is March 26, 2003 with respect to the consolidated financial statements of Prime Hospitality Corp. included in the Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP New York, New York March 27, 2003 EX-99.1 9 y84868exv99w1.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION I, A.F. Petrocelli, certify that: 1. I have reviewed this annual report on Form 10-K of Prime Hospitality Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ A.F. Petrocelli ----------------------- A.F. Petrocelli, Chief Executive Officer EX-99.2 10 y84868exv99w2.txt CERTIFICATION OF CFO EXHIBIT 99.2 CERTIFICATION I, Douglas W. Vicari, certify that: 1. I have reviewed this annual report on Form 10-K of Prime Hospitality Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Douglas W. Vicari ----------------------- Douglas W. Vicari Chief Financial Officer EX-99.3 11 y84868exv99w3.txt CERTIFICATION OF VP-FINANCE EXHIBIT 99.3 CERTIFICATION I, Richard T. Szymanski, certify that: 1. I have reviewed this annual report on Form 10-K of Prime Hospitality Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Richard T. Szymanski ------------------------ Richard T. Szymanski VP-Finance -----END PRIVACY-ENHANCED MESSAGE-----