-----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, ItAE9rz2LbVi6hxG4tprnIqj8I+owgw3VfKdwLj55WcZRaHNsJ2YOMu5EULuyU1K kUJChRUWkaghown7sU5vKg== 0000950144-98-003939.txt : 19980401 0000950144-98-003939.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003939 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICO INC CENTRAL INDEX KEY: 0000089121 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 650350241 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11342 FILM NUMBER: 98583379 BUSINESS ADDRESS: STREET 1: 1601 BELVEDERE RD STE 501 S CITY: WEST PALM BEACH STATE: FL ZIP: 33406 BUSINESS PHONE: 5616899970 MAIL ADDRESS: STREET 1: 1601 BELVEDERE ROAD CITY: WEST PALM BEACH STATE: FL ZIP: 33406 10-K405 1 SERVICO, INC. 10-K405 12/31/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ______________ Commission File No. 1-11342 ------- SERVICO, INC. (Exact name of registrant as specified in its charter) FLORIDA 65-0350241 - ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 1601 BELVEDERE ROAD, WEST PALM BEACH, FL 33406 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (561) 689-9970 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock New York Stock Exchange $.01 par value per share Securities registered pursuant to Section 12(g) of the Act: None 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 (Section 229.405 of this chapter) 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. [ ] The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the registrant as of March 25, 1998, was $338,592,702 based on the closing price of $20.4375 per share of the Common Stock as reported by the New York Stock Exchange on such date. The registrant had 21,038,995 shares of Common Stock, par value $.01, outstanding as of March 25, 1998. Documents incorporated by reference: None 2 PART I ITEM 1. BUSINESS GENERAL Servico, Inc., its wholly owned subsidiaries and consolidated partnerships (collectively, the "Company") is one of the largest owners and operators of full-service hotels in the United States. At December 31, 1997, the Company operated 71 hotels containing approximately 14,500 rooms located in 23 states and Canada. The Company's hotels are primarily mid-sized, with an average of approximately 204 rooms per hotel, and are primarily located in secondary metropolitan markets. The Company's full-service hotels offer food and beverage services, meeting space and banquet facilities. The Company's hotels include 58 wholly owned hotels, 11 partially owned hotels and two managed hotels. Six of the hotels are subject to long-term ground leases. All of the Company's hotels are affiliated with nationally recognized hospitality franchisors, including Holiday Inn, Crowne Plaza, Hilton, Omni, Radisson, Sheraton and Westin. The Company operates 44 hotels under franchise agreements with Holiday Inn, making the Company the second largest Holiday Inn franchisee in the United States. The Company's objective is to maximize shareholder value by enhancing its position within the full-service segment of the lodging industry. The Company seeks to achieve external growth through the acquisition of additional hotels and internal growth through a focused operating strategy that generates continued increases in both revenue per available room ("RevPAR") and food and beverage revenues. The Company's hotel acquisition strategy has in the past been focused on the purchase of single mid-market full-service hotels or small portfolios which management believes have the potential for attractive returns. Management believes that such acquisitions permit timely hotel-level improvements, generate generally predictable cash flow and earnings growth, and are attractive because of the positive impact of food and beverage services, meeting space and banquet facilities on occupancy and profitability and the limited construction in this segment. The Company has also pursued larger acquisitions. As previously reported, the Company has entered into an agreement to acquire AMI Operating Partners, L.P. ("AMI"), which owns 15 full service hotels, for approximately $12 million. The Company currently owns in excess of 50% of the outstanding partnership interests of the partnership which owns 99% of AMI's limited partnership interest. AMI's hotels serve as collateral for approximately $63 million of debt which the Company is seeking to refinance in connection with the transaction. Further, on March 20, 1998, the Company entered into a definitive agreement with Impac Hotel Group, L.L.C., a privately owned hotel ownership, management and development company, to merge and form a new company. Under the terms of the agreement, the Company's existing shareholders will receive one share of the new company's common stock for each share of the Servico stock held by them (approximately 21,000,000 shares) and the members of Impac will receive 6,000,000 shares of the new company. The new company will own and manage 140 hotels (136 of which will be owned) with more than 1 3 26,000 rooms and will operate in 35 states and Canada. The merger is expected to close in June, 1998 subject to customary conditions, including regulatory approvals and approval by the Company's shareholders. The Company's operating strategy emphasizes (i) experienced management, with performance-based incentives at corporate, regional and hotel management levels, (ii) effective centralized corporate and regional support personnel, who closely monitor hotel-level performance and provide substantial accounting, payroll, data processing, training and other support services, (iii) the use of banquet facilities, food and beverage operations and meeting space to maximize occupancy and improve profitability and (iv) a commitment to reinvest capital into its owned hotels. During the period from 1991 through 1994, the Company devoted significant resources and efforts to renovating and repositioning its hotel properties. Approximately $6,700 per room was spent on hotel renovations and upgrading of hotel operating systems and equipment. Fourteen of the Company's hotels underwent changes in franchise affiliations to enhance their competitive position in their respective markets. These efforts resulted in increased RevPAR. The Company generally classifies its hotels as either "Stabilized Hotels" or "Reposition Hotels". The Stabilized Hotels currently include all hotels which were acquired by the Company through 1994 and 17 of the hotels acquired during 1995 and 1996 which, based on management's determination, have achieved normalized operations. The Reposition Hotels currently include seven of the hotels acquired during 1995 and 1996 and the 12 hotels acquired during 1997 all of which are still the subject of management's post acquisition repositioning and renovation initiatives. Since January 1994, the Company has acquired ownership interests in a total of 39 additional hotel properties. The following table sets forth information concerning the acquisition of ownership interests in hotels during 1996 and 1997:
Wholly Partially Total Owned Owned ------------------- -------------------- ------------------- Number Number Number Number Number Number of of of of of of Hotels Rooms Hotels Rooms Hotels Rooms ------- -------- ------ ------- ------ ------ Fiscal Year-End 1995 46 9,031 35 6,573 11 2,458 1996 Additions 11 2,028 8 1,377 3 651 ------- -------- ------ ------- ------ ------ Fiscal Year-End 1996 57 11,059 43 7,950 14 3,109 1997 Additions 12 3,002 15 3,689 (3) (687) ------- -------- ------ ------- ------ ------ Fiscal Year-End 1997 69 14,061 58 11,639 11 2,422 ======= ======== ====== ======= ====== ======
During 1996 and 1997, the Company purchased 23 hotels and acquired 100% ownership in 3 hotels owned by partnerships in which the Company previously had majority ownership. The average purchase price of the 23 hotels was $39,905 per room and the Company expects to spend approximately $8,500 per room in renovations and capital assets for a total cost per room of $48,405. The Company believes this cost per room is significantly below replacement cost, which the Company estimates to be between $75,000 and $90,000 per room for new construction of hotels with similar facilities in the respective markets. The Company recognizes that, although contributing to the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") and net income, during the repositioning period (generally 12 to 36 months) hotels will usually experience lower operating results such as RevPAR and profit margins. 2 4 The following table provides key hospitality performance measures for 1995, 1996 and 1997 for both the Stabilized Hotels and Reposition Hotels included in the Company's consolidated financial statements:
Number Number of of Average Hotels(a) Rooms(a) Occupancy Daily Rate RevPAR -------- ------- --------- ---------- ------ 1995 Stabilized Hotels 32 6,464 67.7% $66.72 $45.17 Reposition Hotels 11 1,876 67.6% $58.42 $39.49 ----- ------ Total 43 8,340 67.7% $65.99 $44.68 ===== ====== 1996 Stabilized Hotels 32 6,464 68.1% $70.39 $47.94 Reposition Hotels 24 4,355 61.8% $62.78 $38.80 ----- ------ Total 56 10,819 66.0% $68.01 $44.89 ===== ====== 1997 Stabilized Hotels 49 9,580 69.0% $73.49 $50.71 Reposition Hotels 19 4,241 59.7% $66.20 $39.52 ----- ------ Total 68 13,821 66.7% $71.91 $47.96 ===== ======
(a) Excludes a 240 room hotel in which the Company has a minority ownership interest. For the year ended December 31, 1997, the operating performance of the 49 Stabilized Hotels continued to improve, as demonstrated by a 5.8% increase in revenues, a 7.5% increase in net operating income and a 5.1% increase in RevPAR over the comparable prior year period. The operating performance at all of the Company's hotels during the same period does not reflect the same increases primarily because of the lower operating results of the Reposition Hotels. Management believes that the Reposition Hotels were acquired at attractive prices and represent significant opportunities for improved operating results in the future. The Company is in the process of repositioning and renovating the Reposition Hotels based on strategic plans designed to address the opportunities presented by each hotel and the hotel's particular market. Renovations are chosen based on anticipated returns on investment. These renovations include enhancing lobbies, restaurants and public areas, upgrading guest rooms and converting unprofitable lounge areas to meeting rooms to accommodate the needs of business travelers. In certain instances, hotel properties are reflagged with different franchise brands to further identify the improved property to the community. As a fully integrated owner and manager, Servico seeks to capitalize on its management experience and expertise by continuing to acquire underperforming full-service hotels and improving the operating performance of hotels after acquisition. The Company's management team has successfully managed hotels in all segments of the hotel industry. Management believes that the Company's past success and future 3 5 performance depend on its ability (i) to identify underperforming hotels and quickly implement successful turnaround plans; (ii) to develop and implement marketing plans that particularly position each hotel property within its local market and (iii) to develop management plans that focus on guest satisfaction, revenue yield, cost control and labor productivity. The Company's management culture stresses entrepreneurship and creativity. FRANCHISE AFFILIATIONS In recent years, operators of hotels not owned or managed by major lodging companies have affiliated their hotels with national hotel franchisors as a means of remaining competitive with hotels owned by or affiliated with national lodging companies. Franchisors provide a number of services to hotel operators which can positively contribute to the improved financial performance of their properties, including national reservation systems, marketing and advertising programs and direct sales programs. The Company believes that hotel franchisors with larger numbers of hotels enjoy greater brand awareness among potential hotel guests than those with fewer numbers of hotels. Hotels typically operate with high fixed costs, and increases in revenues generated by affiliation with a national franchisor can, at times, contribute positively to a hotel's financial performance. At December 31, 1997, all of the Company's owned or managed hotels were affiliated with national hotel franchises, as set forth in the following table:
Wholly Partially Third Party Total Owned Owned Managed --------------- ---------------- --------------- ---------------- Number Number Number Number Number Number Number Number of of of of of of of of Franchise Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms - --------- ------ ----- ------ ----- ------ ----- ------ ----- Holiday Inn 41 8,155 34 6,552 6 1,346 1 257 Hilton Inn 4 776 3 583 1 193 - - Best Western 3 499 3 499 - - - - Crowne Plaza 3 695 1 275 2 420 - - Four Points 3 468 3 468 - - - - Radisson 3 602 1 163 1 244 1 195 Hampton Inn 2 237 2 237 - - - - Howard Johnson 2 255 2 255 - - - - Omni 2 605 1 386 1 219 - - Sheraton 2 673 2 673 - - - - Other 6 1,548 6 1,548 - - - - ------ ------ ------ ------ ------ ----- ------ ----- Total 71 14,513 58 11,639 11 2,422 2 452 ====== ====== ====== ====== ====== ===== ====== =====
The Company's license agreements with the national hotel franchises typically authorize the operation of a hotel under the licensed name, at a specific location or within a specific area, and require that the hotel be operated in accordance with standards specified by the licensor. The license agreements also permit the Company to utilize the licensor's reservation system. Generally, the license agreements require the Company to pay a royalty fee, an advertising/marketing fee, a fee for the use of the licensor's nationwide reservation system and certain ancillary charges. Royalty fees under the Company's various license 4 6 agreements generally range from 3% to 5% of gross room revenues, while advertising/marketing fees provided for in the agreements generally range from 1% to 2% of gross room revenues and reservation system fees generally are 1% of gross room revenues. The license agreements are subject to cancellation in the event of a default, including the failure to operate the hotel in accordance with the quality standards and specifications of the licensor. The license agreements generally have an original ten year term, although certain license agreements provide for original 15 and 20 year terms. The majority of the Company's license agreements have five to ten years remaining on the term. The licensor may require the Company to upgrade its facilities at any time to comply with the licensor's then current standards. The licensee may apply for a license renewal as existing licenses expire. In connection with license renewals, the licensor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facility or the licensor may elect not to renew the license. It is the Company's policy to review individual property franchise affiliations at the time of property acquisition and, thereafter, on a regular basis. These reviews may result in changes in such affiliations. MANAGEMENT AGREEMENTS At December 31, 1997, the Company managed two hotels for third parties. All hotels managed for third parties are done so in accordance with written management agreements. These management agreements provide that the Company be paid a base fee calculated as a percentage of gross revenues, and generally provide for an accounting services fee and an incentive management fee. The incentive fees are generally a percentage of gross operating profits exceeding negotiated amounts. All operating and other expenses are paid by the owner. The management agreements provide for original terms of from one to five years. Fees payable to the Company under the management agreements range from 1.5% to 5% of gross sales, and accounting fees range from $1,000 to $2,300 per month. One of the Company's hotels, the Westin William Penn Hotel located in Pittsburgh, Pennsylvania, is managed by an unaffiliated third party. The terms of this management agreement provide for the manager to receive the greater of a base fee of 3% of gross revenues or an incentive fee based on profits available for debt service. The agreement also provides that it is the Company's responsibility to make funds available for capital improvements. HOTEL OPERATIONS Each of the hotels owned or managed by the Company has its own on-site management and staff which are employed at the hotel level. These employees are, in turn, supervised by regional managers and the Company's senior management. The Company also has centralized corporate departments which support the on-site management in the following areas: accounting and finance, payroll, data processing and management information services, interior design, purchasing, food and beverage services, human resources, recruiting and training, corporate sales and marketing, legal, advertising, insurance and telecommunications. 5 7 The Company seeks to attract conventions, business meetings and other large groups to the Company's hotels. To this end, the Company maintains corporate sales and marketing departments, which, together with the regional managers assist the individual hotels in the solicitation, organization and planning of major guest functions. EXECUTIVE OFFICERS The Company believes it has a strong management team which is capable of leading the Company as it pursues its business strategy. Information regarding the executive officers of Servico follows: David Buddemeyer has been the Chairman of the Board of Servico since August 1997, its Chief Executive Officer since December 1995, a director since April 1994 and its President since May 1993. Mr. Buddemeyer served as the Chief Operating Officer of the Company from May 1993 to December 1995 and its Executive Vice President from June 1990 to May 1993. Prior to such time, from 1987 to June 1990, he served as Vice President-Operations of Prime Motor Inns, Inc., a hotel management company. Karyn Marasco has been Executive Vice President and Chief Operating Officer since May 1997. Prior to such time, Ms. Marasco was affiliated with Westin Hotels & Resorts for 18 years. Most recently, Ms. Marasco served Westin as Area Managing Director, based in Chicago. Charles M. Diaz has been Vice President-Administration and Secretary of Servico since December 1997. Mr. Diaz joined the Company in March 1993 and has held positions in the construction and operations areas of the Company. Warren M. Knight has been Vice President-Finance of Servico and its Chief Financial Officer since December 1991. Prior to such time, from March 1988 to November 1991, Mr. Knight served as Director of Finance for W.A. Taylor & Co., an importer of distilled spirits into the United States. Peter J. Walz has been Vice President-Acquisitions of Servico since February 1996. Prior to such time, from December 1994 to January 1996, he was a consultant to the Company. From October 1993 to November 1994, Mr. Walz was an executive officer of Hospitality Investment Trust, Inc., a development stage lodging real estate investment trust. Prior to such time, from April 1987 to September 1993, Mr. Walz was Executive Vice President of CMS Development, Inc., a developer of office buildings, condominiums and hotels. FINANCING ARRANGEMENTS Substantially all of the Company's hotels are subject to mortgage financing, which at December 31, 1997, totaled approximately $319.3 million. Approximately $164.4 million of the mortgage financing collateralized by the Company's hotels, and entered into by the various subsidiaries, is guaranteed by Servico, Inc. Servico, Inc.'s guarantees of mortgage financing generally provide for direct recourse by the 6 8 lender against Servico, Inc., without requiring the lender to seek recourse against either the applicable subsidiary or the hotel property securing the mortgage financing. As a consequence, if payments under mortgage financing guaranteed by Servico, Inc. are not timely made, Servico, Inc. may be required to make payments in accordance with its guarantees. COMPETITION AND SEASONALITY The hotel business is highly competitive. The demand for accommodations and the resulting cash flow vary seasonally. The off-season tends to be the winter months for properties located in colder weather climates and the summer months for properties located in warmer weather climates. Levels of demand are dependent upon many factors including general and local economic conditions and changes in levels of tourism and business-related travel. The Company's hotels depend upon both commercial and tourist travelers for revenues. Generally, the Company's hotels operate in areas that contain numerous other competitive lodging facilities, including hotels associated with franchisors which may have more extensive reservation networks than those which may be available to the Company. The Company competes with other facilities on various bases, including room prices, quality, service, location and amenities customarily offered to the traveling public. EMPLOYEES At December 31, 1997, the Company had 4,861 full time and 2,087 part time employees. There are 85 full time employees and 2 part time employees of the Company engaged in administrative and executive activities and the balance of the Company's employees manage, operate and maintain the Company's properties. At December 31, 1997, 601 of the Company's full and part time employees located at eight hotels were covered by collective bargaining agreements. Management considers its relations with its employees to be satisfactory. INSURANCE The Company maintains insurance covering liabilities for personal injuries and property damage. The Company also maintains, among other types of insurance coverage, real and personal property insurance, directors and officers liability insurance, liquor liability insurance, workers' compensation insurance, travel accident insurance for certain of its employees, fiduciary liability insurance and business automobile insurance. The Company believes it maintains sufficient insurance coverage for the operation of its business. REGULATION The Company's hotels are subject to state and local regulations with respect to the sale of alcoholic beverages, and the Company must obtain and maintain various licenses and permits. All such licenses and permits must be periodically renewed and may be revoked or suspended for cause at any time. Certain of these licenses and permits are material to the Company's business and the loss of such licenses could have 7 9 a material adverse effect on the Company's financial condition and results of operations. The Company is not aware of any reason why it should not be in a position to maintain its licenses. The Company is also subject in certain states to dramshop statutes, which may give an injured person the right to recover damages from any establishment which wrongfully served alcoholic beverages to the person who, while intoxicated, caused the injury. The Company believes that its insurance coverage with respect to any such liquor liability is adequate. The Company is subject to certain federal and state labor laws and regulations such as minimum wage requirements, regulations relating to working conditions, laws restricting the employment of illegal aliens and the Americans with Disabilities Act. As a provider of restaurant services, the Company is also subject to certain federal, state and local health laws and regulations. The Company believes it complies with such laws and regulations in all material respects. To date, federal and state environmental regulations have not had a material effect on the Company's operations. However, such laws potentially impose cleanup costs for hazardous waste contamination on property owners. If any material hazardous waste contamination problems do exist on any of the Company's properties, the Company may be exposed to liability for the costs associated with the cleanup of such sites. BACKGROUND The Company's predecessor was incorporated in 1956 under the laws of the state of Delaware. From 1956 through 1990, the Company engaged in the ownership and operation of hotels under a series of different ownerships. In September 1990, the Company's predecessor filed for protection under Chapter 11 of the United States Bankruptcy Code. The Company emerged from reorganization proceedings in August 1992 and, in accordance with the Company's Plan of Reorganization, the Company's creditors were issued 7,000,000 shares of the Company's common stock. ITEM 2. PROPERTIES At December 31, 1997, the Company had ownership interests in 69 hotels containing 14,061 rooms. The Company's hotels generally target commercial, convention, association and vacation travelers as customers. Substantially all of the hotels are "full-service" properties with lodging, food, beverage and meeting facilities, and are subject to financing as described in "Item 1. Financing Arrangements". 8 10 Set forth below is information regarding the Company's owned hotels at December 31, 1997:
Wholly Partially Total Owned Owned(a) -------------------- ------------------- --------------------- Number Number Number Number Number Number of of of of of of State Hotels Rooms Hotels Rooms Hotels Rooms ----- ------ ------ ------ ------ ------ ------ Alabama 4 559 4 559 - - Arizona 4 705 4 705 - - California 2 452 2 452 - - Colorado 1 216 1 216 - - Florida 8 1,741 6 1,229 2 512 Georgia 3 564 2 325 1 239 Illinois 1 420 1 420 - - Indiana 3 640 2 432 1 208 Iowa 4 718 3 525 1 193 Kansas 3 541 3 541 - - Louisiana 2 448 1 204 1 244 Maryland 3 524 3 524 - - Massachusetts 1 243 - - 1 243 Michigan 3 602 2 425 1 177 Minnesota 2 274 2 274 - - Nebraska 2 381 2 381 - - New Mexico 1 130 1 130 - - New York 2 536 2 536 - - North Carolina 2 400 2 400 - - Ohio 2 459 - - 2 459 Pennsylvania 8 1,797 7 1,650 1 147 South Carolina 3 537 3 537 - - Texas 4 960 4 960 - - Windsor, Canada 1 214 1 214 - - ------ -------- ------ ------ ------ ------ Total 69 14,061 58 11,639 11 2,422 ====== ======== ====== ====== ====== ======
(a) Partially owned hotels are owned by partnerships of which Company subsidiaries, in most instances, are the general partner. The Company's partially owned hotels consist of 30% ownership of one hotel containing 240 rooms, 50% ownership of four hotels containing 903 rooms and 51% ownership of six hotels containing 1,279 rooms. Six of the Company's hotels are located on land subject to long-term leases, and two are subject to leases covering the land and improvements. Generally, the leases are for terms in excess of the depreciable lives of the improvements or contain a purchase option and provide for fixed rents. In certain instances, additional rents, based on a percentage of revenue or cash flow, may be payable. The leases generally require the Company to pay the cost of repairs, insurance and real estate taxes. 9 11 ITEM 3. LEGAL PROCEEDINGS The Company is a party to legal proceedings arising in the ordinary course of its business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended December 31, 1997, no matter was submitted to a vote of the Company's shareholders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Servico's common stock is listed on the New York Stock Exchange and its trading symbol is SER. Prior to June 19, 1997, its common stock was listed on the American Stock Exchange. The following table sets forth the high and low sales prices for Servico's common stock on the American and New York Stock Exchanges, as appropriate, on a quarterly basis for the past two years. 1997 1996 ---------------- ---------------- High Low High Low ---- --- ---- --- First Quarter 20 1/2 16 13 7/8 10 1/2 Second Quarter 17 5/8 13 3/4 16 1/2 11 3/4 Third Quarter 18 3/8 14 1/4 17 13 1/2 Fourth Quarter 19 14 17 1/4 14 1/2 As of March 25, 1998, there were 2,995 shareholders of record of Servico's common stock. The Company has not paid any cash dividends since its reorganization and has no current plans to initiate the payment of dividends. The Company currently anticipates that it will retain any future earnings for use in its business. The Board of Directors of the Company will determine future dividend policies based on the Company's financial condition, profitability, cash flow, capital requirements and business outlook, among other factors. There are no restrictions on the Company's ability to pay dividends. 10 12 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected financial data derived from the Company's historical financial statements for the years ended December 31, 1993 through 1997. This financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included in this Form 10-K.
1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT SHARE DATA) Revenues $ 276,657 $ 239,526 $ 178,480 $ 149,683 $ 128,998 Income before non-recurring items, net of taxes 12,570 5,398 4,264 2,588 710 Non-recurring items, net of taxes(a) -- 3,150 (356) 193 1,067 Income before extraordinary items, net of taxes 12,570 8,548 3,909 2,781 1,777 Extraordinary items, net of taxes (3,751) (348) -- 1,436 -- Net income 8,819 8,200 3,909 4,217 1,777 EBITDA (b) 69,559 57,915 36,894 26,376 19,697 Earnings per common share (c): Income before non-recurring items, net of taxes $ .83 $ .58 $ .49 $ .33 $ .10 Income before extraordinary items, net of taxes $ .83 $ .92 $ .45 $ .36 $ .25 Net income $ .58 $ .88 $ .45 $ .54 $ .25 Earnings per common share-assuming dilution: Income before non-recurring items, net of taxes $ .80 $ .55 $ .46 $ .31 $ .10 Income before extraordinary items, net of taxes $ .80 $ .88 $ .42 $ .33 $ .25 Net incom $ .56 $ .84 $ .42 $ .51 $ .25 Basic weighted average shares 15,183,258 9,295,358 8,651,444 7,826,945 7,060,721 Diluted weighted average shares 15,639,719 9,751,139 9,318,670 8,334,520 7,130,726 Cash dividends per common share -- -- -- -- -- End of period: Total assets $ 627,651 $ 439,786 $ 324,202 $ 228,900 $ 191,270 Long-term obligations 323,320 284,880 210,242 143,830 114,841 Total stockholders' equity 239,535 74,738 62,820 46,740 35,008 (a) Non-recurring items, net of taxes, are as follows: Gain on litigation settlement -- 3,653 -- -- -- Other non-recurring income (expense) -- (503) (356) 193 -- Gain on recovery of investments -- -- -- -- 1,067 (b) EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values. EBITDA is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. (c) All prior-period earnings per share amounts have been restated to conform to the Financial Accounting Standards Board Statement No. 128 "Earnings per Share".
11 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Management believes that results of operations in the hotel industry are best explained by four key performance measures: occupancy levels, average daily rate, RevPAR and EBITDA margins. These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and, in the case of occupancy levels, changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most Company hotels experience lower occupancy levels in the fall and winter (November through February) which may result in lower revenues, lower net income and less cash flow during these months. The Company's business strategy includes the acquisition of underperforming hotels and the implementation of the Company's operational initiatives and repositioning and renovation programs to achieve revenue and margin improvements. Such initiatives typically require a twelve to thirty-six month period before newly acquired underperforming hotels are repositioned and stabilized. During this period, the revenues and earnings of these hotels may be adversely affected and may negatively impact consolidated RevPAR, average daily rate, and occupancy rate performance as well as consolidated earnings margins. During 1996 and 1997, the Company purchased 23 hotels and acquired 100% ownership in three hotels owned by partnerships in which the Company previously had majority ownership. The average purchase price of the 23 hotels was $39,905 per room and the Company expects to spend approximately $8,500 per room in renovations and capital assets for a total cost per room of $48,405. The Company believes this cost per room is significantly below replacement cost, which the Company estimates to be between $75,000 and $90,000 per room for new construction of hotels with similar facilities in the respective markets. The Company's operating results were materially impacted by these acquisition and renovations activities. Accordingly, in order to better illustrate underlying trends of the Company's core hotel base, the Company tracks the performance of both Stabilized Hotels and Reposition Hotels. The Stabilized Hotels currently include all hotels which were acquired by the Company through 1994 and 17 of the hotels acquired during 1995 and 1996 which, based on management's determination, have achieved normalized operations. The Reposition Hotels currently include seven of the hotels acquired during 1995 and 1996 and the 12 hotels acquired during 1997 (the "1997 Acquisitions"), all of which are still the subject of management's post acquisition repositioning and renovation initiatives. Ten of the hotels acquired during 1997 were acquired during the last quarter; therefore, the performance measures for the Reposition Hotels are not comparable to prior periods. The discussion of results of operations, income taxes and liquidity and capital resources that follows is derived from the Company's Audited Consolidated Financial Statements set forth in "Item 8. Financial Statements and Supplementary Data" included in this Form 10-K and should be read in conjunction with such financial statements and notes thereto. 12 14 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 ("1997") AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 ("1996") At December 31, 1997, the Company owned 68 hotels, managed two hotels for third party owners and had a minority investment in one hotel compared with 56 hotels owned, four managed for third party owners and a minority investment in one hotel at December 31, 1996. Occupancy and average daily rate for owned hotels for 1997 was 66.7% and $71.91, respectively, compared with 66.0% and $68.01, respectively, for 1996. RevPAR for the Stabilized Hotels increased 6.4% during 1997 to $50.71 from $47.68 during 1996. The occupancy level and average daily rate for the Stabilized Hotels during 1997 was 69.0% and $73.49 respectively, compared with 67.4% and $70.74 respectively for 1996. The increase in occupancy and average daily rate for the Stabilized Hotels during 1997 is attributable to successful yield management and marketing strategies primarily in those hotels that have recently completed major renovations. RevPAR, occupancy and average daily rate for the Reposition Hotels during 1997 were $39.52, 59.7% and $66.20 respectively. The Company is currently implementing new marketing strategies and operational improvements at all of the Reposition Hotels and expects to complete significant renovations at many of these hotels during 1998. In addition, the Company is currently negotiating to obtain new franchise affiliations at certain of the properties. Revenues are comprised of room, food and beverage and other revenues. Room revenues are derived from guest room rentals, while food and beverage revenues primarily include sales from the Company's hotel restaurants, room service and hotel catering. Other revenues include charges for guests' long-distance telephone service, laundry service, use of meeting facilities and fees earned by the Company for services rendered in conjunction with managed properties. Revenues for the Company were $276.7 million for 1997, a 15.5% increase over revenues of $239.5 million for 1996. Of this $37.2 million increase in revenues, approximately $9.2 million was attributable to the Stabilized Hotels with the remaining $28 million increase attributable to the Reposition Hotels with the 1997 Acquisitions contributing approximately $13.4 million. Operating expenses are comprised of direct, general and administrative, other hotel operating costs and depreciation and amortization. Direct expenses, including both rooms and food and beverage operations, reflect expenses directly related to hotel operations. General and administrative expenses represent corporate salaries and other corporate operating expenses. Other expenses include primarily property level expenses related to general operations such as advertising, utilities, repairs and maintenance and other property administrative costs. Direct operating expenses for the Company were $110.5 million for 1997 and $96.4 million for 1996. Of the $14.1 million increase, $13.1 million is directly attributable to the Reposition Hotels with approximately $5.9 million relating to 1997 Acquisitions. The direct operating expenses for the Stabilized Hotels were $87.3 million (41.7% of related direct revenues) for 1997 as compared to $86.2 million (42.9% of related direct revenues) for 1996. The decrease in operating expenses as a percentage of revenues was a result of the combined effect of strong revenue growth and continued emphasis on cost controls. Other operating expenses for the Company were $88 million for 1997 and $77.2 million for 1996. This increase of $10.8 million was attributable to the Reposition Hotels. Depreciation and amortization expense for the Company was $23 million for 1997 and $18.7 million for 1996. Included in 13 15 this $4.3 million increase was $2.7 million associated with the Reposition Hotels and the remaining increase was related to equipment purchases and improvements made at the Stabilized Hotels. As a result of the above, income from operations was $46.1 million for 1997 as compared to $37.9 million for 1996. (Included in 1996 was a non-recurring charge of $.8 million relating to a severance payment.) Interest expense, net of interest income, was $24.2 million for 1997, a $3.6 million decrease from the $27.8 million for 1996. The decrease was offset in part by a $1.2 million increase relating to the 1997 Acquisitions. The decrease was primarily a result of a reduction in the level of debt and effective interest rate in connection with certain debt which was repaid with the proceeds of the common stock offering as more fully discussed in Liquidity and Capital Resources. Included in other income for 1996 was a non-recurring $3.6 million gain on litigation settlement (net of expenses) in connection with a lawsuit brought on behalf of the Company against a bank group and law firm based on alleged breaches of their duties to the Company. Minority interests in net income of consolidated partnerships were approximately $1 million for 1997 and $2.1 million for 1996. Of this $1.1 million decrease, $.9 million related to three hotels in which the Company increased its ownership from 51% to 100% during 1997. During 1997 the Company repaid, prior to maturity, approximately $128 million in debt, and as a result recorded an extraordinary loss on early extinguishment of debt of approximately $3.8 million (net of income tax benefit of $2.5 million) relating to the write-off of unamortized loan costs associated with the debt. The Company recognized an extraordinary loss on early extinguishment of debt of $.3 million, after taxes in 1996 which related to the refinancing of certain hotels as more fully discussed in Liquidity and Capital Resources. After a provision for income taxes of $8.4 million for 1997 and $3.2 million for 1996, the Company had net income of $8.8 million ($.56 per share) for 1997 and $8.2 million ($.84 per share) for 1996. Without consideration of the non-recurring items discussed above, the Company had recurring income of $12.6 million for 1997 ($.80 per share) and $5.4 million for 1996 ($.55 per share). YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 ("1995") At December 31, 1996, the Company owned 56 hotels, managed 4 hotels for third party owners and had a minority investment in 1 hotel compared with 43 hotels owned, 9 managed for third party owners and 3 minority investments at December 31, 1995. Revenues in 1996 were $239.5 million, a 34.2% increase over 1995's revenues of $178.5 million. Of the $61 million increase, $9.3 million was attributable to the Stabilized Hotels and $51.7 million was attributable to the Reposition Hotels. The increase for the Stabilized Hotels was primarily the result of a 6.1% increase in RevPAR due to successful yield management and marketing strategies as well as the continued improvement in the hospitality industry generally. However, the increase in RevPAR for these hotels was impacted during 1996 by the loss of business associated with hurricane and storm activity in the southeastern United States during July and September. 14 16 Operating expenses before depreciation and amortization were $182.9 million in 1996 (76.4% of revenue) compared with $142.3 million (79.7% of revenue) for 1995. The decrease in operating expenses as a percentage of revenues was a result of the combined effect of strong revenue growth and continued emphasis on cost controls. Depreciation and amortization expense in 1996 was $18.7 million, an increase over 1995 depreciation and amortization expense of $12.4 million. Of this increase, $2.1 and $4.2 million related to capital improvements made at the Stabilized Hotels and the Reposition Hotels, respectively. As a result of the above, income from operations for 1996 was $37.9 million, an increase of 59.2% over 1995 income from operations of $23.8 million. Interest expense (net of interest income) was $27.8 million for 1996, a $10.9 million increase over the $16.9 million of interest expense for 1995. Included in the $10.9 million increase was $7 million of interest expense on mortgages related to the Reposition Hotels. The remaining $3.9 million increase for the Stabilized Hotels included a $1.7 million expense associated with the amortization of certain deferred loan costs related to a $123.2 million refinancing (See Note 4 of the Notes to Consolidated Financial Statements), with the balance related to new borrowings. Minority interests in net income of consolidated partnerships was $2.1 million for 1996 and $.6 million for 1995. Of this $1.5 million increase, $1.2 million related to nine of the Reposition Hotels which were acquired in partnership with third parties. Other income for 1996 includes a $3.6 million net settlement of a lawsuit received by the Company as more fully discussed in Note 10 of the Notes to Consolidated Financial Statements. The Company recognized an extraordinary charge of $.3 million, after taxes, in 1996 which related to early extinguishment of debt associated with the refinancing of certain hotels as more fully discussed under Liquidity and Capital Resources. After a provision for income taxes of $3.2 million and a loss on early extinguishment of debt of $.3 million, net of taxes, for 1996 and a provision for income taxes of $2.6 million for 1995, the Company had net income of $8.2 million ($.84 per share) for 1996 and $3.9 million ($.42 per share) for 1995. Without consideration of the non-recurring and extraordinary items, the Company had net income of $5.4 million ($.55 per share) for 1996 and $4.3 million ($.46 per share) for 1995. INCOME TAXES As of December 31, 1997, the Company had a net operating loss carryforward of approximately $22.1 million for federal income tax purposes. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are existing cash balances and cash flow from operations. Net cash provided by operating activities for 1997 was $42 million as compared to $31 million for 1996. The Company had earnings before interest, taxes, depreciation and amortization ("EBITDA") for 1997 of $69.6 million, a 20.2% increase over the $57.9 million for 1996. EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values, although EBITDA 15 17 is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. At December 31, 1997, the Company had working capital of $1.3 million as compared to a working capital deficit of $14.2 million at December 31, 1996. Included in the working capital deficit for 1996 was $15.3 million of mortgage notes payable which were due to mature within twelve months. The Company refinanced these mortgage notes before their due dates. The Company's ratio of current assets to current liabilities was 1:1 at December 31, 1997 and .7:1 at December 31, 1996 (1:1 at December 1996 without consideration of the mortgages due to mature in 1997). At December 31, 1997, the Company's long-term obligations were $323.3 million compared with $284.9 million at December 31, 1996. In June 1997 Servico completed a secondary offering of 10 million shares of common stock at $14.50 per share. An additional 1.5 million shares were issued in July 1997 upon exercise by the underwriter of the over-allotment option. These stock sales resulted in net proceeds to Servico of $156 million which were used to repay $128 million of debt, to purchase the minority interests in three majority owned hotels for $11.8 million and to provide working capital. Certain of the Company's hotels are operated under license agreements that require the Company to make capital improvements in accordance with a specified time schedule. Additionally, in connection with the refinancing and acquisition of hotels, the Company has agreed to make certain capital improvements and, as of December 31, 1997, has approximately $29.8 million escrowed for such improvements. The Company estimates its remaining obligations for all of such commitments to be approximately $32 million, of which approximately $29 million is expected to be spent during 1998, and the balance is expected to be spent during 1999. The Company may require additional financing to continue its growth strategy. There is no assurance that such financing will be available in amounts required or on terms satisfactory to the Company and the Company does not currently have any lines of credit. The Company's financial position may, in the future, be strengthened through an increase in revenues, the refinancing of its properties or capital from equity or debt markets. There is no assurance the Company will be successful in these efforts. INFLATION The rate of inflation has not had a material effect on the Company's revenues or costs and expenses in the three most recent fiscal years, and it is not anticipated that inflation will have a material effect on the Company in the near term. YEAR 2000 MATTERS The Year 2000 Issue is the result of certain computer programs being written using two digits rather than four to define the applicable year. Certain of the Company's computer programs may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in miscalculations causing disruptions of operations, including a temporary inability to process transactions. 16 18 In 1995, the Company initiated the updating of its existing accounting software to be year 2000 compliant. Management has determined that the year 2000 Issue will not pose significant operational problems for its computer systems. As a result, all costs associated with this conversion, estimated to be less than $150,000, are being expensed as incurred. The Company has initiated formal communications with its significant suppliers to determine the Company's vulnerability to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of the Company's suppliers will be timely converted and would not have an adverse effect on the Company. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company anticipates completing the Year 2000 project within one year but not later than September 30, 1999, which is prior to any anticipated impact on its operating systems. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. FORWARD-LOOKING STATEMENTS Statements in this Form 10-K which express "belief", "anticipation" or "expectation", as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Moreover, there are important factors which include, but are not limited to, general and local economic conditions, risks relating to the operation and acquisition of hotels, government legislation and regulation, changes in interest rates, the impact of rapid growth, the availability of capital to finance growth, the historical cyclicality of the lodging industry and other factors described in Part I of this Form 10-K and other Servico, Inc. filings with the United States Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. Actual results could differ materially from these forward- looking statements. In light of the risks and uncertainties, there is no assurance that the forward-looking statements contained in this Form 10-K will in fact prove correct or occur. The Company does not undertake any obligation to publicly release the results of any revisions to these forward-looking statements to reflect future events or circumstances. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 for a list of the Servico, Inc. Consolidated Financial Statements and Schedules filed as part of this report. 17 19 SUPPLEMENTARY INFORMATION-QUARTERLY RESULTS OF OPERATIONS. The following table summarizes the unaudited quarterly financial data (IN THOUSANDS, EXCEPT SHARE DATA):
First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1997 Revenues $ 62,647 $ 71,176 $ 68,591 $ 74,243 Income from operations 8,681 14,927 12,335 10,155 Income before extraordinary item 310 4,143 4,955 3,162 Extraordinary item: Loss on early extinguishment of debt, net of income taxes of $2,500 -- (3,751) -- -- Net income $ 310 $ 392 $ 4,955 $ 3,162 Earnings per share: Income before extraordinary item $ .03 $ .43 $ .24 $ .15 Extraordinary item -- (.39) -- -- Net income $ .03 $ .04 $ .24 $ .15 Earnings per share-assuming dilution (a): Income before extraordinary item $ .03 $ .42 $ .23 $ .15 Extraordinary item -- (.38) -- -- Net income $ .03 $ .04 $ .23 $ .15 YEAR ENDED DECEMBER 31, 1996 Revenues $ 52,599 $ 63,300 $ 61,503 $ 62,124 Income from operations 6,742 12,770 10,184 8,245 Income before extraordinary item 2,236 3,250 1,366 1,696 Extraordinary item: Loss on extinguishment of debt, net of income taxes of $134 in the second quarter and $98 in the fourth quarter, respectively -- (202) -- (146) Net income $ 2,236 $ 3,048 $ 1,366 $ 1,550 Earnings per share: Income before extraordinary item $ .25 $ .35 $ .15 $ .18 Extraordinary item -- (.02) -- (.02) Net income $ .25 $ .33 $ .15 $ .16 Earnings per share-assuming dilution (a): Income before extraordinary item $ .23 $ .33 $ .14 $ .17 Extraordinary item -- (.02) -- (.01) Net income $ .23 $ .31 $ .14 $ .16
(a) All prior-period earnings per share amounts have been restated to conform to the Financial Accounting Standards Board Statement No. 128 "Earnings per share". 18 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The table below sets forth the names and ages of the directors and the executive officers of Servico as well as the positions and offices held by such persons. A summary of the background and experience of each of these individuals is set forth after the table.
NAME AGE POSITION WITH SERVICO ---- --- --------------------- DIRECTOR WHOSE TERM EXPIRES IN 1998: Michael A. Leven 60 Director DIRECTORS WHOSE TERMS EXPIRE IN 1999: David Buddemeyer 40 Chairman of the Board, President and Chief Executive Officer Peter R. Tyson 51 Director Richard H. Weiner 48 Director DIRECTOR WHOSE TERM EXPIRES IN 2000: Joseph C. Calabro 46 Director EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS: Karyn Marasco 40 Executive Vice President and Chief Operating Officer Charles M. Diaz 29 Vice President-Administration and Secretary Warren M. Knight 51 Vice President-Finance and Chief Financial Officer Peter J. Walz 54 Vice President-Acquisitions
DAVID BUDDEMEYER has been the Chairman of the Board of Servico since August 1997, its Chief Executive Officer since December 1995, a director since April 1994 and its President since May 1993. Mr. Buddemeyer served as the Chief Operating Officer of the Company from May 1993 to December 1995 and its Executive Vice President from June 1990 to May 1993. Prior to such time, from 1987 to June 1990, he served as Vice President-Operations of Prime Motor Inns, Inc., a hotel management company. 19 21 JOSEPH C. CALABRO has been a director of Servico since August 1992. Mr. Calabro has been a principal of Joseph C. Calabro, C.P.A., a Devon, Pennsylvania accounting firm, since 1982. Mr. Calabro has also been an officer and director of Bibsy Corporation, which previously owned and operated a Holiday Inn hotel in Bensalem, Pennsylvania, since 1971. MICHAEL A. LEVEN has been a director of Servico since August 1997. Mr. Leven is President and Chief Executive Officer of US Franchise Systems, Inc. Prior to joining US Franchise Systems, Inc., Mr. Leven was President and Chief Operating Officer of Holiday Inn Worldwide. PETER R. TYSON has been a director of Servico since August 1992. From December 1990 to the present, Mr. Tyson has been President of Peter R. Tyson & Associates, Inc., a firm offering consulting services to clients in the hospitality industry. Prior to forming Peter R. Tyson & Associates, Inc., Mr. Tyson was the partner-in-charge of the hospitality industry consulting practice in the Philadelphia office of the accounting and consulting firm of Laventhol & Horwath, with which he was associated for 20 years. RICHARD H. WEINER has been a director of Servico since August 1992. Mr. Weiner is a senior partner in the Albany, New York law firm of Cooper, Erving, Savage, Nolan & Heller, where he has practiced law since 1975. KARYN MARASCO has been Executive Vice President and Chief Operating Officer since May 1997. Prior to such time, Ms. Marasco was affiliated with Westin Hotels and Resorts for 18 years. Most recently, Ms. Marasco served Westin as Area Managing Director, based in Chicago. CHARLES M. DIAZ has been Vice President-Administration and Secretary of Servico since December 1997. Mr. Diaz joined the Company in March 1993 and has held positions in the construction and operations areas of the Company. WARREN M. KNIGHT has been Vice President-Finance and Chief Financial Officer of Servico since December 1991. Prior to such time, from March 1988 to November 1991, Mr. Knight served as Director of Finance for W.A. Taylor & Co., an importer of distilled spirits into the United States. PETER J. WALZ has been Vice President-Acquisitions of Servico since February 1996. Prior to such time, from December 1994 to January 1996, he was a consultant to the Company. From October 1993 to November 1994, Mr. Walz was an executive officer of Hospitality Investment Trust, Inc., a development stage lodging real estate investment trust. Prior to such time, from April 1987 to September 1993, Mr. Walz was Executive Vice President of CMS Development, Inc., a developer of office buildings, condominiums and hotels. DIRECTOR COMPENSATION During 1997, Servico paid non-employee directors an annual retainer of $18,000, as well as a fee per board meeting or board committee meeting of $1,000. Mr. John Adams, who served as Chairman of the Board until his resignation from the Board, received compensation of $58,333 for serving as Chairman from January to August 1997, but received no retainer, meeting or committee fees. Servico also reimbursed directors other than Mr. Adams for expenses associated with attending Board and committee meetings. Under Servico's Stock Option Plan, each non-employee director is automatically granted, on the date such director's term of office commences and each year thereafter on the day following any annual meeting of 20 22 shareholders (as long as such director's term as a director is continuing for the ensuing year), an option to acquire 5,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. All options granted to non-employee directors become exercisable upon grant. In addition, in August 1997 each non-employee director was awarded an option to acquire 20,000 shares of common stock at an exercise price equal to the fair market price on date of grant. Such options became exercisable upon date of grant and were granted outside of the Servico Stock Option plan. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS Servico's Board of Directors held ten meetings during the last fiscal year. No director attended fewer than 75% of the total aggregate number of meetings of the Board of Directors and any committee of the Board of Directors on which such director served during their tenure as a director or committee member. The Board of Directors of Servico currently has three standing committees -- the Audit Committee, the Compensation Committee and the Stock Option Committee. The full Board of Directors currently serves as the Nominating Committee. The principal functions of the Audit Committee are to review Servico's financial statements and management's disclosures, recommend to the Board of Directors the appointment of independent public accountants to be employed by Servico, confer with the independent public accountants concerning the scope of their audit and, on completion of their audit, review the accountants' findings and recommendations, review the adequacy of Servico's systems of internal accounting controls, review areas of possible conflicts of interest and sensitive payments and consider such other matters as the committee deems appropriate. The Audit Committee held two formal meetings during the last fiscal year. The present members of the Audit Committee are Joseph C. Calabro, Peter R. Tyson and Richard H. Weiner. The principal functions of the Compensation Committee are to approve or, in some cases, to recommend to the Board of Directors, remuneration arrangements and compensation plans involving Servico's directors and executive officers, review bonus criteria and bonus recommendations and review compensation of directors. The Compensation Committee held one formal meeting during the last fiscal year. The present members of the Compensation Committee are Joseph C. Calabro, Peter R. Tyson and Richard H. Weiner. The principal function of the Stock Option Committee is to administer the Servico Stock Option Plan. The Stock Option Committee held one formal meeting during the last fiscal year. The present members of the Stock Option Committee are Joseph C. Calabro and Peter R. Tyson. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires Servico's directors, executive officers and 10% shareholders to file reports of ownership and reports of changes in ownership of Servico's Common Stock and other equity securities with the Securities and Exchange Commission and the New York Stock Exchange. Directors, executive officers and 10% shareholders are required to furnish Servico with copies of all Section 16(a) forms they file. Based on a review of the copies of such reports furnished to it, Servico believes that during 1997 Servico's directors, executive officers and 10% shareholders complied with all Section 16(a) filing requirements applicable to them, except with respect to the Form 4s required to be filed with respect to the August 1997 stock option grants to directors which were not timely filed. 21 23 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning compensation paid or accrued by Servico, to or on behalf of the Chief Executive Officer and to each of the Company's four most highly compensated executive officers other than the Chief Executive Officer during the year ended December 31, 1997. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM-COMPENSATION ------------------------------------- ----------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS(5) COMPENSATION($)(6) --------------------------- ---- --------- -------- -------------- --------------- ----------------- David Buddemeyer, 1997 385,000 120,000 -- 400,000 2,948 Chairman of the Board, President 1996 350,000 96,745 -- 13,500 4,726 and Chief Executive Officer 1995 275,000 70,905 -- 5,000 4,733 Karyn Marasco, 1997 137,269 60,000 -- 125,000 -- Executive Vice President and Chief Operating Officer(1) Warren M. Knight, 1997 188,000 60,000 -- 75,000 3,556 Vice President-Finance and 1996 170,000 46,990 -- 13,500 4,844 Chief Financial Officer 1995 150,000 38,675 -- 5,000 3,921 Robert D. Ruffin(2) 1997 168,000 -- -- -- 3,712 1996 160,000 44,227 -- 13,500 5,192 1995 150,000 38,675 -- 5,000 4,279 Peter J. Walz 1997 150,000 -- 174,700(4) 100,000 3,793 Vice President-Acquisitions(3) 1996 122,596 -- 139,438(4) 15,000 2,375 1995 -- -- 348,730(4) -- --
(1) Ms. Marasco's employment with Servico began in May 1997. (2) Mr. Ruffin served as Vice President-Administration and Secretary until his resignation on December 31, 1997. (3) Mr. Walz's employment with Servico began in January 1996. (4) Represents commission payments made to Mr. Walz. (5) Represents the number of shares of Common Stock underlying the options/SARs. (6) Each item included in this column represents a contribution made by Servico under its 401(k) Plan on behalf of the named executive based on such executive's annual elective pre-tax deferred contribution (included under Salary) to such plan. 22 24 STOCK OPTION PLAN The Company's Stock Option Plan provides for the issuance of incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986 (the "Internal Revenue Code") and non-qualified stock options not intended to meet the requirements of Section 422A of the Internal Revenue Code. The plan is administered by a committee of the Board of Directors which, subject to the terms of the plan, determines to whom grants are made and the vesting, timing and amounts of such grants. The following table sets forth information concerning stock option grants made during 1997 to the executive officers named in the "Summary Compensation Table", including the potential realizable value of each grant assuming that the market value of the Common Stock appreciates from the date of grant to the expiration of the option at annualized rates of 5% and 10%, in each case compounded annually over the term of the option. These assumed rates of appreciation have been specified by the Securities and Exchange Commission for illustration purposes only and are not intended to predict future prices of the Common Stock. The actual future value of the options will depend on the market value of the Common Stock. STOCK OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE AT NUMBER OF ---------------- ASSUMED ANNUAL SECURITIES PERCENT OF TOTAL RATES OF STOCK UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION OPTIONS/SARS GRANTED TO PRICE EXPIRATION FOR OPTION GRANTED (1) EMPLOYEES (%) ($/SH) DATE 5% ($) 10% ($) ----------- ------------- ------ --------- ------ ------- David Buddemeyer 400,000 35.27% $ 16.75 8/27/2007 4,213,594 10,678,074 Karyn Marasco 50,000 4.41% $ 15.25 5/06/2007 479,532 1,215,229 Karyn Marasco 75,000 6.61% $ 16.75 8/27/2007 790,049 2,002,139 Warren M. Knight 75,000 6.61% $ 16.75 8/27/2007 790,049 2,002,139 Peter J. Walz 100,000 8.82% $ 16.75 8/27/2007 1,053,398 2,669,519
(1) Approximately 410,000 of such options are subject to approval by the Company's shareholders of an increase in the number of shares available for grant under the Servico Stock Option Plan. The following table sets forth certain summary information concerning exercised and unexercised options to purchase Servico's Common Stock as of December 31, 1997, under Servico's Stock Option Plan held by the executive officers named in the "Summary Compensation Table". 23 25 STOCK OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS HELD AT OPTIONS/SARS(2) FISCAL YEAR-END(#) AT FISCAL YEAR-END ($) NAME AND POSITION ACQUIRED ON VALUE -------------------------- ----------------------------- DURING 1997 FISCAL YEAR EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- ------------ ------------ ----------- ------------- ----------- ------------- David Buddemeyer, -- -- 189,700 333,800 1,393,163 128,275 Chairman of the Board President and Chief Executive Officer Karyn Marasco -- -- 25,000 100,000 18,125 72,500 Executive Vice President and Chief Operating Officer Warren M. Knight -- -- 112,400 73,800 1,224,100 95,775 Vice President-Finance and Chief Financial Officer Robert D. Ruffin(1) -- -- 60,700 12,800 746,788 80,900 Peter J. Walz Vice President-Acquisitions -- -- 23,000 92,000 20,875 83,500
(1) Mr. Ruffin served as Vice President-Administration and Secretary until his resignation on December 31, 1997. (2) The value of unexercised in-the-money options/SARs represents the number of options/SARs held at year-end 1997 multiplied by the difference between the exercise price and $16.875, the closing price of Servico's Common Stock at year-end 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding ownership of Common Stock as of March 25, 1998, by (i) each person known to Servico to be the beneficial owner of more than 5% of the issued and outstanding Common Stock as of March 25, 1998, (ii) each of the members of Servico's Board of Directors, (iii) each of Servico's current executive officers named in the "Summary Compensation Table" under "Executive Compensation" above, and (iv) all directors and executive officers of Servico as a group. All shares were owned directly with sole voting and investment power unless otherwise indicated. 24 26
SHARES OF PERCENT OF NAME AND ADDRESS COMMON STOCK COMMON STOCK OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1) ------------------- ------------------ --------------------- BENEFICIAL OWNERS OF 5% OR MORE OF OUTSTANDING COMMON STOCK: Heitman/PRA Securities Advisors, Inc. 1,307,000(2) 6.1% 180 North LaSalle Street, Suite 3600 Chicago, IL 60601 Eagle Asset Management 1,301,815(3) 6.1% 880 Carillon Parkway St. Petersburg, FL 33716 Prudential Insurance Company of America 1,111,000(4) 5.2% 751 Broad Street Newark, NJ 07102-3777 DIRECTORS: David Buddemeyer 202,219(5) * 1601 Belvedere Road West Palm Beach, FL 33406 Joseph C. Calabro 261,100(6) 1.2% 868 Lancaster Avenue Devon, PA 19333 Michael A. Leven 25,000(7) * 13 Corporate Square Suite 250 Atlanta, GA 30329 Peter R. Tyson 55,600(8) * 135 E. State Street Kennett Square, PA 19348 Richard H. Weiner 55,100(8) * 39 N. Pearl St. Albany, NY 12207 NON-DIRECTOR EXECUTIVE OFFICERS: Warren M. Knight 116,111(9) * 1601 Belvedere Road West Palm Beach, FL 33406 Karyn Marasco 22,500(10) * 1601 Belvedere Road West Palm Beach, FL 33406 Peter J. Walz 25,500(11) * 1601 Belvedere Road West Palm Beach, FL 33406 All directors and executive officers as a 769,365(12) 3.6% group (nine persons) *Represents less than 1%
25 27 (1) Ownership percentages are based on 21,565,795 shares of Common Stock outstanding as of March 25, 1998 and shares of Common Stock subject to outstanding stock options which are exercisable by the named individual or group. (2) Heitman/PRA Securities Advisors, Inc. filed a Schedule 13G dated February 12, 1998, with the Securities and Exchange Commission (the "SEC") reporting ownership of 1,307,000 shares of Common Stock with sole voting power with respect to 1,231,000 shares, sole dispositive power with respect to 1,284,400 and shared dispositive power with respect to 22,600. (3) Eagle Asset Management, Inc. filed a Schedule 13G dated January 31, 1998, with the SEC reporting ownership of 1,301,815 shares of Common Stock with sole voting and dispositive power. (4) The Prudential Insurance Company of America filed a Schedule 13G dated February 10, 1998, with the SEC reporting ownership of 1,111,000 shares of Common Stock with shared voting and dispositive power with respect to 414,600 shares. (5) Includes currently exercisable options to purchase 172,400 shares. (6) Includes currently exercisable options to purchase 55,000 shares. Mr. Calabro has sole voting and dispositive power with respect to 203,100 of such shares and shares voting and dispositive power with respect to 3,000 shares with his wife. (7) Includes currently exercisable options to purchase 25,000 shares. (8) Includes currently exercisable options to purchase 55,000 shares. (9) Includes currently exercisable options to purchase 112,400 shares. (10) Includes currently exercisable options to purchase 22,500 shares. (11) Includes currently exercisable options to purchase 23,500 shares. (12) Includes 526,800 shares of Common Stock which may be acquired pursuant to currently exercisable options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following parties had a direct or indirect material interest in transactions with Servico since the beginning of its most recently completed fiscal year and such transactions are described below. 26 28 ENERGY MANAGEMENT CORPORATION. In April 1994, Servico issued one million shares of its Common Stock to EMC in connection with a merger between wholly owned subsidiaries of Servico and EMC pursuant to that certain Stock Acquisition and Standstill Agreement, as amended, (the "EMC Acquisition Agreement") and the related Agreement and Plan of Merger, each dated April 13, 1994. The sole asset of the EMC subsidiary acquired by Servico was $7 million in cash, which Servico agreed would be utilized for general working capital, capital expenditures, possible acquisitions and other general corporate purposes and not for the redemption of any of Servico's capital stock or for the payment of dividends by Servico. In connection with the transaction Servico agreed, during the term of the EMC Acquisition Agreement, to cause the nomination of one designee of EMC to Servico's Board of Directors. EMC designated Mr. John W. Adams to be its representative. Mr. Adams was appointed to Servico's Board of Directors on April 29, 1994, and was named Chairman of the Board on December 21, 1995. Mr. Adams resigned from the Board in August 1997. Pursuant to the EMC Acquisition Agreement, EMC also agreed to certain standstill provisions generally prohibiting it from acquiring voting securities of Servico with voting rights of 30% or more of the voting rights of all outstanding voting securities of Servico and to provisions which restrict the amount and manner by which it may transfer any Common Stock owned by it. On May 5, 1994, Servico filed with the Securities and Exchange Commission on behalf of EMC, and at EMC's expense, a registration statement on Form S-3, relating to the proposed sale from time to time by EMC of all or any portion of its shares of Common Stock on the New York Stock Exchange. PENGO SECURITIES CORP. In March 1995, Servico issued 800,000 shares of its Common Stock to Pengo, which is affiliated with EMC, for $8 million, or $10 a share, pursuant to that certain Stock Acquisition and Standstill Agreement dated March 23, 1995, as amended, (the "Pengo Acquisition Agreement"). Additionally, in connection with this transaction, an affiliate of Pengo agreed to make an additional $8 million equity investment in partnerships or joint ventures with Servico for the purpose of acquiring hotel properties. Pursuant to the Pengo Acquisition Agreement, Pengo also agreed to standstill provisions substantially identical to those contained in the EMC Acquisition Agreement. Servico also agreed to file with the Securities and Exchange Commission on behalf of Pengo, and at Pengo's expense, a registration statement on Form S-3, relating to the proposed sale from time to time by Pengo of all or any portion of its shares of Common Stock. LIMITED PARTNERSHIPS WITH AFFILIATED ENTITIES. Subsidiaries of Servico (the "Servico Subsidiaries") have entered into partnership agreements in connection with the formation of partnerships for the purpose of owning hotel properties with SOLVation Inc., Spire Realty Group, Worcester Hospitality Company, Inc. and Wolverine Hospitality Company, Inc. (the "EMC/Pengo Affiliates"), all of which are affiliated with either EMC or Pengo, principal shareholders of the Company and with John W. Adams. The partnerships own the following properties with the ownership interests of the Company and the EMC/Pengo Affiliates indicated: 27 29
EMC/PENGO SERVICO AFFILIATES HOTEL INTEREST INTEREST - ----- -------- -------- Holiday Inn, Augusta, Georgia 51% 49% Holiday Inn, Fort Wayne, Indiana 51% 49% Hilton Hotel, Sioux City, Iowa 51% 49% Crowne Plaza, Worcester, Massachusetts 51% 49% Crowne Plaza, Saginaw, Michigan 51% 49% Holiday Inn, Richfield, Ohio 51% 49%
During 1997 the Company purchased all of the minority interests held by the EMC/Pengo affiliates in the three partnerships which owned the Holiday Inn Select, Phoenix, AZ, the Holiday Inn, Manhattan, KS and the Holiday Inn, Lawrence, KS for approximately $11,800,000. Subsidiaries of the Company serve as the General Partner for each of the partnerships. Additionally, Servico receives management fees from the partnerships with respect to each of these hotels. During 1997, such fees were approximately $1,042,000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following are filed as part of this report: (1) (2) FINANCIAL STATEMENTS The financial statements, financial statement schedules and supplementary information listed in the accompanying Index to Financial Statements Covered by Report of Independent Certified Public Accountants. (3) EXHIBITS The exhibits listed in the accompanying Index to Exhibits. (b) Reports on Form 8-K: During the quarter ended December 31, 1997, the Company did not file any reports on Form 8-K. However, a report on Form 8-K was filed on March 26, 1998 relating to an Agreement and Plan of Merger, dated as of March 20, 1998, among Servico, Impac, SHG, Servico Merger-Sub, and Impac Merger-Sub. 28 30 Servico, Inc. and Subsidiaries Index to Financial Statements Covered by Report of Independent Certified Public Accountants [Item 14(a)(1) and (2)] Consolidated Financial Statements Report of Independent Certified Public Accountants................................................F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996......................................F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995................................................................F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995....................................................F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ...............................................................F-6 Notes to Consolidated Financial Statements..........................................................F-8
All schedules have been omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedules or because the information required is included in the consolidated financial statements or notes thereto. F-1 31 Report of Independent Certified Public Accountants The Stockholders and Board of Directors Servico, Inc. We have audited the accompanying consolidated balance sheets of Servico, Inc. and subsidiaries as of December 31, 1997 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, 1997. 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 consolidated financial position of Servico, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP West Palm Beach, Florida February 16, 1998, except for paragraph one of Note 11, as to which the date is March 5, 1998 and for paragraph two of Note 11, as to which the date is March 20, 1998 F-2 32 Servico, Inc. and Subsidiaries Consolidated Balance Sheets
DECEMBER 31, ---------------------- 1997 1996 -------- -------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 15,243 $ 19,473 Accounts receivable, net of allowances 11,023 7,742 Other receivables 930 855 Inventories 4,485 2,796 Deferred income taxes 2,254 2,067 Other current assets 7,969 5,047 -------- -------- Total current assets 41,904 37,980 Property and equipment, net 534,080 364,922 Investment in unconsolidated entities 995 906 Other assets, net 50,672 35,978 -------- ------- $627,651 $439,786 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,543 $ 6,369 Accrued liabilities 27,355 23,100 Current portion of long-term obligations 5,728 22,719 -------- -------- Total current liabilities 40,626 52,188 Long-term obligations, less current portion 323,320 284,880 Deferred income taxes 10,615 8,353 Commitments and contingencies Minority interests 13,555 19,627 Stockholders' equity: Common stock, $.01 par value-25,000,000 shares authorized; 20,974,852 and 9,369,605 shares issued and outstanding at December 31, 1997 and 1996, respectively 210 94 Additional paid-in capital 210,998 55,136 Retained earnings 28,327 19,508 -------- -------- Total stockholders' equity 239,535 74,738 -------- -------- $627,651 $439,786 ======== ========
SEE ACCOMPANYING NOTES. F-3 33 Servico, Inc. and Subsidiaries Consolidated Statements of Income
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Rooms $ 179,956 $ 156,564 $ 113,902 Food and beverage 80,335 68,803 53,499 Other 16,366 14,159 11,079 --------- --------- --------- 276,657 239,526 178,480 Operating expenses: Direct: Rooms 49,608 43,667 32,140 Food and beverage 60,919 52,761 41,474 General and administrative 8,973 9,297 8,977 Other 88,036 77,183 59,727 Depreciation and amortization 23,023 18,677 12,370 ------- ------ ------ 230,559 201,585 154,688 ------- ------- ------- Income from operations 46,098 37,941 23,792 Other income (expenses): Interest income and other 1,720 1,723 1,197 Gain on litigation settlement -- 3,612 -- Interest expense (25,909) (29,443) (17,903) Minority interests (960) (2,060) (572) --------- --------- --------- Income before income taxes and extraordinary item 20,949 11,773 6,514 Provision for income taxes 8,379 3,225 2,605 --------- --------- --------- Income before extraordinary item 12,570 8,548 3,909 Extraordinary item: Loss on extinguishment of indebtedness, net of income tax benefit of $2,500 in 1997 and $232 in 1996 (3,751) (348) -- --------- --------- --------- Net income $ 8,819 $ 8,200 $ 3,909 ========= ========= ========= Earnings per common share: Income before extraordinary item $ .83 $ .92 $ .45 Extraordinary item (.25) (.04) -- --------- --------- --------- Net income per common share $ .58 $ .88 $ .45 ========= ========= ========= Earnings per common share-assuming dilution Income before extraordinary item $ .80 $ .88 $ .42 Extraordinary item (.24) (.04) -- --------- --------- --------- Net income per common share-assuming dilution $ .56 $ .84 $ .42 ========= ========= =========
SEE ACCOMPANYING NOTES. F-4 34 Servico, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
COMMON STOCK ADDITIONAL TOTAL ----------------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ----------- ----------- ----------- ----------- ----------- (In Thousands, Except Share Data) Balance at December 31, 1994 8,110,172 $ 81 $ 39,260 $ 7,399 $ 46,740 Issuance of common stock 830,000 8 8,157 -- 8,165 Shares retired (159,532) (2) 2 -- -- 401(k) Plan contribution 38,829 1 331 -- 332 Exercise of stock options 26,800 -- 107 -- 107 Reduction of valuation allowance -- -- 3,567 -- 3,567 Net income -- -- -- 3,909 3,909 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 8,846,269 88 51,424 11,308 62,820 401(k) Plan contribution 25,536 1 465 -- 466 Exercise of stock options 497,800 5 2,008 -- 2,013 Tax benefit from exercise of stock options -- -- 1,239 -- 1,239 Net income -- -- -- 8,200 8,200 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 9,369,605 94 55,136 19,508 74,738 Issuance of common stock 11,500,000 115 156,085 -- 156,200 401(k) Plan contribution 49,847 -- 282 -- 282 Exercise of stock options 86,600 1 437 -- 438 Tax benefit from exercise of stock options -- -- 175 -- 175 Adjustment from foreign currency translations -- -- (579) -- (579) Purchase of common stock (31,200) -- (538) -- (538) Net income -- -- -- 8,819 8,819 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 20,974,852 $ 210 $ 210,998 $ 28,327 $ 239,535 =========== =========== =========== =========== ===========
SEE ACCOMPANYING NOTES. F-5 35 Servico, Inc. and Subsidiaries Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income $ 8,819 $ 8,200 $ 3,909 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,023 18,677 12,370 Loss on extinguishment of indebtedness 6,251 580 -- Deferred income taxes 2,216 1,252 1,328 Minority interests 960 2,060 572 401(k) Plan contributions 282 548 322 Provision for (recoveries) losses on receivables (69) 27 94 Equity in (profit) loss of unconsolidated entities (107) 63 85 Gain on litigation settlement -- (3,868) -- Gain on recovery of investments -- (134) -- Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivables (2,017) (824) (2,307) Inventories (1,458) (761) (399) Other assets 425 1,875 272 Accounts payable 1,174 200 (403) Accrued liabilities 2,522 3,075 4,824 --------- --------- --------- Net cash provided by operating activities 42,021 30,970 20,667 --------- --------- --------- INVESTING ACTIVITIES Acquisitions of property and equipment (143,406) (70,312) (73,038) Capital improvements, net (48,252) (26,323) (20,417) Purchase of minority interests (11,748) -- -- Net deposits for capital expenditures (17,247) (7,074) (6,105) Purchase of marketable securities (500) -- -- Payments on notes receivable issued to related parties 470 1,200 -- Decrease (increase) investment in unconsolidated entities 17 2,198 (2,118) Notes receivable issued to related parties -- (1,670) -- Net proceeds from litigation settlement -- 3,868 -- Net proceeds from recovery of investments -- 556 -- --------- -------- --------- Net cash used in investing activities (220,666) (97,557) (101,678) --------- -------- ---------
CONTINUED ON THE FOLLOWING PAGE. F-6 36 Servico, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) FINANCING ACTIVITIES Proceeds from issuance of long-term obligations 191,560 166,317 127,141 Proceeds from issuance of common stock 156,638 2,013 8,272 Principal payments of long-term obligations (167,647) (92,216) (59,498) Payments of deferred loan costs (4,652) (6,533) (4,657) (Distributions to) contributions from minority interests (946) 5,078 8,182 Payments for repurchase of common stock (538) -- -- --------- --------- --------- Net cash provided by financing activities 174,415 74,659 79,440 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (4,230) 8,072 (1,571) Cash and cash equivalents at beginning of year 19,473 11,401 12,972 --------- --------- --------- Cash and cash equivalents at end of year $ 15,243 $ 19,473 $ 11,401 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest, net of amount capitalized $ 22,109 $ 23,147 $ 11,935 ========= ========= ========= Income taxes paid, net of refunds $ 1,091 $ 2,531 $ 1,032 ========= ========= =========
SEE ACCOMPANYING NOTES. F-7 37 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Servico, Inc., its wholly owned subsidiaries and consolidated partnerships (collectively, the "Company"), own or manage hotels in 23 states and Canada. At December 31, 1997 and 1996, the Company owned, either wholly or partially, or managed 71 and 61 hotels, respectively. PRINCIPLES OF CONSOLIDATION The financial statements consolidate the accounts of Servico, Inc. ("Servico"), its wholly owned subsidiaries (owning 58 hotels) and partnerships in which Servico exercises control over the partnerships' assets and operations (owning 10 hotels). Servico believes it has control of partnerships when the Company manages and has control of the partnerships' assets and operations, has the ability and authority to enter into financing arrangements on behalf of the entity or to sell the assets of the entity within reasonable business guidelines. An unconsolidated entity (owning 1 hotel) in which the company exercises significant influence over operating and financial policies is accounted for on the equity method. The accounts of 4 hotels which the Company managed for third party owners during all or part of 1997 (2 at December 31, 1997) are not consolidated, however, management fee income earned from these hotels is included in other revenues. All significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories consist primarily of food and beverage, linens, china, tableware and glassware and are valued at the lower of cost (computed on the first-in, first-out method) or market. MINORITY INTERESTS Minority interests represent the minority interests' proportionate share of equity or deficit of partnerships which are accounted for by the Company on a consolidated basis. The Company generally allocates to minority interests their share of any profits or losses in accordance with the provisions of the applicable agreements. However, if the loss applicable to a minority interest exceeds its total investment and advances, such excess is charged to the Company. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Property under capital leases is amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. F-8 38 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT (CONTINUED) The Company capitalizes interest costs incurred during the renovation of capital assets. During the years ended December 31, 1997, 1996 and 1995, the Company capitalized $1,650,000, $644,000 and $632,000 of interest, respectively. Management periodically evaluates the Company's property and equipment to determine if there has been any impairment in the carrying value of the assets in accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of " ("Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. DEFERRED COSTS Deferred franchise, financing, and other deferred costs of $16,371,000 and $18,248,000 at December 31, 1997 and 1996, respectively, are included in other assets, net of accumulated amortization of $2,509,000 and $4,129,000 at December 31, 1997 and 1996, respectively, which is computed using the straight-line method, over the terms of the related franchise, loan or other agreements. The straight-line method of amortizing deferred financing costs approximates the interest method. CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts. The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. In the opinion of management, the carrying value of long-term debt approximates market value as of December 31, 1997 and 1996. F-9 39 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Concentration of credit risk associated with cash and cash equivalents is considered low due to the credit quality of the issuers of the financial instruments held by the Company and due to their short duration to maturity. Accounts receivable are primarily from major credit card companies, airlines and other travel related companies. The Company performs ongoing evaluations of its significant customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. At December 31, 1997 and 1996, these allowances were $300,000 and $305,000, respectively. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE The Company adopted Financial Accounting Standards Board Statement No. 128 "Earnings Per Share" effective with the period ending December 31, 1997. Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the periods and include common stock contributed or to be contributed by the Company to its employees 401(k) Plan (the "401(k)"). Dilutive earnings per common share include the Company's outstanding stock options, if dilutive. STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and, because the exercise price of the Company's employee stock options is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation", net income and earnings per share are not materially different from amounts reported, therefore, no pro forma information has been presented. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred $1,867,000, $1,613,000 and $1,194,000 in advertising costs during 1997, 1996 and 1995, respectively. F-10 40 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 2. PROPERTY AND EQUIPMENT At December 31, 1997 and 1996, property and equipment consisted of the following:
USEFUL LIVES (YEARS) 1997 1996 -------- --------- --------- (IN THOUSANDS) Land -- $ 48,798 $ 32,246 Buildings and improvements 10-40 430,363 304,388 Furnishings and equipment 3-10 99,487 72,762 --------- --------- 578,648 409,396 Less accumulated depreciation and amortization (75,976) (52,955) Construction in progress 31,408 8,481 --------- --------- $ 534,080 $ 364,922 ========= =========
During the year ended December 31, 1997, the Company purchased 12 hotels for an aggregate purchase price of $140,300,000 which were paid for by the delivery of mortgage notes totaling $72,655,000 and cash for the balance. The 12 hotels purchased, containing an aggregate of 3,002 guest rooms, are operated under license agreements with nationally recognized franchisors and are managed by the Company. In addition, the Company increased its ownership interests in three partnerships, owning three hotels, from 51% to 100% for approximately $11,800,000. The minority partners in the above partnerships are affiliates of Energy Management Corporation ("EMC") (see Note 8 for further information on EMC). F-11 41 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. PROPERTY AND EQUIPMENT (CONTINUED) During the year ended December 31, 1996, the Company purchased eight hotels and entered into three partnerships which purchased an additional three hotels. The aggregate purchase price for the eleven hotels was $60,700,000 and was paid for by the delivery of mortgage notes totaling $40,600,000 and cash for the balance, of which approximately $2,000,000 was contributed by the minority partners. In addition, in May 1996, the Company increased its ownership interests in two partnerships, owning two hotels, from 25% to 51% for approximately $3,000,000. As a result of the increase in ownership, the accounts of these two partnerships are included in the Company's consolidated financial statements. The minority partners in all five of the above partnerships are affiliates of EMC. The thirteen hotels combined above, containing an aggregate of 2,479 guest rooms, are operated under license agreements with nationally recognized franchisors and are managed by the Company. Unaudited pro forma results of operations assuming the 12 hotels acquired in 1997 were acquired on January 1, 1996, and the 13 hotels acquired in 1996 were acquired on January 1, 1995, are as follows:
YEARS ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $334,340 $320,127 $221,342 Income before extraordinary item 15,532 9,384 4,708 Net income 11,781 9,036 4,708 Earnings per share: Income before extraordinary item $ 1.02 $ 1.01 $ .54 Net income $ .78 $ .97 $ .54 Earnings per share-assuming dilution: Income before extraordinary item $ .99 $ .96 $ .51 Net income $ .75 $ .93 $ .51 Weighted average shares 15,183 9,295 8,651 Diluted shares 15,640 9,751 9,319
F-12 42 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. ACCRUED LIABILITIES At December 31, 1997 and 1996, accrued liabilities consisted of the following: 1997 1996 ------- ------- (IN THOUSANDS) Salaries and related costs $10,775 $ 9,117 Real estate taxes 4,118 2,500 Interest 1,969 2,335 Advance deposits 1,666 1,842 Sales taxes 2,523 1,781 Other 6,304 5,525 ------- ------- $27,355 $23,100 ======= ======= 4. LONG-TERM OBLIGATIONS At December 31, 1997 and 1996, long-term obligations consisted of the following: 1997 1996 --------- --------- (IN THOUSANDS) Mortgage notes payable with fixed rates ranging from 8.6% to 10.7%, variable rates ranging from Prime (8.5% at December 31, 1997) and LIBOR (5.7% at December 31, 1997) plus 1.8% to 3.5%, payable through 2010 $ 319,286 $ 284,180 Other 9,762 23,419 --------- --------- 329,048 307,599 Less current portion of long-term obligations (5,728) (22,719) --------- --------- $ 323,320 $ 284,880 ========= =========
Substantially, all of the Company's property and equipment are pledged as collateral for long-term obligations of which approximately $164,400,000 has been guaranteed by Servico, Inc. Certain of the mortgage notes are subject to a prepayment penalty if repaid prior to their maturity. During 1997 Servico completed a secondary offering of 11.5 million shares of common stock at $14.50 per share, which resulted in net proceeds to Servico of $156,000,000. The Company repaid, prior to maturity, approximately $128,000,000 in debt secured by 21 of its hotels and, as a result, recorded, an extraordinary loss on early extinguishment of debt of approximately $3,800,000 (net of income tax benefit of $2,500,000) relating to the write-off of unamortized loan costs associated with the debt. Seventeen of these hotels have subsequently been used to secure approximately $81,200,000 in new variable rate mortgage notes which generated approximately $78,300,000 of net proceeds for use in the acquisition of new properties. The Company has also refinanced eight other properties generating approximately $3,100,000 in net proceeds. As a result of the debt repayment and the refinancings, the Company has no debt maturing in the next twelve months. F-13 43 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM OBLIGATIONS (CONTINUED) During 1996, the Company refinanced certain long-term obligations on 20 of its hotels. The Company issued approximately $123,200,000 in new variable rate mortgage notes, satisfied approximately $84,500,000 of existing obligations, paid approximately $5,000,000 in fees and expenses, escrowed approximately $1,300,000 for future use by the Company and generated approximately $32,400,000 of net proceeds. In addition, the Company recorded approximately $7,400,000 in non-cash deferred loan costs which were being amortized over 36 months. In accordance with the loan agreements, these deferred loan costs were reduced by approximately $2,400,000 and the unamortized costs were written off when the loans were repaid, prior to maturity, in June 1997. In connection with this refinancing the Company recorded an extraordinary loss on early extinguishment of debt of $348,000 (net of income taxes of $232,000). Maturities of long-term obligations for each of the five years after December 31, 1997 and thereafter, are as follows (IN THOUSANDS): 1998 $ 5,728 1999 5,243 2000 164,117 2001 13,641 2002 5,272 Thereafter 135,047 ------------ $ 329,048 =========== 5. INCOME TAXES Provision for income taxes for the Company is as follows:
YEARS ENDED DECEMBER 31, 1997 1996 1995 ------------------------------ ------------------------------ ------------------------------ CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL ------ ------ ------ ------ ------ ------ ------ ------ ------ (IN THOUSANDS) Federal $3,289 $3,186 $6,475 $1,322 $1,170 $2,492 $ 751 $1,262 $2,013 State and local 1,693 211 1,904 651 82 733 526 66 592 ------ ------ ------ ------ ------ ------ ------ ------ ------ $4,982 $3,397 $8,379 $1,973 $1,252 $3,225 $1,277 $1,328 $2,605 ====== ====== ====== ====== ====== ====== ====== ====== ======
F-14 44 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) The components of the cumulative effect of temporary differences in the deferred income tax liability and asset balances at December 31, 1997 and 1996, are as follows:
1997 1996 -------------------------------------- ----------------------------------------- CURRENT NON-CURRENT CURRENT NON-CURRENT TOTAL ASSET LIABILITY TOTAL ASSET LIABILITY -------- -------- -------- -------- -------- ----------- (IN THOUSANDS) Property and equipment $ 21,151 $ -- $ 21,151 $ 20,201 $ -- $ 20,201 Net operating loss carryforward (7,905) (605) (7,300) (10,286) (605) (9,681) Alternative minimum tax credits (3,739) -- (3,739) (1,371) -- (1,371) Self-insurance reserve (878) (878) -- (928) (928) -- Vacation pay accrual (681) (681) -- (438) (438) -- Other 413 (90) 503 (892) (96) (796) -------- -------- -------- -------- -------- -------- $ 8,361 $ (2,254) $ 10,615 $ 6,286 $ (2,067) $ 8,353 ======== ======== ======== ======== ======== ========
The difference between income taxes using the effective income tax rate and the federal income tax statutory rate of 34% is as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Federal income tax at statutory rate $ 7,123 $ 4,003 $ 2,215 State income taxes, net 1,256 483 390 Tax benefit with respect to legal settlement -- (1,261) -- ------- ------- ------- $ 8,379 $ 3,225 $ 2,605 ======= ======= =======
As of December 31, 1997, the Company had a net operating loss carryforward of approximately $22,100,000 for federal income tax purposes which expires in the years 2005 through 2008. The full amount of the income tax benefit of this net operating loss carryforward has been reflected in the Consolidated Financial Statements of the Company in prior years. F-15 45 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 -------------- ------------- ------------- Numerator: Income before extraordinary item $ 12,570,000 $ 8,548,000 $ 3,909,000 Extraordinary item (3,751,000) (348,000) -- -------------- ------------- ------------ Net income $ 8,819,000 $ 8,200,000 $ 3,909,000 ============== ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares 15,183,000 9,295,000 8,652,000 Effect of dilutive securities: Employee stock options 457,000 456,000 667,000 ---------- ---------- ------------ Denominator for dilutive earnings per share - adjusted weighted-average shares 15,640,000 9,751,000 9,319,000 ========== ========= ============ Basic earnings per share: Income before extraordinary item $ .83 $ .92 $ .45 Extraordinary item (.25) (.04) -- -------------- ------------- ------------ Net income $ .58 $ .88 $ .45 ============== ============= ============ Diluted earnings per share: Income before extraordinary item $ .80 $ .88 $ .42 Extraordinary item (.24) (.04) -- -------------- ------------- ------------ Net income $ .56 $ .84 $ .42 ============== ============= ============
All prior-period earnings per share amounts have been restated to conform to the Financial Accounting Standards Board Statement No. 128 "Earnings per share". 7. COMMITMENTS AND CONTINGENCIES Six of the Company's hotels are subject to long-term ground leases expiring from 2014 through 2075 which provide for minimum payments as well as incentive rent payments and most of the Company's hotels have noncancellable operating leases, mainly for operating equipment. The land covered by one lease can be purchased by the Company for approximately $2,600,000. For the years ended December 31, 1997, 1996 and 1995, lease expense for the five noncancellable ground leases and noncancellable operating leases was approximately $1,624,000, $1,381,000 and $1,280,000, respectively. F-16 46 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. COMMITMENTS AND CONTINGENCIES (continued) At December 31, 1997, the future minimum commitments for noncancellable leases are as follows (IN THOUSANDS): 1998 $ 1,727 1999 1,490 2000 1,306 2001 1,162 2002 920 Thereafter 27,820 ---------- $ 34,425 ========== The Company has entered into license agreements with various hotel chains which require annual payments for license fees, reservation services and advertising fees. The license agreements generally have an original ten year term. The majority of the Company's license agreements have five to ten years remaining on the term. The licensors may require the Company to upgrade its facilities at any time to comply with the licensor's then current standards. Upon the expiration of the term of a license, the Company may apply for a license renewal. In connection with the renewal of a license, the licensor may require payment of a renewal fee, increased license, reservation and advertising fees, as well as substantial renovation of the facility. Payments made in connection with these agreements totaled approximately $14,498,000, $12,401,000 and $8,649,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The license agreements are subject to cancellation in the event of a default, including the failure to operate the hotel in accordance with the quality standards and specifications of the licensors. The Company believes that the loss of a license for any individual hotel would not have a material adverse effect on the Company's financial condition and results of operations. The Company believes it will be able to renew its current licenses or obtain replacements of a comparable quality. Sixteen hotels which the Company owns are operated under license agreements that require the Company to make certain capital improvements in accordance with a specified time schedule. Further, in connection with the financing of the Company's hotels (see Note 4) and the acquisition of other hotels (see Note 2), the Company has agreed to make certain capital improvements and has approximately $29,800,000 escrowed for such improvements which is included in other assets on the accompanying balance sheet. The Company estimates its remaining obligations for all the above commitments to be approximately $32,000,000 of which approximately $29,000,000 is expected to be spent in 1998 and the balance during 1999. F-17 47 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has maintenance agreements, primarily on a one to three year basis, which resulted in expenses of approximately $2,497,000, $2,106,000 and $1,699,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company is a party to legal proceedings arising in the ordinary course of its business, the impact of which would not, either individually or in the aggregate, in management's opinion, based upon the facts known by management and the advice of counsel, have a material adverse effect on the Company's financial condition or results of operations. 8. RELATED PARTY TRANSACTIONS In March 1995, the Company issued 800,000 shares of its common stock at a price of $10 per share to an affiliate of EMC. In connection with the acquisition of the 800,000 shares, an affiliate of EMC agreed to make an additional $8,000,000 equity investment in partnerships or joint ventures with the Company for the purpose of acquiring hotel properties. At December 31, 1997, affiliates of EMC held minority interests in six consolidated partnerships owning six hotels. 9. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN The Company makes contributions to several multi-employer pension plans for employees of various subsidiaries covered by collective bargaining agreements. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Certain withdrawal penalties may exist, the amount of which are not determinable at this time. The cost of such contributions during the years ended December 31, 1997, 1996 and 1995, was approximately $412,000, $499,000 and $433,000, respectively. The Company adopted, the 401(k) for the benefit of its non-union employees under which participating employees may elect to contribute up to 10% of their compensation. The Company may match an employee's elective contributions to the 401(k), subject to certain conditions, with shares of the Company's common stock equal to up to 100% of the amount of such employee's elective contributions. These employer contributions vest at a rate of 20% per year beginning in the third year of employment. The cost of these contributions during the years ended December 31, 1997, 1996 and 1995, was $282,000, $548,000 and $322,000, respectively. The 401(k) does not require a contribution by the Company. The Company has also adopted the Servico, Inc. Stock Option Plan, as amended, (the "Option Plan"). In accordance with the Option Plan, options to acquire up to 1,425,000 shares of common stock may be granted to employees, directors, independent contractors and agents as determined by a committee appointed by the Board of Directors. Options may be granted at an exercise price not less than fair market value on the date of grant. These options will generally vest over five years. F-18 48 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN (CONTINUED) In addition, in August 1997 each non-employee director was awarded an option to acquire 20,000 shares of common stock at an exercise price equal to the fair market price on date of grant. Such options became exercisable upon date of grant and were granted outside of the Servico Stock Option plan. The following table indicates all options granted and their status: OPTION PRICE NUMBER RANGE OF SHARES PER SHARE --------- ------------ Balance December 31, 1994 1,130,500 $ 4.00-8.63 Granted 50,000 9.50 Exercised (26,800) 4.00 Forfeited (16,500) 8.63 --------- ----------- Balance December 31, 1995 1,137,200 4.00-9.50 Granted 216,500 10.75-16.13 Exercised (497,800) 4.00-9.50 Forfeited (38,900) 8.63-10.75 --------- ----------- Balance December 31, 1996 817,000 4.00-16.13 Granted (a) 977,700 15.25-16.81 Exercised (86,600) 4.00-10.75 Forfeited (19,400) 8.63-10.75 --------- ----------- Balance December 31, 1997 1,688,700 $ 4.00-16.81 ========= =========== (a) Approximately 670,000 of the options granted in 1997 are subject to shareholder approval at the next annual meeting. At December 31, 1997, there were 843,340 options exercisable, of which 92,400 were subsequently exercised at prices between $4.00-$10.75 per share. The income tax benefit, if any, associated with the exercise of stock options is credited to additional paid-in capital. 10. CERTAIN NON-RECURRING EVENTS In January 1996, the Company entered into an agreement with its former chief Executive Officer in connection with his resignation from the Company and its Board of Directors. This agreement provided for payments totaling approximately $830,000 over a twenty-four month period, the cost of which is included in other operating expenses for the year ended December 31, 1996. In March 1996, the Company received approximately $3,900,000 in connection with the settlement of a lawsuit brought of behalf of Servico, against a bank group and law firm, based on alleged breaches prior to 1990 of their duties to the Company. This amount, less approximately $300,000 of associated expenses, in included in other income for the year ended December 31, 1996. F-19 49 11. SUBSEQUENT EVENTS In November, 1997 the Company signed definitive agreements to purchase a partnership which owns 15 full service hotels. On March 5, 1998, the Company purchased controlling interest in the entity which presently owns a 99% interest in the partnership owning the hotels. The Company currently intends to sell five of the hotels and to retain ten hotels containing 1,772 rooms. The purchase price of the hotels will be approximately $75,000,000 and is expected to be paid for by the assumption of approximately $63,000,000 in debt and cash for the balance. This transaction is expected to be completed during the second quarter of 1998. On March 20, 1998, the Company signed a definitive agreement with a privately owned hotel company to merge and form a new publicly owned company. Under the terms of the agreement, the Company's existing shareholders will receive one share of the merged company's common stock for each share of Servico stock held by them (approximately 21,000,000 shares). The owners of the private company will initially receive 6,000,000 shares of common stock of the merged company and an additional 1,400,000 shares upon the completion of construction of six hotels during 1999. The merged company will own and manage 140 hotels. (136 of which will be owned) with more than 26,000 rooms and operate in 35 states and Canada. The merger will be accounted for under the purchase method of accounting and is expected to close in June 1998 subject to customary conditions, including regulatory approvals and approval by the Company's shareholders. F-20 50 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 (I) Servico's Consolidated Third Restated Amended Plan of Reorganization 2.2 (X) Agreement and Plan of Merger, dated as of March 20, 1998, among Servico, Impac, SHG, Servico Merger-Sub, and Impac Merger-Sub. 3.1 (II) Certificate of Incorporation of Servico, Inc. 3.2 (V) Amended and Restated By-laws of the Company (as of June 23, 1994) 10.1 (I) Employment Agreement between David E. Hawthorne and the Company, dated April 30, 1992 10.2 (I) Servico Stock Option Plan 10.3 (I) Key Executives Bonus Award Program 10.4 (I) Regional Vice President Bonus Award Program 10.5 (III) Servico, Inc. Amended and Restated 401(k) Plan 10.6 (IV) Employment Agreement between David Buddemeyer and the Company, dated May 14, 1993. 10.7 (V) Stock Acquisition and Standstill Agreement between Servico, Inc. and EMC Acquisition Corporation dated April 13, 1994. 10.8 (V) Agreement and Plan of Merger by and among Servico, Inc., EMC Acquisition Corporation, Energy Management Corporation and EMC Target Corporation dated April 13, 1994. 10.9 (V) Agreement of Limited Partnership of Fort Wayne Hospitality Associates II, Limited Partnership by and among Spire Realty Group, Servico Fort Wayne II, Inc. and SOLVation Inc. doing business as Smith Management Company. 10.10 (V) Stock Acquisition and Standstill Agreement between Servico, Inc. and Pengo Securities Corp. dated March 23, 1995. 10.11 (VI) Agreement of Limited Partnership of Worcester Hospitality Associates Limited Partnership by and among Worcester Hospitality Company, Inc., and Servico Worcester, Inc. and SOLVation Inc., doing business as Smith Management Company dated as of May 4, 1995.
29 51 10.12 (VI) Amended and Restated Agreement of Limited Partnership of Worcester Hospitality Associates Limited Partnership by and among Servico Worcester, Inc., and Worcester Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of June 9, 1995. 10.13 (VI) Agreement of Limited Partnership of Sioux City Hospitality, L.P. by and among Fourth Street Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of January 16, 1996. 10.14 (VI) Agreement of Limited Partnership of Saginaw Hospitality Limited Partnership by and among Servico Saginaw, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of August 17, 1995. 10.15 (VI) Agreement of Limited Partnership of Brecksville Hospitality, L.P. by and among Brecksville Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of January 16, 1996. 10.16 (VI) Agreement of Limited Partnership of East Washington Hospitality Limited Partnership by and among Servico East Washington, Inc., and East Washington Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of June 20, 1995. 10.17 (VI) Agreement of Limited Partnership of Lawrence Hospitality Associates, L.P. by and among Servico Lawrence, Inc., and Jayhawk Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of August 8, 1995. 10.18 (VI) Agreement of Limited Partnership of Manhattan Hospitality Associates, L.P. by and among Servico Manhattan, Inc., and Jayhawk Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of August 8, 1995. 10.19 (VI) Agreement of Limited Partnership of 1075 Hospitality, L.P. by and among Stevens Creek Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of January 16, 1996. 10.20 (VI) Severance Agreement between David E. Hawthorne and the Company, dated as of January 2, 1996. 10.21 (VI) Loan Agreement by and among Servico Fort Wayne, Inc., Washington Motel Enterprises, Inc., Servico Hotels I, Inc., Servico Hotels II, Inc., Servico Hotels III, Inc., Servico Hotels IV, Inc., New Orleans Airport Motel Associates, LTD., Wilpen, Inc., Hilton Head Motel Enterprises, Inc., and Moon Airport Motel, Inc., and Column Financial, Inc., dated as of January 31, 1995.
30 52 10.22 (VI) Credit Facility Agreement between DLJ Mortgage Capital, Inc. and Servico, Inc., dated as of June 9, 1995. 10.23 (VI) Loan Agreement by and between Apico Inns of Pittsburgh, Inc. and Column Financial, Inc., dated as of September 27, 1995 (sample loan agreement under the Credit Facility Agreement). 10.24 (VII) Loan Agreement by and between Servico Ft. Pierce, Inc. and Lehman Brothers Holdings Inc., dated April 29, 1996 (form of loan agreement executed in connection with a total refinancing of $123,185,000 secured by 20 hotels). 10.25 (VIII) First Amendment to Stock Acquisition and Standstill Agreement between Servico, Inc. and Pengo Securities Corp., dated April 26, 1996. 10.26 (VIII) First Amendment to Stock Acquisition and Standstill Agreement between Servico, Inc. and Energy Management Corporation, dated as of April 26, 1996. 10.27 (IX) Employment agreement between Karyn Marasco and the Company, dated May 2, 1997. 10.28 Acquisition Agreement dated as of November 7, 1997 by and among Prime Motor Inns Limited Partnership, Prime-American Realty Corp. and the Company. 10.29 Stock Purchase Agreement dated as of December 9, 1997 by and among Prime-American Realty Corp, Prime Hospitality , Inc. and the Company. 10.30 First Amendment to Acquisition Agreement dated March 12, 1998 among Prime Motor Inns Limited Partnership, Prime-American Realty Corp. and the Company. 10.31 (X) Voting Agreement, dated as of March 20, 1998, between Servico and Certain Members of Impac. 10.32 (X) Voting Agreement, dated as of March 20, 1998, between Servico and Certain Other Members of Impac. 21 Subsidiaries of the Company 23 Consent of Independent Certified Public Accountants 27.1 Financial Data Schedule -- 1997 27.2 Amended Financial Data Schedule -- 1996
(I) This exhibit is incorporated by reference to exhibits to the Company's Form 10 Registration Statement filed June 17, 1992. 31 53 (II) This exhibit is incorporated by reference to exhibits to the Company's Form 10-K for the fiscal year ended June 30, 1992, filed September 21, 1992. (III) This exhibit is incorporated by reference to exhibits to the Company's Form 10-K for the transition period from July 1, 1992 to December 31, 1992, filed March 24, 1993. (IV) This exhibit is incorporated by reference to exhibits to the Company's Form 10-K for the year ended December 31, 1993, filed March 2, 1994. (V) This exhibit is incorporated by reference to the Company's Form 10-K for the year ended December 31, 1994, filed March 27, 1995. (VI) This exhibit is incorporated by reference to the Company's Form 10-K for the year ended December 31, 1995, filed March 27, 1996. (VII) This exhibit is incorporated by reference to the Company's Form 10-Q for the period ended March 31, 1996, filed May 10, 1996. (VIII) This exhibit is incorporated by reference to the Company's Form 10-Q for the period ended June 30, 1996, filed August 13, 1996. (IX) This exhibit is incorporated by reference to the Company's Form 10-Q for the period ended June 30, 1997, filed August 14, 1997. (X) This exhibit is incorporated by reference to the Company's Form 8-K filed March 26, 1998. 32 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 1998. SERVICO, INC. BY: /s/ DAVID BUDDEMEYER --------------------------- David Buddemeyer, President And Chief Executive Officer 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 Company and in the capacities indicated, on March 31, 1998.
SIGNATURE TITLE --------- ----- /s/ DAVID BUDDEMEYER Chairman of the Board of Directors, - ------------------------------------- President and Chief Executive Officer David Buddemeyer /s/ WARREN M. KNIGHT Vice President-Finance and - ------------------------------------- Chief Financial and Principal Warren M. Knight Accounting Officer /s/ JOSEPH C. CALABRO Director - ------------------------------------- Joseph C. Calabro /s/ MICHAEL A. LEVEN Director - ------------------------------------- Michael A. Leven /s/ PETER R. TYSON Director - ------------------------------------- Peter R. Tyson /s/ RICHARD H. WEINER Director - ------------------------------------- Richard H. Weiner
33 EX-10.28 2 ACQUISITION AGREEMENT 11/7/97 1 EXHIBIT 10.28 ================================================================================ ACQUISITION AGREEMENT AMONG SERVICO, INC., PRIME MOTOR INNS LIMITED PARTNERSHIP, PRIME-AMERICAN REALTY CORP., AND SERVICO ACQUISITION CORP. DATED AS OF NOVEMBER 7, 1997 ================================================================================ 2 TABLE OF CONTENTS
PAGE ARTICLE I - ACQUISITION...................................................................................1 1.1 Purchase and Sale of the Limited Partnership Interest...................................1 1.2 Delivery................................................................................2 1.3 Closing.................................................................................2 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SERVICO AND SAC............................................2 2.1 Organization, Standing and Power........................................................2 2.2 Legal, Valid and Binding Agreement......................................................2 2.3 No Violation or Conflict................................................................2 2.4 Governmental Consents...................................................................3 2.5 Brokers.................................................................................3 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PRIME AND THE GENERAL PARTNER..........................................................................................3 3.1 Organization, Standing and Power........................................................3 3.2 Legal, Valid and Binding Agreement......................................................3 3.3 Authority to do Business................................................................3 3.4 Certificate of Limited Partnership, Limited Partnership Agreement and Records.............................................................................4 3.5 Subsidiaries............................................................................4 3.6 No Violation or Conflict................................................................4 3.7 Governmental Consents...................................................................4 3.8 Exchange Act Reports; Financial Statements..............................................5 3.9 Compliance with Laws....................................................................5 3.10 Legal Proceedings.......................................................................6 3.11 Brokers.................................................................................6 3.12 Absence of Material Adverse Changes.....................................................6 3.13 Capitalization..........................................................................7 3.14 Rights, Warrants, Options...............................................................7 3.15 Title to Personal Property and Condition of Assets......................................7 3.16 Real Property...........................................................................7 3.17 Intangible Property.....................................................................8 3.18 Governmental Authorizations.............................................................9 3.19 Insurance...............................................................................9 3.20 Employment Matters......................................................................9 3.21 Material Agreements....................................................................10 3.22 Related Party Transactions.............................................................11 3.23 Tax Matters............................................................................11 3.24 Disclosure.............................................................................12
-i- 3 ARTICLE IV - COVENANTS...................................................................................12 4.1 Interim Operations of AMI..............................................................12 4.2 Access.................................................................................13 4.3 Schedules..............................................................................14 4.4 Consents...............................................................................14 4.5 Reasonable Efforts.....................................................................14 4.6 Notification...........................................................................14 4.7 No Solicitation........................................................................15 4.8 Confidentiality........................................................................15 4.9 Publicity..............................................................................15 4.10 Proxy Statement........................................................................16 4.11 Special Meeting........................................................................16 4.12 Dissolution of Prime...................................................................16 ARTICLE V- ADDITIONAL AGREEMENTS.........................................................................17 5.1 Survival of the Representations, Warranties, Covenants and Agreements..................17 5.2 Investigation..........................................................................17 5.3 Indemnification........................................................................17 ARTICLE VI - CONDITIONS PRECEDENT........................................................................18 6.1 Mutual Conditions Precedent............................................................18 6.2 Conditions Precedent to the Obligations of Servico.....................................18 6.3 Conditions Precedent to the Obligations of Prime.......................................19 6.4 Termination............................................................................20 ARTICLE VII - MISCELLANEOUS..............................................................................21 7.1 Further Assurances.....................................................................21 7.2 Notices................................................................................21 7.3 Entire Agreement.......................................................................21 7.4 Assignment.............................................................................22 7.5 Waiver.................................................................................22 7.6 No Third Party Beneficiary.............................................................22 7.7 Severability...........................................................................22 7.8 Fees and Expenses......................................................................22 7.9 Section Headings.......................................................................23 7.10 Counterparts...........................................................................24 7.11 Time of Essence........................................................................24 7.12 Litigation; Prevailing Party...........................................................24 7.13 Remedies Cumulative....................................................................24 7.14 Injunctive Relief......................................................................24 7.15 Governing Law..........................................................................24 7.16 Certain Definitions....................................................................24
-ii- 4 GLOSSARY OF DEFINED TERMS
DEFINED TERM SECTION DEFINED TERM SECTION - ------------ ------- ------------ ------- affiliate.......................................ss.7.17(a) Limited Partnership Agreement....................ss.3.4 Agreement.......................................Preamble Limited Partnership Interests....................Preamble AMI.............................................Preamble multiemployer plan...............................ss.3.20(d) AMI Material Agreements.........................ss.3.21 NYSE.............................................ss.2.4 business day...................................ss.7.17(b) partnership interests............................ss.7.17(e) Closing.........................................ss.1.3 Permitted Exceptions.............................ss.3.16 Code............................................ss.4.20 Personal Property................................ss.3.15 Competing Transaction...........................ss.7.8(d) person...........................................ss.7.17(f) employee pension benefit plan...................ss.3.20(d) Prime............................................Preamble employee welfare benefit plan...................ss.3.20(d) Prime Financial Statements.......................ss.3.8(b) End Date........................................ss.6.4(c) Prime Hospitality................................ss.3.14 Environmental Law...............................ss.3.9(b) Prime Indemnified Party..........................ss.5.3(a) Environmental Permit............................ss.3.9(b) Prime Material Adverse Effect....................ss.7.17(g) ERISA...........................................ss.4.20(d) Prime Pension Plan...............................ss.4.20(d) Exchange Act....................................ss.2.4 Prime Plans......................................ss.3.20(d) Furman Selz.....................................ss.3.11 Prime Related Parties............................ss.3.22 Governmental Entity.............................ss.2.4 Prime Related Party..............................ss.3.22 General Partner.................................Preamble Prime SEC Reports................................ss.3.8(a) General Partner Prime Special Meeting............................ss.4.10(a) Purchase Agreement............................ss.6.1(d) Prime Welfare Plan...............................ss.3.20(d) GP Interest.....................................Preamble Proxy Statement..................................ss.4.10(a) group health plan...............................ss.3.20 Real Property....................................ss.3.16 Improvements....................................ss.3.16 SAC..............................................Preamble knowledge.......................................ss.7.17(c) SEC..............................................ss.3.8 Law.............................................ss.7.17(d) Securities Act...................................ss.3.13 Licenses........................................ss.3.18 Servico..........................................Preamble Liens...........................................ss.1.1 subsidiaries.....................................ss.7.17(h) Limited Partners................................Preamble subsidiary.......................................ss.7.17(h) Tax..............................................ss.7.17(i)
-iii- 5 ACQUISITION AGREEMENT --------------------- THIS ACQUISITION AGREEMENT (the "Agreement") is made and entered into as of the 7th day of November, 1997, by and among SERVICO, INC., a Florida corporation ("Servico"), SERVICO ACQUISITION CORP., a Florida corporation and a wholly-owned subsidiary of Servico ("SAC"), PRIME MOTOR INNS LIMITED PARTNERSHIP, a Delaware limited partnership ("Prime") and PRIME-AMERICAN REALTY CORP., a Delaware corporation (the "General Partner"). W I T N E S S E T H: -------------------- WHEREAS, Prime owns a 99% limited partnership interest (the "Limited Partnership Interest") in AMI Operating Partners, L.P., a Delaware limited partnership ("AMI"); WHEREAS, the General Partner owns a 1% general partnership interest (the "GP Interest") in AMI, which, together with the Limited Partnership Interest, constitutes 100% of all partnership interests in AMI; WHEREAS, the General Partner is the sole general partner of each of Prime and AMI; WHEREAS, the board of directors of the General Partner has determined that it is in the best interests of Prime and its limited partners (the "Limited Partners") that Prime sell, assign and transfer to SAC the Limited Partnership Interest on the terms set forth herein; and WHEREAS, the board of directors of the General Partner has approved this Agreement and agreed to recommend that the Limited Partners vote to approve this Agreement and the transactions set forth herein as contemplated by this Agreement; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I ACQUISITION ----------- 1.1 PURCHASE AND SALE OF THE LIMITED PARTNERSHIP INTEREST. Subject to the terms and conditions set forth herein, at the Closing, Prime shall sell, assign and transfer to SAC and SAC shall purchase and acquire from Prime, the Limited Partnership Interest free and clear of any and all claims, liens, charges, security interests, pledges or encumbrances of any nature whatsoever (whether absolute, accrued contingent or otherwise) ("Liens"). At the Closing, SAC shall, subject to the terms and conditions set forth herein, and in consideration of the sale, assignment and transfer of the Limited Partnership Interest as set forth herein, pay to Prime, the sum of Eight Million Dollars ($8,000,000) (the "Purchase Price"), by wire transfer of immediately available funds to such account -1- 6 as Prime shall designate and make the indemnifications and undertakings provided herein to survive the Closing. 1.2 DELIVERY. The sale, assignment and transfer of the Limited Partnership Interest at the Closing shall be effected by (i) the delivery to SAC (in addition to any other deliveries required under this Agreement ) of an instrument of transfer, duly executed on behalf of Prime, sufficient to transfer such Limited Partnership Interest to SAC, free and clear of all Liens and (ii) the execution and delivery by Prime or the General Partner of such other documents necessary to admit SAC as a substitute limited partner of AMI, having all the rights of a limited partner under the Delaware Revised Uniform Limited Partnership Act and the Limited Partnership Agreement of AMI with respect to the Limited Partnership Interest. 1.3 CLOSING. Unless this Agreement shall have been terminated pursuant to Section 6.4, the consummation of the transactions contemplated by this Agreement shall take place as promptly as practicable (and in any event within three business days) after satisfaction or waiver of the conditions set forth in Article VI, at a closing (the "Closing") to be held at the offices of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., 150 West Flagler Street, Suite 2200, Miami, Florida, 33130, unless another date, time or place is agreed to by Prime and Servico. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SERVICO AND SAC ------------------------------------------------- Servico and SAC hereby represent and warrant to Prime and the General Partner as follows: 2.1 ORGANIZATION, STANDING AND POWER. Each of Servico and SAC has been duly organized and is validly existing and in good standing under the laws of the State of Florida and has all requisite right, power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 2.2 LEGAL, VALID AND BINDING AGREEMENT. The execution, delivery and performance of this Agreement by Servico and SAC and the consummation by Servico and SAC of the transactions contemplated hereby have been duly and effectively authorized by all requisite corporate action and no other corporate proceedings on the part of Servico or SAC are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Servico and SAC and, assuming the due authorization, execution and delivery by the other parties hereto, constitutes the legal, valid and binding obligations of Servico and SAC, enforceable against Servico and SAC in accordance with its terms. 2.3 NO VIOLATION OR CONFLICT. Except as set forth on SCHEDULE 2.3, the execution, delivery and performance of this Agreement by Servico and SAC and the consummation by Servico and SAC of the transactions contemplated hereby do not and will not (i) conflict with or violate any provision of the Articles of Incorporation or Bylaws of Servico or SAC, (ii) assuming that all consents, approvals, authorizations and permits described in Section 2.4 have been obtained and all filings and notifications described in Section 2.4 have been made, violate or conflict with any Law applicable to Servico or SAC or by which any property or asset of Servico or SAC is bound or affected, and (iii) with or without the passage of time or the giving of notice, result in the breach of, or constitute a default under, cause the acceleration of performance under, permit the unilateral modification or termination of, or require any consent under, or result in the creation of any liens or other encumbrance upon any property or assets of Servico or SAC pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other obligation, except, with -2- 7 respect to clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not, individually or in the aggregate, prevent or materially delay the performance by Servico or SAC of its obligations pursuant to this Agreement or the consummation of the transactions contemplated hereby. 2.4 GOVERNMENTAL CONSENTS. The execution and delivery of this Agreement by each of Servico and SAC does not, and the performance by each of Servico and SAC of its obligations hereunder and the consummation of the transactions contemplated hereby will not, require any consent, approval, authorization or permit of, or filing by Servico or SAC with or notification by Servico or SAC to, any United States federal, state or local or any foreign governmental, regulatory or administrative authority, agency or commission or any court, tribunal or arbitral body (a "Governmental Entity"), except (i) applicable requirements of the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act") and the rules and regulations of the New York Stock Exchange (the "NYSE") and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, prevent or materially delay the performance by Servico or SAC of its obligations pursuant to this Agreement and the consummation of the transactions contemplated hereby. 2.5 BROKERS. Except as indicated on SCHEDULE 2.5, neither Servico nor SAC has employed any financial advisor, broker or finder and has not incurred and neither will, except as provided in Section 7.9, incur any broker's, finder's, investment banking or similar fees, commissions or expenses to any other party in connection with the transactions contemplated by this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PRIME AND THE GENERAL PARTNER --------------------------------------------------------------- Prime and the General Partner hereby represent and warrant to Servico and SAC as follows: 3.1 ORGANIZATION, STANDING AND POWER. Each of Prime, AMI and the General Partner has been duly organized and is validly existing and in good standing under the laws of the state of Delaware. Each of Prime and the General Partner has all requisite right, power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 3.2 LEGAL, VALID AND BINDING AGREEMENT. The execution, delivery and performance of this Agreement by Prime and the General Partner and the consummation by Prime and the General Partner of the transactions contemplated hereby have been duly and effectively authorized by all requisite corporate or partnership, as the case may be, action and no other corporate or partnership proceedings on the part of Prime or the General Partner are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than the approval of this Agreement and the transactions contemplated hereby by the holders of at least a majority of the units of limited partnership interest of Prime ("Prime Units") at the Prime Special Meeting). This Agreement has been duly executed and delivered by Prime and the General Partner and, assuming the due authorization, execution and delivery by the other parties hereto, constitutes the legal, valid and binding obligations of Prime and the General Partner, enforceable against Prime and the General Partner in accordance with its terms. 3.3 AUTHORITY TO DO BUSINESS. Except as provided on SCHEDULE 3.3, each of Prime, the General Partner and AMI has all requisite power and authority and all necessary governmental -3- 8 approvals to own, operate and lease its properties and assets and to conduct its business as presently conducted. SCHEDULE 3.3 sets forth (i) those jurisdictions in which Prime, the General Partner or AMI manages or operates facilities and/or properties and (ii) all jurisdictions in which Prime, the General Partner or AMI is qualified to do business. Except as provided on SCHEDULE 3.3, each of Prime, the General Partner and AMI is duly qualified or licensed to do business and is in good standing in all jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification or license, except where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Prime Material Adverse Effect. 3.4 CERTIFICATE OF LIMITED PARTNERSHIP, LIMITED PARTNERSHIP AGREEMENT AND RECORDS. Copies of the Amended and Restated Agreement of Limited Partnership of Prime and the Agreement of Limited Partnership of AMI (each a "Limited Partnership Agreement"), in each case as in effect on the date hereof, have been delivered to Servico and are complete and correct as of the date hereof. 3.5 SUBSIDIARIES. Except for Prime's ownership of AMI, neither Prime nor AMI has any equity investment in any other corporation, limited liability company, association, partnership, joint venture or other entity. 3.6 NO VIOLATION OR CONFLICT. Except as set forth on SCHEDULE 3.6, the execution, delivery and performance of this Agreement by Prime and the General Partner and the consummation by Prime and the General Partner of the transactions contemplated hereby do not and will not (i) conflict with or violate any provision of the Certificate of Limited Partnership or Limited Partnership Agreement of Prime or AMI or the Certificate of Incorporation or Bylaws of the General Partner, (ii) assuming that all consents, approvals, authorizations and permits described in Section 3.7 have been obtained and all filings and notifications described in Section 3.7 have been made, violate or conflict with any Law applicable to Prime, the General Partner or AMI or by which any property or asset of Prime, the General Partner or AMI is bound or affected, and (iii) with or without the passage of time or the giving of notice, result in the breach of, or constitute a default under, cause the acceleration of performance under, permit the unilateral modification or termination of, or require any consent under, or result in the creation of any liens or other encumbrance upon any property or assets of Prime or AMI pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other obligation, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not, individually or in the aggregate, (A) have a Prime Material Adverse Effect nor (B) prevent or materially delay the performance by Prime or the General Partner of its obligations pursuant to this Agreement or the consummation of the transactions contemplated hereby. 3.7 GOVERNMENTAL CONSENTS. Except as provided on SCHEDULE 3.7, the execution and delivery of this Agreement by each of Prime and the General Partner does not, and the performance by each of Prime and the General Partner of its obligations hereunder and the consummation of the transactions contemplated hereby will not, require any consent, approval, authorization or permit of, or filing by Prime with or notification by Prime or the General Partner to, any Governmental Entity, except (i) applicable requirements of the Exchange Act and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, (A) prevent or materially delay the performance by Prime or the General Partner of its obligations pursuant to this Agreement and the consummation of the transactions contemplated hereby or (B) have a Prime Material Adverse Effect. -4- 9 3.8 EXCHANGE ACT REPORTS; FINANCIAL STATEMENTS. (a) Since January 1, 1995, Prime has timely filed all reports and other documents required to be filed by it with the Securities and Exchange Commission (the "SEC") under the Exchange Act, including but not limited to proxy statements and reports on Form 10-K, Form 10-Q and Form 8-K (collectively, the "Prime SEC Reports"). As of the respective dates they were filed with the SEC, the Prime SEC Reports, including all documents incorporated by reference into such reports, complied in all material respects with the rules and regulations of the SEC and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) The consolidated financial statements (the "Prime Financial Statements") of Prime included in the Prime SEC Reports, as of the dates thereof and for the periods covered thereby, present fairly, in all material respects, the financial position, results of operations, and cash flows of Prime and AMI on a consolidated basis (subject, in the case of unaudited statements, to normal recurring year-end audit adjustments which were not and are not expected, individually or in the aggregate, to have a Prime Material Adverse Effect). Any supporting schedules included in the Prime SEC Reports present fairly, in all material respects, the information required to be stated therein. Such Prime Financial Statements and supporting schedules were prepared: (A) in accordance with Regulation S-X promulgated by the SEC; and (B) except as otherwise noted in the Prime SEC Reports, in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis. Other than as disclosed by the Prime Financial Statements included in the Prime SEC Reports or on SCHEDULE 3.8 hereto, none of Prime, the General Partner or AMI has any liabilities, commitments or obligations of any nature whatsoever, whether accrued, contingent or otherwise that would be required to be reflected on, or reserved against in, a balance sheet or in notes thereto prepared in accordance with GAAP, other than liabilities, commitments or obligations incurred since December 31, 1996 in the ordinary course of business that would not, individually or in the aggregate, have a Prime Material Adverse Effect. Except as set forth on SCHEDULE 3.8 and except for the Limited Partnership Interest, Prime has no assets of any nature whatsoever, and Prime has no liabilities (whether accrued, contingent or otherwise), of any nature whatsoever, except as specifically set forth in the Prime Financial Statements and specifically designated therein as a liability of Prime and not of AMI. 3.9 COMPLIANCE WITH LAWS. (a) Except as set forth on SCHEDULE 3.9, each of Prime, the General Partner and AMI is in compliance with all federal, state, local and foreign laws, ordinances, regulations, judgments, rulings, orders and other legal requirements applicable to it, its operations or its properties, including, without limitation, those relating to employment, building, zoning, safety and health, and environmental matters, except where the failure to so comply, individually or in the aggregate, would not have a Prime Material Adverse Effect. Except as set forth on SCHEDULE 3.9 or as could not reasonably be expected to have a Prime Material Adverse Effect, neither Prime, the General Partner nor AMI has received written notification from any Governmental Entity asserting that it may not be in compliance with, or may have violated, any of the Laws which said Governmental Entity enforces, or threatening to revoke any authorization, consent, approval, franchise, license or permit, and neither Prime, the General Partner nor AMI is subject to any agreement or consent decree with any Governmental Entity arising out of previously asserted violations. -5- 10 (b) Without limiting the generality of Section 3.9(a), except as set forth on SCHEDULE 3.9 or in the Prime SEC Reports, or as would not, individually or in the aggregate, have a Prime Material Adverse Effect: (i) Prime, the General Partner and AMI are, to the best of their knowledge, in compliance with all applicable Environmental Laws. All past noncompliance of Prime or AMI with Environmental Laws or Environmental Permits has been resolved without any pending, ongoing or future obligation, cost or liability; and (ii) neither Prime, the General Partner nor AMI has, to the best of their knowledge, released a Hazardous Material at, or transported a Hazardous Material to or from, any real property currently or formerly owned, leased or occupied by Prime or AMI in violation of any Environmental Law. For purposes of this Agreement: "ENVIRONMENTAL LAW" means any federal, state or local statute, law, ordinance, regulation, rule, code or order of the United States or any other jurisdiction and any enforceable judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to pollution or protection of the environmental or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Material, as in effect as of the date of this Agreement. "ENVIRONMENTAL PERMIT" means any permit, approval, identification number, license or other authorization required under or issued pursuant to any applicable Environmental Law. "HAZARDOUS MATERIAL" means (i) any petroleum, petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials or polychlorinated biphenyls or (ii) any chemical, material or substance defined or regulated as toxic or hazardous or as a pollutant or contaminant or waste under any applicable Environmental Law. 3.10 LEGAL PROCEEDINGS. Except as set forth on SCHEDULE 3.10 or in the Prime SEC Reports, neither Prime, the General Partner nor AMI is, nor during the past three years has been, a party to any pending or, to the knowledge of Prime, threatened, legal, administrative or other proceeding, arbitration or investigation, that is or could have been reasonably expected to, individually or in the aggregate, result in a Prime Material Adverse Effect. Except as set forth on SCHEDULE 3.10, Prime has no knowledge of any set of facts which could reasonably be expected to result in any such legal, administrative or other proceeding, arbitration or investigation involving Prime, the General Partner or AMI. Except as set forth on SCHEDULE 3.10, neither Prime, the General Partner nor AMI is subject to any order, writ, injunction, decree, judgment, stipulation, determination or award entered by or with any Governmental Entity which could, individually or in the aggregate, reasonably be expected to have a Prime Material Adverse Effect. 3.11 BROKERS. Except for Furman Selz Incorporated ("Furman Selz"), who is acting as financial advisor to the General Partner and will be entitled to a fee of up to $350,000 and expenses in compensation therefor, neither Prime, the General Partner nor AMI has employed any financial advisor, broker or finder and has not incurred and none will incur any broker's, finder's, investment banking or similar fees, commissions or expenses to any other party in connection with the transactions contemplated by this Agreement. 3.12 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as set forth on SCHEDULE 3.12 or in the Prime SEC Reports, since December 31, 1996: (i) each of Prime, the General Partner and AMI has conducted its business only in the ordinary and usual course and in a manner consistent with past practices; (ii) there has not been any Prime Material Adverse Effect, (iii) there has not been any event that could reasonably be expected to prevent or materially delay the performance of Prime's or the General Partner's obligations pursuant to this Agreement and the consummation of the transactions contemplated hereby by Prime or the General Partner; and (iv) neither Prime nor AMI has engaged or agreed to engage in any of the actions described in Section 4.1 (except as otherwise specifically permitted in Section 4.1). All proceeds from any sales of any properties of AMI since December 31, -6- 11 1996 have been used solely to (a) pay costs and expenses of or related to such sales, (b) pay prepayment penalties in connection with the repayment of AMI's outstanding indebtedness to persons other than Prime Related Parties, (c) repay such indebtedness or (d) fund renovations to AMI's existing properties. 3.13 CAPITALIZATION. The only partnership interests in AMI are the Limited Partnership Interest and the GP Interest. The Limited Partnership Interest has been duly authorized, is validly issued and outstanding, and is fully paid. The Limited Partnership Interest is owned beneficially and of record by Prime, free and clear of all Liens. No interests or securities issued by Prime or AMI from the date of its organization to the date hereof were issued in violation of any statutory or common law preemptive rights or the Securities Act of 1933, as amended (the "Securities Act") or the rules and regulations of the SEC thereunder, or any state securities or "blue sky" laws. There are no distributions which have accrued or been declared but are unpaid on the partnership interests of AMI. All Taxes required to be paid in connection with the issuance by AMI of its partnership interests have been paid. 3.14 RIGHTS, WARRANTS, OPTIONS. There are no outstanding: (i) securities or instruments convertible into or exercisable for any partnership interests of AMI; (ii) options, warrants, subscriptions or other rights to acquire partnership interests of AMI; (iii) debt securities with any voting rights or convertible into securities with voting rights; or (iv) commitments, agreements or understandings of any kind, including employee benefit arrangements, relating to any partnership interests of AMI, or the issuance or repurchase by Prime, the General Partner or AMI of any partnership interests of AMI, any such securities or instruments convertible into or exchangeable for partnership interests of AMI or any such options, warrants or rights. Neither Prime Hospitality, Inc., a Delaware corporation ("Prime Hospitality") nor AMI Management Corp., a subsidiary of Prime Hospitality, nor any of their successors, assigns or affiliates have any right under the Limited Partnership Agreement of Prime or otherwise to acquire the Limited Partnership Interest or to receive notice of the transactions contemplated hereby. 3.15 TITLE TO PERSONAL PROPERTY AND CONDITION OF ASSETS. Except as set forth on SCHEDULE 3.15, AMI is the legal and beneficial owner of each item of personal property, tangible and intangible, as reflected on the September 30, 1997 Prime Financial Statements and to each item of personal property, tangible and intangible, acquired by or on behalf of AMI since September 30, 1997 (other than non-material property disposed of in the ordinary course of business consistent with past practice since September 30, 1997 to persons who are not affiliates of Prime, the General Partner or AMI), free and clear of any Liens, except as set forth on the September 30, 1997 Prime Financial Statements or in SCHEDULE 3.15 hereto (all such personal property being hereinafter referred to as the "Personal Property"). Except as set forth on SCHEDULE 3.15, all equipment, machinery, fixtures and other Personal Property owned or utilized by AMI are in good operating condition and in a good state of maintenance and repair and are adequate for the conduct of their respective businesses. Except for leasehold interests and other leased properties, and properties used under license or franchise agreements, specifically identified in either SCHEDULE 3.15 or 3.16 hereto, there are no assets owned by any third party (including Prime and the General Partner) which are used in the operations or the business of AMI, as presently conducted or proposed to be conducted. 3.16 REAL PROPERTY. SCHEDULE 3.16 hereto sets forth a true and complete list, with the legal description thereof, of all real property owned or leased by AMI, together with a brief description of all structures, fixtures or improvements ("Improvements") thereon (such real property and Improvements, collectively, the "Real Property"). AMI owns good and marketable title to, or holds a valid leasehold interest in, all of the Real Property, free and clear of all Liens, mortgages, conditional sales agreements, restrictions, reservations, covenants, encumbrances, charges, restraints -7- 12 on transfer, or any other title defect of any nature, other than liens for real property taxes not yet due and other than those matters specifically disclosed on SCHEDULE 3.16 or any title insurance policies or commitments provided to Servico and listed on SCHEDULE 3.16, which matters, individually or in the aggregate, do not materially adversely impair the marketability of the Real Property as it is now used by AMI (the "Permitted Exceptions"). Except as disclosed on SCHEDULE 3.16, all Improvements are in good structural condition, free of any structural or other defect or impairment which impairs in any material respect the value, utility, or life expectancy of such Improvements, or which might otherwise adversely affect, in any material respect, the operation thereof. Except as disclosed on SCHEDULE 3.16 or on any surveys delivered to Servico, none of the Improvements encroach onto adjoining land or onto any easements and there is no encroachment of Improvements from adjoining land onto any of the Real Property. None of the Real Property is located in an area identified by any Governmental Entity as having special flood or mud slide hazards or wetlands. There are no soil or geological conditions which might impair or adversely affect in any material respect the current use of any of the Real Property. Except as set forth on SCHEDULE 3.16, neither the whole nor any portion of the Real Property is being condemned or otherwise taken by any public authority, nor is any such condemnation or taking, to the knowledge of Prime, threatened or contemplated. No portion of any of the Real Property is affected by any outstanding special assessments or impact fees imposed by any Governmental Entity. Except for any Permitted Exceptions, no commitments relating to the Real Property have been made to any Governmental Entity, utility company, school board, church or other religious body or any homeowner or homeowners association, merchant's association or any other organization, group or individual which would impose an obligation upon Prime, the General Partner or AMI or any of their successors or assigns to make any contribution or dedication of money or land or to construct, install or maintain any improvements of a public or private nature on or off the Real Property; and no Governmental Entity has imposed any requirement that any owner of the Real Property pay directly or indirectly any special fees or contributions or incur any expenses or obligations in connection with the Real Property. The parking facilities at each parcel of Real Property are adequate to comply with all Laws and the conduct of business on the respective properties as presently conducted or proposed to be conducted. Neither Prime nor the General Partner has any information or knowledge of (a) any change contemplated in any Law, (b) any judicial or administrative action, (c) any action by adjacent landowners, or (d) any other fact or condition of any kind or character which could materially adversely affect the current use or operation of the Real Property. Neither the General Partner nor any of its affiliates owns or leases, directly or indirectly, any property adjacent to the Real Property. Neither the air rights over the Real Property nor any other "development rights" with respect to the Real Property has been assigned, transferred, leased or encumbered. 3.17 INTANGIBLE PROPERTY. Except as set forth on SCHEDULE 3.17 or as would not, individually or in the aggregate, have a Prime Material Adverse Effect, AMI owns or possesses adequate licenses or other valid rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade dress, trade name rights, copyrights, service marks, trade secrets, applications for trademarks and for service marks, know-how and other proprietary rights and information used or held for use in connection with its business as currently conducted or proposed to be conducted , and neither Prime nor the General Partner is aware of any assertion or claim challenging the validity of any of the foregoing. The conduct of the respective businesses of Prime, the General Partner and AMI as currently conducted does not conflict in any way with any patent, patent right, license, trademark, trademark right, trade dress, trade name, trade name right, service mark or copyright of any third party that, individually or in the aggregate, would have a Prime Material Adverse Effect. To the knowledge of Prime, there are no infringements of any proprietary rights owned by or licensed by or to AMI that, individually or in the aggregate, would have a Prime Material Adverse Effect. -8- 13 3.18 GOVERNMENTAL AUTHORIZATIONS. Except as set forth on SCHEDULE 3.18, Prime, the General Partner and AMI have in full force and effect all authorizations, consents, approvals, franchises, certificates, operating authorities, licenses and permits required under applicable Law (collectively referred to as "Licenses") for the ownership of Prime's, the General Partner's and AMI's properties and operation of their businesses as presently operated, except where the failure to have any such Licenses could not reasonably be expected to have a Prime Material Adverse Effect. Except as set forth on SCHEDULE 3.18, none of the transactions contemplated hereby could reasonably be expected to have a material adverse effect on the status of any such License or require Prime, the General Partner or AMI to obtain any additional License to continue to operate their respective businesses as presently conducted. 3.19 INSURANCE. SCHEDULE 3.19 sets forth a list and description of all insurance policies existing as of the date hereof providing insurance coverage of any nature to Prime, the General Partner or AMI. All such policies are in full force and effect, are valid and enforceable in accordance with their terms and are sufficient for compliance with all Laws and all AMI Material Agreements. 3.20 EMPLOYMENT MATTERS. (a) LABOR RELATIONS. Except as set forth on SCHEDULE 3.20(A), the employees of Prime, the General Partner and AMI are not represented by any labor union and are not subject to a collective bargaining agreement. Neither Prime, the General Partner nor AMI have experienced any strike, work stoppage or labor disturbance with any group of employees and to Prime's knowledge, no set of facts exists which could reasonably be expected to lead to any of the foregoing events. (b) EMPLOYMENT AGREEMENTS. Except as set forth on SCHEDULE 3.20(B), there are no employment, consulting, severance or indemnification arrangements, agreements, or to the knowledge of Prime, material understandings between Prime, the General Partner or AMI and any officer, director, consultant or employee. Except as set forth on SCHEDULE 3.20(B), the terms of employment or engagement of all employees, agents, consultants and professional advisors of Prime, the General Partner or AMI are such that their employment or engagement may be terminated by not more than two weeks' notice given at any time without liability for payment of compensation or damages. (c) WINEGARDEN & HAMMONS AGREEMENTS. Set forth as SCHEDULE 3.20(C) are true and correct copies of the agreements with Winegarden & Hammons, Inc. for the management of AMI's properties and the administration of Prime. (d) EMPLOYEE BENEFIT PLANS. Except as set forth on SCHEDULE 3.20(D), there are no pension, retirement, stock or equity purchase, stock or equity bonus, stock or equity ownership, stock or equity option, profit sharing, savings, medical, disability, hospitalization, insurance, deferred compensation, bonus, incentive, welfare or any other employee benefit plan, policy, agreement, commitment or arrangement maintained by or binding upon Prime, the General Partner or AMI for any of their partners, directors, officers, consultants, employees or former employees (the "Prime Plans"). SCHEDULE 3.20(D) also identifies each Prime Plan which constitutes an "employee pension benefit plan" ("Prime Pension Plan") or an "employee welfare benefit plan" ("Prime Welfare Plan"), as such terms are defined in the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder ("ERISA"). None of the Prime Plans is a "multiemployer plan," as such term is defined in ERISA, or is subject to Title IV of ERISA. Each Prime Pension Plan has been determined to be qualified under Section 401(a) of the Code, and each such Plan remains so qualified; and to Prime's knowledge, no facts or circumstances -9- 14 exist which could result in the revocation of such qualification. Each Prime Welfare Plan which is intended to meet the requirements for tax-favored treatment under Subchapter B of Chapter 1 of the Code meets such requirements. Each Prime Plan has been administered in all material respects in accordance with its terms and the Code, and each Prime Pension Plan and Prime Welfare Plan has been administered in all material respects in accordance with ERISA. The assets of each Prime Plan are at least equal in value to the present value of the accrued benefits of participants of such Plan. No facts or circumstances exist which could reasonably be expected to give rise to any liability of any Prime Plan, Prime, AMI, the General Partner, Servico, SAC or to any other person. Prime or AMI has paid all amounts required under applicable Law, any Prime Pension Plan and any Prime Welfare Plan to be paid as a contribution to each Prime Pension Plan and Prime Welfare Plan through the date hereof. To the extent required by Law, Prime has set aside adequate reserves to meet contributions which are not yet due under any Prime Pension Plan or Prime Welfare Plan. Neither Prime, the General Partner, AMI nor any other person acting for or on behalf of any of them has engaged in any transaction or taken any other action with respect to any Prime Plan which would subject Prime, AMI or the General Partner to: (i) any Tax, penalty or liability for prohibited transactions under ERISA or the Code; (ii) any Tax under Code Sections 4971, 4972, 4976, 4977 or 4979; or (iii) a penalty under ERISA Sections 502(c) or 502(l). Neither Prime, the General Partner nor AMI, nor any director, partner, officer or employee of Prime, the General Partner or AMI, to the extent it or he is a fiduciary with respect to any Prime Pension Plan or Prime Welfare Plan, has breached any of its or his responsibilities or obligations imposed upon fiduciaries under ERISA or the Code or which could result in any claim being made under, by or on behalf of any Prime Pension Plan or Prime Welfare Plan or any participant or beneficiary thereof. Each Prime Welfare Plan which is a group health plan within the meaning of Code Section 5000(b)(1) complies in all material respects with and in each and every case has complied in all material respects with the applicable requirements of Code Section 4980B and Part 6 of Title I of ERISA and does not benefit retirees, except as otherwise required by law. As of the date thereof, there was no accrued vacation or sick leave payable to the directors or employees of Prime, the General Partner or AMI which is not reflected in the Prime Financial Statements. (e) PERSONNEL. SCHEDULE 3.20(E) sets forth: (i) the names of all officers of Prime, the General Partner and AMI; and (ii) the names and job designations of all employees of Prime, the General Partner and AMI whose cash compensation exceeds $75,000 per annum. Except as disclosed in the Prime Financial Statements and except for unpaid base compensation accrued in the ordinary course of business consistent with past practice since September 30, 1997, there are no material sums due to any employees of Prime, the General Partner or AMI. 3.21 MATERIAL AGREEMENTS. (a) SCHEDULE 3.21 sets forth a list of all written and oral agreements, arrangements or commitments (collectively, the "AMI Material Agreements") to which any of Prime, the General Partner or AMI is a party or by which it or any of its respective assets are bound which are or could reasonably be expected to be material to the financial position or results of operations of Prime, the General Partner or AMI, including, but not limited to, any: (i) contract, commitment, agreement or relationship resulting in a commitment or potential commitment for expenditure or other obligation or potential obligation, or which provides for the receipt or potential receipt, involving in excess of $100,000, or a series or related contracts, commitments, agreements or relationships that in the aggregate give rise to rights or liabilities exceeding such amounts; (ii) indenture, mortgage, promissory note, loan agreement, guarantee or other agreement or commitment relating to the borrowing of money, encumbrance of assets or guaranty of any obligation; (iii) licensing, franchise or royalty agreements or agreements providing for other similar rights or agreements with third parties; (iv) agreements which restrict Prime, the General Partner or AMI from engaging in any line -10- 15 of business or from competing with any other person or entity anywhere in the world; (v) agreements or arrangements for the sale of any of the assets, property or rights owned or utilized by AMI in the operation of its business or requiring the consent of any party to the transfer and assignment of such assets, property and rights, except for agreements or arrangements to sell products or services in the ordinary course of business consistent with past practices; (vi) agreement, contract or arrangement with any affiliate of Prime, the General Partner or AMI or any affiliate of any partner, officer, director or employee of Prime, the General Partner or AMI; (vii) lease of or agreement to purchase real property; (viii) indemnification, contribution or similar agreement or arrangement pursuant to which Prime, the General Partner or AMI may be required to make any indemnification or contribution to any other person except to the extent provided in the Certificate of Limited Partnership or Limited Partnership Agreement of Prime or AMI or the Certificate of Incorporation or bylaws of the General Partner, as in effect on the date hereof; or (ix) other material contract, agreement or instrument which cannot be terminated without penalty to Prime, the General Partner or AMI, upon the provision of not greater than 30 days notice. (b) Except as set forth on SCHEDULE 3.21, all AMI Material Agreements have been entered into on an "arms-length" basis with parties who are not affiliates of Prime, the General Partner or AMI. Except as set forth on SCHEDULE 3.21, the AMI Material Agreements are each in full force and effect and are the valid and legally binding obligations of AMI, Prime or the General Partner, as the case may be, and, to the best of Prime's knowledge (without independent inquiry), have not been breached by any of the other parties thereto and are valid and binding obligations of the other parties thereto. Neither Prime, the General Partner nor AMI is in default under the Certificate of Limited Partnership or Limited Partnership Agreement of Prime or AMI or the Certificate of Incorporation or bylaws of the General Partner or in default or alleged default under any AMI Material Agreement and no event has occurred which with the giving of notice or lapse of time or both would constitute such a default. 3.22 RELATED PARTY TRANSACTIONS. Except as set forth on SCHEDULE 3.22 or reflected in the Prime Financial Statements, neither Prime nor the General Partner nor any director, officer, partner or shareholder of Prime, the General Partner or AMI, nor to Prime's knowledge, any employee of Prime, AMI or the General Partner (individually a "Prime Related Party" and collectively the "Prime Related Parties") or any affiliate of any Prime Related Party: (i) owns, directly or indirectly, in whole or in part, any material property, asset (other than cash) or right, real, personal or mixed, tangible or intangible, which is associated with or necessary in the operation of the business of AMI, as presently conducted or (ii) has an interest in or is, directly or indirectly, a party to any AMI Material Agreement or any other contract, agreement, lease or arrangement to which AMI is bound or is a party. 3.23 TAX MATTERS. (a) All federal, state, local and foreign Tax returns and Tax reports, if any, required to be filed with respect to the business or assets of Prime, AMI or the General Partner have been filed with the appropriate governmental agencies in all jurisdictions in which such returns and reports are required to be filed; all of the foregoing as filed are true, correct and complete in all material respects, and in all material respects reflect accurately all liability for Taxes of Prime, AMI and the General Partner for the periods for which such returns relate; and all amounts shown as owing thereon have been paid. Except as set forth on SCHEDULE 3.23, none of such returns or reports have been audited by any Governmental Authority. (b) Except as set forth in SECTION 3.23, none of Prime, AMI or the General Partner will have any liability with respect to Taxes, if any, payable by them or relating to or chargeable against any of their assets, revenues or income through September 30, 1997, including, but not limited -11- 16 to, interest and/or penalties, in excess of the amounts paid through the date hereof or provided for by adequate reserves on the books of Prime, AMI or the General Partner, as the case may be; and none of Prime, AMI or the General Partner will have any liability with respect to any such Taxes through the Closing in excess of the amounts paid through the date thereof or then provided for by adequate reserves on the books of Prime, AMI or the General Partner, as the case may be. (c) None of Prime, AMI nor the General Partner has waived any restrictions on assessment or collection of Taxes or consented to the extension of any statute of limitations relating to federal, state, local or foreign taxation. (d) Set forth on SCHEDULE 3.23 is a summary of all disputes, claims and appeals by Prime, AMI, the General Partner or any governmental authority with respect to Taxes. 3.24 DISCLOSURE. No representation or warranty of Prime or the General Partner herein (including the exhibits and schedules hereto), and no certificate furnished or to be furnished by or on behalf of Prime or the General Partner to Servico or its agents pursuant to this Agreement, contains or will, at the time it is made, contain any untrue statement of a material fact or omits or will, at the time it is made, omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. ARTICLE IV COVENANTS ---------- 4.1 INTERIM OPERATIONS OF AMI. Except as set forth on SCHEDULE 4.1, during the period from the date of this Agreement to the Closing, the General Partner shall use its best efforts to cause each of AMI and Prime to operate its business only in the usual and ordinary course consistent with past practices and (i) preserve intact its business organization and goodwill in all respects, (ii) continuously maintain insurance coverage substantially equivalent to the insurance coverage in existence on the date hereof, and (iii) maintain its relationships with franchisors, licensors, distributors, suppliers and others with which it has business relations. Additionally, the General Partner shall cause any proceeds from the sales of any properties of AMI to be used solely to (a) pay costs and expenses of or related to such sales, (b) pay any prepayment penalties in connection with the repayment of AMI's outstanding indebtedness to persons other than Prime Related Parties, (c) repay such indebtedness, or (d) fund renovations to AMI's existing properties. Except as otherwise expressly contemplated herein or set forth on SCHEDULE 4.1, without the written consent of Servico (which shall not be unreasonably withheld or delayed and shall be deemed to have been given if not expressly denied within ten (10) days after written request therefor), Prime shall not, nor shall it cause or permit AMI to, (i) amend or otherwise change its Certificate of Limited Partnership or Limited Partnership Agreement; (ii) issue, sell or authorize for issuance or sale, any partnership interests or shares of any class of its securities or other equity interests or any subscriptions, options, warrants, rights or convertible securities or enter into any agreements or commitments of any character obligating it to issue or sell any such partnership interests, securities or other equity interests; (iii) redeem, purchase or otherwise acquire, directly or indirectly, any of its partnership interests or other equity interests or any option, warrant or other right to purchase or acquire any such partnership interests or other equity interests or return all or any portion of any capital contributions; (iv) enter into any commitment or transaction (including, but not limited to, any capital expenditure or sale of assets), other than in the ordinary course of business consistent with past practices; provided, however, that, except as set forth on SCHEDULE 4.1, no commitment or transaction involving the receipt or potential receipt of in excess of One Hundred Thousand Dollars ($100,000) or payment -12- 17 or potential payment of in excess of One Hundred Thousand Dollars ($100,000) shall be entered into without the prior written consent of Servico; (v) create, incur, assume, maintain or permit to exist any long-term indebtedness or short-term indebtedness or indebtedness for borrowed money (including purchase money financing), except in the ordinary course of business consistent with past practices under an existing loan availability, or any lien, pledge, mortgage or other encumbrance affecting any of its assets; (vi) pay, discharge or satisfy claims, liabilities or obligations (absolute, accrued, contingent or otherwise) which involve payments or commitments to make payments which exceed normal business operating requirements, consistent with past practice; (vii) cancel any debts or waive any claims or rights; (viii) make any loans, advances or capital contributions to, or investments in financial instruments of, any person or entity; (ix) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person or entity; (x) grant any increase in the compensation payable or to become payable to any of its partners, officers, employees or consultants or establish, adopt or increase any bonus, insurance or other employee benefit plan, payment or arrangement made to, for or with any such persons or pay any bonus to any manager, partner, officer, director or employee, except to persons other than officers, directors or consultants of AMI or Prime pursuant to existing plans in amounts and at times in conformity with such plans and consistent with past practices; (xi) enter into any employment agreement or grant any severance or termination pay with or to any partner, officer, director or employee, except to persons other than officers, directors or consultants of AMI or Prime pursuant to existing plans in amounts and at times in conformity with such plans and consistent with past practices; (xii) declare or pay any distribution (whether in cash or other property) with respect to its partnership interests; (xiii) alter in any way the manner of keeping its books, accounts or records or its accounting practices therein reflected; (xiv) enter into any agreement which would be an AMI Material Agreement or amend, terminate, renew or modify any existing AMI Material Agreement; (xv) enter into any indemnification, contribution or similar agreement requiring it to indemnify any other person or entity or make contributions to any other person or entity; (xvi) do any act, or omit to do any act, or permit, to the extent within Prime's or AMI's control, any act or omission to act which would cause a violation or breach of any of the representations, warranties or covenants of Prime or the General Partner set forth in this Agreement; (xvii) sell, transfer, surrender, abandon or dispose of any of its assets or property rights (tangible or intangible), other than in the ordinary course of business consistent with past practices or, with respect to any hotel properties, only pursuant to AMI Material Agreements currently in effect and disclosed on SCHEDULE 3.21 or as otherwise set forth on SCHEDULE 4.1; (xviii) enter into any agreement or take any action which could have a Prime Material Adverse Effect (financial or otherwise); or (xix) agree, whether in writing or otherwise, to do any of the foregoing. 4.2 ACCESS. Prime and the General Partner shall: (i) afford to Servico and its agents and representatives full access to the properties, books, records and other information of Prime, AMI and the General Partner, provided that such access shall be granted upon reasonable notice and at reasonable times during normal business hours in such a manner as to not unreasonably interfere with normal business operations; (ii) use its reasonable efforts to cause Prime's, the General Partner's and AMI's personnel, without unreasonable disruption of normal business operations, to assist Servico in its investigation of Prime, AMI and the General Partner pursuant to this Section 4.2; and (iii) promptly make available to Servico such information and documents concerning the business, assets, liabilities, properties and personnel of Prime, AMI and the General Partner as Servico may from time to time reasonably request and as can be provided without unreasonable expense or disruption of normal business operations. Prime and the General Partner shall use their best efforts to cause their advisors, consultants, contractors and managers to cooperate with Servico and its agents and representatives, and to make available to Servico and its agents and representatives, information and documents, on terms and subject to conditions similar to those provided in the preceding sentence and subject to the reimbursement by Servico or its agents and representatives of the reasonable out- -13- 18 of-pocket costs or expenses (but not fees) of such advisors, consultants, contractors and managers associated with making available such information and documents. 4.3 SCHEDULES. Immediately following the execution and delivery of this Agreement, Prime, AMI and the General Partner, together with their advisors, representatives, and counsel, shall commence, and proceed as promptly as practicable with, the preparation of the Schedules hereto, which Schedules shall be delivered to Servico not later than three (3) weeks after the execution and delivery hereof. Servico or its advisors, representatives and counsel may participate in such process (as part of their review contemplated by Section 4.2 and not as the preparers of such Schedules). 4.4 CONSENTS. Each of Prime, the General Partner and Servico agrees to cooperate with each other, file, submit or request promptly after the date of this Agreement and to prosecute diligently any and all applications or notices required to be filed or submitted to any Governmental Entity, including those specified in Sections 2.4 and 3.7. Each of Prime, the General Partner and Servico shall promptly make available to the other such information as each of them may reasonably request relating to its business, assets, liabilities, properties and personnel as may be required by each of them to prepare and file or submit such applications and notices and any additional information requested by any Governmental Entity, and shall update by amendment or supplement any such information given in writing. Each of Prime, the General Partner and Servico represents and warrants to the other that such information, as amended or supplemented, shall be an accurate and complete description of the information or data purported to be shown. Each of Prime and Servico shall promptly provide the other with copies of all filings made with Governmental Entities in connection with this Agreement. 4.5 REASONABLE EFFORTS. Subject to the terms and conditions of this Agreement, each of the parties shall use its reasonable efforts in good faith to take or cause to be taken as promptly as practicable all reasonable actions that are within its control to cause to be fulfilled those conditions precedent to its obligations to consummate the transactions contemplated by this Agreement. The parties shall use reasonable efforts to obtain all consents and approvals required in connection with the consummation of the transactions contemplated by this Agreement. 4.6 NOTIFICATION. Each party to this Agreement shall promptly notify the other parties in writing of the occurrence, or threatened occurrence, of (i) any event that, with the lapse of time or notice or both, would constitute a violation or breach of this Agreement by such party, (ii) any event that would cause any representation or warranty made by such party in this Agreement to be false or misleading in any respect; and (iii) any other matter which may occur from and after the date of this Agreement which, if existing on the date of such Agreement, would have been required to be disclosed herein. The updating of any schedule pursuant to this Section 4.6 shall not be deemed to release any party for the breach of any representation, warranty or covenant hereunder or of any other liability arising hereunder. 4.7 NO SOLICITATION. Except for the transactions contemplated by this Agreement, unless and until this Agreement shall have been terminated, Prime and the General Partner shall not (nor shall they permit AMI or any of its or their partners, shareholders, officers, directors, agents or affiliates to) directly or indirectly (i) solicit, encourage (including by furnishing information to any third party or group), initiate or, except as provided in the proviso to this sentence, participate in any negotiations or discussions with respect to any offer or proposal to acquire all or substantially all of the business and assets or capital stock or partnership interests of Prime, AMI or the General Partner, whether by merger, purchase of assets or otherwise, or (ii) except as required by Law, disclose any nonpublic information or any other information not customarily disclosed to any person or entity concerning the business and assets of Prime, the General Partner and AMI, afford to any person or -14- 19 entity (other than Servico and its designees) access to the books or records of Prime, the General Partner or AMI or otherwise assist or encourage any person or entity in connection with any of the foregoing; provided, however, that Prime, AMI and/or the General Partner may entertain, participate in negotiations or discussions with respect to, and accept, any unsolicited offer or proposal that Prime, AMI and/or the General Partner reasonably determines, considering all of the terms and conditions of the transactions contemplated by this Agreement and all of the terms and conditions of such offer or proposal, is more favorable to the Limited Partners. In the event that Prime, AMI or the General Partner shall receive or become aware of any offer or proposal of the type referred to in clause (i) above or the proviso to the preceding sentence, Prime shall promptly inform Servico of such offer or proposal and the terms and provisions thereof. 4.8 CONFIDENTIALITY. The parties acknowledge that all confidential or proprietary information with respect to the business and operations of the other party and their respective subsidiaries is valuable, special and unique. The parties shall not disclose, directly or indirectly, to any person or entity, or use or purport to authorize any person or entity to use any confidential or proprietary information with respect to the other party or any of their respective subsidiaries for any purpose other than the evaluation of the transactions contemplated by this Agreement, without the prior written consent of the other party, including without limitation, information as to the financial condition, results of operations, customers, suppliers, products, products under development, services, services under development, inventions, sources, leads or methods of obtaining new business, pricing methods or formulas, costs, marketing strategies or any other information relating to Prime, the General Partner, AMI, SAC or Servico or any of their respective subsidiaries, which could reasonably be regarded as confidential or proprietary (whether such data is obtained from such party or its affiliates, from advisors or consultants to, or managers for, or representatives of such party or its affiliates, or from other parties in a relationship of confidentiality with such party or its affiliates, and without regard to the form or medium in which such information is embodied), but not including information which (i) is or shall become generally available to the public other than as a result of an unauthorized disclosure by any of the parties or any of its affiliates, (ii) becomes available to the other party on a nonconfidential basis from a source other than a party to this Agreement, provided such source is not in violation of a confidentiality agreement with the party providing such information or (iii) is required to be disclosed by law or by the rules and regulations of the NYSE. The covenants of the parties contained in this Section 4.8 shall survive any termination of this Agreement. In the event that the transactions contemplated by this Agreement are consummated, Servico's obligations under this Section 4.8 with respect to Prime, the General Partner and AMI shall terminate. 4.9 PUBLICITY. The parties agree to reasonably cooperate in issuing any press release or other public announcement or making any governmental filing concerning this Agreement or the transactions contemplated hereby. Nothing contained herein shall prevent any party from at any time furnishing any information to any Governmental Entity which it is by Law or pursuant to the rules and regulations of the NYSE so obligated to disclose or from making any disclosure which its independent outside counsel (which may be such party's regularly engaged outside counsel) deems (in the case of non-governmental filings, in writing) necessary in order to fulfill such party's disclosure obligations under applicable law, or the rules and regulations of the NYSE; provided, however, that such party shall afford the other parties prompt notice of the proposed disclosure and the opportunity to seek a protective order or other relief. If such order or other relief is denied, or the provisions of the foregoing proviso are waived, the disclosing party shall disclose only so much of any confidential or proprietary information as is required under the circumstances to be disclosed. -15- 20 4.10 PROXY STATEMENT. (a) As promptly as practicable after the execution of this Agreement, Prime shall prepare and file with the SEC a proxy statement with respect to the transactions contemplated by this Agreement relating to the special meeting of Prime's Limited Partners (the "Prime Special Meeting") to be held to consider the approval of this Agreement and the transactions contemplated hereby (such document, together with any amendments thereto, the "Proxy Statement"). Servico shall furnish all information concerning Servico, its offer contemplated by this Agreement, and, to the extent required by applicable Law, its analysis of and plans for AMI's properties, as Prime may reasonably request in connection with the preparation of the Proxy Statement. The Proxy Statement shall be mailed to the Limited Partners of Prime as promptly as practicable. Prime shall cause the Proxy Statement to comply as to form and substance in all material respects with the applicable requirements of the Exchange Act and all other applicable Law and shall ensure that none of the information included in the Proxy Statement shall, at (i) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the Limited Partners of Prime or (ii) the time of the Prime Special Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) The Proxy Statement shall include the recommendation of the General Partner to Prime's Limited Partners that they vote in favor of approval of this Agreement and the transactions contemplated hereby. (c) No amendment or supplement to the proxy statement filed with the SEC, shall be made without the approval of Servico, which approval shall not be unreasonably withheld or delayed. Prime shall promptly advise Servico of any request by the SEC for amendment of such proxy statement or comments thereon and responses thereto or requests by the SEC for additional information. 4.11 SPECIAL MEETING. Prime shall call and hold the Prime Special Meeting as promptly as practicable for the purpose of voting upon the approval of this Agreement pursuant to the Proxy Statement and the transactions contemplated hereby. Prime shall use its best efforts to solicit from its Limited Partners, proxies in favor of the approval of this Agreement and the transactions contemplated hereby pursuant to the Proxy Statement and shall take such other action as is reasonably necessary or advisable to secure the vote or consent of Limited Partners required by applicable Law. 4.12 DISSOLUTION OF PRIME. Immediately after the Closing, Prime shall wind up its affairs, dissolve and distribute the Purchase Price to its Limited Partners in accordance with the terms of its Limited Partnership Agreement and the Delaware Revised Uniform Limited Partnership Act. ARTICLE V ADDITIONAL AGREEMENTS --------------------- 5.1 SURVIVAL OF THE REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. The representations and warranties of Prime, the General Partner and Servico contained in this Agreement shall terminate at the Closing. 5.2 INVESTIGATION. The representations, warranties, covenants and agreements of this Agreement shall not be affected or diminished in any way by the receipt of any notice pursuant to Section 4.6 or by any investigation (or failure to investigate) at any time by or on behalf of the party for whose benefit such representations, warranties, covenants and agreements were made. All -16- 21 statements contained herein or in any schedule, certificate, exhibit, list or other document delivered pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties for purposes of this Agreement. 5.3 INDEMNIFICATION. (a) For a period of six years after the Closing, Servico shall, subject to applicable Law, indemnify, defend and hold harmless the present directors and officers of the General Partner (each a "Prime Indemnified Party") against all losses, claims, demands, costs, damages, liabilities, expenses, judgments, fines, settlements and other amounts arising out of actions or omissions occurring at or prior to the Closing to the same extent (including mandatory advancement of expenses) but without limitation as to amount as provided under the Limited Partnership Agreements of Prime and AMI and the Certificate of Incorporation and bylaws of the General Partner. During such period, Servico shall obtain or maintain in effect a directors' and officers' liability insurance policy or a noncancellable runoff policy insuring the Prime Indemnified Parties, with coverage in amount and scope substantially equivalent to the General Partner's existing coverage, for events or occurrences prior to the Closing. (b) For purposes of the foregoing, (i) any claim against S. Leonard Okin in his capacity as a consultant to Prime, AMI or the General Partner shall be deemed to be a claim against him as an officer of the General Partner and (ii) any claim against Paul H. Rich or Siegel Rich Inc. as a consultant to Prime, AMI or the General Partner shall be deemed to be a claim against Seymour G. Siegel as a director of the General Partner. (c) The indemnification provided for above shall (i) include any claim against any Prime Indemnified Party arising directly or indirectly out of this Agreement and (ii) if litigation is commenced against such Prime Indemnified Party which has not finally concluded within six (6) years after the Closing, continue until such litigation is finally concluded. (d) If a claim under this Section 5.3 is not paid in full by Servico within sixty (60) days after a written claim has been received by Servico, the indemnified party may at any time thereafter bring suit against Servico to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by Servico to recover an advancement of expenses pursuant to an undertaking, such person shall be entitled to be paid also the expenses of prosecuting or defending such suit. (e) In any suit brought by an indemnified party to enforce a right to indemnification or to an advancement of expenses pursuant to the terms of an undertaking, the burden of providing that such person is not entitled to be indemnified, or to such advancement of expenses, shall be on Servico. (f) For a period of six (6) years after the Closing, Servico shall, subject to applicable law, indemnify, defend and hold harmless Furman Selz to the same extent, and on the same terms and subject to the same conditions, that Prime and the General Partner had agreed to indemnify and hold harmless Furman Selz. A complete and correct copy of such agreement shall be provided to Servico with the Schedules contemplated in Section 4.3. (g) During the term of this Agreement, Servico shall pay all reasonable expenses (including reasonable attorneys' fees) incurred by any Prime Indemnified Party in defending any proceeding brought by any of the Limited Partners against such Prime Indemnified Party as a consequence of the execution and delivery of this Agreement and the proposed sale of the Limited -17- 22 Partnership Interest to SAC pursuant to this Agreement. Servico's obligations under this paragraph 5.3(g) shall terminate upon termination of this Agreement. ARTICLE VI CONDITIONS PRECEDENT -------------------- 6.1 MUTUAL CONDITIONS PRECEDENT. The respective obligations of the parties to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions: (a) GOVERNMENTAL CONSENTS. All material consents and approvals required by Governmental Entities for the consummation of the transactions contemplated by this Agreement shall have been obtained. (b) NO LITIGATION. No litigation, arbitration or other proceeding shall be pending or, to the knowledge of the parties, threatened by or before any court, arbitration panel or governmental authority, and no law or regulation shall have been enacted after the date of this Agreement; and no judicial or administrative decision shall have been rendered, which, in each case, enjoins, prohibits or materially restricts, or seeks to enjoin, prohibit or materially restrict, the consummation of the transactions contemplated by this Agreement. (c) PARTNERSHIP APPROVALS. The Limited Partners of Prime shall have approved this Agreement and the transactions contemplated hereby in accordance with its Certificate of Limited Partnership and Limited Partnership Agreement. (d) GENERAL PARTNER PURCHASE AGREEMENT. Servico shall have entered into a binding agreement with the General Partner pursuant to which Servico will acquire the GP Interest and Servico or its designee will be substituted and admitted as the sole general partner of AMI. 6.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SERVICO. The obligations of Servico to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE. Each of the representations and warranties of Prime and the General Partner contained herein or in any certificate or other document delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects (except for such representations and warranties qualified by materiality which shall be true and correct in all respects) as of the Closing with the same force and effect as though made on and as of such date, except that representations as to agreements, licenses, franchises, rights, conditions, facts or relationships that will terminate or be altered at the Closing by virtue of the Closing or changes in relationships caused by the Closing shall be understood to have no force, or validity beyond the Closing. (b) PERFORMANCE. Prime and the General Partner shall have performed and complied in all material respects with all of the agreements, covenants and obligations required under this Agreement to be performed or complied with by them prior to or at the Closing. (c) NO MATERIAL ADVERSE EFFECT. There shall not have occurred any event or condition which has adversely affected or is reasonably likely to adversely affect in any material -18- 23 respect the condition (financial or otherwise) of AMI or its assets, liabilities (whether absolute, accrued, contingent or otherwise), earnings, business, prospects or operations. (d) CONSENTS AND AGREEMENTS. Prime and the General Partner shall have obtained all material authorizations, consents, waivers and approvals required in connection with the consummation of the transactions contemplated hereby. (e) OPINION OF COUNSEL. Servico shall have received from Brown & Wood LLP, legal counsel to Prime, an opinion letter, dated as of the Closing, in form and substance reasonably satisfactory to Servico, with respect to the matters set forth in EXHIBIT 6.2(e) to this Agreement. (f) CERTIFICATES. Prime shall have delivered to Servico a certificate executed by the principal executive officer of the General Partner, dated as of the Closing, certifying in such detail as Servico may reasonably request, that (i) the conditions specified in Sections 6.2(a) and (b) (insofar as they are to be performed by or Prime or the General Partner) have been fulfilled and (ii) attached to such certificate is a true and correct copy of the resolutions or consents of the Board of Directors of the General Partner authorizing the execution, delivery and performance of this Agreement by Prime and the General Partner. Servico shall also have received (i) a certificate from the Secretary of the General Partner as to the incumbency and signatures of the officers of Prime and the General Partner executing this Agreement, and (ii) a certificate issued by the Secretary of State of Delaware and of each state in which the General Partner or AMI is qualified to do business, as of a date reasonably acceptable to Servico, as to the good standing of the General Partner and AMI in those states. (g) CONSULTING AGREEMENT. Servico shall enter into a Consulting Agreement with Mr. Leonard Okin in the form attached as EXHIBIT 6.2(g) hereto. 6.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRIME AND THE GENERAL PARTNER. The obligations of Prime and the General Partner to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE. Each of the representations and warranties of Servico contained herein or in any certificate or document delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects (except for such representations and warranties qualified by materiality which shall be true and correct in all respects) on and as of the Closing with the same force and effect as though made on and as of such date. (b) PERFORMANCE. Servico shall have performed and complied in all material respects with all of the agreements, covenants and obligations required under this Agreement to be performed or complied with by it prior to or at the Closing. (c) CONSENTS AND AGREEMENTS. Servico shall have obtained all material authorizations, consents, waivers and approvals required in connection with the consummation of the transactions contemplated hereby. (d) OPINION OF COUNSEL. Prime and the General Partner shall have received from Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., legal counsel to Servico, an opinion letter, dated as of the Closing, in form and substance reasonably satisfactory to Prime and the General Partner, with respect to the matters set forth in EXHIBIT 6.3(d) to this Agreement. -19- 24 (e) SERVICO'S CERTIFICATES. Servico shall have delivered to Prime a certificate executed by its Chairman and President, dated as of the Closing, certifying in such detail as Prime may reasonably request, that: (i) the conditions specified in Sections 6.3(a) and (b) (insofar as they are to be performed by Servico) have been fulfilled; and (ii) attached to such certificate is a true and correct copy of the resolutions of the Board of Servico authorizing the execution, delivery and performance of this Agreement by Servico. Prime and the General Partner shall also have received (i) a certificate from the Secretary of Servico as to the incumbency and signatures of the officers of Servico executing this Agreement and (ii) a certificate issued by the Secretary of State of Florida as to the due formation, valid existence and good standing of Servico in Florida. 6.4 TERMINATION. This Agreement may be terminated at any time prior to the date of Closing, as follows: (a) by mutual written consent of Servico and Prime; (b) by either Servico or Prime, if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated hereby, and such order, decree, ruling or other action shall have become final and nonappealable; (c) by either Servico or Prime, if the Closing has not occurred by June 1, 1998 (such date or such later date mutually agreed to in writing by the parties hereto referred to as the "End Date") (other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed at or prior to the Closing); (d) by either Servico or Prime, if the Prime Special Meeting shall have been held, and the Limited Partners shall have failed to approve this Agreement; (e) by Servico at any time in its sole discretion if any of the representations or warranties of Prime or the General Partner in this Agreement are not in all material respects true and correct, or if Prime or the General Partner breach in any material respect any covenant contained in this Agreement, provided that if such misrepresentation or breach is curable, it is not cured within ten business days after notice thereof, but in any event prior to the End Date; (f) by Prime at any time in its sole discretion if any of the representations or warranties of Servico or SAC in this Agreement are not in all material respects true and correct, or if Servico or SAC breach in any material respect any covenant contained in this Agreement, provided that if such misrepresentation or breach is curable, it is not cured within ten business days after notice thereof, but in any event prior to the End Date; (g) by Servico, in Servico's sole discretion, at any time prior to the passage of seven (7) days after delivery to Servico of the Schedules contemplated in Section 4.3; or (h) by Prime, if Prime has not obtained prior to seven (7) days after execution and delivery of this Agreement, the required approval of the holders of AMI's outstanding secured indebtedness to the application of AMI's available funds to the payment of up to $700,000 of the fees and expenses of this transaction, including the fees and expenses of Furman Selz, the fees and expenses of Brown & Wood LLP, the costs of preparing, filing, printing and distributing the Proxy Statement, and the cost of holding the Prime Special Meeting. -20- 25 If this Agreement is terminated pursuant to this Section 6.4, written notice thereof shall promptly be given by the party electing such termination to the other party and, subject to the expiration of the cure periods provided in clauses (e) and (f) above, if any, this Agreement shall terminate without further actions by the parties and no party shall have any further obligations under this Agreement except to the extent provided in Section 7.8; provided that any termination of this Agreement pursuant to this Section 6.4 shall not relieve any party from any liability for the willful or intentional breach of any of its representations or warranties or the willful or intentional breach of any of its covenants or agreements contained in this Agreement. Notwithstanding the termination of this Agreement, the respective obligations of the parties under Sections 4.8 (Confidentiality), 4.9 (Publicity), 7.8 (Fees and Expenses), 7.12 (Litigation; Prevailing Party), 7.14 (Injunctive Relief) and 7.15 (Governing Law) shall survive the termination of this Agreement. Subject to Section 4.7 hereof, upon termination of this Agreement, each party shall return all documents and other materials of any other party relating to the transactions contemplated by this Agreement, whether so obtained before or after the execution of this Agreement, to the party furnishing the same. ARTICLE VII MISCELLANEOUS ------------- 7.1 FURTHER ASSURANCES. The parties hereto shall deliver any and all other instruments or documents required to be delivered pursuant to, or necessary or proper in order to give effect to, all of the terms and provisions of this Agreement including, without limitation, all necessary bulk of sale, assignments and such other instruments of transfer as may be necessary or desirable to transfer ownership. 7.2 NOTICES. Any notice or other communication under this Agreement shall be in writing and shall be delivered personally or sent by registered mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below their names on the signature pages of this Agreement (or at such other addresses as shall be specified by the parties by like notice). Such notices, demands, claims and other communications shall be deemed given when actually received or (a) in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery, (b) in the case of registered U.S. mail, five days after deposit in the U.S. mail, or (c) in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise. A copy of any notices delivered to Servico or SAC shall also be sent to Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., 150 West Flagler Street, Suite 2200, Miami, Florida 33130, Attention: Alison W. Miller, Esq. A copy of any notices delivered to Prime or the General Partner shall also be sent to Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, Attention: Michael G. Wolfson, Esq. 7.3 ENTIRE AGREEMENT. This Agreement, along with the Schedules and Exhibit hereto, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings, negotiations and discussions, both written and oral, among the parties hereto with respect to the subject matter hereof. This Agreement may not be amended or modified in any way except by a written instrument executed by all of the parties hereto. 7.4 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party without the written consent of the other parties hereto (whether by operation of Law or otherwise). Subject to the preceding sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, personal representatives, legal representatives, and assigns. -21- 26 7.5 WAIVER. At any time prior to the date of Closing, any representation, warranty, covenant, term or condition of this Agreement which may legally be waived, may be waived, or the time of performance thereof extended, at any time by the party hereto entitled to the benefit thereof, and any term, condition or covenant hereof may be amended by the parties hereto at any time. Any such waiver, extension or amendment shall be evidenced by an instrument in writing duly executed on behalf of the appropriate party by a person who has been authorized by its Board of Directors, in the case of Servico and the General Partner, or the General Partner, on behalf of Prime, to execute waivers, extensions or amendments on its behalf. No waiver by any party hereto, whether express or implied, of its rights under any provision of this Agreement shall constitute a waiver of such party's rights under such provisions at any other time or a waiver of such party's rights under any other provision of this Agreement or any other agreement. No failure by any party hereto to take any action against any breach of this Agreement or default by another party shall constitute a waiver of the former party's right to enforce any provision of this Agreement or to take action against such breach or default or any subsequent breach or default by such other party. 7.6 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person other than the parties hereto and their respective heirs, personal representatives, legal representatives, successors and permitted assigns, any rights or remedies under or by reason of this Agreement other than the Limited Partners with respect to the provisions of Section 4.12 hereto. 7.7 SEVERABILITY. In the event that any one or more of the provisions contained in this Agreement shall be declared invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect, and such invalid, void or unenforceable provision shall be interpreted as closely as possible to the manner in which it was written. 7.8 FEES AND EXPENSES. (a) Except as provided below, all fees and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses. In no event shall the aggregate fees and expenses incurred by or on behalf of AMI in connection with this Agreement and any of the transactions contemplated herewith exceed $700,000 in the aggregate. (b) If this Agreement shall be terminated pursuant to Section 6.4(e) as the result of an intentional or willful breach by Prime or the General Partner of any representation, warranty or covenant contained herein, then Prime shall pay Servico an amount equal to all costs and out-of-pocket expenses (including reasonable attorneys' and advisors' fees) of up to $300,000 incurred by Servico in connection with this Agreement and the transactions contemplated by this Agreement. (c) If this Agreement shall be terminated pursuant to Section 6.4 (f) as the result of an intentional or willful breach by Servico of any representation, warranty or covenant contained herein, then Servico shall pay Prime an amount equal to all costs and out-of-pocket expenses (including reasonable attorneys' and advisors fees, including the fees and expenses of Furman Selz) of up to $700,000 incurred by Prime in connection with this Agreement and the transactions contemplated by this Agreement. (d) If this Agreement shall be terminated by Prime for any reason other than pursuant to Section 6.4(f) and, at the time of such termination, there shall exist or be proposed a Competing Transaction then, promptly after the execution of any agreement with respect to the Competing Transaction or, if no agreement is executed, the consummation of the Competing -22- 27 Transaction, Prime shall pay to Servico $1 million. A "Competing Transaction" means any of the following involving Prime or AMI, as the case may be (other than the transactions contemplated by this Agreement): (i) a merger, consolidation, exchange, business combination or other similar transaction, (ii) any sale, lease, exchange, transfer or other disposition of 15% or more of the assets of such party other than sales of properties pursuant to AMI Material Agreements currently in effect and disclosed on SCHEDULE 3.21 or as agreed to in writing by Servico, or (iii) a tender offer or exchange offer for 15% or more of the outstanding limited partnership interests of Prime. (e) If this Agreement is terminated other than pursuant to Sections 6.4(e) and (g) (in which case no amounts will be payable by Servico hereunder), Servico shall, within five (5) business days after such termination, reimburse Prime and the General Partner for up to $100,000 of the fees and reasonable expenses of Furman Selz. (f) Each party agrees that the actual damages accruing from termination of this Agreement pursuant to the termination provisions referenced in Section 7.8(b), (c) or (d) are incapable of precise estimation and would be difficult to prove, and that the damages stipulated herein bear a reasonable relationship to the potential injury likely to be sustained in the event of termination pursuant to such occurrence. The payments stipulated in Section 7.8(b), (c) or (d) are intended by the parties to provide just compensation in the event of termination pursuant to said termination provision referenced in Section 7.8(b), (c) or (d), and are not intended to compel performance or to constitute a penalty for nonperformance. (g) Any payment required to be made pursuant to Section 7.8(b), (c) or (d) shall be made not later than five business days after the occurrence of the event for which a party is entitled to payment and delivery by such party to the other party of a notice of demand for payment, provided that such notice shall include an itemization setting forth in reasonable detail all expenses of such party for which it is entitled to reimbursement hereunder (which itemization may be supplemented and updated from time to time by such party until the sixtieth day after such party delivers such notice of demand for payment). All payments required to be made pursuant to this Section 7.8 shall be made by wire transfer of immediately available funds to an account designated by such party in the notice of demand for payment delivered pursuant to this Section 7.8(g). (h) In the event a party shall fail to make any payment required pursuant to Section 7.8(b), (c), (d) or (e), the amount of any such required payment shall be increased to include the costs and expenses actually incurred or accrued by the other party (including, without limitation, fees and expenses of counsel) in connection with the collection under and enforcement of this Section 7.8, together with interest on such unpaid amounts commencing on the date that such payment under Section 7.8(b), (c),(d) or (e) became due, at a rate equal to the rate of interest publicly announced by Citibank, N.A., from time to time, in The City of New York, from time to time, as such bank's base rate plus 2.00%. 7.9 SECTION HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of any provisions of this Agreement. 7.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the several parties hereto in separate counterparts, each of which shall be deemed to be one and the same instrument. 7.11 TIME OF ESSENCE. Wherever time is specified for the doing or performance of any act or the payment of any funds, time shall be considered of the essence. -23- 28 7.12 LITIGATION; PREVAILING PARTY. In the event of any litigation with regard to this Agreement, the prevailing party shall be entitled to receive from the non-prevailing party and the non-prevailing party shall pay upon demand all reasonable fees and expenses of counsel for the prevailing party. 7.13 REMEDIES CUMULATIVE. No remedy made available by any of the provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity. 7.14 INJUNCTIVE RELIEF. It is possible that remedies at law may be inadequate and, therefore, the parties hereto shall be entitled to equitable relief including, without limitation, injunctive relief, specific performance or other equitable remedies in addition to all other remedies provided hereunder or available to the parties hereto at law or in equity. 7.15 GOVERNING LAW. This Agreement has been entered into and shall be construed and enforced in accordance with the laws of the State of New York without reference to the choice of law principles thereof. 7.16 CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the following meanings: (a) "AFFILIATE" has the meaning specified in Rule 144 promulgated by the SEC under the Securities Act; (b) "BUSINESS DAY" means any day on which the principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized by law or executive order to close in the City of New York, USA; (c) "KNOWLEDGE" means, with respect to any matter in question, that such party (i) has actual knowledge of such matter or (ii) after due investigation, should have known of such matter. Where reference is made to the knowledge of Prime, such reference shall be deemed to include only the directors and executive officers of the General Partner, all of whom shall have been deemed to have conducted the investigation required by this definition; (d) "LAW" means any federal, state or local statute, law, ordinance, regulation, rule, code, order or other requirement or rule of law of the United States or any other jurisdiction; (e) "PARTNERSHIP INTERESTS" means all of the partners' rights in the subject partnership, including, but not limited to, the profits and losses of the partnership and the right to receive distributions of the partnership's assets; (f) "PERSON" means an individual, corporation, partnership, limited partnership, limited liability company, syndicate, person (including, without limitation, a "PERSON" as defined in Section 13(d)(3) of the Exchange Act), trust, association, entity or government or political subdivision, agency or instrumentality of a government; (g) "PRIME MATERIAL ADVERSE EFFECT" means any change in or effect on the business of AMI that is, or is reasonably likely to be, materially adverse to the business, assets (including -24- 29 intangible assets), liabilities (contingent or otherwise), condition (financial or otherwise), results of operations or prospects of AMI; (h) "SUBSIDIARY" or "SUBSIDIARIES" of any person means any corporation, limited liability company, partnership, joint venture or other legal entity of which such person (either alone or through or together with any other subsidiary of such person) owns, directly or indirectly, more than fifty percent of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation, partnership or other legal entity; and (i) "TAX" means any federal, state, local or foreign income, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, transportation, transportation excise, registration, value added, documentary stamp, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee or other withholding, or other tax or governmental charge, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing; the foregoing shall include any transferee or secondary liability for a Tax and any liability assumed by agreement or arising as a result of being (or ceasing to be) a member of any affiliated group (or being included (or required to be included) in any tax return relating thereto). -25- 30 IN WITNESS WHEREOF, the parties hereto have each executed and delivered this Agreement as of the day and year first above written. SERVICO, INC., a Florida corporation By:/s/ David Buddemeyer --------------------------------------- Name: David Buddemeyer ------------------------------------- Title: President & CEO ------------------------------------ Address: 1601 Belvedere Road West Palm Beach, Florida 33406 SERVICO ACQUISITION CORP., a Florida corporation By: /s/ David Buddemeyer --------------------------------------- Name: David Buddemeyer ------------------------------------- Title: President & CEO ------------------------------------ Address: 1601 Belvedere Road West Palm Beach, Florida 33406 PRIME MOTOR INNS LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME-AMERICAN REALTY CORP., a Delaware corporation, its General Partner By: /s/ S. Leonard Okin --------------------------------------- Name: S. Leonard Okin ------------------------------------- Title: VP & CEO ------------------------------------ Address: 21-00 Route 208 South Fair Lawn, N.J. 07410 PRIME-AMERICAN REALTY CORP., a Delaware corporation By: /s/ S. Leonard Okin --------------------------------------- Name: S. Leonard Okin ------------------------------------- Title: VP & CEO ------------------------------------ Address: 21-00 Route 208 South Fair Lawn, N.J. 07410 I:\W-AGT\10673\129\acq-agr.n4 -26- EX-10.29 3 STOCK PURCHASE AGREEMENT 12/9/97 1 EXHIBIT 10.29 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of December 9, 1997 by and among Servico, Inc., a Florida corporation (the "Company"), Prime-American Realty Corp., a Delaware corporation ("Prime American") and Prime Hospitality, Inc. ("Prime Hospitality"). W I T N E S S E T H: A. AMIOP Acquisition Corp., a Delaware corporation ("AAC"), is a newly formed subsidiary of Prime American. B. The sole assets of AAC will, as of the Closing Date (as hereinafter defined), consist solely of a 1% general partnership interest (the "GP Interest") in AMI Operating Partners, L.P., a Delaware limited partnership ("AMI"). C. Prime American owns all of the outstanding shares of AAC Common Stock, par value $0.001 per share (collectively, the "Shares"), and desires to transfer the Shares to the Company on the terms and subject to the conditions set forth in this Agreement. D. The Company has entered into an Acquisition Agreement dated November 7, 1997 (the "Acquisition Agreement"), among the Company, Servico Acquisition Corp., a Florida corporation and wholly-owned subsidiary of the Company, Prime Motor Inns Limited Partnership ("Prime") and Prime American. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the Acquisition Agreement. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, the Company and Prime American, intending to be legally bound, hereby agree as follows: 1. SALE AND PURCHASE OF STOCK. Subject to the terms and conditions of this Agreement, on the Closing Date, Prime American shall assign, transfer, convey and deliver to the Company, and the Company shall acquire and accept delivery from Prime American of, all of Prime American's right, title and interest in and to the Shares. At the Closing, Prime American shall deliver to the Company all of the certificates representing the Shares, together with transfer forms duly executed by Prime American, separate from the certificates and executed in favor of the Company, sufficient to vest in the Company good and indefeasible title in the Shares, free and clear of any and all claims, liens, charges, security interests, pledges or encumbrances of any nature whatsoever. The closing (the "Closing") of such sale and purchase shall take place concurrently with the closing of the transactions contemplated in the Acquisition Agreement (such date being referred to herein as the "Closing Date"), at the offices of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., 150 West Flagler Street, Suite 2200, Miami, Florida 33130. 2. PAYMENT AND DELIVERY. Subject to the terms and conditions set forth herein, in exchange for the assignment, transfer, conveyance and delivery of the Shares, the Company shall, on the Closing Date, deliver to Prime American a warrant (the "Warrant") entitling Prime American to purchase at any time and from any time after the Closing Date and prior to the fifth anniversary of the Closing Date One Hundred Thousand (100,000) shares of the Company's common stock, par value $.01 per share (the "Common Stock") at an exercise price of $18.00 per share (the "Exercise Price"), subject to adjustment. At the Closing, the Company shall deliver to Prime American a Warrant Certificate evidencing the Warrant substantially in the form of Exhibit A hereto. 2 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to Prime American and Prime Hospitality as follows: 3.1 ORGANIZATION, STANDING AND POWER. The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Florida, with all requisite right, power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 3.2 CAPITALIZATION. As of the date of this Agreement, the authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, of which 20,868,405 shares are issued and outstanding on the date of this Agreement. All of the issued and outstanding shares of Common Stock are validly issued, fully paid and non-assessable. All voting rights with respect to the securities of the Company are vested exclusively in the Common Stock. All shares of Common Stock issuable upon exercise of the Warrants issued by the Company pursuant to this Agreement ("Warrant Shares") will, upon issuance in accordance with the terms of this Agreement, be duly authorized, validly issued, fully paid and non-assessable. 3.3 LEGAL, VALID AND BINDING AGREEMENT. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and effectively authorized by all requisite corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to issue the Warrants. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by the other parties hereto, constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms. 3.4 NO VIOLATION OR CONFLICT. Except as set forth on SCHEDULE 3.4, the execution, delivery and performance of this Agreement by the Company and the issuance of the Warrants by the Company do not and will not (i) conflict with or violate any provision of the Articles of Incorporation or Bylaws of the Company, (ii) assuming that all consents, approvals, authorizations and permits described in Section 3.5 have been obtained and all filings and notifications described in Section 3.5 have been made, violate or conflict with any Law applicable to the Company or by which any property or asset of the Company is bound or effected, and (iii) with or without the passage of time or the giving of notice, result in the breach of, or constitute a default, cause the acceleration of performance, permit the unilateral modification or termination of, or require any consent under, or result in the creation of any liens or other encumbrance upon any property or assets of the Company pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other obligation, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would neither, individually or in the aggregate, prevent or materially delay the performance by the Company of its obligations pursuant to this Agreement or the issuance of the Warrants. 3.5 GOVERNMENTAL CONSENTS. The execution and delivery of this Agreement by the Company does not, and the performance by the Company of its obligations hereunder and the issuance of the Warrants will not, require any consent, approval, authorization or permit of, or filing by the Company with or notification by the Company to, any Governmental Entity, except (i) applicable requirements of the Exchange Act or any state securities or blue sky laws ("Blue Sky Laws"), and the rules and regulations of the NYSE, and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or materially delay the performance by the Company of its obligations pursuant to this Agreement and the issuance of the Warrants. 3.6 EXCHANGE ACT REPORTS; FINANCIAL STATEMENTS. Since January 1, 1995, the Company has timely filed all reports and other documents required to be filed by it with the SEC under the Exchange Act, including but not limited to proxy statements and reports on Form 10-K, Form 10-Q and Form 8-K (collectively, the "Company SEC Reports"). As of the respective dates they were filed with the SEC, the Company SEC Reports, including all documents incorporated by -2- 3 reference into such reports, complied in all material respects with the rules and regulations of the SEC and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.7 INVESTMENT INTENT. The Company is acquiring the Shares for investment and not with a view to, or for sale in connection with, any distribution within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), nor with the present intention of distributing or selling the same. The Company acknowledges its understanding that the Shares have not been registered under the Securities Act, or Blue Sky Laws, and that the Shares may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act or any applicable Blue Sky Laws, except pursuant to an applicable exemption therefrom. 4. REPRESENTATIONS AND WARRANTIES OF PRIME AMERICAN AND PRIME HOSPITALITY. Prime American and Prime Hospitality hereby represent and warrant to the Company as follows: 4.1 ORGANIZATION, STANDING AND POWER. Each of Prime American, Prime Hospitality and AAC is a corporation, duly organized, validly existing and in good standing under the laws of its state of incorporation. Each of Prime American and Prime Hospitality has all requisite right, power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 4.2 LEGAL, VALID AND BINDING AGREEMENT. The execution, delivery and performance of this Agreement by Prime American and Prime Hospitality and the consummation by Prime American and Prime Hospitality of the transactions contemplated hereby have been duly and effectively authorized by all requisite corporate action on the part of Prime American, Prime Hospitality and Prime, as the sole limited partner of AMI, and no other corporate proceedings on the part of Prime American, Prime Hospitality or Prime, as the sole limited partner of AMI, are necessary to authorize this Agreement or to consummate such transactions. This Agreement has been duly executed and delivered by Prime American and Prime Hospitality and, assuming the due authorization, execution and delivery by the other parties hereto, constitutes the legal, valid and binding obligations of Prime American and Prime Hospitality, enforceable against Prime American and Prime Hospitality in accordance with its terms. 4.3 NO VIOLATION OR CONFLICT. Except as set forth on SCHEDULE 4.3, the execution, delivery and performance of this Agreement by Prime American and Prime Hospitality and the consummation by Prime American and Prime Hospitality of the transactions contemplated hereby do not and will not (i) conflict with or violate any provision of the Certificate or Articles of Incorporation or Bylaws of Prime American, Prime Hospitality or AAC or the Certificate of Limited Partnership or Limited Partnership Agreement of AMI or Prime, (ii) assuming that all consents, approvals, authorizations and permits described in Section 4.4 have been obtained and all filings and notifications described in Section 4.4 have been made, violate or conflict with any Law applicable to Prime American or Prime Hospitality or by which any property or asset of Prime American or Prime Hospitality is bound or effected, and (iii) with or without the passage of time or the giving of notice, result in the breach of, or constitute a default, cause the acceleration of performance, permit the unilateral modification or termination of, or require any consent under, or result in the creation of any liens or other encumbrance upon any property or assets of Prime American (including the Shares) or Prime Hospitality pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other obligation, except, with respect to clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would neither, individually or in the aggregate, (A) prevent or materially delay the performance by Prime American or Prime Hospitality of its obligations pursuant to this Agreement or the consummation of the transactions contemplated hereby or (B) have an AAC Material Adverse Effect. For purposes of this Agreement, -3- 4 "AAC Material Adverse Effect" means any change in or effect on the business of Prime American or AAC that is, or is reasonably likely to be, materially adverse to the business, assets (including intangible assets), liabilities (contingent or otherwise), condition (financial or otherwise) or results of operations of Prime American or AAC. 4.4 GOVERNMENTAL CONSENTS. The execution and delivery of this Agreement by Prime American and Prime Hospitality does not, and the performance by Prime American and Prime Hospitality of its obligations hereunder and the consummation of the transactions contemplated hereby will not, require any consent, approval, authorization or permit of, or filing by Prime American or Prime Hospitality with or notification by Prime American or Prime Hospitality to, any Governmental Entity. 4.5 ARTICLES OF INCORPORATION AND BYLAWS. A true and complete copy of the Articles of Incorporation and Bylaws and minute books of AAC have been delivered by Prime American to the Company. 4.6 CAPITALIZATION. The authorized capital stock of AAC consists of 1,000 shares of AAC Common Stock. AAC has issued 100 shares of AAC Common Stock, of which 100 shares are outstanding. All of such outstanding stock has been duly authorized and validly issued and is credited as fully paid, with no personal liability attaching to the ownership thereof. No class of equity securities of AAC exists other than the AAC Common Stock noted above. The Shares to be transferred by Prime American hereunder constitute one hundred percent (100%) of the issued and outstanding capital stock of AAC. 4.7 TITLE TO SHARES; LIENS. At the Closing, Prime American will transfer and convey, and the Company will acquire, good, valid and marketable title to the Shares, free and clear of all liens, encumbrances, security interests, options or claims whatsoever. 4.8 ABSENCE OF OBLIGATIONS AND LIABILITIES. As of the Closing Date, AAC's sole asset will be the GP Interest and AAC will have no liabilities except in connection therewith. AAC has not conducted any business or commenced any operations and, from the date hereof, shall not conduct any business or commence any operations whatsoever other than acquiring the GP Interest and in connection therewith. AAC is not subject to and there is no basis for assertion against AAC or the GP Interest of, any claim, liability, commitment or obligation of any nature, whether absolute, accrued, contingent or otherwise, and whether due or to become due other than obligations of Prime which are attributable to the GP Interest and which are disclosed in the Prime Financial Statements or on Schedule 3.8 of the Acquisition Agreement. 4.9 LITIGATION. There are no actions, suits, proceedings or investigations pending, or to the best of Prime American's and Prime Hospitality's knowledge, directly or indirectly threatened, nor has any notice of such items been received by AAC, Prime Hospitality or Prime American, in any court or before any governmental agency or instrumentality against or affecting Prime American, Prime Hospitality or AAC (as plaintiff or defendant), the GP Interest or any of the Shares which could (i) prevent the consummation of the transactions contemplated by this Agreement or (ii) individually or in the aggregate, have an AAC Material Adverse Effect, or which otherwise involves or could involve a claim or claims for damages against AAC or affect the GP Interest. 4.10 INVESTMENT INTENT. Prime American is acquiring the Warrants and will acquire the Warrant Shares for investment and not with a view to, or for sale in connection with, any distribution within the meaning of the Securities Act, nor with the present intention of distributing or selling the same. Each of Prime American and Prime Hospitality acknowledges its understanding that neither the Warrants nor the Warrant Shares have been registered under the Securities Act or Blue Sky Laws, and that the Warrants and the Warrant Shares may not be sold, transferred, offered -4- 5 for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act or any applicable Blue Sky Laws, except pursuant to an applicable exemption therefrom. 5. COVENANTS AND OTHER AGREEMENTS. 5.1 INTERIM OPERATIONS OF AAC. During the period from the date of this Agreement to the Closing Date, Prime American shall cause AAC not to conduct any business other than that necessary to comply with the provisions of this Agreement and in any event, during the period from the date of this Agreement to the Closing Date, Prime American will cause AAC not to (i) amend or otherwise change its Articles of Incorporation or Bylaws; (ii) issue, sell or authorize for issuance or sale, shares of any class of its securities or make or agree to make any change in its capitalization; (iii) enter into any commitment or transaction or make any capital expenditure or incur any indebtedness; (iv) enter into any contract or agreement; (v) do any act, or omit to do any act, or permit any act or omission to act which would cause a violation or breach of any of the representations, warranties or covenants of (A) Prime American or Prime Hospitality set forth in this Agreement or (B) Prime or Prime American set forth in the Acquisition Agreement; (vi) apply any of its assets to the direct or indirect payment, discharge, satisfaction or reduction of any amount payable directly or indirectly to or for the benefit of Prime American, Prime Hospitality or any affiliate thereof or to the prepayment of any such amounts; or (vii) agree, whether in writing or otherwise, to do any of the foregoing. 5.2 ACCESS. Prime American shall afford to the Company and its agents and representatives full access during normal business hours throughout the period prior to the Closing Date to all properties, books, contracts, commitments and records of Prime American and AAC and, during such period, Prime American shall furnish promptly to the Company all information concerning Prime American, AAC or the GP Interest as the Company may reasonably request. 5.3 CONSENTS. The parties hereto will each use reasonable efforts to obtain all consents, authorizations, orders and approvals required in connection with, and waivers of any violations, breaches and defaults that may be caused by, the consummation of the transactions contemplated by this Agreement. 5.4 REASONABLE EFFORTS. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 5.5 NOTIFICATION. Each of the parties hereto shall promptly notify the other in writing of any event, condition, circumstance, occurrence, transaction or other item occurring from the date of this Agreement through the Closing (i) that would in itself, or with any notice, lapse of time or both, constitute a violation or breach by such party of this Agreement, or (ii) which would have been required to have been disclosed by such party on any Schedule or Exhibit hereto or thereto, had such event, condition, circumstance, occurrence, transaction or item existed on the date of this Agreement. Any such notification shall not diminish or alter any of the representations, warranties or covenants of the parties set forth in this Agreement nor shall it limit or restrict any rights or remedies either party may have with respect to a breach or violation of any such representations, warranties or covenants. 5.6 ACQUISITION PROPOSALS. Except for the transactions contemplated by this Agreement, unless and until this Agreement shall have been terminated, neither Prime Hospitality nor Prime American shall (nor will they permit either AAC or any of their respective officers, directors, agents or affiliates to): directly or indirectly (i) solicit, encourage, initiate or participate in any negotiations or discussions with respect to any offer or proposal to acquire the GP Interest, or all or substantially all of the business and properties or capital stock of AAC, whether by merger, -5- 6 purchase of assets or otherwise or (ii) except as required by law, disclose any information not customarily disclosed to any person concerning the GP Interest or the business and properties of AAC, afford to any person (other than the Company and its designees) access to the GP Interest or the properties, books or records of AAC or otherwise assist or encourage any person in connection with any of the foregoing. In the event Prime American, Prime Hospitality or AAC shall receive any offer or proposal of the type referred to in clause (i) above, Prime American and Prime Hospitality shall promptly inform the Company as to any such offer. 5.7 WAIVER OF PRIME GENERAL PARTNERSHIP INTEREST. Prime American and Prime Hospitality hereby agree, effective as of the Closing, to waive any and all rights they may have to receive any of the Sale or Refinancing Proceeds (as such terms are defined in the Limited Partnership Agreement of Prime) or other distributions from Prime resulting from the sale of the Limited Partnership Interest in AMI pursuant to the Acquisition Agreement or the subsequent dissolution or liquidation of Prime, it being understood that all such proceeds shall be paid to the Limited Partners of Prime. 6. CONDITIONS TO PRIME AMERICAN'S AND PRIME HOSPITALITY'S OBLIGATIONS. The obligations of Prime American and Prime Hospitality under Sections 1 and 2 of this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of the Company contained herein or in any certificate or other document delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects (except for such representations and warranties qualified by materiality which shall be true and correct in all respects) as of the Closing Date with the same force and effect as though made on and as of such date. 6.2 PERFORMANCE. The Company shall have performed and complied in all material respects with all agreements, obligations and covenants required by this Agreement to be performed or complied with by the Company. 6.3 ACQUISITION AGREEMENT. The Acquisition Agreement and the transactions contemplated thereby shall have been consummated. 7. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the Company under Sections 1 and 2 of this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions: 7.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of Prime American and Prime Hospitality contained herein or in any certificate or other document delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects (except for such representations and warranties qualified by materiality which shall be true and correct in all respects) as of the Closing Date with the same force and effect as though made on and as of such date. 7.2 PERFORMANCE. Prime American and Prime Hospitality shall have performed and complied in all material respects with all agreements, obligations and covenants required by this Agreement to be performed or complied with by Prime American or Prime Hospitality. 7.3 ACQUISITION AGREEMENT. The Acquisition Agreement and the transaction contemplated thereby shall have been consummated. 7.4 ADMISSION OF AAC AS A SUBSTITUTE GENERAL PARTNER. AAC shall have been admitted and substituted as the sole general partner of AMI. An Amendment to the Certificate of -6- 7 Limited Partnership of AMI shall have been filed with the Secretary of State of Delaware pursuant to the Delaware Revised Uniform Limited Partnership Act and a copy thereof, certified by the Secretary of State of Delaware, shall have been provided to the Company. 8. REGISTRATION, TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES. 8.1 WARRANT OFFICE. The Company shall maintain at the Warrant Office the Warrant Register for registration of the Warrants and the Warrant Certificate and any transfer thereof. At the Closing, the Company shall register the Warrants and the Warrant Certificate evidencing the Warrants in the Warrant Register in the name of Prime American as the initial Warrant Holder. The Company may deem and treat the registered holder of the Warrant Certificate as the absolute owner thereof and the Warrants represented thereby (notwithstanding any notation of ownership or other writing on the Warrant Certificates made by any person) for the purpose of any exercise thereof or any distribution to the Warrant Holder thereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. For purposes of this Agreement: "WARRANT HOLDER" shall mean Prime American, as the original registered holder of the Warrants, and any registered transferee of a Warrant Holder. "WARRANT OFFICE" shall mean the office or agency of the Company at which the Warrant Register shall be maintained and where the Warrants may be presented for exercise, exchange, substitution and transfer, which office or agency will be the office of the Company at 1601 Belvedere Road, West Palm Beach, Florida, 33406, which office or agency may be changed by the Company pursuant to notice in writing to the persons named in the Warrant Register as the holders of the Warrants. "WARRANT REGISTER" shall mean the register maintained by the Company at the Warrant Office. 8.2 REGISTRATION OF WARRANTS. Subject to Section 16.3 hereof, the Company shall register the transfer of any outstanding Warrants in the Warrant Register upon surrender of the Warrant Certificate evidencing such Warrants to the Company at the Warrant Office, accompanied (if so required by it) by a written instrument or instruments of transfer in form reasonably satisfactory to it, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof. Upon any such registration of transfer, a new Warrant Certificate evidencing the transferred Warrants shall be issued to the transferee and the surrendered Warrant Certificate shall be canceled. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such Warrant Certificate in a name other than that of the original Warrant Holder and the Company shall not be required to issue or deliver such Warrant Certificate unless and until the person(s) requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 8.3 EXCHANGE OF CERTIFICATES. A Warrant Certificate may be exchanged, at the option of the holder thereof when surrendered to the Company at the Warrant Office, for another Warrant Certificate of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled. 8.4 TRANSFER CHARGES; LEGENDS. Except as set forth in Section 8.2 hereof, no charge shall be made for any transfer or exchange of the Warrants or any Warrant Certificate. Except as provided in Section 16.1 hereof, each Warrant Certificate issued upon transfer or -7- 8 exchanges shall bear the legend set forth in Section 16.1 hereof if the Warrant Certificate presented for transfer or exchange bore such legend. 9. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only (in the case of a lost, stolen or destroyed Warrant Certificate) upon receipt of a bond of indemnity reasonably satisfactory to the Company. No service charge shall be made for any such substitution, but all expenses and reasonable charges associated with procuring such indemnity and all stamp, tax and other governmental duties that may be imposed in relation thereto shall be borne by the holder of such Warrant Certificate. Each Warrant Certificate issued in any such substitution shall bear the legend set forth in Section 16.1 hereof if the Warrant Certificate for which such substitution was made bore such legend. 10. EXERCISE OF WARRANTS. 10.1 ELECTION. The Warrants will terminate on, and must be exercised prior to, the fifth anniversary of the Closing Date. Subject to such termination, the registered holder of the Warrants may elect to exercise such Warrants, in whole or in part, on any business day (as such term is defined in the Acquisition Agreement) during the period after the Closing Date but prior to the fifth anniversary of the Closing Date. 10.2 PRESENTATION OF CERTIFICATES; PAYMENT. The Warrant Holder will exercise the Warrants by presenting to the Company at the Warrant Office, the Warrant Certificate evidencing the Warrants, with the form of election to purchase attached thereto duly completed and signed by the Warrant Holder (the "Presentment Date"). Upon payment of the Exercise Price multiplied by the number of Warrant Shares to be issued in lawful money of the United States of America, the Company shall promptly issue and cause to be delivered to or upon the written order of the Warrant Holder and in such name or names as such Warrant Holder may designate, a certificate for the Warrant Shares issued upon such exercise. Any persons so designated to be named therein shall be deemed to have become holders of record of such Warrant Shares as of the Presentment Date. 10.3 CASHLESS EXERCISE. In addition to the method of payment set forth in Section 10.2 hereof and in lieu of any cash payment required thereunder, the Warrant Holder shall have the right at any time and from time to time to exercise the Warrants in whole or in part by surrendering the Warrant Certificate in the manner specified in Section 10.2 hereof in exchange for the number of shares of Common Stock equal to the product of (x) the number of shares as to which the Warrants are being exercised multiplied by (y) a fraction, the numerator of which is the Market Price (as defined below) of a share of the Common Stock less the Exercise Price, and the denominator of which is such Market Price. 10.4 DEFINITION OF MARKET PRICE. As used herein, the phrase "Market Price" shall be deemed to be the average of the average of the high and low prices for each of the ten (10) trading days immediately preceding the Presentment Date, as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading by NASDAQ, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted by NASDAQ on any day during such ten-day period, the average of the bid prices for such day as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or similar organization if NASDAQ is no longer reporting such information, or if the Common Stock is not quoted on NASDAQ, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. -8- 9 11. NO FRACTIONAL SHARES. The Company shall not be required to issue fractional shares of Common Stock on the exercise of Warrants. If any fraction of a share of Common Stock would, except for the provisions of this Section 11, be issuable on the exercise of the Warrants, the Company shall pay an amount in cash equal to the closing price of a share of Common Stock on the NYSE Composite Tape on the first business day immediately preceding the date of exercise of the Warrant multiplied by such fraction computed to the nearest whole cent. 12. RESERVATION AND ISSUANCE OF WARRANT SHARES. 12.1 RESERVATION OF SHARES. The Company will at all times after the date hereof have authorized, and reserve and keep available, for the purpose of enabling it to satisfy its obligation to issue Warrant Shares upon the exercise of the Warrants, the number of shares of Common Stock deliverable upon exercise of the Warrants. 12.2 CORPORATE ACTION. The Company will take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price per share. 13. SHAREHOLDER RIGHTS. 13.1 NO SHAREHOLDER RIGHTS. Nothing contained in this Warrant Agreement or in the Warrant Certificate shall be construed as conferring upon the holder thereof the right to vote or to consent or to receive notice as a shareholder in respect of the meetings of shareholders or the election of directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. 13.2 NO OBLIGATION TO PURCHASE. Nothing contained in this Warrant Agreement or in the Warrant Certificate shall be construed as imposing any obligation on the registered Warrant Holder to purchase any securities or as imposing any liabilities on such Warrant Holder as a shareholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. 14. CERTAIN EVENTS. 14.1 CAPITAL REORGANIZATION. If there shall be any consolidation or merger to which the Company is a party (other than a consolidation or a merger in which the Company is the survivor), or any sale or conveyance of the property of the Company as an entirety or substantially as an entirety (any such event being called a "CAPITAL REORGANIZATION"), then, in addition to any other rights the Warrant Holder may have under this Warrant Agreement, effective upon the effective date of such capital reorganization, the Warrant Holder shall have the right to receive, upon exercise of the Warrants, the kind and amount of securities and property (including cash) which the Warrant Holder would have owned or have been entitled to receive after such capital reorganization if the Warrants had been exercised immediately prior to such capital reorganization. 14.2 DIVIDENDS; RECAPITALIZATION. If the Company shall (i) pay a dividend or make a distribution in Common Stock, (ii) subdivide its outstanding Common Stock, (iii) combine its outstanding Common Stock into a smaller number of shares, or (iv) issue by reclassification of its Common Stock any shares or other securities of the Company, then subject to the provisions of Section 14.3, in each such event, the number of shares of Common Stock purchasable upon exercise of each Warrant immediately prior thereto, shall be adjusted so that the Warrant Holder shall be entitled to receive the kind and number of Common Stock or other securities of the Company which the Warrant Holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening -9- 10 of such event (or any record date with respect thereto). Such adjustment shall be made whenever any of the events listed above shall occur. 14.3 MINIMUM ADJUSTMENT. No adjustment in the Exercise Price will be required unless the adjustment would require a change of at least 1% in the Exercise Price; provided, however, that any adjustments which are not made because of this Section 14.3 will be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 14.3 will be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. 14.4 ABANDONMENT OF ACTIONS. If the Company shall set a record date to determine the holders of shares of Common Stock for purposes of a distribution or dividend or a capital reorganization or recapitalization, and shall legally abandon such action prior to effecting such action, then no additional amounts shall be distributable to the Warrant Holder pursuant to Section 14 in respect thereof upon exercise of their Warrants. 15. NOTICES TO HOLDERS. In the event: (i) of any capital reorganization or recapitalization to which the Company is a party and for which approval of any shareholders of the Company is required; (ii) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution in Common Stock; or (iii) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; the Company shall cause to be given to the registered Warrant Holder at its address on the Warrant Register, at least ten (10) calendar days prior to the applicable record date, if any, hereinafter specified, or, if no such record date is specified, ten (10) calendar days prior to the taking of any action referred to in clauses (i) and (iii) above (but in no event later than the date that the Company provides public notice of any such action), by registered mail, postage prepaid, return receipt requested, a written notice stating (X) the date on which any such capital reorganization, dissolution, liquidation or winding up is expected to become effective, (Y) the date on which a record is to be taken for the purpose of such dividend or distribution and stating the amount and character of such dividend or distribution, or (Z) the date of which any such other action is to be effected, and, if applicable and known to the Company, the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such capital reorganization, dissolution, liquidation or winding up. The failure to give the notice required by this Section 15 or any defect therein shall not affect the legality or validity of any dividend, distribution, capital reorganization, dissolution, liquidation or winding up or other action referred to above, or the vote upon any such action. 16. RESTRICTIONS ON TRANSFER, SUBSEQUENT TRANSFEREES AS THIRD PARTY BENEFICIARIES. 16.1 LEGENDS. Except as otherwise provided in Section 16.2 hereof, each Warrant Certificate and each certificate for the Warrant Shares issued to a Warrant Holder shall include a legend in substantially the following form (with such changes therein as may be appropriate to reflect whether such legend refers to Warrants or Warrant Shares), provided that such legend shall not be required if such transfer is being made in connection with a sale which is exempt from registration pursuant to Rule 144 under the Securities Act (or -10- 11 any successor rule) or if the opinion of counsel referred to in Section 16.2 hereof is to the further effect that neither such legend nor the restrictions on transfer in this Section 16 are required in order to ensure compliance with the Securities Act: "THE [WARRANTS/SHARES] REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR LAWS." 16.2 TERMINATION OF RESTRICTIONS. The restrictions set forth in this Section 16 shall terminate and cease to be effective with respect to any Warrants or Warrant Shares registered under the Securities Act upon receipt by the Company of an opinion of counsel, in form reasonably satisfactory to the Company, to the effect that compliance with such restrictions is not necessary in order to comply with the Securities Act and any applicable state securities laws with respect to the transfer of the Warrants and/or the Warrant Shares. Whenever such restrictions shall so terminate, the holder of such Warrants and/or Warrant Shares shall be entitled to receive from the Company, without expense, a Warrant Certificate or certificates for such Warrant Shares not bearing the legend set forth in Section 16.1 hereof. 16.3 SUBSEQUENT TRANSFERS. It is the intention of the parties hereto that each Warrant Holder who acquires the Warrants by transfer be (i) bound by the terms and conditions of this Warrant Agreement and (ii) a beneficiary of, and entitled to enforce, the provisions of this Warrant Agreement that bestow rights on the Warrant Holder. 17. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations, warranties and covenants of the parties contained in this Agreement shall be continuing representations and warranties and shall survive the Closing and any exercise of the Warrants. 18. TERMINATION. This Agreement shall terminate automatically upon termination of the Acquisition Agreement, whereupon the foregoing provisions of this Agreement shall cease to have any force or effect. 19. NO BROKERS OR FINDERS. Except as provided in the Acquisition Agreement, each of the parties hereto represents to the other that it has not incurred any obligation or liability, contingent or otherwise, for any brokers or finders in respect of the matters provided for in this Agreement and each party agrees to indemnify and hold the other party and its affiliates harmless with respect to any broker's or finder's fees which may be claimed or asserted arising from any express or implied agreement or engagement with or by the indemnifying party. 20. NOTICES. All notices provided for in this Agreement shall be in writing signed by the party giving such notice, and shall be delivered personally or sent by facsimile, overnight courier or by registered or certified mail, return receipt requested. Notices shall be deemed to have been received on the date of personal delivery, or if sent by overnight courier or registered or -11- 12 certified mail on the date delivered to the courier or the U.S. mails or, in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise. Notices shall be sent to the following addresses: To the Company: Servico, Inc. 1601 Belvedere Road West Palm Beach, Florida 33406 Attention: David Buddemeyer To Prime American: Prime-American Realty Corp. P.O. Box 230 Hawthorne, New Jersey 07507 To Prime Hospitality: Prime Hospitality, Inc. 700 Route 46 East Fairfield, New Jersey 07004 or to such other address as any party shall designate in the manner provided in this Section 20. 21. MISCELLANEOUS. 21.1 This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 21.2 This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns. 21.3 This Agreement and the Acquisition Agreement represent the entire agreement between the parties relating to the subject matter hereof, superseding any and all prior or contemporaneous oral and prior written agreements. This Agreement may not be modified or amended nor may any right be waived except by a writing signed by both of the parties hereto which expressly refers to this Agreement and which states that it is a modification, amendment or waiver. 21.4 The parties acknowledge and agree that the breach of the provisions of this Agreement by Prime American, on the one hand, or the Company, on the other hand, would irreparably damage the other party thereto, and accordingly agree that injunctive relief and specific performance shall be appropriate remedies to enforce the provisions of this Agreement; provided, however, that nothing herein shall limit the remedies, legal or equitable, otherwise available. 21.5 In the event of any litigation with regard to this Agreement, the prevailing party shall be entitled to receive from the non-prevailing party, and the non-prevailing party shall pay upon demand, all reasonable fees and expenses of counsel for the prevailing party. 21.6 The captions and headings contained herein are solely for convenience and reference and do not constitute a part of this Agreement. 21.7 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document. 21.8 Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person or entity other than the parties hereto and their -12- 13 respective heirs, personal representatives, legal representatives, successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 21.9 Except as expressly set forth herein or in the Acquisition Agreement, each party agrees to pay, without right of reimbursement from the other party, the costs incurred by it incident to the performance of its obligations under this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, costs incident to the preparation of this Agreement, and the fees and disbursements of counsel, accountants and consultants employed by such party in connection herewith. 21.10 This Agreement shall be subject to the exclusive jurisdiction and venue of the courts of Palm Beach County, Florida. The parties to this Agreement agree that any breach of any term or condition of this Agreement shall be deemed to be a breach occurring in the State of Florida by virtue of a failure to perform an act required to be performed in the State of Florida and irrevocably and expressly agree to submit to the jurisdiction of the courts of the State of Florida for the purpose of resolving any disputes among the parties relating to this Agreement or the transactions contemplated hereby. The parties irrevocably waive, to the fullest extent permitted by law, any objection which they may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, or any judgment entered by any court in respect hereof brought in Palm Beach County, Florida, and further irrevocably waive any claim that any suit, action or proceeding brought in Palm Beach County, Florida has been brought in an inconvenient forum. [REMAINDER OF THIS PAGE INTENTIONALLY OMITTED] -13- 14 IN WITNESS WHEREOF, the parties hereto have each executed and delivered this Agreement as of the day and year first above written. SERVICO, INC. By: /s/ David Buddemeyer ------------------------------------- David Buddemeyer President PRIME-AMERICAN REALTY CORP. By: /s/ S. Leonard Okin ------------------------------------- S. Leonard Okin VP & CEO PRIME HOSPITALITY, INC. By: /s/ David A. Simon ------------------------------------- David A. Simon President I:\W-AGT\10673\129\STK-PUR.N5 -14- EX-10.30 4 IST AMENDMENT TO ACQUISITION AGREEMENT 3/12/98 1 EXHIBIT 10.30 FIRST AMENDMENT TO ACQUISITION AGREEMENT First Amendment, dated as of March 12, 1998, to that certain Acquisition Agreement dated as of November 7, 1997 (the "Acquisition Agreement") among Servico, Inc., a Florida corporation ("Servico"), Servico Acquisition Corp., a Florida corporation and a wholly-owned subsidiary of Servico, Prime Motor Inns Limited Partnership, a Delaware limited partnership ("Prime"), and Prime-American Realty Corp., a Delaware corporation (the "General Partner"). WHEREAS, the parties hereto desire to amend the Acquisition Agreement on the terms set forth herein; NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. The Acquisition Agreement shall remain in full force and effect except as specifically amended hereby. 2. The Purchase Price, as defined in Section 1.1 of the Acquisition Agreement, shall be increased from Eight Million Dollars ($8,000,000) to Twelve Million Dollars ($12,000,000). 3. Section 6.2(g), CONSULTING AGREEMENT, of the Acquisition Agreement shall be deleted in it entirety. 4. Section 3.11, BROKERS, of the Acquisition Agreement shall be amended to reflect a reduction in the fee payable to Furman Selz in connection with this transaction to a fee of up to $200,000. 5. Upon the Closing, Servico shall assume the termination payment and compensation obligations of Prime under that certain Consulting Services Agreement, dated as of December 1, 1994, among Prime, the General Partner, AMI Operating Partners, L.P., a Delaware limited partnership, and S. Leonard Okin. 6. This First Amendment may be executed in any number of counterparts and by the several parties hereto in separate counterparts, each of which shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to the Acquisition Agreement to be duly executed as of the day and year first above written. SERVICO, INC., a Florida corporation By: /s/ David Buddemeyer ---------------------------------------- Name: David Buddemeyer ------------------------------------- Title: President and Chief Executive Officer ------------------------------------- Address: 1601 Belvedere Road West Palm Beach, Florida 33406 -1- 2 SERVICO ACQUISITION CORP., a Florida corporation By: /s/ David Buddemeyer ---------------------------------------- Name: David Buddemeyer ------------------------------------- Title: President and Chief Executive Officer ------------------------------------- Address: 1601 Belvedere Road West Palm Beach, Florida 33406 PRIME MOTOR INNS LIMITED PARTNERSHIP, a Delaware limited partnership By: PRIME-AMERICAN REALTY CORP., a Delaware corporation, its General Partner By: /s/ S. Leonard Okin ---------------------------------------- Name: S. Leonard Okin ------------------------------------- Title: VP & CEO ------------------------------------- Address: 21-00 Route 208 South Fair Lawn, N.J. 07014 PRIME-AMERICAN REALTY CORP., a Delaware corporation By: /s/ S. Leonard Okin ---------------------------------------- Name: S. Leonard Okin ------------------------------------- Title: VP & CEO ------------------------------------- Address: 21-00 Route 208 South Fair Lawn, N.J. 07014 -2- EX-21 5 SUBSIDIARIES 1 Exhibit 21 SUBSIDIARIES OF THE COMPANY
STATE OF CORPORATION NAME INCORPORATION - ---------------- ------------- 3401 Austin Beverage Corporation Texas Albany Hotel Inc. Florida Apico Hills Inc. Penna. Apico Inn of Greentree Inc. Penna. Apico Inns of Penna. Inc. Penna. Apico Inns of Pittsburgh Inc. Penna. Apico Management Corp. Penna. Baltimore Enterprises of Florida Inc. Florida Bloomington Motel Ent. Inc. Indiana Bloomington Restaurant Inns Inc. Indiana Brecksville Hospitality, Inc. Ohio Bridgeport Motel Ent. Inc. Conn. Brunswick Motel Ent. Inc. Georgia Dothan Hospitality 3053, Inc. Alabama Dothan Hospitality 3053, Inc. Delaware Dothan Hospitality 3071, Inc. Delaware Dothan Hospitality 3071, Inc. Alabama Fayetteville Motel Ent. Inc. N. Carolina Fleet Beverage Corp. Texas Fourth Street Hospitality, Inc. Iowa Ft Laud Motel Associates Inc. Florida Ft Wayne Motel Ent. Inc. Indiana Gadsden Hospitality, Inc. Alabama Gadsden Hospitality, Inc. Delaware Groupers And Company Seafood Restaurant S. Carolina Harrisburg Motel Ent. Inc. Penna. Heartlands Garden Grille, Inc. Kansas Hilton Head Motel Ent. Inc. S. Carolina Island Motel Ent. Inc. Georgia KDS Corporation Nevada Kinser Motel Ent. Inc. Indiana Main Avenue Beverage Corporation Texas Marketing Design Force Inc. Florida McKnight Motel Inc. Penna. Minneapolis Motel Ent. Inc. Minn. Moon Airport Motel Inc. Penna. New Orleans Airport Motel Ent. Inc. Florida N.H. Motel Ent. Inc. Michigan
2 Palm Beach Motel Ent. Inc. Florida Penmoco Inc. Michigan Raleigh Motel Ent. Inc. N. Carolina Raleigh-Downtown Ent. Inc. N. Carolina Royce Holding Corp Delaware Royce Hotel Corporation Delaware Royce Management Corp. Florida Royce Management Corp. of Ga. Georgia Royce Management Corp. of Oxford Falls Penna. Second Fayettville Motel Ent. Inc. N. Carolina Second Palm Beach Motel Ent. Inc. Florida Servico Acquisition Corp. Florida Servico Austin, Inc. Texas Servico Cedar Rapids, Inc. Iowa Servico Colesville, Inc. Maryland Servico Columbia, Inc. Maryland Servico Columbia II, Inc. Maryland Servico Columbus Inc. Florida Servico Concord, Inc. California Servico Council Bluffs, Inc. Iowa Servico East Washington, Inc. Florida Servico Flagstaff, Inc. Arizona Servico Fort Wayne II Inc. Florida Servico Fort Wayne Inc. Florida Servico Frisco, Inc. Colorado Servico Ft. Pierce, Inc. Delaware Servico Ft. Worth, Inc. Texas Servico Grand Island, Inc. New York Servico Hilton Head, Inc. S. Carolina Servico Hospitality Inc. Florida Servico Hotels I Inc. Florida Servico Hotels II Inc. Florida Servico Hotels III Inc. Florida Servico Hotels IV Inc. Florida Servico Houston, Inc. Texas Servico Jamestown, Inc. New York Servico Lansing, Inc. Michigan Servico Lawrence, Inc. Kansas Servico Lawrence II, Inc. Kansas Servico Management Corp. Florida Servico Management Corp. (Texas) Texas Servico Manhattan, Inc. Kansas Servico Manhattan II, Inc. Kansas Servico Market Center, Inc. Texas Servico Maryland, Inc. Maryland Servico Melbourne Inc. Florida Servico Metairie, Inc. Louisiana Servico Niagara Falls, Inc. New York Servico New York, Inc. New York
3 Servico Northwoods Inc. Florida Servico Omaha Central, Inc. Nebraska Servico Omaha, Inc. Nebraska Servico Operations Corporation Florida Servico Pensacola, Inc. Delaware Servico Pensacola 7200, Inc. Delaware Servico Pensacola 7330, Inc. Delaware Servico Rolling Meadows, Inc. Illinois Servico Roseville, Inc. Minnesota Servico Saginaw, Inc. Michigan Servico Silver Spring Inc. Florida Servico Summerville, Inc. S. Carolina Servico Tucson, Inc. Arizona Servico West Des Moines, Inc. Iowa Servico West Palm Beach, Inc. Florida Servico Wichita, Inc. Kansas Servico Windsor, Inc. Florida Servico Windsor II, Inc. Florida Servico Winter Haven, Inc. Florida Servico Worcester, Inc. Florida Sharon Motel Ent. Inc. Penna. SHC Of Delaware Inc. Delaware Sheffield Motel Ent. Inc. Alabama SMC Management Corp. of Ft Wayne Indiana SMC Management Corp. of Indianapolis Indiana Southfield Hospitality Inc. Michigan Southfield Hotel Ent. Inc. Michigan So. Carolina Interstate Motel Ent. Inc. S. Carolina Stevens Creek Hospitality, Inc. Georgia Washington Motel Ent. Inc. Penna. Wilpen Inc. Penna.
EX-23 6 CONSENT OF INDEP. CERTIFIED PUBLIC ACCOUNTANTS 1 Exhibit 23 Consent of Independent Certified Public Accountants We consent to the incorporation by reference in the Registration Statements (Form S-4 No. 333- 38975, Form S-3 No. 333-27303, Form S-8 No. 33-60088, Form S-8 No. 33-60090, Form S-8 No. 33-81954, Form S-3 No. 33-78566 and Form S-3 No. 33-92658) of Servico, Inc. of our report dated February 16, 1998, (except for paragraph one of Note 11, as to which the date is March 5, 1998 and for paragraph two of Note 11, as to which the date is March 20, 1998) with respect to the consolidated financial statements of Servico, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP West Palm Beach, Florida March 25, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 15,243 0 11,953 0 4,485 41,904 534,080 0 627,651 40,626 323,320 0 0 210 239,325 627,651 0 276,657 0 230,559 (760) 0 25,909 20,949 8,379 12,570 0 (3,751) 0 8,819 .58 .56
EX-27.2 8 FINANCIAL DATA SCHEDULE
5 1996 EARNINGS PER SHARE AMOUNTS ARE BEING RESTATED TO CONFORM TO THE FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 128 "EARNINGS PER SHARE". 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 19,473 0 8,597 0 2,796 37,980 364,922 0 439,786 52,188 284,880 0 0 94 74,644 439,786 0 239,526 0 201,585 (3,275) 0 29,443 11,773 3,225 8,548 0 (348) 0 8,200 .88 .84
-----END PRIVACY-ENHANCED MESSAGE-----