-----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, EdcFQWITRI5vGi8FsNXs/dDGmOhKaDSTvzARZksotLDVUBrhrzQ4MEin5APOHegy GljohkBwrW46XHVpaTt4ZQ== 0000950123-97-001989.txt : 19970307 0000950123-97-001989.hdr.sgml : 19970307 ACCESSION NUMBER: 0000950123-97-001989 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970306 SROS: NYSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06869 FILM NUMBER: 97551905 BUSINESS ADDRESS: STREET 1: 700 RTE 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 2018821010 MAIL ADDRESS: STREET 1: 700 RTE 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: PRIME MOTOR INNS INC DATE OF NAME CHANGE: 19920609 FORMER COMPANY: FORMER CONFORMED NAME: PRIME EQUITIES INC DATE OF NAME CHANGE: 19731120 10-K405 1 FORM 10-K 1 ================================================================================ 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO 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, 07004 FAIRFIELD, NEW JERSEY (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 882-1010 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------------------------------------------------------------------------ PAR VALUE $.01 PER SHARE, COMMON STOCK NEW YORK STOCK EXCHANGE 7% CONVERTIBLE SUBORDINATED NOTES DUE 2002 NEW YORK STOCK EXCHANGE 9 1/4% FIRST MORTGAGE NOTES DUE 2006 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Warrants to Purchase Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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] The aggregate market value of the registrant's common stock held by non-affiliates on February 28, 1997 based on the last sale price as reported by the National Quotation Bureau, Inc. on that date was approximately $658,485,300, , . The Registrant had 39,908,230 shares of Common Stock outstanding as of February 28, 1997. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement prepared for the 1997 annual meeting of shareholders are incorporated by reference into Part III of this report. ================================================================================ 2 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 generally accepted accounting principles 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 a leading national hotel company, with a portfolio of 108 hotels containing 15,479 rooms located in 25 states and the U.S. Virgin Islands (the "Portfolio"). Prime controls two high-quality hotel brands -- AmeriSuites(R) and Wellesley Inns(R) -- as well as a portfolio of upscale full-service hotels. One of the country's largest hotel owner/operators, Prime has positioned itself to benefit significantly from favorable lodging industry fundamentals that have prevailed in recent years. From 1994 to 1996, the Company's EBITDA has grown at a compound annual rate of 44.0%, from $42.8 million in 1994 to $88.8 million in 1996, while recurring net income has grown at a compound annual rate of 48.7%, from $12.8 million to $28.3 million over the same period. The Company's strategy is to capitalize on two lodging industry trends: (i) favorable industry fundamentals, which are producing strong earnings growth due to the operating leverage inherent in hotel ownership and (ii) growing consumer preferences for newer all-suite accommodations with strong brand identities. Reflecting this strategy, the Company owns and operates 95 of the 108 hotels in the Portfolio and holds financial or equity interests in 8 of the remaining 13 hotels managed by the Company for third parties. Furthermore, more than 85% of the Company's capital spending in 1995 and 1996 was dedicated to the growth of the Company's proprietary AmeriSuites and Wellesley Inns brands. Through its focus on hotel equity ownership, the Company is benefiting from the operating leverage inherent in the lodging industry. Through its development of proprietary brands, the Company is positioning itself to generate additional revenue not dependent on investment in real estate. Prime's Portfolio is modern and well-maintained, with an average hotel age of approximately 11 years. Over the past three years, the Company has achieved rapid growth in the Portfolio, from 5,092 owned rooms at January 1, 1994 to 12,802 owned rooms at February 28, 1997. At the same time, the Company has focused on brand development, with the number of Owned Hotels operated under Prime's proprietary AmeriSuites and Wellesley Inns brands increasing from 19 of the 41 Owned Hotels at January 1, 1994 to 68 of the 95 Owned Hotels at February 28, 1997. The Company's hotels serve three major lodging industry segments: the all-suites segment, under the Company's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the limited-service segment, primarily under the Company's proprietary Wellesley Inns brand. All-Suites: Prime owns and operates 40 all-suite hotels under the AmeriSuites brand name, and currently has another 45 AmeriSuites under development, including 27 under construction. AmeriSuites are upper mid-price, all-suite hotels containing approximately 128 suites and located primarily near suburban commercial centers, corporate office parks and other travel destinations, with close proximity to dining, 1 3 shopping and entertainment amenities. Since January 1, 1995, AmeriSuites has been one of the fastest growing domestic hotel chains, expanding from 13 hotels to 40 hotels at February 28, 1997, an increase of 208%. In 1996, AmeriSuites contributed approximately $26.0 million, or 28.6%, of the Company's Hotel EBITDA, a percentage which the Company believes will increase significantly in 1997. Full-Service: Prime operates 32 upscale full-service hotels with food service and banquet facilities under franchise agreements with national hotel brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. In 1996, the Company's full-service hotels contributed approximately $44.5 million, or 48.9%, of the Company's Hotel EBITDA. Limited-Service: Prime operates 36 limited-service hotels, 28 of which are Wellesley Inns. The Company owns all of the Wellesley Inns, which compete primarily in the mid-price segment with hotels such as Hampton Inns and La Quinta Inns. The remaining eight limited-service hotels are operated under franchise agreements with well-known national chains. In accordance with its brand development strategy, the Company expects to divest a number of these eight hotels within the next several years. In 1996, the Company's limited-service hotels contributed approximately $20.5 million, or 22.5%, of the Company's Hotel EBITDA. OPERATING PERFORMANCE AND INTERNAL GROWTH Prime seeks to achieve internal growth through the use of sophisticated operating, marketing and financial systems at its hotels. Prime has demonstrated its ability to operate its hotels effectively in each of its three segments, achieving revenue per available room ("REVPAR") increases in 1996 at its comparable AmeriSuites, full-service and limited-service hotels of 11.7%, 15.8% and 5.2%, respectively, versus 1995 results. Management believes that: (i) the AmeriSuites chain is positioned to benefit from increased critical mass and name recognition resulting from the chain's rapid growth, expanded marketing initiatives and product improvements; (ii) the upscale full-service segment, located principally in the Northeast, is positioned to benefit from strong regional and segment fundamentals, including significant barriers to entry; and (iii) the Company's Wellesley Inns are positioned to benefit from a $9.0 million renovation and reimaging program to be completed in March 1997. The Company's emphasis on efficient operations has increased operating margins, thus translating its top-line REVPAR growth into increased earnings for each of its three industry segments. In 1996, gross operating profit increased by 17.0%, 25.9% and 10.4%, respectively, for comparable AmeriSuites, full-service and limited-service hotels, versus 1995 results. The Company expects to further improve its operating performance in 1997 through the implementation of a new proprietary yield management system, an enhanced central reservations system serving the AmeriSuites and Wellesley Inns chains, digital telecommunications conversions, improved telephone call accounting systems and significant increases in employee training programs. AMERISUITES EXPANSION Prime's external growth focuses on the accelerated expansion of its AmeriSuites brand through the construction of new AmeriSuites hotels. The Company believes that AmeriSuites, which offers an excellent guest experience and desirable suite accommodations at mid-scale prices, is well-positioned to become a preeminent brand in the rapidly growing all-suites segment. Prime plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. At present, 40 AmeriSuites are open, with an additional 45 hotels under development, including 27 under construction. At these levels, the Company believes that it is approaching the critical mass necessary to begin development of franchising programs, which would further leverage the value of its proprietary brands. AmeriSuites are positioned in the upper mid-price segment of the lodging industry, competing predominantly with other mid-price and upscale brands such as Courtyard by Marriott and Holiday Inn. The Company markets AmeriSuites as "America's All-Suite Hotel," emphasizing superior price/value relative to traditional mid-price hotels by focusing on the chain's spacious suites, upscale facilities and attractive amenity package. The Company is committed to the expansion of the AmeriSuites brand due to its attractive investment returns, rapid stabilization, broad customer appeal and positioning in the fast-growing all-suites segment. 2 4 Management believes that the growing AmeriSuites infrastructure, consisting of elements such as improved frequency programs, an enhanced central reservations system, increased advertising and marketing programs and the increased visibility from the doubling of the chain's number of hotels in the past year will permit AmeriSuites to achieve critical mass and outperform its older, more established competitors. Additionally, management believes that recent product improvements such as a larger, more upscale lobby and arrival area, standardized indoor pools in Northern climates and specially designed business suites will continue to enhance operating performance. Prime believes that it has access to sufficient resources to implement its planned expansion of the AmeriSuites brand, including capital from the following sources: (i) borrowings under the Company's $100 million Revolving Credit Facility; and (ii) internally generated free cash flow from hotel operations. With a significant hotel asset base, Prime also expects to seek additional debt or equity financing or enter into sale/leaseback agreements with respect to certain of its properties. INDUSTRY OVERVIEW The lodging industry as a whole has experienced five consecutive years in which the growth in room demand has exceeded the growth in supply. In 1996, industry-wide percentage growth in demand for hotel rooms exceeded industry-wide percentage growth in supply of hotel rooms by 34.8% (3.1% versus 2.3%). The excess of demand growth over supply growth in the past several years has led to industry-wide increases in occupancy percentages and average daily rate ("ADR"), with occupancy rising to 65.7% in 1996 from 65.1% in 1995, and ADR increasing 6.7% in 1996 over 1995 levels. The following table was compiled from industry operating data as reported by Smith Travel Research and highlights industry data for the United States and the regions in which most of the Company's hotels are located: the Middle Atlantic region, which is comprised of New Jersey, New York and Pennsylvania; and the South Atlantic region, which is comprised of Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware. The table also includes operating data concerning the three price levels (of the five price levels classified by Smith Travel Research) in which the Company competes: upscale, mid-price and economy. 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 --------------------------- --------------------------- --------------------------- 1994 V. 1995 V. 1996 V. 1994 V. 1995 V. 1996 V. 1994 V. 1995 V. 1996 V. 1993 1994 1995 1993 1994 1995 1993 1994 1995 ------- ------- ------- ------- ------- ------- ------- ------- ------- United States.................. 1.4% 1.6% 2.3% 4.7% 3.0% 3.1% 7.3% 6.1% 7.8% BY REGION: Middle Atlantic................ 0.4 1.1 1.0 4.0 1.2 3.3 10.5 5.8 10.1 South Atlantic................. 1.1 1.3 2.0 3.2 3.6 3.3 4.9 6.9 7.9 BY SERVICE (PRICE LEVEL): Upscale........................ 2.0 1.9 3.4 3.8 2.6 3.4 5.0 4.7 5.4 Mid-Price...................... 2.0 2.4 3.3 4.2 3.8 3.3 5.5 5.9 6.7 Economy........................ 1.1 2.0 2.3 2.6 3.0 2.4 5.0 6.2 6.7
3 5 PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Owned Hotels and Managed Hotels as of February 28, 1997:
MANAGED WITH FINANCIAL OWNED(1) INTEREST(2) OTHER MANAGED TOTAL ---------------- --------------- --------------- ---------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ------ All-Suites: AmeriSuites.................. 40 5,012 0 0 0 0 40 5,012 Full-Service: Marriott..................... 1 517 0 0 1 525 2 1,042 Radisson..................... 3 627 0 0 0 0 3 627 Sheraton..................... 3 589 0 0 0 0 3 589 Crowne Plaza................. 3 717 0 0 0 0 3 717 Holiday Inn.................. 2 390 3 690 0 0 5 1,080 Ramada....................... 8 1,256 3 672 1 125 12 2,053 Howard Johnson............... 1 210 1 116 1 115 3 441 Independent.................. 1 149 0 0 0 0 1 149 ------ ----- ----- --- ------ -- - - Total Full-Service... 4,455 1,478 765 32 6,698 22 7 3 Limited-Service: Wellesley Inn................ 28 2,823 0 0 0 0 28 2,823 Howard Johnson............... 4 372 1 149 2 285 7 806 Other........................ 1 140 0 0 0 0 1 140 ------ ----- ----- --- ------ -- - - Total Limited-Service.... 3,335 149 285 36 3,769 33 1 2 ------ ----- ----- --- ------ -- - - Total........... 12,802 1,627 1,050 108 15,479 95 8 5 ====== ===== ===== === ====== == = =
- --------------- (1) Of the 95 Owned Hotels, 14 are operated under lease agreements. The leases covering the Company's leased hotels provide for fixed lease rents and, in most instances, additional percentage rents based on a percentage of room revenues. The leases also generally require the Company to pay the cost of repairs, insurance and real estate taxes. In addition, some of the Company's Owned Hotels are located on land subject to long-term leases, generally for terms in excess of the depreciable lives of the improvements. (2) Eight Managed Hotels in which the Company holds a mortgage or profit participation on the property. 4 6 The following table sets forth the location of the Company's hotels as of February 28, 1997:
MANAGED WITH FINANCIAL OWNED INTEREST OTHER MANAGED TOTAL ----------------- ---------------- ---------------- ----------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ------ Arizona................ 1 118 -- -- -- -- 1 118 Arkansas............... 1 130 -- -- -- -- 1 130 California............. -- -- -- -- 1 96 1 96 Connecticut............ 4 589 -- -- -- -- 4 589 Florida................ 23 2,551 -- -- 1 115 24 2,666 Georgia................ 6 803 -- -- 1 189 7 992 Illinois............... 3 369 -- -- -- -- 3 369 Indiana................ 1 126 -- -- -- -- 1 126 Kansas................. 1 126 -- -- -- -- 1 126 Kentucky............... 1 123 -- -- -- -- 1 123 Maryland............... 1 128 -- -- 1 525 2 653 Michigan............... 1 128 -- -- -- -- 1 128 Minnesota.............. 1 128 -- -- -- -- 1 128 Nevada................. 2 350 -- -- -- -- 2 350 New Jersey............. 17 2,674 7 1,489 1 125 25 4,288 New York............... 8 941 -- -- -- -- 8 941 North Carolina......... 2 254 -- -- -- -- 2 254 Ohio................... 4 508 -- -- -- -- 4 508 Oklahoma............... 1 128 -- -- -- -- 1 128 Oregon................. 1 161 -- -- -- -- 1 161 Pennsylvania........... 2 377 1 138 -- -- 3 515 South Carolina......... 1 111 -- -- -- -- 1 111 Tennessee.............. 4 507 -- -- -- -- 4 507 Texas.................. 5 640 -- -- -- -- 5 640 U.S. Virgin Islands.... 1 517 -- -- -- -- 1 517 Virginia............... 3 315 -- -- -- -- 3 315 ------ ----- ----- --- ------ -- - - Total........ 12,802 1,627 1,050 108 15,479 95 8 5 ====== ===== ===== === ====== == = =
5 7 The following table sets forth for the five years ended December 31, 1996 operating data for the hotels in the Company's portfolio as of December 31, 1996. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, have been excluded from the table. For purposes of showing operating trends, the results of 25 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
MANAGED WITH OWNED FINANCIAL INTEREST OTHER MANAGED TOTAL --------------------------- --------------------------- --------------------------- --------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS --------- ------ --------- ------ --------- ------ --------- 1992.................. 55 7,087 9 1,747 2 650 66 1993.................. 59 7,576 9 1,747 3 765 71 1994.................. 66 8,642 9 1,747 5 1,050 80 1995.................. 74 9,616 9 1,747 5 1,050 88 1996.................. 90 11,645 9 1,747 5 1,050 104 ROOMS ------ 1992.................. 9,484 1993.................. 10,088 1994.................. 11,439 1995.................. 12,413 1996.................. 14,442
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY --------- ------ ------ --------- ------ ------ --------- ------ ------ --------- 1992.................. 69.2% $56.04 $38.75 70.7% $58.50 $41.33 64.9% $87.81 $56.96 69.2% 1993.................. 71.4 57.11 40.77 72.9 60.72 44.26 64.9 86.91 56.41 71.2 1994.................. 69.9 60.59 42.35 72.1 66.42 47.88 68.2 73.66 50.27 70.1 1995.................. 69.6 64.26 44.70 73.5 69.55 51.09 70.5 77.58 54.71 70.2 1996.................. 69.6 70.39 48.97 75.6 73.92 55.88 76.9 83.06 63.83 71.0 ADR REVPAR ------ ------ 1992.................. $58.58 $40.51 1993.................. 59.63 42.48 1994.................. 62.84 44.05 1995.................. 66.28 46.54 1996.................. 71.99 51.08
All-Suite Hotels The Company currently owns 40 AmeriSuites hotels and has 45 AmeriSuites hotels under development, including 27 under construction. Prime plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. AmeriSuites are all-suites, upper mid-price hotels which offer guests an attractively designed suite with a complimentary continental breakfast in a spacious lobby cafe, remote-control cable television, fully-equipped business centers, 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 quality of the guest suites, which offer distinct living, sleeping and kitchen areas and the consistency of product quality. 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, dual phone lines, easy chair and ottoman, in addition to voice mail, data ports and other amenities. Each AmeriSuites contains approximately 128 suites, including 24 TCB Suites, and two to four meeting rooms. AmeriSuites are primarily located near suburban commercial centers, corporate office parks and other travel destinations, with close proximity to dining, shopping and entertainment amenities. The target customer is primarily 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 sales, national marketing programs and a central reservation system. On January 31, 1997, the Company converted its central reservation system for its AmeriSuites and Wellesley Inns brands to a new system developed and operated by Anasazi Travel Resources, Inc. The new reservation system will broaden access to travel agents through additional global distribution systems and immediately increased the number of agent terminals by 23%. Through a real-time interface connecting the hotels with the central reservation system and global distribution systems, the Company will be able to swiftly implement marketing and yield management strategies. Additionally, the system will provide the Company with detailed guest history data for new marketing initiatives such as frequent traveler programs. The system also has the capability to provide automatic linkage with other reservation systems which may facilitate new marketing alliances with strategic partners. The Company believes it has outlined a comprehensive strategy for the rapid development of the AmeriSuites brand while maintaining control of the development process. 6 8 Detailed Site Selection. The Company undertakes an extensive review process in selecting sites for new AmeriSuites. Key factors in the selection of sites include close proximity to demand generators, superior visibility, ease of access and nearby guest amenities. Sites are initially identified with the assistance of a nationwide network of brokers. Once identified, the Company qualifies the sites before entering into a letter of intent. After a letter of intent is signed, the Company assesses the feasibility of the sites, which includes extensive reconnaissance by the Company's operations and sales and marketing staffs as well as independent consultants. Upon satisfactory completion of economic feasibility, the Company will enter into a contract for the site and commence legal, engineering and environmental due diligence. The entire process, from site selection to completion of construction and opening, takes approximately 18 months. Suburban Market Focus. The Company believes that suburban markets offer a number of features which permit the rapid expansion of AmeriSuites. As opposed to major metropolitan markets, suburban markets offer ample land to construct new hotels. More importantly, the Company believes that suburban locations appeal to multiple demand generators. In addition to the business traveler, who is the target customer for AmeriSuites, the weekend/leisure traveler is attracted by the close proximity to nearby dining, shopping and entertainment amenities. Cluster Strategy. The Company intends to expand into new regions by first developing hotels in cities which it has targeted as "key" cities. The Company will then add additional hotels in that region in cities which are logical destinations from the "key" cities. This strategy permits the Company to quickly build brand recognition of AmeriSuites in a particular region. Key cities where AmeriSuites are open or under development include Atlanta (7), Chicago (6), Miami/Ft. Lauderdale (5), Dallas/Ft. Worth (5) and Denver (3). The following table sets forth for the five years ended December 31, 1996 certain data with respect to AmeriSuites hotels, all of which are owned by the Company. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations. For purposes of showing operating trends, comparable data has also been presented for the AmeriSuites hotels which have been in operation for all of 1995 and 1996.
COMPARABLE TOTAL ------------------------------- ------------------------------- HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ 1992......................... 6 749 6 749 1993......................... 8 993 8 993 1994......................... 12 1,494 12 1,494 1995......................... 12 1,494 19 2,319 1996......................... 12 1,494 35 4,348
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1992......................... 60.0% $54.99 $32.97 60.0% $54.99 $32.97 1993......................... 64.1 56.21 36.01 64.1 56.21 36.01 1994......................... 65.9 59.90 39.50 65.9 59.90 39.50 1995......................... 68.5 65.70 45.03 67.2 65.45 43.98 1996......................... 70.9 70.90 50.28 65.6 72.12 47.28
The Company believes that the all-suites segment will continue to be a high growth segment of the industry. During the 1992-1996 period, demand for all-suites rooms grew at more than triple the rate of demand growth experienced by the lodging industry as a whole, and exceeded all-suites supply growth by 17.7%. The operating performance of the AmeriSuites hotels is benefiting from this favorable trend. For the 12 owned AmeriSuites hotels which were open for all of 1996 and 1995, REVPAR increased by 11.7% during 1996. The Company plans to develop the AmeriSuites brand primarily through new construction to assure product consistency and quality. The average age of the AmeriSuites hotels as of February 28, 1997 was approximately three years. The Company believes that AmeriSuites provide attractive investment returns due 7 9 to their reasonable cost and rapid stabilization rate. In 1996, AmeriSuites which were in operation for at least one year generated an average EBITDA of $1.26 million, representing an average unleveraged 18.1% return on total invested capital. The Company believes that returns from AmeriSuites development have generally equaled or exceeded those prevalent in the hotel acquisition markets. Since January 1, 1996 the Company has opened 21 new AmeriSuites hotels, bringing the number of AmeriSuites owned and operated by the Company to 40. Full-Service Hotels The Company operates 32 upscale full-service hotels with food service and banquet facilities under franchise agreements with Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson. 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 full-service hotels consists primarily of business travelers. Consequently, the Company's sales force markets to companies which have a significant number of employees traveling in the Company's operating regions who consistently produce a high volume demand for hotel room nights. In addition, the Company's sales force actively markets meeting and banquet services to groups and individuals for seminars, business meetings, holiday parties and weddings. The 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 facsimile services. In order to enhance guest satisfaction, the Company also has theme concept lounges in a number of its hotels. In recent years, the Company has received recognition from various franchisors and associations for its hotel quality and service. The Company owns and operates one resort hotel, the Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 517-room resort hotel which includes a 421-room eight-story building and 96 rooms in the adjacent Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive convention facilities, complete sports and beach facilities and a self-contained total energy system. Certain of these facilities suffered hurricane damage as described in the following paragraph. The Frenchman's Reef is marketed directly through its own sales force in New York City and at the hotel, and through the Marriott reservation system. The Frenchman's Reef market includes tour groups, corporate meetings, conventions and individual vacationers. In September 1995, the Frenchman's Reef suffered hurricane damage when Hurricane Marilyn struck the U.S. Virgin Islands. In 1996, the Company and its insurance carrier settled the Company's property and business interruption insurance claim for $25.0 million. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the island. The Company is currently reviewing its claim for property damage with its insurance carrier. The Company is currently underway with plans to refurbish and upgrade the Frenchman's Reef. In addition to hurricane-related renovations, the plan provides for structural enhancements, redesigned guestrooms, increased banquet and meeting space and new landscaping. The Company estimates that the cost of refurbishment will be approximately $30.0 million. The Company has continued to operate the hotel. However, due to the extent of the renovations and the additional damage caused by Hurricane Bertha, the Company expects to close the hotel around April 1, 1997 and plans to reopen the hotel in December 1997, although there can be no assurance that the Frenchman's Reef will reopen at such time or that the cost of refurbishment will not exceed the Company's estimate. The Company does not believe that the closing of the Frenchman's Reef will have a material impact on its cash flow due to the seasonality of the hotel's operations and its business interruption insurance. 8 10 The following table sets forth for the five years ended December 31, 1996, operating data for the full-service hotels in the Company's portfolio as of December 31, 1996. For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, have been excluded from the table. Operating data for the hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of nine Owned Hotels that were managed by the Company prior to their acquisition by the Company during the five-year period are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL ---------------------------- --------------------------- HOTELS ROOMS HOTELS ROOMS --------- ------- --------- ------ 1992................... 18 3,284 28 5,532 1993................... 18 3,284 29 5,647 1994................... 19 3,639 30 6,002 1995................... 20 3,788 31 6,151 1996................... 20 3,788 31 6,151
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------- --------- ------ ------ 1992................... 66.1% $67.58 $44.64 67.5% $67.29 $45.45 1993................... 68.0 69.57 47.29 69.4 69.04 47.90 1994................... 67.2 75.31 50.64 69.0 74.31 51.27 1995................... 65.9 78.06 51.46 68.7 77.49 53.21 1996................... 69.9 85.74 59.93 72.4 83.89 60.77
The Company has taken advantage of opportunities for acquisitions of full-service hotels at attractive multiples of cash flow or at significant discounts to replacement values. In 1996, the Company acquired the 151 room Ramada Plaza Suites in Secaucus, NJ and repositioned the hotel as a Radisson Suite hotel. In February 1997, the Company acquired the 150-room Holiday Inn in Monroe Township, NJ. The majority of the Company's repositioning efforts have been performed at the full-service hotels. Since 1994, the Company successfully completed the repositioning of 13 of its full-service hotels which included changing the franchise affiliations of 6 such hotels. The Company recently completed the repositioning of the Hasbrouck Heights, NJ Sheraton Hotel to a Crowne Plaza. Limited-Service Hotels The Company's limited-service hotels consist of 28 Wellesley Inns and 8 other hotels operated under franchise agreements, primarily with Howard Johnson. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The acquisition enabled the Company to establish full control over its proprietary Wellesley Inns brand with all 28 Wellesley Inns owned and operated by the Company. The acquisition provides the Company with significant new opportunities to maximize the value of its brand. Of the Company's 28 Wellesley Inns, 15 are located in Florida and the remainder in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has 105 rooms and is distinguished by its classic stucco exterior, spacious lobby and amenities such as pool facilities, complimentary continental breakfast, remote control cable television and facsimile services. In connection with the acquisition of the 16 Wellesley Inns, the Company has refurbished five of these hotels and expects to complete renovations on nine other hotels by March 1997 to ensure consistent product quality throughout the chain. Marketing efforts for the Wellesley Inns chain will continue to rely heavily on direct marketing and billboard advertising. In addition, the Wellesley Inns, along with the Company's AmeriSuites, are marketed under the new reservation system developed by Anasazi Travel Resources, Inc. In Florida, where the population has grown rapidly and development opportunities continue to exist, the Company has built a geographically concentrated group of Wellesley Inns, thereby developing regional brand name recognition in Florida. The majority of the Florida Wellesley Inns were constructed within the past five years. 9 11 The Company's other limited-service hotels have an average of between 100 and 120 rooms and offer complimentary continental breakfast, remote control cable television, pool facilities and facsimile services, generally with restaurant facilities within a short distance of the hotel. They are designed to appeal primarily to business travelers. In accordance with its strategy, the Company expects to divest a number of these hotels within the next several years. The following table sets forth for the five years ended December 31, 1996 operating data for the limited-service hotels as of December 31, 1996. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of 16 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL ------------------------------- ------------------------------- HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ 1992........... 31 3,054 32 3,203 1993........... 33 3,299 34 3,448 1994........... 35 3,509 38 3,943 1995........... 35 3,509 38 3,943 1996........... 35 3,509 38 3,943
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1992........... 74.7% $44.83 $33.49 74.0% $44.86 $33.21 1993........... 77.1 45.69 35.22 76.4 45.71 34.90 1994........... 73.8 47.77 35.27 73.0 47.47 34.67 1995........... 74.6 51.01 38.04 74.0 50.73 37.54 1996........... 72.6 53.13 38.59 72.7 53.43 38.87
OPERATIONS As a leading domestic hotel operating company, the Company enjoys a number of operating advantages over other lodging companies. With 108 hotels covering a number of price points and broad geographic regions, the Company possesses the critical mass to support sophisticated operating, marketing and financial systems. The Company believes that its broad array of central services permits on-site hotel general managers to effectively focus on providing guest services, results in economies of scale and leads to above-market hotel profit margins. As a result of these operating strategies, the Company's hotels generated average operating profit margins that exceeded comparable industry averages for 1995, the most current data available from industry sources, by approximately 3% for all-suites hotels, 16% for full-service hotels and 4% for limited-service hotels. The Company's operating strategy combines operating service and guidance from its central management team with decentralized decision-making authority delegated to each hotel's on-site management. The on-site hotel management teams consist of a general manager and, depending on the hotel's size and market positioning, managers of sales and marketing, food and beverage, front desk services, housekeeping and engineering. The Company's operating objective is to exceed guest expectations by providing quality services and comfortable accommodations at 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, hiring practices and incentive programs. Each hotel's management team is empowered to take all necessary steps to ensure guest satisfaction within established guidelines. Key on-site personnel participate in an incentive program based on hotel revenues and profits. 10 12 The central management team is located in Fairfield, New Jersey, with an AmeriSuites office in Atlanta, Georgia. 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. Operations Management. Operations management consists of the development, implementation and monitoring of hotel operating standards and is provided by a network of regional operating officers who are each responsible for the operations of 10 to 30 hotels. They are supported by training, food and beverage and human resources departments, each staffed full-time by specialized professionals. The cornerstone of operations management is employee training, with a staff of professionals dedicated to training in sales, housekeeping, food service, front desk services and leadership. The Company believes these efforts increase employee effectiveness, reduce turnover and improve the level of guest services. The Company's cost-effective centralized management services benefit not only its existing operations but also provide additional opportunities for growth and development from acquisitions. In all of the recently acquired hotels, the Company's central management has assumed certain of the operational responsibilities which previously had been performed by the on-site hotel management. In addition, the Company believes it has improved operating efficiencies for each of the hotels that it has acquired. Sales and Marketing Management. Aggressive sales and marketing is a top operating priority. Sales and marketing management is directed by a corporate staff of 20 professionals, including regional marketing directors who are responsible for each hotel's sales and marketing strategies, and the Company's national sales group, Market Segments, Inc. ("MSI"). In cooperation with the regional marketing staff, on-site sales management develops and implements shortand 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. The Company is in the process of initiating a new internally developed proprietary yield management system which will be implemented in all of the Company's hotels. In addition, the Company assumes prominent roles in franchise marketing associations to obtain maximum benefit from franchise affiliations. The Company's in-house creative department develops hotel advertising materials and programs at cost-effective rates. Complementing regional and on-site marketing efforts, MSI's marketing team targets specific hotel room demand generators including tour operators, major national corporate accounts, athletic teams, religious groups and others with segment-specialized sales initiatives. MSI's primary objective is to book hotel rooms at the Company's hotels and its secondary objective is to market its services on a commission basis to 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 handles purchasing, directs construction and maintenance and provides design services. Technical staff teams support each hotel's information and communication systems needs. The technical support staff is currently implementing digital telecommunications conversions and call accounting system upgrades in all of the Company's hotels. Additionally, the Company directs safety/risk management activities and provides central legal services. REFURBISHMENT PROGRAM The Company continuously refurbishes its Owned Hotels in order to maintain consistent quality standards. The Company generally spends approximately 4% to 6% of hotel revenue on capital improvements at its Owned Hotels and typically refurbishes each hotel approximately every five years. The Company 11 13 believes that its Owned Hotels are in generally good physical condition, with over half of the Owned Hotels being five years old or less. The Company recommends the refurbishment and repair projects on its Managed Hotels although spending amounts vary based on the plans of such hotels' owners and the significance of the Company's interest as a mortgagee. In addition to making normal capital improvements, the Company reviews on an on-going basis each hotel's competitive position in the local market in order to decide the types of product that will best meet the market's demand characteristics. During the past three years, the Company has implemented a program of repositioning its Owned Hotels. Repositioning a hotel generally requires renovation and refurbishment of the exterior and interior of the building and may result in a change of brand name. In 1994, 1995 and 1996, the Company spent $8.9 million, $13.7 million and $16.8 million respectively, on the repositioning of 34 of its Owned Hotels, which included changing the franchise affiliation of 12 of such hotels. In 1996, the Company completed the repositioning of the Hasbrouck Heights Crowne Plaza and five of the recently acquired Wellesley Inns. The Company intends to spend approximately $7.0 million in 1997 relating to the refurbishing of nine other recently acquired Wellesley Inns and the Monroe Township Holiday Inn. MORTGAGES AND NOTES RECEIVABLE As of December 31, 1996, mortgages and notes receivable totaled $25.5 million (including the current portion) and consisted primarily of an aggregate principal amount of $8.6 million of mortgages and notes secured by Managed Hotels and $13.6 million of mortgages secured by hotels that are leased by the Company from third parties. The Company has pursued a strategy of converting its mortgage and notes receivable into cash or operating hotel assets and has received $54.8 million in cash and added five operating hotel assets through note settlements over the past three years. In 1996, the Company obtained control of the 210-room Howard Johnson Hotel in Cocoa Beach, FL and the 204-room Radisson Hotel in Fairfield, NJ by converting these mortgage notes receivable into operating hotel assets. See Note 6 to Consolidated Financial Statements. MANAGEMENT AGREEMENTS As of February 28, 1996, the Company provided hotel management services to third party hotel owners of 13 Managed Hotels. Management fees are based on fixed percentages of the property's total revenues and incentive payments based on certain measures of hotel income. Additional fees are also generated from the rendering of specific services such as accounting services, construction services, design services and sales commissions. The Company's fixed management fee percentages range from 1.0% to 5.0% and average 3.5% of total revenues before giving consideration to performance related incentive payments. The base and incentive fees comprised 58.5%, or $3.9 million, of the total management and other fees for 1996. Terms of the management agreements vary but the majority are short-term and, therefore, there are risks associated with termination of these agreements. Although management agreements may be terminated in connection with a change in ownership of the underlying hotels, such risks may be limited due to the Company's other financial interests in these hotels. The Company holds financial interests in the form of mortgages or profit participations in 8 of the 13 Managed Hotels. FRANCHISE AGREEMENTS The Company enters into non-exclusive franchise licensing agreements with franchisors, which agreements typically have a ten year term and allow the Company to benefit from franchise brand recognition and loyalty. The nonexclusive nature of the franchise agreement allows the Company the flexibility to continue to develop properties with the brands that have shown success in the past or to develop in conjunction with other brand names. This flexibility also plays an important role in the Company's repositioning strategy, which emphasizes proper positioning of its properties within their respective markets to maximize their return on investment. Over the past three years, the Company has repositioned several hotels. These repositionings include the Portland, Oregon Crowne Plaza (formerly Howard Johnson), the Las Vegas, Nevada Crowne Plaza (formerly Howard Johnson), the Fairfield, New Jersey Radisson (formerly Sheraton), the Orlando, Florida Shoney's Inn (formerly Howard Johnson), the Trevose, Pennsylvania Radisson (formerly Ramada), the Princeton, New Jersey Holiday Inn (formerly Ramada) and the Hasbrouck Heights Crowne Plaza 12 14 (formerly Sheraton) and the Secaucus, New Jersey Radisson Suite hotel (formerly Ramada Plaza). The Company believes its relationships with numerous nationally recognized franchisors provides significant benefits for both its existing hotel portfolio and prospective hotel acquisitions. While the Company currently enjoys good relationships with its franchisors, there can be no assurance that a desirable replacement would be available if any of the franchise agreements were to be terminated. The franchise agreements require the Company to pay annual fees, to maintain certain standards and to implement certain programs which require additional expenditures by the Company such as remodeling or redecorating. The payment of annual fees, which typically total 7% to 8% of room revenues, cover 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 annual fees payable to the franchisor. WORKING CAPITAL The Company has financed its operations and capital needs principally through a combination of cash flow from operations and proceeds from debt or equity offerings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SEASONALITY The impact of seasonality on the Company as a whole is insignificant due to the seasonal balance achieved from the geographical location of the Company's hotel properties. COMPETITION The Company operates and manages hotel properties in areas that contain numerous other hotels, some of which are affiliated with national or regional brands. The Company competes with other hotels primarily on the basis of price, physical facilities and customer service. EMPLOYEES As of December 31, 1996, the Company employed approximately 5,800 employees. Certain of the Company's employees are covered by collective bargaining agreements. The Company believes that relations with its employees are good. ENVIRONMENTAL MATTERS The Hotels are subject to environmental regulations under Federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. The Company does not believe that it is subject to any material environmental liability. ITEM 3. LEGAL PROCEEDINGS 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 will, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fiscal quarter ended December 31, 1996 to a vote of the security holders of the Company. 13 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, commenced trading on the New York Stock Exchange (the "NYSE") on August 3, 1992 under the symbol "PDQ." As of February 28, 1997 there were 39,908,230 shares of common stock outstanding. In addition, warrants to purchase an aggregate of 975,707 shares of common stock were outstanding as of February 28, 1997. The warrants are not listed on any exchange. The following table sets forth the reported high and low closing sales prices of the common stock on the NYSE.
HIGH LOW DIVIDEND/SHARE ---- --- -------------- YEAR ENDED DECEMBER 31, 1995 First Quarter............................................ $10 3/8 $ 7 3/8 -0- Second Quarter........................................... 10 5/8 9 1/4 -0- Third Quarter............................................ 11 9 1/2 -0- Fourth Quarter........................................... 10 1/4 9 3/8 -0- YEAR ENDED DECEMBER 31, 1996 First Quarter............................................ 13 5/8 9 5/8 -0- Second Quarter........................................... 17 1/4 12 -0- Third Quarter............................................ 19 7/8 16 3/8 -0- Fourth Quarter........................................... 17 1/4 14 -0-
As of February 28, 1997, the closing sales price of the common stock on the NYSE was $16 1/2 per share, and there were approximately 2,328 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. The Company is prohibited by the terms of certain debt agreements from paying cash dividends. 14 16 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY AND ITS PREDECESSOR The Company is the successor in interest to PMI ("Prime Motor Inns, Inc."), which emerged from chapter 11 reorganization on July 31, 1992 (the "Effective Date"). PMI had filed for protection under chapter 11 of the United States Bankruptcy Code in September 1990. The Company implemented "fresh start" reporting pursuant to the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" of the American Institute of Certified Public Accountants, as of the Effective Date. Accordingly, the consolidated financial statements of the Company are not comparable in all material respects to any such financial statement as of any date or any period prior to the Effective Date. Subsequent to the Effective Date, the Company changed its fiscal year end from June 30 to December 31. The table below presents selected consolidated financial data derived from: (i) the Company's historical financial statements for the years ended December 31, 1993, 1994, 1995 and 1996, (ii) the Company's historical financial statements as of and for the five-month period ended December 31, 1992, (iii) the Company's "fresh start" balance sheet as of the Effective Date, and (iv) the historical consolidated financial statements of PMI for the one month ended July 31, 1992 and for the year ended June 30, 1992. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
PRE-REORGANIZATION POST-REORGANIZATION -------------------- ------------------------------------------------------------------ AS OF AND FOR AS OF AND FOR THE THE ONE FOR THE AS OF AND FOR YEAR MONTH FIVE MONTHS THE YEAR ENDED ENDED ENDED AS OF ENDED DECEMBER 31, JUNE 30, JULY 31, JULY 31, DEC. 31, ----------------------------------------- 1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 1996 --------- -------- -------- ----------- -------- -------- -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Total revenues................. $134,190 $ 8,793 -- $ 41,334 $108,860 $134,303 $205,628 $268,868 Valuation writedowns and reserves..................... (62,123) (13,000) -- -- -- -- -- -- Reorganization items........... (23,194) 1,796 -- -- -- -- -- -- Income (loss) from continuing operations before extraordinary items(2)....... (71,965) (10,274) -- 1,393 8,175 18,258 17,465 30,914 Extraordinary items-gains on discharge of indebtedness (net of income taxes)........ -- 249,600 -- -- 3,989 172 104 202 Net income (loss).............. (71,965) 239,326 -- 1,393 12,164 18,430 17,569 31,116 BALANCE SHEET DATA: Total assets................... $554,118 -- $468,650 $ 403,314 $410,685 $434,932 $573,241 $786,098 Long-term debt, net of current portion...................... 8,921 -- 204,438 192,913 168,618 178,545 276,920 298,875 Stockholders' equity (deficiency)................. (229,292) -- 135,600 137,782 171,364 204,065 232,916 419,895
- --------------- (1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at which time it owned or managed 141 hotels. During its approximately two-year reorganization, PMI restructured its assets, operations and capital structure. On the Effective Date, the Company emerged from chapter 11 reorganization with 75 Owned or Managed Hotels, $135.6 million of stockholders' equity and $266.4 million of total debt. (2) Approximately $2.3 million and $28.0 million of contractual interest expense during the one month ended July 31, 1992 and for the fiscal year ended June 30, 1992, respectively, was not accrued and was not paid due to the Chapter 11 proceeding. 15 17 ITEM 6. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED) Quarterly financial data for the years ending December 31, 1995 and 1996 is presented as follows (in thousands, except per share amounts).
THREE MONTHS ENDED ------------------------------------------------------- JUNE MARCH 31, 30, SEPTEMBER 30, DECEMBER 31, 1995 1995 1995 1995 --------- ------- ------------- ------------ Net revenue.................................... $48,238 $51,703 $52,703 $ 52,984 Operating income............................... 10,600 12,058 12,141 11,012 Net income before extraordinary items.......... 4,208 4,915 4,060 4,282 Extraordinary items (net of tax)............... 7 54 12 31 Net income..................................... 4,215 4,969 4,072 4,313 Earnings per common share: Primary: Income before extraordinary items.............. 0.13 0.15 0.13 0.13 Extraordinary items............................ -- -- -- -- ------- ------- ------- ------- Earnings per share............................. $ 0.13 $ 0.15 $ 0.13 $ 0.13 ======= ======= ======= ======= Earnings per common share: Fully diluted: Income before extraordinary items.............. 0.13 0.15 0.13 0.13 Extraordinary items............................ -- -- -- -- ------- ------- ------- ------- Earnings per share............................. $ 0.13 $ 0.15 $ 0.13 $ 0.13 ======= ======= ======= =======
THREE MONTHS ENDED ------------------------------------------------------- JUNE MARCH 31, 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 --------- ------- ------------- ------------ Net revenue.................................... $58,614 $69,893 $68,847 $ 71,514 Operating income............................... 14,141 16,778 16,139 15,861 Net income before extraordinary items.......... 7,792 7,163 8,095 7,864 Extraordinary items (net of tax)............... 149 27 7 19 Net income..................................... 7,941 7,190 8,102 7,883 Earnings per common share: Primary: Income before extraordinary items.............. 0.24 0.22 0.21 0.18 Extraordinary items............................ -- -- -- -- ------- ------- ------- ------- Earnings per share............................. $ 0.24 $ 0.22 $ 0.21 $ 0.18 ======= ======= ======= ======= Earnings per common share: Fully diluted: Income before extraordinary items.............. 0.22 0.20 0.20 0.18 Extraordinary items............................ -- -- -- -- ------- ------- ------- ------- Earnings per share............................. $ 0.22 $ 0.20 $ 0.20 $ 0.18 ======= ======= ======= =======
16 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 The Company is a leading hotel owner/operator which, as of February 28, 1997, owned or leased 95 hotels and managed 13 hotels for third parties. The Company has a financial interest in the form of mortgages or profit participations (primarily incentive management fees) in eight of the Managed Hotels. The Company consolidates the results of operations of its Owned Hotels and records management fees (including incentive management fees) and interest income, where applicable, on the Managed Hotels. The Company's strategy is to capitalize on two lodging industry trends: (i) favorable industry fundamentals, which are producing strong earnings growth due to the operating leverage inherent in hotel ownership and (ii) growing consumer preferences for newer all-suite accommodations with strong brand identities. Through its focus on hotel equity ownership, the Company is benefiting from the operating leverage inherent in the lodging industry. Through its development of proprietary brands, the Company is positioning itself to generate additional revenue not dependent on investment in real estate. The Company seeks to achieve internal growth through the use of sophisticated operating, marketing and financial systems at its hotels. The Company's external growth focuses on the accelerated expansion of its proprietary AmeriSuites brand through new construction. Although future results of operations may be adversely affected in the short term by the costs associated with the construction and acquisition of new hotels, it is expected that this impact will be offset, after an initial period, by revenues generated by such new hotels. In 1996, earnings from recurring operations increased by 62.4%, reflecting a 12.0% REVPAR increase at comparable hotels, the addition of 44 hotels primarily through acquisition or construction over the past two years and the impact of increased operating leverage. The Company's EBITDA increased by $29.2 million, or 49.1%, from $59.6 million in 1995 to $88.8 million in 1996, and Hotel EBITDA increased by $35.1 million, or 62.9%, from $55.8 million in 1995 to $90.9 million in 1996. EBITDA represents earnings before interest, taxes, depreciation and amortization. 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 the operations of Owned Hotels. The Company's hotels operate in three segments of the industry: the all-suites segment, under the Company's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the midprice limited-service segment, primarily under the Company's proprietary Wellesley Inns brand. The following table illustrates the Hotel EBITDA contribution from each segment (in thousands):
1995 1996 ---------------------- ---------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------- ---------- ------- ---------- All-suites................................ $13,663 24.5% $25,987 28.6% Full-service.............................. 30,286 54.3 44,460 48.9 Limited-service........................... 11,840 21.2 20,452 22.5 ------- ----- ------- ----- Total........................... $55,789 100.0% $90,899 100.0% ======= ===== ======= =====
Hotel EBITDA for 1996 reflects the shifting mix in the Company's hotel portfolio toward its proprietary brand AmeriSuites and the acquisition of 16 Wellesley Inns in March 1996. 17 19 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for the years ended December 31, 1995 and 1996. The results of the four hotels divested during 1995 and 1996 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) --------------------- --------------------- 1995 1996 1995 1996 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging....................................... $146,184 $198,947 $110,565 $124,164 Food and Beverage............................. 37,955 41,437 25,867 28,636 Management and Other Fees..................... 8,115 6,729 Interest on Mortgages and Notes Receivable.... 11,895 6,090 Business Interruption Insurance............... -- 13,562 Rental and Other.............................. 1,479 2,103 -------- -------- Total Revenues........................ 205,628 268,868 Direct Hotel Operating Expenses: Lodging....................................... 38,383 51,577 29,877 31,731 Food and Beverage............................. 28,429 32,053 19,296 21,090 Selling and General........................... 49,753 61,789 34,938 37,352 Occupancy and Other Operating................... 11,763 16,833 General and Administrative...................... 15,515 17,813 Depreciation and Amortization................... 15,974 25,884 Other Expense................................... 2,200 -- Operating Income................................ 43,611 62,919 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue... 26.3% 25.9% 27.0% 25.6% Food and Beverage, as a percentage of food and beverage revenue........................... 74.9% 77.4% 74.6% 73.6% Selling and General, as a percentage of lodging and food and beverage revenue...... 27.0% 25.7% 25.6% 24.4% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue......... 6.4% 7.0% General and Administrative, as a percentage of total revenue................................. 7.5% 6.6% OTHER DATA(1): Occupancy....................................... 69.0% 69.7% 69.9% 71.9% ADR............................................. $ 65.77 $ 70.22 $ 65.40 $ 71.14 REVPAR.......................................... $ 45.41 $ 48.95 $ 45.68 $ 51.16 Gross Operating Profit.......................... $ 67,574 $ 94,965 $ 52,321 $ 62,627
- --------------- (1) For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, and four hotels disposed of in 1995 and 1996 have been excluded from the Other Data section of the table. Comparable Owned Hotels refers to 46 Owned Hotels that were owned or leased by the Company during all of 1995 and 1996 (excluding the Frenchman's Reef). 18 20 Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $52.7 million, or 36.1%, from $146.2 million in 1995 to $198.9 million in 1996. Lodging revenues increased due to incremental revenues of $52.6 million from the 44 new hotels added during 1995 and 1996 and higher revenues for comparable Owned Hotels, which increased by $13.6 million, or 12.3%, in 1996 as compared to 1995. The revenue gains were offset by a decrease of $13.8 million at the Frenchman's Reef attributable to hurricane-related damage. The Company operates in three major segments of the industry: all-suites, full-service and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for 1996, as compared to 1995, by industry segment:
YEAR ENDED DECEMBER 31, 1996 ----------------- All-suites................................... 11.7% Full-service................................. 15.8% Limited-service.............................. 5.2% Total.............................. 12.0%
The REVPAR growth at comparable Owned Hotels reflects strong results in each of the Company's industry segments. The REVPAR increases reflect the results of several repositionings and continued favorable industry trends in the full-service segment, and growing recognition of the AmeriSuites brand in the fast-growing all-suites segment. The improvements in REVPAR were generated by increases in ADR, which rose by 8.8% and gains in occupancy of 2.9%. Food and beverage revenues increased by $3.4 million, or 9.2%, from $38.0 million in 1995 to $41.4 million in 1996. The increase was primarily due to the strong growth at comparable hotels and additional revenues from four new hotels in 1996. The increases were partially offset by lower food and beverage revenues at the Frenchman's Reef, which declined by $5.1 million due to the hurricane damage. Food and beverage revenues for comparable Owned Hotels increased by $2.8 million, or 10.7%, due to increased banquet business. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group, Market Segments, Inc. ("MSI"). Management and other fees decreased by $1.4 million, or 17.1%, from $8.1 million in 1995 to $6.7 million in 1996, primarily due to the conversions of Managed Hotels into Owned Hotels. Partially offsetting these decreased management fees were increased base and incentive management fees associated with the remaining Managed Hotels and increased revenues generated by MSI. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $5.8 million, or 48.8%, from $11.9 million in 1995 to $6.1 million in 1996, primarily due to conversions of notes receivable into operating hotel assets or cash in 1995 and 1996. Business interruption insurance revenue of $13.6 million in 1996 is based on the settlement of the Company's claim related to the hurricane damage caused by Hurricane Marilyn in September 1995 at the Frenchman's Reef. The Company is currently preparing a claim under its business interruption insurance with respect to Hurricane Bertha, which caused damage to the hotel in July 1996. Direct lodging expenses increased by $13.2 million, or 34.4%, from $38.4 million in 1995 to $51.6 million in 1996, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 26.3% in 1995 to 25.9% in 1996. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.0% in 1995 to 25.6% in 1996. Direct food and beverage expenses increased by $3.7 million, or 12.7%, from $28.4 million in 1995 to $32.1 million in 1996, due to the increased revenues at comparable hotels and the addition of four full-service 19 21 hotels in 1996. As a percentage of food and beverage revenues, direct food and beverage expenses increased from 74.9% in 1995 to 77.4% in 1996, due to lower margins at the Frenchman's Reef attributable to the hurricane damage. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue decreased from 74.6% in 1995 to 73.6% in 1996, primarily due to the higher margins associated with the increased banquet business. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $12.0 million, or 24.2%, from $49.8 million in 1995 to $61.8 million in 1996, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses decreased from 27.0% in 1995 to 25.7% in 1996 due primarily to the impact of the increases in ADR. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased from 25.6% in 1995 to 24.4% in 1996 due primarily to the ADR increases. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $5.0 million, or 43.1%, from $11.8 million in 1995 to $16.8 million in 1996 due to the addition of new hotels, including several leased hotels. Occupancy and other operating expenses as a percentage of hotel revenues increased from 6.4% in 1995 to 7.0% in 1996 due to rent expense associated with the new leased hotels. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $2.3 million, or 14.8%, from $15.5 million in 1995 to $17.8 million in 1996, due to increased advertising, personnel and training costs associated with opening the new AmeriSuites hotels. As a percentage of total revenues, general and administrative expenses decreased from 7.5% in 1995 to 6.6% in 1996 due to operating leverage. Depreciation and amortization expense increased by $9.9 million, or 62.0%, from $16.0 million in 1995 to $25.9 million in 1996, due to the impact of new hotel properties and refurbishment efforts at several hotels. Other expense of $2.2 million for 1995 consisted of a reserve for insurance deductibles related to hurricane damage caused by Hurricane Marilyn at the Frenchman's Reef hotel in St. Thomas, U.S. Virgin Islands. Investment income decreased by $251,000, or 5.2%, from $4.9 million in 1995 to $4.6 million in 1996, due to lower weighted average cash balances in 1996. Interest expense decreased by $1.3 million, or 6.0%, from $21.6 million in 1995 to $20.3 million in 1996, primarily due to capitalized interest related to new AmeriSuites construction. Capitalized interest increased by $4.9 million from $2.6 million in 1995 to $7.5 million in 1996. The decrease in interest expense was partially offset by interest associated with higher average borrowings in 1996. Other income consists of items which are not part of the Company's recurring operations. For 1996, other income consisted of gains on the sales of land and hotel properties of $2.5 million and a gain on the settlement of a note receivable of $1.8 million. Other income for 1995 consisted of a gain on the settlement of a note receivable of $822,000 and gains on property sales of $1.4 million. Pretax extraordinary gains of approximately $174,000 and $337,000 for 1995 and 1996 relate to the retirement of debt. 20 22 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for the years ended December 31, 1995 and 1994. The results of the four hotels divested during 1994 and 1995 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) --------------------- --------------------- 1994 1995 1994 1995 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) INCOME STATEMENT DATA: Revenues: Lodging....................................... $ 88,753 $146,184 $ 76,604 $ 83,190 Food and Beverage............................. 18,090 37,955 13,601 13,299 Management and Other Fees..................... 10,021 8,115 Interest on Mortgages and Notes Receivable.... 15,867 11,895 Rental and Other.............................. 1,572 1,479 -------- -------- Total Revenues........................ 134,303 205,628 Direct Hotel Operating Expenses: Lodging....................................... 25,490 38,383 20,722 21,908 Food and Beverage............................. 13,886 28,429 10,634 10,467 Selling and General........................... 27,244 49,753 23,009 24,338 Occupancy and Other Operating................... 9,799 11,763 General and Administrative...................... 15,089 15,515 Depreciation and Amortization................... 9,427 15,974 Other Expense................................... -- 2,200 Operating Income................................ 33,368 43,611 OPERATING EXPENSE MARGINS: Direct Hotel Operating Expenses: Lodging, as a percentage of lodging revenue... 28.7% 26.3% 27.1% 26.3% Food and Beverage, as a percentage of food and beverage revenue........................... 76.8% 74.9% 78.2% 78.7% Selling and General, as a percentage of lodging and food and beverage revenue...... 25.5% 27.0% 25.5% 25.2% Occupancy and Other Operating, as a percentage of lodging and food and beverage revenue......... 9.2% 6.4% General and Administrative, as a percentage of total revenue.............................. 11.2% 7.5% OTHER DATA: Occupancy....................................... 68.0% 69.2% 70.4% 72.3% ADR............................................. $ 60.36 $ 73.28 $ 59.92 $ 63.97 REVPAR.......................................... $ 41.04 $ 50.71 $ 42.21 $ 46.22 Gross Operating Profit.......................... $ 40,223 $ 67,605 $ 35,824 $ 39,926
- --------------- (1) For purposes of this discussion of results of operations, comparable Owned Hotels refers to the 37 Owned Hotels that were owned or leased by the Company during all of 1994 and 1995. Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $57.4 million, or 64.7%, from $88.8 million in 1994 to $146.2 million in 1995. The increase was due to $52.1 million of lodging revenues generated by the conversion of the Company's interest in the Frenchman's Reef from a mortgage note receivable to a hotel asset and the 19 new hotels added during 21 23 1994 and 1995, with the balance coming from growth in revenues at comparable Owned Hotels. Lodging revenues for comparable Owned Hotels increased by $6.6 million, or 8.6%, in 1995 as compared to 1994. The Company operates in three major segments of the industry: all-suites, full-service and limited-service. The following table sets forth the growth in REVPAR at the comparable Owned Hotels for 1995, as compared to 1994, by industry segment:
YEAR ENDED DECEMBER 31, 1995 ----------------- All-suites................................... 11.9% Full-service................................. 8.7% Limited-service.............................. 9.2% Total.............................. 9.5%
The REVPAR growth at comparable Owned Hotels reflects strong results in each of the Company's industry segments. Repositioning efforts at both full-service and limited-service hotels also contributed to the REVPAR increases. The improvements in REVPAR were generated by increases in ADR, which rose by 6.8% and gains in occupancy of 2.7%. Food and beverage revenues increased by $19.9 million, or 109.8%, from $18.1 million in 1994 to $38.0 million in 1995. The increase was primarily due to the additional food and beverage operations related to the Frenchman's Reef and six other full-service hotels acquired since January 1, 1994. Food and beverage revenues for comparable Owned Hotels decreased by $302,000 in 1995 compared to 1994. The decrease was primarily due to decreased banquet business and lower beverage revenues at the Company's sports lounges. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group, MSI. Management and other fees decreased by $1.9 million, or 19.0%, from $10.0 million in 1994 to $8.1 million in 1995. The decrease was primarily due to the loss of management fees on five Managed Hotels acquired by the Company during 1994 and 1995 and six additional hotels which were sold by a third party hotel owner in 1994. Partially offsetting these decreased management fees were increased base and incentive management fees associated with the remaining Managed Hotels and increased revenues generated by MSI. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $4.0 million, or 25.0%, from $15.9 million in 1994 to $11.9 million in 1995, primarily due to the Company's conversion of a $50.0 million note receivable secured by the Frenchman's Reef into an operating hotel asset in December 1994. Partially offsetting the decrease was interest income related to the purchase of $17.4 million of first mortgages secured by two hotels for $12.7 million in June 1995. Direct lodging expenses increased by $12.9 million, or 50.6%, from $25.5 million in 1994 to $38.4 million in 1995, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 28.7% in 1994 to 26.3% in 1995. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 27.1% in 1994 to 26.3% in 1995. Direct food and beverage expenses increased by $14.5 million, or 104.7%, from $13.9 million in 1994 to $28.4 million in 1995, primarily due to the addition of seven new full-service hotels. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 76.8% in 1994 to 74.9% in 1995. The decrease was primarily due to increased revenues in higher margin areas such as banquet departments at the new hotels. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue increased slightly from 78.2% in 1994 to 78.7% in 1995. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $22.6 22 24 million, or 82.6%, from $27.2 million in 1994 to $49.8 million in 1995, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses increased from 25.5% in 1994 to 27.0% in 1995 due to the addition of new full-service properties which generally require higher levels of unallocated expenses. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased slightly from 25.5% in 1994 to 25.2% in 1995. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $2.0 million, or 20.0%, from $9.8 million in 1994 to $11.8 million in 1995 as the additional costs associated with the new hotels were offset by real estate tax refunds of approximately $600,000 during the year. As a percentage of hotel revenues, occupancy and other operating expenses decreased from 9.2% in 1994 to 6.4% in 1995, primarily due to operating leverage. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $426,000, or 2.8%, from $15.1 million in 1994 to $15.5 million in 1995, due to ordinary inflationary increases which were partially offset by central office payroll reductions. As a percentage of total revenues, general and administrative expenses decreased from 11.2% in 1994 to 7.5% in 1995 due to operating leverage. Other expense of $2.2 million for the year ended December 31, 1995 consists of a reserve for insurance deductibles related to damage caused by Hurricane Marilyn at the Frenchman's Reef. Depreciation and amortization expense increased by $6.6 million, or 69.4%, from $9.4 million in 1994 to $16.0 million in 1995, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels. Interest expense increased by $7.6 million, or 54.4%, from $14.0 million in 1994 to $21.6 million in 1995, primarily due to new mortgage borrowings of $39.0 million incurred in February 1995 and $86.3 million of 7% Convertible Subordinated Notes due 2002 (the "Convertible Notes") issued in April 1995. Investment income increased by $2.9 million from $2.0 million in 1994 to $4.9 million in 1995 primarily due to higher average cash balances generated by the new borrowings. Other income consists of items which are not part of the Company's recurring operations. For the year ended December 31, 1995, other income consisted of a gain on the settlement of a note receivable of $822,000 and gains on the sale of land parcels of $1.4 million. Other income for the year ended December 31, 1994 consisted primarily of a gain on the settlement of the Rose and Cohen note receivable of $6.4 million, gains on property sales of $1.1 million and rebates of prior years' insurance premiums of $1.6 million. Pretax extraordinary gains of approximately $174,000 for the year ended December 31, 1995 relate to the retirement of secured notes with a face value of $22.2 million. Pretax extraordinary gains of approximately $292,000 for the year ended December 31, 1994 relate to the retirement of debt with a face value of $8.3 million. LIQUIDITY AND CAPITAL RESOURCES Prime's external growth focuses on the accelerated expansion of its AmeriSuites brand through new construction. As of February 28, 1997, Prime had 40 AmeriSuites in operation and plans to have 69 AmeriSuites hotels open by the end of 1997 and 100 AmeriSuites open by the end of 1998. Prime believes that it has access to sufficient resources to implement its planned expansion of the AmeriSuites brand, including capital from the following sources: (i) borrowings under the Company's $100 million Revolving Credit Facility; and (ii) internally generated free cash flow from hotel operations. With a significant hotel asset base, Prime also expects to seek additional debt or equity financing or enter into sale/leaseback agreements with respect to certain of its properties. 23 25 At December 31, 1996, the Company had cash, cash equivalents and current marketable securities of $16.2 million. At December 31, 1996, the Company had $87.5 million available under the Revolving Credit Facility, of which $47.5 million was borrowed as of February 28, 1997. As of February 28, 1997, the Company had $40.0 million available under the Revolving Credit Facility. The Company's major sources of cash for 1996 were net proceeds of approximately $115.5 million from the issuance of the $120.0 million First Mortgage Notes in January 1996, gross borrowings under the Revolving Credit Facility of $52.5 million, net proceeds of $141.4 million from the issuance of 8.3 million shares of Common Stock and cash flow from operations of $65.9 million. The Company's major uses of cash during the period were capital expenditures relating primarily to acquisitions and development of $286.5 million and debt repayments of $184.7 million, including repayments of $40.0 million under the Revolving Credit Facility. Cash flow from operations was $65.9 million in 1996 as compared to $38.6 million in 1995. Cash flow from operations was positively impacted by the utilization of net operating loss carryforwards ("NOLs") and other tax basis differences of $11.8 million in 1996 and $9.5 million in 1995, respectively. At December 31, 1996, the Company had federal NOLs relating to its predecessor, Prime Motor Inns, Inc. ("PMI"), of approximately $90.7 million which are subject to annual utilization limitations and expire beginning in 2005 and continuing through 2007. Common Stock. On August 2, 1996, the Company sold 8.3 million shares of Common Stock at a price of $18 per share. The Company utilized the net proceeds from the offering of approximately $141.4 million to fund AmeriSuites development, to reduce indebtedness of $40.0 million under the Revolving Credit Facility and to repay certain other indebtedness of $26.7 million, thereby increasing availability for further AmeriSuites development. Debt. On June 28, 1996, the Company established a Revolving Credit Facility with a group of financial institutions providing for availability of funds up to the lesser of $100.0 million or a borrowing base determined under the agreement. The Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. Additional hotels may be added or substituted subject to the approval of the lenders. The Revolving Credit Facility bears interest at LIBOR plus 2.25% and is available through June 2001. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and also contains covenants which limit the incurrence and payment of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. The aggregate amount of the Revolving Credit Facility will be reduced to $87.0 million on June 28, 1999 and $75.0 million on June 28, 2000. On June 28, 1996, the Company borrowed $40.0 million under the Revolving Credit Facility and the proceeds were used to retire $20.0 million of interim financing with the remainder utilized principally for the development of AmeriSuites hotels. On August 5, 1996, the Company repaid the full amount of this borrowing under the Revolving Credit Facility with the proceeds from the issuance of Common Stock. As of December 31, 1996, the Company had borrowed $12.5 million under the Revolving Credit Facility. The Company borrowed an additional $47.5 million through February 28, 1997 and has borrowing availability of approximately $40.0 million under the Revolving Credit Facility. On August 2, 1996, the Company prepaid in full $26.7 million of debt secured by 10 hotels with the proceeds from the issuance of Common Stock. The loans were due in February 2000 and bore interest at LIBOR plus 4.25%. The hotels formerly used as collateral for this debt were added to the collateral for the Revolving Credit Facility. In May 1996, the Company borrowed $20.0 million from a financial institution with interest at LIBOR plus 2.25%. Proceeds were utilized for the development of AmeriSuites hotels. The borrowing was subsequently repaid with the proceeds from the Revolving Credit Facility. In January 1996, the Company issued $120.0 million of 9 1/4% First Mortgage Notes due 2006. Interest on the First Mortgage Notes is payable semi-annually on January 15 and July 15. The Notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, liens, dividend 24 26 payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. The Notes are redeemable, in whole or in part, at the option of the Company on or after January 15, 2001 at premiums to principal which decline on each anniversary date thereafter. The Company utilized a portion of the proceeds to pay down approximately $51.6 million of indebtedness, with the remainder of the proceeds used to finance the purchase of the Wellesley Inns described below and the development of AmeriSuites hotels. During 1996, the Company prepaid and retired $1.4 million of its 10% Senior Secured Notes resulting in pre-tax extraordinary gains of $151,000. The Company also retired $2.4 million of mortgage debt in conjunction with the sale of a hotel which resulted in a pre-tax extraordinary gain of $186,000. As of December 31, 1996, the Company had $13.9 million of debt related to the Frenchman's Reef which was originally scheduled to mature in December 1996. The Company and the lender entered into an agreement to extend the maturity of the loan to January 1998. The amended loan bears interest at the same rate currently in effect and principal payments were waived until maturity. All other terms and conditions of the loan remained in effect. The Company is currently in negotiation to obtain new financing in connection with the refurbishment plans at the Frenchman's Reef. In October 1996, the Company entered into a six-month interest rate contract with a major financial institution to hedge its interest rate exposure on the anticipated financing of its development program in 1997. Under the agreement, the Company effectively fixed interest rates for approximately seven years at a Treasury yield of 6.4% on a $98.4 million notional principal amount. Capital Investments. The Company's capital spending in 1996 was focused on the development of its AmeriSuites hotel chain and the consolidation of ownership of its Wellesley Inns chain. In 1996, the Company spent $184.6 million on new construction and $69.4 million on acquisitions funded primarily by existing cash balances, internally generated cash flow, the issuance of Common Stock and proceeds from borrowings under the Revolving Credit Facility and the issuance of the First Mortgage Notes. The Company intends to rapidly expand its AmeriSuites chain through new construction. The Company has opened 21 new AmeriSuites hotels since January 1, 1996 bringing the total to 40 hotels as of February 28, 1997. The Company plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of 1998. As of February 28, 1997, the Company had 45 AmeriSuites hotels under development, including 27 under construction. The Company expects to spend a total of approximately $300 million on development of new AmeriSuites hotels in each of 1997 and 1998. On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited service hotels for approximately $65.1 million in cash. Subsequently, the Company sold two of the Wellesley Inns, which were converted to another brand affiliation, and the two other limited-service hotels, which were not consistent with the Company's strategy, for aggregate proceeds of $11.4 million. The acquisition enabled the Company to establish full control over its proprietary Wellesley Inns brand with all 28 Wellesley Inns owned and operated by the Company. In order to ensure consistent quality and enhance the value of its brand, the Company refurbished five of these acquired hotels in 1996 and expects to complete the renovation of nine other acquired Wellesley Inns hotels by March 1997 at a total renovation cost for 1996 and 1997 of approximately $9.0 million. In September 1996, the Company acquired the Ramada Plaza Suite Hotel in Secaucus, NJ, which was repositioned as a Radisson Suite Hotel. The acquisition price of $16.5 million included the assumption of $12.2 million of debt. In February 1997, the Company acquired a Holiday Inn in Monroe Township, NJ for $11.2 million in cash. The Company may from time to time acquire full-service hotels having operating synergies with other Company hotels, although no such acquisitions are currently pending. During 1996, the Company spent approximately $30.8 million on capital improvements at its Owned Hotels, of which approximately $16.8 million related to refurbishments and repositionings of recently acquired hotels. In 1996, the Company completed the refurbishment and repositioning of the Hasbrouck Heights, NJ, Crowne Plaza, the Las Vegas St. Tropez Hotel and five of the recently acquired Wellesley Inns. The Company 25 27 intends to spend approximately $7.0 million in 1997 relating to the refurbishing of nine other recently acquired Wellesley Inns and the Monroe Township Holiday Inn. In September 1995, the Frenchman's Reef in St. Thomas U.S. Virgin Islands suffered damage when Hurricane Marilyn struck the island. The Company and its insurance carrier settled the Company's property and business interruption insurance claim with respect to Hurricane Marilyn for $25.0 million. In July 1996, the Company received the final installment under its settlement, bringing the net proceeds to $22.8 million, net of deductibles, for which the Company provided a reserve of $2.2 million in 1995. The Company utilized all insurance proceeds to reduce the Frenchman's Reef mortgage loan to $13.9 million. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. The Company is currently reviewing its claim for property damage with its insurance carrier and is in the process of preparing a claim under its business interruption insurance. The Company is currently underway with plans to refurbish and upgrade the Frenchman's Reef. In addition to hurricane-related renovations, the plan provides for structural enhancements, redesigned guestrooms, increased banquet and meeting space and new landscaping. The Company estimates that the cost of refurbishment will be approximately $30.0 million. The Company has continued to operate the hotel. However, due to the extent of the renovations and the additional damage caused by Hurricane Bertha, the Company expects to close the hotel around April 1, 1997 and plans to reopen the hotel in December 1997, although there can be no assurance that the Frenchman's Reef will reopen at such time or that the cost of refurbishment will not exceed the Company's estimate. The Company does not believe the closing of the Frenchman's Reef will have a material impact on its cash flow due to the seasonality of the hotel's operations and its business interruption insurance coverage. In order to facilitate future tax-free exchanges of hotel properties, the Company from time to time enters into arrangements with an unaffiliated third party under Section 1031 of the Internal Revenue Code of 1986, as amended. As of February 28, 1997, the Company had advanced approximately $22.0 million to such third party which advances are classified as property, equipment and leasehold improvements. Asset Realizations. The Company has pursued a strategy of converting mortgage notes receivable and other assets into cash or operating hotel assets. During 1996, the Company received $7.9 million in cash in settlement of notes receivable and $13.0 million in cash on sales of properties resulting in gains of $4.3 million. In January 1996, the Company obtained control of the 210-room Howard Johnson Hotel in Cocoa Beach, FL and the 204-room Radisson Hotel in Fairfield, NJ by converting its mortgage notes receivable into operating hotel assets. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements included in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 26 28 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 --------------------------- --- ------------------------------------------------------ David A. Simon............. 44 President, Chief Executive Officer and Chairman of the Board of Directors John M. Elwood............. 42 Executive Vice President, Chief Financial Officer and Director Howard M. Lorber(1)........ 48 Director Herbert Lust, II(1)........ 70 Director Jack H. Nusbaum............ 56 Director Allen J. Ostroff(1)........ 60 Director A.F. Petrocelli(1)......... 53 Director Paul H. Hower.............. 62 Executive Vice President Timothy E. Aho............. 53 Senior Vice President/Development Denis W. Driscoll.......... 52 Senior Vice President/Human Resources John H. Leavitt............ 44 Senior Vice President/Sales and Marketing Joseph Bernadino........... 50 Senior Vice President, Secretary and General Counsel Richard T. Szymanski....... 39 Vice President and Corporate Controller Douglas W. Vicari.......... 37 Vice President and Treasurer
- --------------- (1) Member of the Compensation and Audit Committee. The following is a biographical summary of the experience of the directors and executive officers of the Company: David A. Simon has been President, Chief Executive Officer and a Director since 1992 and Chairman of the Board of Directors of the Company since 1993. Mr. Simon was Chief Executive Officer and a director of PMI during 1992. John M. Elwood has been a Director and Executive Vice President of the Company since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the Director of Reorganization of PMI during 1992. Howard M. Lorber has been a Director and a member of the Compensation and Audit Committee since 1994. Mr. Lorber is Chairman of the Board of Directors of Nathan's Famous, Inc. and Hallman & Lorber Associates, Inc. and a director of New Valley Corporation, United Capital Corp. and Alpine Lace Brands, Inc. Mr. Lorber has been Chief Executive Officer of Hallman & Lorber Associates, Inc. for more than the past five years, President and Chief Operating Officer of New Valley Corporation since 1994 and Chief Executive Officer of Nathan's Famous, Inc. since 1993. Mr. Lorber has also been a general partner or shareholder of a corporate general partner of various limited partnerships organized to acquire and operate real estate properties. Herbert Lust, II has been a Director since 1992 and Chairman of the Compensation and Audit Committee of the Company since 1993. Mr. Lust was a member of the Committee of Unsecured Creditors of PMI through 1992. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust. 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 the past twenty-five years. He also is a 27 29 director of Pioneer Companies, Inc., W.R. Berkley Corporation, Strategic Distribution, Inc., The Topps Company, Inc. and Fine Host Corporation. Allen J. Ostroff has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Ostroff has been a Managing Director of the Prudential Realty Group, a subsidiary of The Prudential Insurance Company of America, since June 1994 and was a Senior Vice President of the Prudential Realty Group from 1992 to June 1994. A.F. Petrocelli has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Petrocelli has been the Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years. He is also a director of Nathan's Famous, Inc. Paul H. Hower has been an Executive Vice President of the Company since 1993. Mr. Hower was President of Integrity Hospitality Services from 1991 to 1993 and prior to such time was Vice President and Hotel Division Manager of B.F. Saul Co. Timothy E. Aho has been a Senior Vice President of the Company since 1994. Mr. Aho was a Senior Vice President of Development for Boykin Management Company from 1993 to 1994 and Vice President of Development for Interstate Hotels Corporation from 1992 to 1993. Denis W. Driscoll has been a Senior Vice President of the Company since 1993. Mr. Driscoll was President of Driscoll Associates, a human resources consulting organization, from 1992 to 1993. John H. Leavitt has been a Senior Vice President of the Company since 1992. Mr. Leavitt was a Senior Vice President of PMI during 1992 and a Senior Vice President of Medallion Hotel corporation prior to such time. Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of the Company since 1992. Mr. Bernadino was an Assistant Secretary and Assistant General Counsel of PMI during 1992. Richard T. Szymanski has been a Vice President and Corporate Controller of the Company since 1992. Mr. Szymanski was Corporate Controller of PMI during 1992. Douglas W. Vicari has been a Vice President and Treasurer of the Company since 1992 and was Vice President and Treasurer of PMI during 1992. 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." 28 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The Financial Statements listed in the accompanying index to financial statements are filed as part of this Annual Report. 2. Exhibits (2) (a) Reference is made to the Disclosure Statement for Debtors' Second Amended Joint Plan of Reorganization, dated January 16, 1992, which includes the Debtors' Second Amended Plan of Reorganization as an exhibit thereto filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) 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. (c) 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. (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 the Form of 9.20% Junior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Form of 8.20% Tax Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (c) Reference is made to the Form of 10.20% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (d) Reference is made to the Form of 8% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (e) Reference is made to the Form of 9.20% OVR Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 29 31 (f) Reference is made to the Collateral Agency Agreement among the Company, U.S. Trust and the Secured Parties, dated as of July 31, 1992 filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (g) Reference is made to the Security Agreement between the Company and U.S. Trust, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (h) Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (i) Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (j) Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (k) Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (l) 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. (m) Reference is made to an Indenture, dated April 26, 1995, between the Company and the Trustee related to the issuance of 7% Convertible Subordinated Notes due 2002, filed as an Exhibit to the Company's Form 10-K dated March 21, 1996, which is incorporated herein by reference. (n) Reference is made to an Indenture, dated January 23, 1996, between the Company and the Trustee related to 9 1/4% First Mortgage Notes due 2006, filed as an Exhibit to the Company's Form 10-K dated March 21, 1996, which is incorporated herein by reference. (o) Reference is made to the Senior Secured Revolving Credit Agreement, dated as of June 26, 1996, among the Company and the Lenders Party hereto, and Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent, filed as an Exhibit to the Company's Amendment No.1 to Form S-3 dated July 26, 1996, which is incorporated herein by reference. (p) Master Repurchase Agreement, dated as of October 23, 1996, between BT Securities Corporation and Prime Hospitality Corp. (10) (a) Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc., dated June 3, 1985, and its related agreements, each of which was included as Exhibits to the Form 8-K dated August 14, 1985 of PMI, which are incorporated herein by reference. (b) Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q, dated February 12, 1988 of PMI, which is incorporated herein by reference. 30 32 (c) 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. (d) 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. (e) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David A. Simon filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and John Elwood filed as an Exhibit to the Company's Form 10-K, dated March 26, 1993, which is incorporated herein by reference. (g) Reference is made to the Employment Agreement, dated as of May 18, 1993, between Paul Hower filed as an Exhibit to the Company's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. (h) Reference is made to the Consolidated and Amended Settlement Agreement, dated as of October 12, 1993, between Allan V. Rose and the Company filed as an Exhibit to the Company's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. (i) Reference is made to the Consent and Amendment to Prime Hospitality Corp. 9.20% Junior Secured Notes filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (j) Reference is made to the Agreement, dated February 6, 1995, among Suites of America, Inc., ShoLodge, Inc. and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (k) Reference is made to the Change of Control Agreement, dated February 15, 1995, between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (l) Reference is made to the Change of Control Agreement dated, February 15, 1995, between John M. Elwood and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (m) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Paul H. Hower and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (n) Reference is made to the Change of Control Agreement dated, February 15, 1995, between John H. Leavitt and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (o) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Denis W. Driscoll and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (p) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Timothy E. Aho and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (q) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Joseph Bernadino and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. 31 33 (r) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (s) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (t) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard Moskal and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (u) Reference is made to the Employment Agreement, dated May 15, 1995, between John Elwood and the Company, filed as an Exhibit to the Company's Form 10-K, dated March 21, 1996. (v) Reference is made to the Employment Agreement, dated August 1, 1995, between David Simon and the Company, filed as an Exhibit to the Company's Form 10-K, dated March 21, 1996. (11) Statement regarding computation of per share earnings. (21) Subsidiaries of the Company are as follows:
JURISDICTION OF NAME INCORPORATION --------------------------------------------------- --------------- Caldwell Holding Corp. ............................ Delaware Dynamic Marketing Group, Inc. ..................... Delaware Fairfield Holding Corp. ........................... Delaware Fairfield-Meridian Claims Service, Inc. ........... Delaware FR Delaware, Inc. (Subsidiary of FR Management Corporation)..................................... Delaware FR Management Corporation.......................... Virginia KSA Management, Inc. .............................. Kansas Mahwah Holding Corp. .............................. Delaware Market Segments, Incorporated...................... Delaware PHC Construction Corp. ............................ Delaware PHC Hotels, Inc. .................................. Delaware Prime-American Realty Corp. ....................... Delaware Prime Note Collections Company, Inc. .............. Delaware Prime-O-Lene, Inc. ................................ New Jersey Republic Motor Inns, Inc. ......................... Virginia
(23) Consent of Arthur Andersen LLP (27) Financial data schedule. 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 finish a copy of such instruments to the Commission upon request. 32 34 PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (ITEM 14(A))
PAGE ---- Report of Independent Public Accountants.............................................. F-2 Consolidated Financial Statements: Balance Sheets at December 31, 1995 and 1996........................................ F-3 Statements of Income for the Years Ended December 31, 1994, 1995 and 1996........... F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996............................................................................. F-5 Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... F-6 Notes to Consolidated Financial Statements............................................ F-7
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. Separate financial statements of 50% or less owned entities accounted for by the equity method have been omitted because such entities considered in the aggregate as a single subsidiary would not constitute a significant subsidiary. F-1 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Prime Hospitality Corp.: We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries ("the Company") as of December 31, 1995 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey January 28, 1997 F-2 36 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
1995 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents............................................ $ 49,533 $ 15,997 Marketable securities available for sale............................. 11,929 238 Restricted cash...................................................... 8,973 2,637 Accounts receivable, net of reserves of $213 and $420 in 1995 and 1996, respectively.................................... 13,139 12,653 Current portion of mortgages and notes receivable.................... 1,533 1,338 Other current assets................................................. 8,070 11,228 -------- -------- Total current assets.............................................. 93,177 44,091 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization........................................ 398,201 695,253 Mortgages and notes receivable, net of current portion................. 64,962 24,195 Other assets........................................................... 16,901 22,559 -------- -------- Total Assets...................................................... $573,241 $786,098 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt.............................................. $ 5,731 $ 3,419 Other current liabilities............................................ 38,961 45,887 -------- -------- Total current liabilities......................................... 44,692 49,306 Long-term debt, net of current portion................................. 276,920 298,875 Other liabilities...................................................... 18,713 18,022 -------- -------- Total liabilities................................................. 340,325 366,203 -------- -------- Commitments and contingencies.......................................... -- -- Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued........................................... -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized 31,004,499 and 39,804,917 shares issued and outstanding in 1995 and 1996, respectively............................................ 310 398 Capital in excess of par value....................................... 183,050 338,825 Retained earnings.................................................... 49,556 80,672 -------- -------- Total stockholders' equity........................................ 232,916 419,895 -------- -------- Total Liabilities and Stockholders' Equity................... $573,241 $786,098 ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-3 37 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- Revenues: Lodging.................................................. $ 88,753 $146,184 $198,947 Food and beverage........................................ 18,090 37,955 41,437 Management and other fees................................ 10,021 8,115 6,729 Interest on mortgages and notes receivable............... 15,867 11,895 6,090 Business interruption insurance.......................... -- -- 13,562 Rental and other......................................... 1,572 1,479 2,103 -------- -------- -------- Total revenues................................... 134,303 205,628 268,868 -------- -------- -------- Costs and expenses: Direct hotel operating expenses: Lodging............................................... 25,490 38,383 51,577 Food and beverage..................................... 13,886 28,429 32,053 Selling and general................................... 27,244 49,753 61,789 Occupancy and other operating............................ 9,799 11,763 16,833 General and administrative............................... 15,089 15,515 17,813 Depreciation and amortization............................ 9,427 15,974 25,884 Other expense............................................ -- 2,200 -- -------- -------- -------- Total costs and expenses......................... 100,935 162,017 205,949 -------- -------- -------- Operating income........................................... 33,368 43,611 62,919 Investment income.......................................... 1,966 4,861 4,610 Interest expense........................................... (13,993) (21,603) (20,312) Other income............................................... 9,089 2,239 4,306 -------- -------- -------- Income before income taxes and extraordinary items......... 30,430 29,108 51,523 Provision for income taxes................................. 12,172 11,643 20,609 -------- -------- -------- Income before extraordinary items.......................... 18,258 17,465 30,914 Extraordinary items -- gains on discharges of indebtedness (net of income taxes of $120, $70 and $135 in 1994, 1995 and 1996, respectively).................................. 172 104 202 -------- -------- -------- Net income................................................. $ 18,430 $ 17,569 $ 31,116 ======== ======== ======== Earnings per common share: Primary: Income before extraordinary items........................ $ .57 $ .54 $ .85 Extraordinary items...................................... .01 -- -- -------- -------- -------- Earnings per common share.................................. $ .58 $ .54 $ .85 ======== ======== ======== Fully diluted: Income before extraordinary items........................ $ .57 $ .54 $ .80 Extraordinary items...................................... .01 -- -- -------- -------- -------- Earnings per common share.................................. $ .58 $ .54 $ .80 ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-4 38 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK CAPITAL IN ------------------- EXCESS OF RETAINED SHARES AMOUNT PAR VALUE EARNINGS TOTAL ---------- ------ ---------- -------- -------- Balance December 31, 1993..................... 29,988,674 $300 $ 157,507 $ 13,557 $171,364 Net income.................................... -- -- -- 18,430 18,430 Utilization of net operating loss carryforwards............................... -- -- 5,861 -- 5,861 Amortization of pre-fresh start tax basis differences................................. -- -- 6,954 -- 6,954 Federal income tax refund..................... -- -- 200 -- 200 Compensation expense related to stock option plan........................................ -- -- 60 -- 60 Proceeds and tax benefits from exercise of stock options............................... 216,080 2 640 -- 642 Proceeds from exercise of stock warrants...... 204,617 2 552 -- 554 ---------- ---- -------- ------- -------- Balance December 31, 1994..................... 30,409,371 304 171,774 31,987 204,065 Net income.................................... -- -- -- 17,569 17,569 Utilization of net operating loss carryforwards............................... -- -- 3,370 -- 3,370 Amortization of pre-fresh start tax basis differences................................. -- -- 6,167 -- 6,167 Compensation expense related to stock option plan........................................ -- -- 16 -- 16 Proceeds and tax benefits from exercise of stock options............................... 220,159 2 705 -- 707 Proceeds from exercise of stock warrants...... 374,969 4 1,018 -- 1,022 ---------- ---- -------- ------- -------- Balance December 31, 1995..................... 31,004,499 310 183,050 49,556 232,916 Net income.................................... -- -- -- 31,116 31,116 Utilization of net operating loss carryforwards............................... -- -- 10,590 -- 10,590 Amortization of pre-fresh start tax basis differences................................. -- -- 1,243 -- 1,243 Compensation expense related to stock option plan........................................ -- -- 5 -- 5 Proceeds from issuance of stock............... 8,250,000 83 141,337 -- 141,420 Proceeds and tax benefits from exercise of stock options............................... 148,492 1 1,516 -- 1,517 Proceeds from exercise of stock warrants...... 401,926 4 1,084 -- 1,088 ---------- ---- -------- ------- -------- Balance December 31, 1996..................... 39,804,917 $398 $ 338,825 $ 80,672 $419,895 ========== ==== ======== ======= ========
See Accompanying Notes to Consolidated Financial Statements. F-5 39 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- Cash flows from operating activities: Net income............................................... $ 18,430 $ 17,569 $ 31,116 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 9,427 15,974 25,884 Utilization of net operating loss carryforwards....... 5,861 3,370 10,590 Gains on settlements of notes receivable.............. (6,224) (822) (1,774) Gains on discharges of indebtedness................... (292) (174) (337) Gains on sales of assets.............................. (1,099) (1,957) (4,349) Amortization of pre-fresh start tax basis differences......................................... 6,954 6,167 1,243 Deferred income taxes................................. (205) 1,557 1,386 Compensation expense related to stock options......... 60 16 5 Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable................................... (1,945) (5,320) 486 Other current assets.................................. 127 (887) (3,158) Other liabilities..................................... (2,760) 3,135 4,844 ------- -------- --------- Net cash provided by operating activities............. 28,334 38,628 65,936 ------- -------- --------- Cash flows from investing activities: Net proceeds from mortgages and other notes receivable... 36,198 27,603 8,933 Disbursements for mortgages and notes receivable......... (1,100) (12,704) (800) Proceeds from sales of property, equipment and leasehold improvements.......................................... 1,480 8,167 12,962 Purchases of property, equipment and leasehold improvements.......................................... (48,473) (74,758) (101,891) Construction of new hotels............................... (14,549) (37,518) (184,566) Decrease in restricted cash.............................. 1,268 752 6,336 Proceeds from insurance settlement....................... -- 7,500 1,500 Proceeds from sales of marketable securities............. 1,116 2,928 15,023 Purchase of marketable securities........................ (5,885) (11,520) -- Other.................................................... (3,965) 846 1,546 ------- -------- --------- Net cash used in investing activities................. (33,910) (88,704) (240,957) ------- -------- --------- Cash flows from financing activities: Net proceeds from issuance of debt....................... 19,026 119,360 182,196 Payments of debt......................................... (43,771) (33,961) (184,740) Proceeds from the exercise of stock options and warrants.............................................. 1,196 1,729 2,605 Proceeds from issuance of common stock................... -- -- 141,420 Other.................................................... 80 (43) 4 ------- -------- --------- Net cash provided by (used in) financing activities... (23,469) 87,085 141,485 ------- -------- --------- Net increase (decrease) in cash and cash equivalents....... (29,045) 37,009 (33,536) Cash and cash equivalents at beginning of period........... 41,569 12,524 49,533 ------- -------- --------- Cash and cash equivalents at end of period................. $ 12,524 $ 49,533 $ 15,997 ======= ======== =========
See Accompanying Notes to Consolidated Financial Statements. F-6 40 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES Prime Hospitality Corp. (the "Company") is a hotel owner/operator with a portfolio of 108 hotels, as of February 28, 1997, located in 25 states and the U. S. Virgin Islands. The Company owns and operates 95 hotels and manages the remaining 13 hotels for third parties. The Company operates its hotels under its proprietary AmeriSuites and Wellesley Inns brand names and under franchise agreements with national hotel chains including Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard Johnson. 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 approximate the present values of amounts to be paid determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company. 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the 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. MARKETABLE SECURITIES Marketable securities consist primarily of commercial paper and other corporate debt and equity securities which mature or are available for sale within one year. Marketable securities are valued at current market value, which approximates cost. F-7 41 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RESTRICTED CASH Restricted cash consists primarily of highly liquid investments that serve as collateral for debt obligations due within one year. MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted for payments and other advances since that date. The amount of interest income recognized on mortgages and notes receivable is generally based on the stated interest rate and the carrying value of the notes. The Company has a number of subordinated or junior mortgages which remit payment based on hotel cash flow. Because there was substantial doubt that the Company would recover any value, these mortgages were assigned no value in the Company's consolidated financial statements when the Company adopted fresh-start reporting on July 31, 1992. Interest on cash flow mortgages and delinquent loans is generally recognized when cash is received. In 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan (SFAS 114)" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118)." Following these standards, the Company measures impairment of a loan based on the present value of expected future cash flows (net of estimated costs to sell) discounted at the loan's effective interest rate. Impairment can also be measured based on a loan's observable market price or the fair value of collateral, if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company will 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 had occurred as of December 31, 1996. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Properties identified for disposal are stated at their estimated net realizable value. During 1995, the Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121)". Following this standard, the Company evaluates whether impairment has occurred at each of its properties based upon the future cash flows (undiscounted and before interest charges) as compared to the carrying value of the property. Based upon its evaluation as of December 31, 1996, the Company has determined that no impairment has occurred. OTHER ASSETS Other assets consist primarily of deferred issuance costs related to the Company's debt obligations. Deferred issuance costs are amortized over the respective terms of the loans using the effective interest method. SELF-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. F-8 42 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 incurred through the balance sheet date. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. For financial reporting purposes, the Company follows SFAS No. 109 "Accounting for Income Taxes". In accordance with SFAS 109, as well as SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized. EARNINGS PER COMMON SHARE Primary earnings per share is computed based on the weighted average number of common shares and common share equivalents (dilutive stock options and warrants) outstanding during each year. The weighted average number of common shares used in computing primary earnings per share was 32,022,000, 32,461,000 and 36,501,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Fully diluted earnings per share, in addition to the adjustments for primary earnings per share, reflects the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 7% Convertible Subordinated Notes from their issuance in April 1995. The weighted average number of common shares used in computing fully diluted earnings per share was 37,423,000 and 43,794,000 for the years ended December 31, 1995 and 1996, respectively. PRE-OPENING COSTS Non-capital expenditures incurred prior to opening new or renovated hotels such as payroll and operating supplies are deferred and expensed within one year after opening. Pre-opening costs charged to expense were $86,000, $364,000 and $1.3 million for the years ended December 31, 1994, 1995 and 1996. As of December 31, 1996, $2.1 million of pre-opening costs are included in other current assets. INTEREST RATE AGREEMENTS The Company has an interest rate swap agreement with a major financial institution which reduces the Company's exposure to interest rate fluctuations on its variable rate debt. The accounting treatment for this agreement is to accrue net interest to be received or to be paid as an adjustment to interest expense as incurred. The Company has an interest rate hedge agreement with a major financial institution which terminates in April 1997 to reduce its interest rate exposure on the anticipated financing of its development program in 1997. Gains or losses resulting from this hedge will be deferred and amortized to interest expense over the life of the anticipated obligation. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1994 and 1995 consolidated financial statements to conform them to the December 31, 1996 presentation. F-9 43 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- HOTEL ACQUISITIONS On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns and two other limited-service hotels for approximately $65.1 million in cash. The acquisition enabled the Company to establish full control over its proprietary Wellesley Inns brand, with all 28 Wellesley Inns now owned and operated by the Company. The acquisition price was comprised of approximately $60.4 million to purchase the first mortgages on the 18 hotels, with a face value of approximately $70.5 million, and $4.7 million to purchase the interests of the three partnerships which owned the hotels. Approximately $1.9 million of the total purchase price was paid to a partnership in which a general partner is a related party. In connection with the transaction, the Company also terminated its management agreements and junior subordinated mortgages related to the 18 hotels. In September 1996, the Company acquired the Ramada Plaza Suite in Secaucus, NJ and repositioned the hotel as a Radisson Suite Hotel. The acquisition price was $16.5 million, which included the assumption of $12.2 million of debt. The 1996 acquisitions have been accounted for as purchases and, accordingly, the revenues and expenses of those hotels have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements since January 1, 1996, reported results would not have been materially different. In March 1995, the Company acquired the option of ShoLodge, Inc. ("ShoLodge") to purchase a 50% interest in eleven of the Company's AmeriSuites hotels and also acquired the remaining AmeriSuites hotel not already owned by the Company. In 1993, the Company and its wholly-owned subsidiary, Suites of America, Inc. ("SOA") entered into agreements with ShoLodge, a company controlled by a former director, designed to further the growth of its AmeriSuites hotels from the six hotels owned by the Company at that time. Pursuant to these agreements, (I) ShoLodge agreed to build and finance six additional AmeriSuites hotels and received an option to purchase a 50% interest in SOA and (ii) the Company received an option pursuant to which it could require ShoLodge to purchase a 50% interest in SOA. The exercise of the option by ShoLodge was scheduled to occur in January 1995, when the Company and ShoLodge began to negotiate the Company's buyout of ShoLodge's option. The consideration payable by the Company was based upon the fair market value of the properties. The consideration totaled $19.7 million and was comprised of (I) $16.1 million in cash, which was paid in 1995, plus (ii) $18.5 million in notes maturing in 1997, less (iii) $14.9 million of existing debt on five hotels, which was forgiven at face value. The transaction resulted in a net increase of approximately $3.6 million of long-term debt. No gain or loss was recorded on the forgiveness of debt. As a result of this transaction, the Company assumed management of these hotels. In August 1995, the Company entered into an agreement to purchase four Bradbury Suites hotels for $18.7 million. The hotels, comprising 447 rooms, were subsequently converted to the Company's proprietary AmeriSuites brand. In August 1995, the Company also purchased the 149 room all-suite St. Tropez Hotel and Shopping Center in Las Vegas for $15.2 million. Revenues and expenses from these transactions have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements for the full year, reported results would not have been materially different. NOTE 3 -- CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- ------- Cash..................................................... $ 4,312 $ 5,079 Commercial paper and other cash equivalents.............. 45,221 10,918 ------- ------- Totals......................................... $49,533 $15,997 ======= =======
F-10 44 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- MARKETABLE SECURITIES Marketable securities are comprised of the following (in thousands):
DECEMBER 31, ---------------- 1995 1996 ------- ---- Equity securities.......................................... $ 3,796 $238 Corporate debt securities.................................. 8,133 -- ------- ---- Totals........................................... $11,929 $238 ======= ====
During 1996, the Company realized $1.8 million in gains on sales of marketable securities which is included in investment income. NOTE 5 -- OTHER CURRENT ASSETS/LIABILITIES Other current assets consist of the following (in thousands):
DECEMBER 31, ------------------ 1995 1996 ------ ------- Hotel inventories......................................... $2,686 $ 4,762 Pre-opening expense....................................... 261 2,088 Accrued interest receivable............................... 2,803 2,082 Prepaid expense........................................... 1,616 1,868 Other..................................................... 704 428 ------ ------- Totals.......................................... $8,070 $11,228 ====== =======
Other current liabilities consist of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- ------- Accounts payable......................................... $ 4,717 $ 5,990 Construction payables.................................... 2,223 6,643 Interest................................................. 3,616 7,734 Accrued payroll and related benefits..................... 3,151 4,590 Accrued expenses......................................... 4,303 4,944 Insurance reserves....................................... 6,007 7,146 Hurricane damage reserve................................. 8,718 2,438 Other.................................................... 6,226 6,402 ------- ------- Totals......................................... $38,961 $45,887 ======= =======
F-11 45 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 ------- ------- Properties operated by the Company(a).................... $57,171 $22,194 Other(b)................................................. 9,324 3,339 ------- ------- Total.......................................... 66,495 25,533 Less current portion..................................... (1,533) (1,338) ------- ------- Long-term portion........................................ $64,962 $24,195 ======= =======
- --------------- (a) At December 31, 1996, the Company is the holder of mortgage notes receivable with a book value of $8.6 million secured primarily by two hotel properties operated by the Company under management agreements and $13.6 million in mortgages secured primarily by four properties operated under lease agreements. These notes bear interest at rates ranging from 8.0% to 13.5% and mature through 2015. The mortgages were derived from the sales of hotel properties. The loans secured by hotel properties operated under management agreements pay interest and principal based upon available cash and include a participation in the future excess cash flow of such hotel properties. One of these mortgages has been structured to include a "senior portion" featuring defined payment terms, and a "junior portion" payable annually based on cash flow. In addition to the mortgage positions referred to above, the Company holds junior or cash flow mortgages and subordinated interests on six other hotel properties operated by the Company under management agreements. Pursuant to these mortgage agreements, the Company is entitled to receive the majority of excess cash flow generated by these hotel properties and to participate in any future sales proceeds. With regard to these properties, third parties hold significant senior mortgages. The junior mortgages mature on various dates from 1999 through 2002. In accordance with the adoption of fresh start reporting under SOP 90-7, no value was assigned to the junior portions of the notes or the junior mortgages and subordinated interests on the other hotels as there was substantial doubt at the time of valuation that the Company would recover any of their value. As a result, interest income on these junior or cash flow mortgages is recognized when cash is received. During 1994, 1995 and 1996, the Company recognized $2.0 million, $2.0 million and $2.9 million, respectively, of interest income related to these mortgages. Future recognition of interest income on these mortgages is dependent primarily upon the net cash flow of the underlying hotels after debt service, which is senior to the Company's junior positions. (b) Other notes receivable currently bear interest at effective rates ranging from 4.0% to 10.0%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company. F-12 46 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, --------------------- YEARS OF 1995 1996 USEFUL LIFE -------- -------- ----------- Land and land leased to others(a).................. $ 69,765 $119,654 Hotels............................................. 246,278 387,631 20 to 40 Furniture, fixtures and autos...................... 67,001 103,899 3 to 10 Leasehold improvements............................. 26,038 58,340 3 to 40 Construction in progress........................... 22,667 78,266 -------- -------- Sub-total..................................... 431,749 747,790 Less accumulated depreciation and amortization..... (33,548) (52,537) -------- -------- Totals................................... $398,201 $695,253 ======== ========
- --------------- (a) Included in land at December 31, 1995 and 1996 was $8.9 million and $32.7 million, respectively, of land associated with hotels under construction. At December 31, 1996, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $5.4 million pursuant to noncancelable operating leases expiring on various dates through 2013. Minimum future rentals under such leases are $7.4 million, of which $3.7 million is scheduled to be received in the aggregate during the five-year period ending December 31, 2001. Depreciation and amortization expense on property, equipment and leasehold improvements was $9.3 million, $14.8 million and $22.0 million for the years ended December 31, 1994, 1995 and 1996, respectively. During the years ended December 31, 1994, 1995 and 1996, the Company capitalized $.8 million, $2.6 million and $7.5 million, respectively, of interest related to borrowings used to finance hotel construction. NOTE 8 -- DEBT Debt consists of the following (in thousands):
DECEMBER 31, --------------------- 1995 1996 -------- -------- 9.25% First Mortgage Notes(a).......................... $ -- $120,000 Revolving Credit Facility(b)........................... -- 12,500 7% Convertible Subordinated Notes(c)................... 86,250 86,250 Mortgages and other notes payable(d)................... 158,904 71,414 10% Senior Secured Notes(e)............................ 30,374 10,867 Capitalized lease obligations(f)....................... 7,123 1,263 -------- -------- Total debt............................................. 282,651 302,294 Less current maturities................................ (5,731) (3,419) -------- -------- Long-Term debt, net of current portion................. $276,920 $298,875 ======== ========
- --------------- (a) On January 23, 1996, the Company issued $120 million of 9.25% First Mortgage Notes due 2006. Interest on the notes is payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain F-13 47 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after January 15, 2001 at premiums to principal which decline on each anniversary date. The Company utilized a portion of the proceeds to pay down $51.6 million of debt. (b) On June 28, 1996, the Company established a revolving credit facility (the "Revolving Credit Facility") with a group of financial institutions providing for availability of funds up to the lesser of $100 million or a borrowing base determined under the agreement. The Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. The Revolving Credit Facility bears interest at LIBOR plus 2.25% and is available for five years. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and also contains certain covenants which limit the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. The aggregate amount of the Revolving Credit Facility will be reduced to $87.0 million on June 28, 1999 and $75.0 million on June 28, 2000. On June 28, 1996, the Company borrowed $40 million under the Revolving Credit Facility and proceeds were used to retire $20 million of interim financing with the remainder utilized principally for development of AmeriSuites hotels. On August 5, 1996, the Company repaid the full amount of this borrowing under the Revolving Credit Facility with proceeds from the issuance of Common Stock (see Note 15). As of December 31, 1996, the Company had borrowed $12.5 million under this facility and had additional borrowing capacity of $87.5 million. (c) In 1995, the Company sold $86.3 million of 7% Convertible Subordinated Notes due 2002. The notes are convertible into common stock at a price of $12 per share at the option of the holder and mature on April 15, 2002. The notes are redeemable, in whole or in part, at the option of the Company after April 17, 1998 at premiums to principal which decline on each anniversary date. (d) The Company has mortgage and other notes payable of approximately $71.4 million that are secured by mortgage notes receivable and hotel properties with a book value of $137.7 million. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1996 these notes bear interest at rates ranging from 6.4% to 10.5%, with a weighted average interest rate of 8.4%, and mature from 1998 through 2008. The Company has $13.9 million of debt secured by the Marriott's Frenchman's Reef Hotel (the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands which was originally scheduled to mature in December 1996. The Company and the lender have entered into an agreement to extend the maturity of the loan to January 1998. The loan continues to bear interest at the same rate and principal payments are waived until maturity. All other terms and conditions of the loan remain in effect. Additionally, the Company's debt related to the Frenchman's Reef is further secured by an assignment of property insurance proceeds related to the hurricane damage (See Note 11). The Company utilized the net insurance proceeds of $22.8 million to reduce the Frenchman's Reef mortgage loan to $13.9 million. The Company is currently in negotiation to obtain new financing in connection with the refurbishment plans at the Frenchman's Reef. On August 2, 1996, the Company prepaid in full $26.7 million of debt secured by 10 hotels with the proceeds from the issuance of Common Stock (See Note 15). The loans were due in February 2000 and bore interest at LIBOR plus 4.25%. The hotels formerly used as collateral for this loan are now part of the collateral securing the Revolving Credit Facility described in (b) above. (e) The 10% Senior Secured Notes were issued pursuant to the Plan, and mature on July 31, 1999. The collateral for the 10% Senior Secured Notes consists primarily of mortgages and notes receivable and real property, net of related liabilities (the "10% Senior Secured Note Collateral"), with a book value of $62.2 million as of December 31, 1996. F-14 48 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest on the 10% Senior Secured Notes is payable semi-annually. The 10% Senior Secured Notes require that 85% of the cash proceeds from the 10% Senior Secured Note Collateral be applied first to interest then to prepayment of principal. Aggregate principal payments on the 10% Senior Secured Notes are required in order that one-third of the principal balance outstanding on December 31, 1996 is paid by July 31, 1998 and all of the balance is paid by July 31, 1999. To the extent the cash proceeds from the 10% Senior Secured Note Collateral are insufficient to pay interest or required principal payments on the 10% Senior Secured Notes, the Company will be obligated to pay any deficiency out of its general corporate funds. The 10% Senior Secured Notes contain covenants which, among other things, require the Company to maintain a net worth of at least $100 million, and preclude cash distributions to stockholders, including dividends and redemptions, until the 10% Senior Secured Notes have been paid in full. As of December 31, 1996, the Company was in compliance with all covenants applicable to the 10% Senior Secured Notes. The Company has $1.4 million of its 10% Senior Secured Notes which it repurchased but did not retire due to certain restrictions under the note agreement. These notes are currently held by a third party agent and are recorded as investments on the Company's balance sheet. As of December 31, 1996, the Company had unrecognized holding gains of approximately $26,000 related to these securities. (f) At December 31, 1996, the Company had a capital lease obligation in the amount of $1.3 million. Principal and interest on this obligation is paid monthly. This lease matures in 2000 and bears interest at Prime plus 3%. In August 1995, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.18% and receives a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement commenced in October 1995 and expires in 1999. In October 1996, the Company entered into a six month interest rate hedge agreement with a major financial institution to reduce its interest rate exposure on the anticipated financing of its development program in 1997. Under the agreement, the Company effectively fixed interest rates at a Treasury yield of 6.4% for approximately seven years on a $98.4 million notional principal amount. Maturities of long-term debt for the next five years ending December 31 are as follows (in thousands): 1997...................................................... $ 3,419 1998...................................................... 17,645 1999...................................................... 25,052 2000...................................................... 12,289 2001...................................................... 14,138 Thereafter................................................ 229,751 -------- Total........................................... $302,294 ========
NOTE 9 -- LEASE COMMITMENTS AND CONTINGENCIES Leases The Company leases various hotels under lease agreements with initial terms expiring at various dates from 1998 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. F-15 49 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule, by year, of future minimum lease payments required under the remaining operating leases that have terms in excess of one year as of December 31, 1996 (in thousands): 1997............................................................... $ 4,833 1998............................................................... 4,787 1999............................................................... 4,828 2000............................................................... 4,717 2001............................................................... 4,326 Thereafter......................................................... 47,023 ------- Total......................................................... $ 70,514 =======
Rental expense for all operating leases, including those with terms of less than one year, consist of the following for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ---------------------------- 1994 1995 1996 ------ ------ ------ Rentals.......................................... $4,654 $4,630 $6,652 Contingent rentals............................... 823 745 1,250 ------ ------ ------ Rental expense.............................. $5,477 $5,375 $7,902 ====== ====== ======
Employee Benefits The Company does not provide any material post employment benefits to its current or former employees. NOTE 10 -- INCOME TAXES The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Current: Federal..................................... $ 970 $ 320 $ 5,147 State....................................... 28 299 563 ------- ------- ------- 998 619 5,710 Deferred: Federal..................................... 9,780 9,929 13,005 State....................................... 1,514 1,165 2,029 ------- ------- ------- 11,294 11,094 15,034 ------- ------- ------- Total............................... $12,292 $11,713 $20,744 ======= ======= =======
Income taxes are provided at the applicable federal and state statutory rates. F-16 50 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of the temporary differences in the areas listed below resulted in deferred income tax provisions for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Utilization of net operating loss............................. $ 5,861 $ 3,370 $11,714 Amortization of pre-fresh start basis differences -- properties and notes......................... 5,632 6,167 1,243 Depreciation.................................................. 200 1,400 830 Compensation expense.......................................... -- 604 691 Other......................................................... (399) (447) 556 ------- ------- ------- Total............................................... $11,294 $11,094 $15,034 ======= ======= =======
At December 31, 1996, the Company had available federal net operating loss carryforwards of approximately $90.7 million which will expire beginning in 2005 and continuing through 2007. Of this amount, $87.3 million is subject to an annual 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 also has potential state income tax benefits relating to net operating loss carryforwards of approximately $5.9 million which will expire during various periods from 1997 to 2006. Certain of these potential benefits are subject to annual limitations similar to federal requirements due to factors such as the level of business conducted in each state and the amount of income subject to tax within each state's carryforward period. In accordance with SFAS 109, the Company has not recognized the future tax benefits associated with the net operating loss carryforwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $31.7 million against the deferred tax asset as of December 31, 1996. To the extent any available carryforwards or other tax benefits 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 reporting purposes. For the years ended December 31, 1994, 1995 and 1996, the Company recognized $5.9 million, $3.4 million and $10.6 million, respectively, of such benefits as a contribution to stockholders' equity. Additionally, the Company recognized $7.0 million, $6.2 million and $1.2 million as a contribution to stockholders' equity for the years ended December 31, 1994, 1995 and 1996, respectively, which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable. As a result of reflecting substantially all of the deferred tax provisions as a contribution to stockholders' equity, the Company had no material deferred tax assets or liabilities as of December 31, 1995 and 1996. NOTE 11 -- BUSINESS INTERRUPTION INSURANCE In September 1995, the Frenchman's Reef suffered damages when Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier settled the Company's property and business interruption insurance claim with respect to the Frenchman's Reef for $25.0 million. In July 1996, the Company received the final installment under its settlement, bringing the net proceeds to $22.8 million, net of deductibles, for which the Company provided a reserve of $2.2 million in 1995. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. The Company is currently reviewing its claim for property damage with its insurance carrier and is in the process of preparing a claim under its business interruption insurance. Although the Company has continued to operate the hotel, the impact of the hurricanes has caused operating profits to decline from prior year levels. In 1996 and 1995, the Company continued to record the operating revenues and expenses of the Frenchman's Reef. In addition, the Company recorded business F-17 51 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interruption insurance revenue of $13.6 million in 1996 based on the claim settlement which is included in operating revenues. The Company is currently underway with plans to refurbish and upgrade the Frenchman's Reef. In addition to the hurricane-related renovations, the plan provides for structural enhancements, redesigned guestrooms, increased banquet and meeting space and new landscaping. Other expense of $2.2 million for the year ended December 31, 1995 consists of a reserve for insurance deductibles related to hurricane damage caused by Hurricane Marilyn at the Frenchman's Reef. NOTE 12 -- OTHER INCOME Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following as of December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ---------------------------- 1994 1995 1996 ------ ------ ------ Gains on settlements of notes receivable................. $6,355 $ 822 $1,774 Gains on sales of properties............................. 1,099 1,417 2,532 Rebates of prior years' insurance premiums............... 1,579 -- -- Other.................................................... 56 -- -- ------ ------ ------ Total.......................................... $9,089 $2,239 $4,306 ====== ====== ======
NOTE 13 -- 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 are assumed to be equal to their reported carrying amounts.
DECEMBER 31, 1995 DECEMBER 31, 1996 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Mortgage and notes receivable........... $ 64,962 $ 76,058 $ 24,195 $ 38,928 Long-term debt.......................... 276,920 278,899 298,875 343,039 Interest rate swap agreement............ -- (15) -- (173) Interest rate hedge agreement........... -- -- -- (620)
The fair value for mortgages and notes receivable is based on the valuation of the underlying collateral utilizing discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or at current rates available to the Company for debt of the same maturities. The fair values of the interest rate swap and hedge agreements are based on the estimated amounts the Company would pay to terminate the agreements. 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. F-18 52 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14 -- RELATED PARTY TRANSACTIONS The following summarizes significant financial information with respect to transactions with present and former officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ----------------------------- 1994 1995 1996 ------- ------- ------- Management and other fee income(a)....................... $ 1,165 $ 1,427 $ 1,040 Interest income(a)....................................... 1,283 518 582 Management fee expense(b)................................ 679 -- -- Interest expense(b)...................................... 461 -- -- Reservation fee expense(b)............................... 317 -- --
- --------------- (a) At December 31, 1996, the Company managed six hotels for partnerships in which related parties own various interests. The income amounts shown above primarily include transactions related to these hotel properties. On March 6, 1996, the Company acquired nine hotels owned by related parties. (See Note 2). (b) In 1991, the Company entered into an agreement with ShoLodge, a company controlled by a former director, whereby ShoLodge was appointed the exclusive agent to develop and manage certain hotel properties. In March 1995, the Company acquired ShoLodge's option to purchase the remaining 50% interest in all eleven hotels developed by ShoLodge and also acquired the ownership interest of the remaining AmeriSuites hotel not already owned by the Company (See Note 2). NOTE 15 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS COMMON STOCK On August 2, 1996, the Company sold 8.3 million shares of Common Stock at a price of $18 per share. The Company utilized the proceeds from the offering of approximately $141.4 million (net of underwriting discounts and expenses of $7.2 million) to fund AmeriSuites development, to reduce indebtedness of $40.0 million under the Revolving Credit Facility and to repay certain other indebtedness of $26.7 million, thereby increasing availability for further AmeriSuites development. 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. A total of 200,000 options were reserved under these plans (net of amounts granted to date) as of December 31, 1996. 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 and expire ten years from the date of grant. During 1995 and 1996, respectively, options to purchase 648,000 and 595,000 shares of common stock were granted under this plan. 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 will be fully vested and exercisable one year after the date of grant and will expire ten years after the date of grant, or earlier if the non-employee director ceases to be a director. Options to purchase 50,000 shares of common stock were granted under this plan in both 1995 and 1996. F-19 53 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the Company's 1992 Stock Option and Performance Incentive Plans, options to purchase 367,000 and 15,000 shares of common stock were issued to employees in 1994 and 1995, respectively. The options were granted at prices which approximate fair market value at the date of grant. Generally, these options can be exercised during a participant's employment in equal annual installments over a three year period and expire six years from the date of grant. Options to purchase 30,000 and 60,000 shares of common stock were issued to non-employee directors of the Company in 1994 and 1995, respectively, under the Company's 1992 Stock Option Plan. The options were granted at prices which approximate fair market value at the date of grant. Generally, one-third of these options were exercisable at the date of grant and the remaining options vest in equal annual installments over a two-year period. The options expire six years after the date of grant. During 1992, options to purchase 350,000 shares were granted to employee officers and directors under the Company's 1992 Stock Option Plan. All 350,000 shares are currently exercisable at December 31, 1996. In addition, options to purchase 330,000 shares were granted to a former officer in 1992, all of which were exercised. The exercise prices of the remaining exercisable options are based on the average market price one year from the date of grant which was determined to be $2.71 per share with respect to 330,000 shares and $3.81 per share with respect to the other 20,000 shares. Based on this exercise price, the amount of compensation expense attributable to these options was $60,000, $16,000 and $5,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Effective January 1, 1996, the Company adopted the provisions of SFAS 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. Had the fair value method of accounting been applied to the Company's stock plans, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, net income would have been reduced by $1.3 million, or $.03 per share in 1995 and $2.3 million, or $.05 per share in 1996. This pro forma impact only takes into account options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1995 and 1996 was $4.46 and $7.33, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $9.59 in 1995 and $16.51 in 1996 and the following weighted average assumptions: risk-free interest rate of 6.22% for 1995 and 6.43% in 1996, volatility of 42.39% for 1995 and 38.64% for 1996, and dividend yield of 0.0% for 1995 and 1996. F-20 54 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the various stock option plans:
NUMBER OPTION PRICE OF SHARES PER SHARE ---------- -------------- Outstanding at December 31, 1994.................................. 1,442,000 Granted........................................................... 773,000 $ 9.25-$10.88 Exercised......................................................... (222,000) $ 2.71-$ 7.63 Canceled.......................................................... (165,000) $ 3.63-$ 9.63 --------- Outstanding at December 31, 1995.................................. 1,828,000 --------- Granted........................................................... 646,000 $14.75-$18.00 Exercised......................................................... (149,000) $ 3.63-$10.81 Canceled.......................................................... (59,000) $ 3.63-$16.63 --------- Outstanding at December 31, 1996.................................. 2,266,000 ========= Exercisable at December 31, 1996.................................. 1,101,000 $ 2.71-$10.88 =========
WARRANTS Pursuant to the Plan, warrants to purchase 2,053,583 shares of the Company's common stock were issued to former shareholders of the Company's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share and expire five years after the date of grant. The exercise price was determined from the average per share daily closing price of the Company's common stock during the year following its reorganization on July 31, 1992. As of December 31, 1996 warrants to purchase 1,027,392 shares have been exercised and 1,026,191 remain outstanding. NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 1994, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------------------- 1994 1995 1996 -------- ------- -------- Assumption of mortgages and notes payable in connection with the acquisitions of hotels................................... $ 18,718 $ 5,120 $ 12,222 Hotels received in settlements of mortgage notes receivable.... 54,521 2,702 35,306 Note receivable received in exchange for the sale of a hotel... $ 1,497 $ -- $ --
Cash paid for interest was $15.5 million, $22.4 million and $22.4 million for the years ended December 31, 1994, 1995 and 1996, respectively. Cash paid for income taxes was $1.9 million, $1.2 million and $8.0 million for the years ended December 31, 1994, 1995 and 1996, respectively. F-21 55 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/ DAVID A. SIMON ------------------------------------ David A. Simon, Chairman of the Board of Directors, President and Chief Executive Officer DATE: February 28, 1997 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 February 28, 1997.
SIGNATURE TITLE - ------------------------------------------ ------------------------------------------------- /s/ DAVID A. SIMON Chairman of Board of Directors, President, Chief - ------------------------------------------ Executive Officer and Director (Principal David A. Simon Executive Officer) /s/ JOHN M. ELWOOD Chief Financial Officer, Executive Vice President - ------------------------------------------ and Director (Principal, Financial and John M. Elwood Accounting Officer) /s/ ALLEN J. OSTROFF Director - ------------------------------------------ Allen J. Ostroff /s/ HERBERT LUST, II Director - ------------------------------------------ Herbert Lust, II /s/ A.F. PETROCELLI Director - ------------------------------------------ A.F. Petrocelli /s/ JACK H. NUSBAUM Director - ------------------------------------------ Jack H. Nusbaum /s/ HOWARD M. LORBER Director - ------------------------------------------ Howard M. Lorber
56 Exhibit Index ------------- Exhibit No Exhibit - ----------- ------- (2)(a) Reference is made to the Disclosure Statement for Debtors' Second Amended Joint Plan of Reorganization, dated January 16, 1992, which includes the Debtors' Second Amended Plan of Reorganization as an exhibit thereto filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) 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. (c) 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. (3)(a) Reference is made to the Restated Certificate of Incorporation of the Company, dated June 5, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (4)(a) Reference is made to the Form of 9.20% Junior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the Form of 8.20% Tax Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (c) Reference is made to the Form of 10.20% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (d) Reference is made to the Form of 8% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (e) Reference is made to the Form of 9.20% OVR Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the Collateral Agency Agreement among the Company, U.S. Trust and the Secured Parties, dated as of July 31, 1992 filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 57 Exhibit No Exhibit - ----------- ------- (g) Reference is made to the Security Agreement between the Company and U.S. Trust, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (h) Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (i) Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (j) Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (k) Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (l) 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. (m) Reference is made to an Indenture, dated April 26, 1995, between the Company and the Trustee related to the issuance of 7% Convertible Subordinated Notes due 2002, filed as an Exhibit to the Company's Form 10-K dated March 21, 1996, which is incorporated herein by reference. (n) Reference is made to an Indenture, dated January 23, 1996, between the Company and the Trustee related to 9 1/4% First Mortgage Notes due 2006, filed as an Exhibit to the Company's Form 10-K dated March 21, 1996, which is incorporated herein by reference. (o) Reference is made to the Senior Secured Revolving Credit Agreement, dated as of June 26, 1996, among the Company and the Lenders Party hereto, and Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent, filed as an Exhibit to the Company's Amendment No.1 to Form S-3 dated July 26, 1996, which is incorporated herein by reference. (p) Master Repurchase Agreement, dated as of October 23, 1996, between BT Securities Corporation and Prime Hospitality Corp. (10)(a) Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc., dated June 3, 1985, and its related agreements, each of which was included as Exhibits to the Form 8-K dated August 14, 1985 of PMI, which are incorporated herein by reference. (b) Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q, dated February 12, 1988 of PMI, which is incorporated herein by reference. (c) Reference is made to the 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. 58 Exhibit No Exhibit - ----------- ------- (d) 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. (e) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David A. Simon filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. (f) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and John Elwood filed as an Exhibit to the Company's Form 10-K, dated March 26, 1993, which is incorporated herein by reference. (g) Reference is made to the Employment Agreement, dated as of May 18, 1993, between Paul Hower filed as an Exhibit to the Company's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. (h) Reference is made to the Consolidated and Amended Settlement Agreement, dated as of October 12, 1993, between Allan V. Rose and the Company filed as an Exhibit to the Company's Form 10-K, dated March 25, 1994, which is incorporated herein by reference. (i) Reference is made to the Consent and Amendment to Prime Hospitality Corp. 9.20% Junior Secured Notes filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (j) Reference is made to the Agreement, dated February 6, 1995, among Suites of America, Inc., ShoLodge, Inc. and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (k) Reference is made to the Change of Control Agreement, dated February 15, 1995, between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (l) Reference is made to the Change of Control Agreement dated, February 15, 1995, between John M. Elwood and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (m) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Paul H. Hower and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (n) Reference is made to the Change of Control Agreement dated, February 15, 1995, between John H. Leavitt and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (o) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Denis W. Driscoll and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (p) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Timothy E. Aho and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (q) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Joseph Bernadino and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (r) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. 59 Exhibit No Exhibit - ----------- ------- (s) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (t) Reference is made to the Change of Control Agreement, dated February 15, 1995, between Richard Moskal and the Company filed as an Exhibit to the Company's Form 10-K, dated March 10, 1995. (u) Reference is made to the Employment Agreement, dated May 15, 1995, between John Elwood and the Company, filed as an Exhibit to the Company's Form 10-K, dated March 21, 1996. (v) Reference is made to the Employment Agreement, dated August 1, 1995, between David Simon and the Company, filed as an Exhibit to the Company's Form 10-K, dated March 21, 1996. (11) Statement regarding computation of per share earnings. (21) Subsidiaries of the Company are as follows: (23) Consent of Arthur Andersen LLP (27) Financial data schedule. EX-4.P 2 MASTER REPURCHASE AGREEMENT 1 EXHIBIT 4(P) MASTER REPURCHASE AGREEMENT DATED AS OF OCTOBER 23, 1996 BETWEEN: BT SECURITIES CORPORATION AND PRIME HOSPITALITY CORP. 1. APPLICABILITY From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or other assets ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder. 2. DEFINITIONS (a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof: (c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Buyer's Margin Percentage to the Repurchase Price for such Transaction as of such date: (d) "Buyer's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction; (e) "Confirmation", the meaning specified in Paragraph 3(b) hereof; (f) "Income", with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon; (g) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (h) "Margin Excess", the meaning specified in Paragraph 4(b) hereof; (i) "Margin Notice Deadline", the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance 2 obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice); (j) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities); (k) "Price Differential", with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360-day-per-year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (l) "Pricing Rate", the per annum percentage rate for determination of the Price Differential; (m) "Prime Rate", the prime rate of U.S. commercial banks as published in The Wall Street Journal (or, if more than one such rate is published, the average of such rates); (n) "Purchase Date", the date on which Purchased Securities are to be transferred by Seller to Buyer; (o) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof; (p) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof; (q) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof; (r) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination; (s) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Seller's Margin Percentage to the Repurchase Price for such Transaction as of such date; (t) "Seller's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction. 3. INITIATION; CONFIRMATION; TERMINATION (a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. (b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer and 3 Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. (c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer. 4. MARGIN MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). (b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer). (c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice. (d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller. (e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or a Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions). (f) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or a Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 4 5. INCOME PAYMENTS Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would be so entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, it any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed. 6. SECURITY INTEREST Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all Income thereon and other proceeds thereof. 7. PAYMENT AND TRANSFER Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request. (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. 8. SEGREGATION OF PURCHASED SECURITIES To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller's interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof. Required Disclosure for Transactions in Which the Seller Retains Custody of the Purchased Securities Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading 5 day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities. 9. SUBSTITUTION (a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. (b) In Transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted. 10. REPRESENTATIONS Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11. EVENTS OF DEFAULT In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day's notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"): (a) The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or - --------------- * Language to be used under 17 C.F.R. sec.403.4(e) if Seller is a government securities broker or dealer other than a financial institution. ** Language to be used under 17 C.F.R. sec.403.5(d) if Seller is a financial institution. 6 deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Insolvency) give notice to the defaulting party of the exercise of such option as promptly as practicable. (b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations in such Transactions to repurchase all Purchased Securities, at the Repurchase Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession or control. (c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. (d) If the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, the nondefaultlng party, without prior notice to the defaulting party, may; (i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source. Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities). (e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder. (f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph. 7 (g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction. (h) To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party's rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. NOTICES AND OTHER COMMUNICATIONS Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence. 14. ENTIRE AGREEMENT; SEVERABILITY This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15. NON-ASSIGNABILITY; TERMINATION (a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. 8 (b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof. 16. GOVERNING LAW This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 17. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18. USE OF EMPLOYEE PLAN ASSETS (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. INTENT (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. (c) The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Transaction hereunder is a "qualified financial contract," as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). 9 (d) It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation", respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA). 20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and (c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. BT SECURITIES CORPORATION PRIME HOSPITALITY CORP. By: By: - --------------------------------------------- --------------------------------------------- Title: Vice President Title: Executive Vice President - --------------------------------------------- --------------------------------------------- Date: 10/23/96 Date: 10/23/96 - --------------------------------------------- ---------------------------------------------
10 ANNEX I SUPPLEMENTAL TERMS AND CONDITIONS 1. MARGIN MAINTENANCE a. Paragraph 4(e) of the Agreement is replaced by the following: Seller and Buyer agree that the respective rights of Buyer and Seller under the subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Excess equals or exceeds $2,000,000. In the event that a Margin Excess equals or exceeds $2,000,000, Buyer and Seller agree that: (1) Where the Margin Excess exceeds the Seller's Margin Amount but is equal to or less than $2,500,000, than Seller may be notice to Buyer require Buyer in such Transaction to transfer to Seller $500,000 in cash in satisfaction of such Margin Excess. (2) Where the Margin Excess exceeds $2,500,000, then, in addition to the amount required by subparagraph (e)(1) of this Paragraph, Seller may by notice to Buyer require Buyer in such Transaction to transfer to Seller additional cash in an amount equal to such Margin Excess minus $2,500,000 rounded upward to the nearest $500,000, in satisfaction of such Margin Excess. 2. COVENANT The financial covenants contained in Section 6.1 to 6.19 of the Senior Secured Revolving Credit Agreement date June 26, 1996 between Prime Brokerage Corp., Credit Lyonnais New York Branch, as Documentation Agent, Bankers Trust Company, as Agent, and the Lenders Party Thereto, are hereby incorporated by reference and made a part of this Agreement to the same extent as if such covenants were fully set forth herein, such covenants to apply, mutatis mutandis, to this Agreement (together with the relevant provisions of any other Section or Sections or Schedule or Schedules to which they refer, including definitions)(the "Credit Agreement"). If for any reason Prime Hospitality Corp. or Bankers Trust Company ceases to be a party to the Credit Agreement or if such Credit Agreement should for any reason terminate, such provisions will be incorporated herein as they existed immediately prior to such event. Each such incorporated covenant will be deemed a representation for purposes of this Agreement." 11 ANNEX II NAMES AND ADDRESSES FOR COMMUNICATIONS BETWEEN PARTIES BT SECURITIES CORPORATION OPERATIONS -- 32ND FLOOR 130 LIBERTY STREET NEW YORK, N.Y. 10008 TELEPHONE: (212) 250-7789 FAX: (212) 250-1292 ATTN: MR. FRANK IUELE EX-11 3 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------- 1995 1996 ------- ------- PRIMARY EARNINGS PER SHARE Income before extraordinary items...................................... $17,465 $30,914 Extraordinary items.................................................... 104 202 ------- ------- Net Income........................................................ $17,569 $31,116 ======= ======= Shares: Weighted average number of common shares outstanding................ 32,461 36,501 ======= ======= Primary earnings per common share: Income before extraordinary items................................... $ 0.54 $ 0.85 Extraordinary items................................................. -- -- ------- ------- Earnings per share................................................ $ 0.54 $ 0.85 ======= ======= FULLY DILUTED EARNINGS PER SHARE Income before extraordinary items...................................... $17,465 $30,914 Interest expense related to convertible debt........................... 2,566 3,902 ------- ------- Income before extraordinary items, as adjusted......................... 20,031 34,816 Extraordinary items.................................................... 104 202 ------- ------- Net income, as adjusted........................................... $20,135 $35,018 ======= ======= Shares: Weighted average number of common shares outstanding................ 32,461 36,606 Assumed conversion of convertible debt.............................. 4,962 7,188 ------- ------- Weighted average number of common shares outstanding, as adjusted... 37,423 43,794 ======= ======= Fully diluted earnings per common share: Income before extraordinary items................................... $ 0.54 $ 0.80 Extraordinary items................................................. -- -- ------- ------- Earnings per share................................................ $ 0.54 $ 0.80 ======= =======
EX-23 4 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of Prime Hospitality Corp.: As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement No. 33-54995. /s/ Arthur Andersen LLP ----------------------------------- ARTHUR ANDERSEN LLP Roseland, New Jersey February 28, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 15,997 238 13,073 420 0 44,091 747,790 52,537 786,098 49,306 298,875 0 0 398 419,497 786,098 240,384 268,868 0 205,949 0 0 20,312 51,523 20,609 30,914 0 202 0 31,116 .85 .80
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