Annual Report (Form 10-K), fiscal year 1994





Item 3. Legal Proceedings.
In April 1994, the Company received a favorable ruling from the U.S. Bankruptcy Court for the Southern District of Florida in its litigation with Financial Security Assurance, Inc. ("FSA") to recover a payment to be made to the Company under the Rose and Cohen note receivable. In 1993, the Company reached a
settlement with Rose and Cohen of an adversary proceeding regarding a promissory note and personal guarantee. The settlement provided for Rose or his affiliate to pay the Company the sum of $25.0 million, all of which was paid into escrow in February 1994, plus proceeds from the sale of approximately 1.1 million shares of the Company's common stock held by Rose. FSA asserted that it was entitled to receive the settlement proceeds under the terms of an intercreditor agreement. Upon receipt of the Bankruptcy Court order in April 1994, the Company used the $25.0 million of settlement proceeds to retire its Senior Secured Notes. On April 21, 1994, FSA filed its notice of appeal of the Bankruptcy Court's order. The appeal was argued before the United States District Court in November 1994 and the decision of the District Court is pending. During 1994, Rose sold approximately 1.0 million shares of the Company's common stock under the terms of the settlement for net proceeds of approximately $6.2 million. Subject to further court order, the Company is required to use the stock proceeds principally to retire Senior Secured Notes. As the Rose and Cohen note had a book value of $25.0 million on the Company's balance sheet, approximately $6.2 million was recorded as other income in the Company's statement of operations.
In December 1994, the Company obtained ownership of the Frenchman's Reef through a pre-negotiated plan of reorganization. The Company had previously reached an agreement in 1993 to restructure its mortgage notes receivable secured by the Frenchman's Reef with the general partner of Frenchman's Reef Beach Associates ("FRBA"), the owner of the hotel. In conjunction with the agreement, FRBA filed a pre-negotiated chapter 11 petition in September 1993. During the reorganization period, the Company continued to receive cash payments on its mortgage notes receivable under a cash collateral order approved by the Bankruptcy Court. Under the plan of reorganization, which was approved by the Bankruptcy Court on November 29, 1994, the Company obtained ownership and control of the hotel.
PMI did not submit its Annual Report on Form 10-K for the fiscal year ended June 30, 1990 and Quarterly Reports on Form 10-Q during the pendency of its reorganization, except for its Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.
In addition to the foregoing legal proceedings, the Company is involved in various other proceedings incidental to the normal
course of its business. Management does not expect that any of such other proceedings will have a material adverse effect on the Company's financial position.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fiscal quarter ended December 31, 1994 to a vote of the security holders of the Company.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, par value $.01 per share, commenced trading on the New York Stock Exchange (the "NYSE") on August 3, 1992 under the symbol "PDQ". As of March 8, 1995 there were 30,556,385 shares of common stock outstanding. The Company's Plan of Reorganization ("the Plan") provided for the issuance of 33,000,000 shares of common stock to holders of claims under the Plan. The number of shares ultimately distributed under the Plan was reduced to 29,913,000 shares based upon the final outcome of disputed claims. In addition, under the Plan warrants to purchase an aggregate of 1,738,872 shares of common stock are outstanding as of March 8, 1995. The warrants are not listed on any exchange.
The following table sets forth the reported high and low closing sales prices of the common stock on the NYSE.
As of March 8, 1995, the closing sales price of the common stock on the NYSE was $9 1/4. As of March 8, 1995, there were approximately 2,900 holders of record of common stock.
The Company has not declared any cash dividends on its common stock since the Effective Date and does not currently anticipate paying any dividends on the common stock in the foreseeable future. The Company currently anticipates that it will retain any future earnings for use in its business. Covenants contained in certain of the Company's debt instruments prohibit the paying of cash dividends.
Item 6.

Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY AND ITS PREDECESSOR
The Company is the successor in interest to the Company's predecessor, PMI, which emerged from chapter 11 reorganization on the Effective Date, July 31, 1992. PMI had filed for protection under chapter 11 of the United States Bankruptcy Code in September 1990. The Company implemented "fresh start" reporting pursuant to the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" of the American Institute of Certified Public Accountants, as of the Effective Date. Accordingly, the consolidated financial statements of the Company are not comparable in all material respects to any such financial statement as of any date or any period prior to the Effective Date. Subsequent to the Effective Date, the Company changed its fiscal year end from June 30 to December 31. The table below presents selected consolidated financial data derived from: (i) the Company's historical financial statements for the years ended December 31, 1993 and 1994, (ii) the Company's historical financial statements as of and for the five-month period ended December 31, 1992, (iii) the Company's "fresh start" balance sheet as of the Effective Date, and (iv) the historical consolidated financial statements of PMI for the one month ended July 31, 1992 and for the years ended June 30, 1990, 1991 and 1992. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
- --------------- (1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at which time it owned or managed 141 hotels. During its approximately two-year reorganization, PMI restructured its assets, operations and capital structure. On the Effective Date, the Company emerged from chapter 11 reorganization with 75 Owned or Managed Hotels, $135.6 million of stockholders' equity and $266.4 million of total debt.
(2) PMI effectively discontinued the operations of its franchise segment on July 1, 1990 with the sales of the Howard Johnson, Ramada and Rodeway franchise businesses in July, 1990.
(3) Approximately $2.3 million, $28.0 million and $25.3 million of contractual interest expense during the one month ended July 31, 1992 and for the fiscal years ended June 30, 1992 and 1991, respectively, was not accrued and was not paid due to the chapter 11 proceeding.
Item 6. (Continued) Selected Quarterly Financial Data (Unaudited)
Quarterly financial data for the years ending December 31, 1993 and 1994 is presented as follows (in thousands, except per share amounts).
(a) Income per share has been restated to reflect a 9.4% retroactive reduction in the number of shares distributed under PMI's plan of reorganization.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading hotel owner/operator which owns or leases 49 Owned Hotels and manages 37 Managed Hotels for third parties. The Company has a financial interest in the form of mortgages or profit participations in 17 of the Managed Hotels. The Company records the direct revenues, operating expenses and depreciation of its Owned Hotels and management fees and interest income, where applicable, on the Managed Hotels.
The Company has implemented a growth strategy which focuses on improving results at existing hotels through increased operating efficiencies, acquiring full-service hotels and expanding its AmeriSuites hotel brand in the all-suites segment. Operating results have continued to improve at comparable hotels due to repositioning efforts, yield management programs and overall improvements in the industry. The Company also added 11 Owned Hotels in 1994 through acquisition, construction or settlements of notes receivable, thereby increasing its Owned Hotel rooms by approximately 40%. The Company believes that it is well positioned to benefit from current industry trends due to its hotel equity ownership position.
The Company has restated net income per common share for all periods to reflect a 9.4% reduction in the number of shares distributed under the plan of reorganization (the "Plan") of the Company's predecessor, PMI. The financial statements had previously given effect to the maximum amount of 33,000,000 shares of Common Stock issuable under the Plan, whereas the Company in total distributed only 29,913,000 shares under the Plan.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for 1993 and 1994. The results of the four hotels divested during 1993 and 1994 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
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(1) For purposes of this discussion of results of operations for 1994 compared to 1993, comparable Owned Hotels refers to the 31 Owned Hotels that were owned or leased by the Company during all of 1994 and 1993.
Room revenues increased by $19.3 million, or 27.7%, from $69.5 million in 1993 to $88.8 million in 1994. This increase was primarily due to incremental room revenues of $17.6 million from hotels acquired or built in 1993 and 1994 and an increase in room revenues at comparable Owned Hotels. Room revenues for comparable Owned Hotels increased by $4.5 million, or 7.2%, in 1994 compared to 1993 due to improvements in ADR which increased by $4.32, or 7.6%, reflecting repositioning and refurbishment efforts at several full-service hotels and improving industry fundamentals. Occupancy rates for comparable Owned Hotels remained relatively constant in 1994 compared to the prior year.
Food and beverage revenues increased by $5.8 million, or 47.4%, from $12.3 million in 1993 to $18.1 million in 1994. This increase was primarily due to the impact of incremental revenues of $5.6 million from additional food and beverage operations of four full-service hotels acquired in 1994. Food and beverage revenues for comparable Owned Hotels increased by $535,000, or 4.9%, in 1994 compared to 1993 primarily as a result of increased banquet sales and the repositioning of three lounges to a sports bar theme.
Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group, Market Segments, Inc. Management and other fees decreased by $810,000, or 7.5%, from $10.8 million in 1993 to $10.0 million in 1994 primarily due to the loss of management fees on four Managed Hotels acquired by the Company during 1994. In addition, the Company's management contracts covering six additional hotels were terminated during 1994 upon divestiture of those hotels by the third party
hotel owners. Partially offsetting these decreased management fees were the addition of two new management contracts and increased revenues associated with the remaining Managed Hotels.
Interest on mortgages and notes receivable in 1993 and 1994 primarily related to mortgages secured by certain Managed Hotels including the Frenchman's Reef. Interest income on mortgages and notes receivable increased by $1.1 million, or 7.5%, from $14.8 million in 1993 to $15.9 million in 1994 primarily due to interest recognized on the Company's cash flow notes, which are subordinated or junior mortgages which remit payment based on hotel cash flow. These cash flow notes bear many of the characteristics and risks of operating hotel equity investments and are assigned no value on the Company's balance sheet due to substantial doubt as to their recoverability. The Company's policy is to recognize interest on cash flow notes when cash is received. In 1994, the portion of interest on mortgages and other notes receivable attributable to cash flow notes increased to $2.0 million from $1.0 million in 1993 primarily due to the execution of revised cash flow note agreements on three hotels and the improved operating performance of the underlying hotels. See "Business -- Mortgages and Notes Receivable."
Approximately $4.3 million and $4.6 million of interest on mortgages and notes receivable in 1993 and 1994, respectively, was derived from the Company's $50.0 million note receivable secured by the Frenchman's Reef. This note was restructured in December 1994 and pursuant to such restructuring, the Company obtained ownership and control of the Frenchman's Reef (see "-- Liquidity and Capital Resources").
Direct room expenses increased by $5.0 million, or 26.1%, from $19.5 million in 1993 to $24.5 million in 1994 due primarily to the addition of new hotels. As a percentage of room revenue, direct room expenses decreased from 28.0% in 1993 to 27.6% in 1994 primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct room expenses increased $411,000, or 2.4%, but decreased as a percentage of comparable room revenue from 27.1% in 1993 to 25.9% in 1994.
Direct food and beverage expenses increased by $3.7 million, or 35.7%, from $10.2 million in 1993 to $13.9 million in 1994 due primarily to the addition of new full-service hotels. As a percentage of food and beverage revenue, direct food and beverage expenses decreased from 83.4% in 1993 to 76.8% in 1994 primarily due to increased revenues in higher margin areas such as banquet departments and sports lounges. For comparable Owned Hotels, direct food and beverage expenses increased $114,000, or 1.3%, but decreased as a percentage of food and beverage revenue from 83.0% in 1993 to 80.1% in 1994.
Direct hotel selling and general expenses consist primarily of hotel expenses which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $6.3 million, or 30.9%, from $20.4 million in 1993 to $26.7 million in 1994 due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as rooms and food and beverage revenues), direct hotel selling and general expenses remained relatively constant at 25.0% in 1994 and 1993. For comparable Owned Hotels, direct selling and general expenses increased $1.1 million, or 6.2%, but decreased slightly as a percentage of comparable Owned Hotel revenues from 24.3% in 1993 to 24.1% in 1994.
Occupancy and other operating expenses which consist primarily of insurance, real estate and other taxes, and rent expense, increased by $214,000, or 1.9%, from $11.0 million in 1993 to $11.3 million in 1994. As a percentage of hotel revenues, occupancy and other operating expenses decreased from 13.5% in 1993 to 10.5% in 1994 primarily due to operating leverage, lower property and liability insurance charges based on favorable claims experiences and reductions in real estate taxes as a result of successful tax appeals on certain properties.
General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned and Managed Hotels and general corporate expenses. General and administrative expenses decreased by $596,000, or 3.8%, from $15.7 million in 1993 to $15.1 million in 1994 primarily due to savings realized from the restructuring of the Company's centralized management operations in 1993. As a percentage of total revenues, general and administrative expenses decreased from 14.4% in 1993 to 11.2% in 1994.
Depreciation and amortization expense increased by $2.3 million, or 32.5%, from $7.1 million in 1993 to $9.4 million in 1994, due to the impact of new hotel properties acquired in the past year and refurbishment efforts at several hotels.
Interest expense decreased by $2.1 million, or 13.2%, from $16.1 million in 1993 to $14.0 million in 1994, primarily due to the net reduction of approximately $27.4 million of debt over the past two years. Interest income on cash investments increased $701,000, or 63.2%, from $1.3 million in 1993 to $2.0 million in 1994 due to higher average cash balances in 1994.
Other income for 1994 consisted of a gain of approximately $6.2 million related to the settlement of the Rose and Cohen note receivable (see "-- Liquidity and Capital Resources"), gains on sales of other hotel assets of approximately $1.0 million and rebates of prior years' insurance premiums of $1.3 million.
Pretax extraordinary gains of approximately $292,000 for 1994 relate to the retirement of secured notes with a face value of $8.3 million. Pretax extraordinary gains of approximately $6.8 million in 1993 relate to the retirement of debt with a face value of $25.8 million.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 COMPARED TO THE YEAR ENDED DECEMBER 31, 1992
The Company is the successor in interest to PMI, which emerged from chapter 11 reorganization on the Effective Date. During its approximately two-year reorganization, PMI restructured its assets, operations and capital structure. As a result, the Company (i) eliminated numerous unprofitable lease and management agreements, (ii) revalued its assets to reflect the then approximate current fair market value of such assets on its financial statements and (iii) reduced its liabilities by $448.8 million. On the Effective Date, the Company emerged from chapter 11 reorganization with 75 Owned or Managed Hotels (as compared to 141 hotels prior to the chapter 11 reorganization), $135.6 million of total equity and $266.4 million of long-term debt.
The Company implemented "fresh start" reporting in accordance with Statement of Position 90-7 of the American Institute of Certified Public Accountants upon its emergence from reorganization on the Effective Date. Under "fresh start" reporting, the purchase method of accounting was used and the assets and liabilities of the Company were restated to reflect their approximate fair value at the Effective Date. In addition, during the reorganization period (September 18, 1990 to the Effective Date), the Company's financial statements were prepared under accounting principles for entities in reorganization which include reporting interest expense only to the extent paid and recording transactions and events directly associated with the reorganization proceedings. Accordingly, the consolidated financial statements of the Company are not comparable in all material respects to any such financial statement as of any date or for any period prior to the Effective Date. Subsequent to the Effective Date, the Company elected to change its fiscal year end from June 30 to December 31.
For purposes of an analysis of the results of operations, comparisons of the Company's results of operations for 1993 to 1992 are made only when, in management's opinion, such comparisons are meaningful. Prior to the Effective Date, the Company did not employ "fresh start" reporting thereby making comparisons to certain financial statement data prior to such date less meaningful. The financial information set forth below presents the revenues and expenses which can be meaningfully compared. The table excludes the items which were affected by the changes in accounting such as interest expense, occupancy and other operating expense and depreciation expense for 1992 and 1993. The financial information below should be read in conjunction with the Consolidated Financial Statements of the Company included elsewhere in this Prospectus and incorporated by reference. Since the Company changed its fiscal year in 1992, management has compiled unaudited data for the calendar year ended December 31, 1992.
The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for 1992 and 1993.
- --------------- (1) For purposes of this discussion of results of operations for the year ended December 31, 1993 compared to the year ended December 31, 1992, Comparable Owned Hotels refers to the 29 Owned Hotels that were owned or leased by the Company during all of 1993 and 1992.
Room revenue increased by $7.1 million, or 11.4%, from $62.4 million in 1992 to $69.5 million in 1993. This increase was primarily due to incremental room revenues of $10.9 million from hotels acquired or built during 1993 and 1992 and increased occupancy and ADR at comparable hotels. The increase was partially offset by a decrease in room revenues of $7.4 million resulting from the divestiture of four hotels in 1992 and 1993. Room revenues for comparable Owned Hotels increased by $3.5 million, or 6.8%, in 1993 compared to 1992, primarily due to an increase in occupancy of 5.9% for 1993, reflecting improved economic conditions and continued limited new room supply. ADR increased $1.30, or 2.4%, in 1993.
Food and beverage revenues decreased by $792,000, or 6.1%, from $13.1 million in 1992 to $12.3 million in 1993. The decrease was primarily due to the loss of food and beverage operations at divested hotels which was partially offset by an increase in food and beverage revenue at comparable Owned Hotels of $506,000, or 5.3%, in 1993.
Management and other fees decreased by $621,000, or 5.4%, from $11.5 million in 1992 to $10.8 million in 1993. The decrease was primarily attributable to the loss of five management contracts due to property divestitures by independent owners, of which two properties were acquired by the Company. This decrease was
partially offset by increases in management fees attributable to improved operating results of the Managed Hotels.
Interest on mortgages and notes receivable decreased by $5.3 million, or 26.4%, from $20.1 million in 1992 to $14.8 million in 1993. This decrease was primarily due to the Company's early collection of a $58.0 million note receivable in August 1992. The decrease was partially offset by interest income of $1.0 million recognized on cash flow notes in 1993 due to the improved performance of the underlying hotels.
Rental and other revenues decreased by $725,000, or 32.5% from $2.2 million in 1992 to $1.5 million in 1993. The decrease was primarily attributable to the loss of rental revenues on properties which the Company converted into operating hotel assets.
Direct room expenses increased by $1.6 million, or 8.9%, from $17.9 million in 1992 to $19.5 million in 1993. As a percentage of room revenue, direct room expenses decreased from 28.6% in 1992 to 28.0% in 1993, primarily due to increases in ADR which had minimal corresponding increases in expenses. Direct room expenses for comparable Owned Hotels increased by $845,000, or 6.0%, but decreased as a percentage of room revenue from 27.1% in 1992 to 26.9% in 1993.
Direct food and beverage expenses decreased by $1.2 million, or 10.3%, from $11.4 million in 1992 to $10.2 million in 1993. As a percentage of food and beverage revenue, direct food and beverage expenses decreased from 87.3% in 1992 to 83.4% in 1993 which reflected an increase in higher margin beverage sales. For comparable hotels, direct food and beverage expenses increased by $202,000, or 2.4%, but decreased as a percentage of food and beverage revenue from 86.7% in 1992 to 84.3% in 1993.
Direct selling and general expenses decreased by $1.7 million, or 7.6%, from $22.1 million in 1992 to $20.4 million in 1993. As a percentage of hotel revenue, direct selling and general expenses decreased from 29.3% in 1992 to 25.0% in 1993, primarily due to the divestiture of four full-service hotels in 1992 and 1993, which generally required increased overhead costs. For comparable Owned Hotels, direct selling and general expenses decreased as a percentage of hotel revenue from 26.1% in 1992 to 24.8% in 1993, primarily due to the restructuring of the Company's centralized operations which eliminated certain allocated central office charges. These cost savings were offset by higher utility charges as a result of an unusually warm summer in 1993.
General and administrative expenses decreased by $1.5 million, or 8.6%, from $17.2 million in 1992 to $15.7 million in 1993. As a percentage of total revenue, general and administrative charges decreased from 15.7% in 1992 to 14.4% in 1993. These decreases were primarily due to the restructuring of the Company's centralized management operations in February 1993 which eliminated approximately $2.5 million of annual costs.
Other income in 1993 consisted primarily of a gain on the sale of a hotel of $1.0 million, settlement of closing adjustments of $625,000 related to the sale of a hotel in a prior year, interest of $1.2 million received as part of a federal tax refund and $500,000 received in settlement of prior year's fees on a Managed Hotel.
Pretax extraordinary gains of $6.8 million in 1993 relate to the repurchase of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital needs through a combination of cash flow from operations, conversion of non-operating assets to cash and proceeds from mortgage financings. The Company believes that its cash flow from operations is sufficient to fund its anticipated working capital needs, routine capital expenditures and debt service obligations due through 1995. An important component of the Company's growth strategy is to increase its equity ownership in hotels, particularly in the full-service and all-suites segments of the market. The Company intends to actively pursue acquisitions of full-service hotels or hotel portfolios which may also require additional capital for the costs of any necessary renovation or refurbishment. Additionally, the Company plans to expand its AmeriSuites hotel brand by opening or commencing construction on ten AmeriSuites hotels in 1995. The Company plans to fund its development and acquisition program in 1995 with the proceeds of debt or equity offerings, mortgage financings of $42.6 million being
incurred in the first quarter of 1995 and additional mortgage financings on its unencumbered properties, as well as, potentially, on any properties acquired. The Company believes that these sources will be adequate to fund the implementation of its growth strategy in 1995.
At December 31, 1994, the Company had cash and cash equivalents of $12.5 million and restricted cash of $9.7 million, which was primarily collateral for various debt obligations. Cash and cash equivalents decreased by $29.0 million during 1994 primarily due to capital expenditures related to the Company's development plan.
Cash flow from operations was approximately $28.7 million in 1994 as compared to $19.7 million in 1993. Cash flow from operations was positively impacted by the utilization of net operating loss carryforwards ("NOLs") of $5.9 million and $4.5 million for 1994 and 1993, respectively. At December 31, 1994, the Company had federal NOLs relating to its predecessor, PMI, of approximately $117.5 million which are subject to annual utilization limitations and expire beginning in 2005 and continuing through 2007.
The Company's other major sources of cash in 1994 were a settlement of the Rose and Cohen note receivable for $31.2 million, mortgage financing and other borrowings of $19.0 million and other collections of mortgages and notes receivable of $5.0 million. The Company's major uses of cash in 1994 were payments of debt of $43.8 million, capital expenditures of $63.4 million and purchases of debt and other securities of $5.9 million.
Debt. During the first quarter of 1994, the Company purchased at a discount $7.2 million of its Senior Secured Notes and Junior Secured Notes for an aggregate purchase price of $7.0 million and retired the debt for a gain of approximately $200,000. In addition, during the first quarter of 1994, the Company purchased through a third party agent approximately $5.2 million of its Senior Secured Notes and Junior Secured Notes for aggregate consideration of $4.8 million. These notes were held by the third party agent and were not retired due to certain restrictions under the note agreements. The purchases were recorded as investments on the Company's balance sheet and gains will not be recorded on these transactions until the notes mature or are redeemed. In April 1994, approximately $1.1 million of these notes were retired with a portion of the proceeds from settlement of the Rose and Cohen note receivable, resulting in a pretax gain of approximately $100,000.
In April 1994, the Company retired its Senior Secured Notes, due July 31, 1997, with a prepayment of $26.4 million from proceeds of the settlement of the Rose and Cohen note receivable and other collections from the collateral for the Senior Secured Notes. The Company issued the Senior Secured Notes on July 31, 1992.
In July 1994, the Company received the required consents from holders of its Junior Secured Notes to remove certain debt covenants which placed limitations on the Company's hotel development spending. In consideration of the consent to the amendment, the Company agreed to increase the interest rate of the Junior Secured Notes from 9.2% to 10.0% per annum and to shorten the maturity from July 31, 2000 to July 31, 1999. In addition, the designation of the Junior Secured Notes changed to Senior Secured Notes as the original Senior Secured Notes were retired.
In November 1994, the Company obtained mortgage financing of $10.8 million on two of its unencumbered properties, the proceeds of which were used for the Company's acquisition and development program in 1994. These notes bear interest at 11.2% and mature in 2004.
In February 1995, the Company obtained $39.0 million of mortgage financing on 11 of its unencumbered hotels under two separate loan agreements. Both loans bear interest at variable rates (approximately 10.5% at closing) and have five-year maturities. The funds will be used to finance the Company's acquisition and development program. The Company also expects to incur an additional $3.6 million of debt in connection with the ShoLodge Transaction. See "-- Capital Investments."
The Company has $34.9 million of debt obligations related to the Frenchman's Reef due in December 1996. The Company intends to seek an extension of the maturity of such debt or refinance it. The debt is secured by the property which has a book value of $50.0 million.
At December 31, 1994, as adjusted to give effect to the incurrence by the Company of $42.6 million of mortgage debt in the first quarter of 1995, the Company would have had $83.7 million in debt that will bear interest at floating rates. The Company has not entered into interest rate protection agreements with respect to its floating rate debt, and, accordingly, the interest the Company pays on such debt will increase or decrease depending on the movement of interest rates generally.
Capital Investments. The Company has implemented a hotel development and acquisition program which focuses on the acquisition of strategically positioned full-service hotels or hotel portfolios and the development of AmeriSuites hotels. The Company spent approximately $51.0 million and assumed $18.7 million of debt in connection with its development and acquisition program in 1994. The cash portion was funded by a combination of existing cash balances, cash flow from operations and mortgage financing.
As part of the Company's full-service acquisition program in 1994, the Company acquired four full-service hotels: the 183-room Ramada Inn in Clifton, New Jersey, the 280-room Ramada Inn in Trevose, Pennsylvania (which the Company has since converted to a Radisson hotel), the 340-room Sheraton hotel in Hasbrouck Heights, New Jersey, and the 225-room Sheraton hotel in Mahwah, New Jersey. The Company is continuing to pursue opportunities to acquire full-service hotels or hotel portfolios to the extent that attractive acquisition opportunities are available.
During 1994, the Company opened four newly constructed AmeriSuites hotels in Overland Park, Kansas, Columbus, Ohio, Tampa, Florida, and Louisville, Kentucky, and two newly constructed Wellesley Inns in Lakeland and Fort Lauderdale, Florida. The Company has begun developing or has plans to develop AmeriSuites on sites it currently owns in the Atlanta, Greensboro, Miami, Baltimore, Detroit and Cleveland areas and has entered into a contract to purchase an additional AmeriSuites site in the Dallas area. The Company currently plans to spend approximately $70.0 million to open or commence construction on 10 new AmeriSuites hotels in 1995 and has already begun construction at the Atlanta, Greensboro and Miami sites.
In February 1995, the Company agreed to purchase an AmeriSuites hotel in Richmond, Virginia and ShoLodge Inc.'s option to acquire a 50% interest in 11 of the Company's 12 AmeriSuites hotels. The acquisition is scheduled to close on March 31, 1995. The total consideration payable by the Company in the ShoLodge Transaction is $34.6 million, of which $16.1 million will be paid in three cash installments during 1995, and the remaining $18.5 million will be paid in notes maturing in 1997. The transaction will result in a net increase of $3.6 million of long-term debt as ShoLodge will forgive certain other existing debt on five of the 11 AmeriSuites. As a result of the transaction, the Company will manage these 12 AmeriSuites bringing to 13 the number of AmeriSuites hotels to be owned and operated by the Company.
The Company continues to pursue its program of refurbishing certain of its Owned Hotels and repositioning them in order to meet the local market's demand characteristics. In some instances, this may involve a change in franchise affiliation. The refurbishment and repositioning program primarily involves hotels which the Company has recently acquired through mortgage foreclosures or settlements, lease evictions/terminations or acquisitions. During 1993 and 1994, the Company spent approximately $5.0 million and $11.9 million on capital improvements at its Owned Hotels, of which approximately $2.8 million and $8.9 million related to refurbishments and repositionings on 12 Owned Hotels. In 1995, the Company intends to spend approximately $18.0 million on capital improvements, of which $10.8 million relates to the refurbishing and repositioning of recently acquired hotels.
Asset Realizations. The Company has pursued a strategy of converting the mortgage notes receivable and other assets that it owns into cash or operating hotel assets. Since July 31, 1992, the Company has received $98.5 million in cash and added seven operating hotel assets through note settlements and lease terminations. During 1994, the Company reduced its long-term mortgage and notes receivable portfolio by $81.8 million to $81.3 million at December 31, 1994. This reduction is primarily attributable to the settlement of the note receivable from Rose and Cohen described below, which carried a book value of $25.0 million, for $31.2 million in cash, and the conversion of the Company's mortgage note receivable secured by the Frenchman's Reef with a book value of $50.0 million into an operating hotel asset. The Company will
continue to pursue settlement with mortgage and note obligors and will utilize the cash for debt repayments or general corporate purposes.
In April 1994, the Company received a favorable ruling from the U.S. Bankruptcy Court for the Southern District of Florida in litigation with Financial Security Assurance, Inc. ("FSA"), with respect to FSA's attempt to recover a payment made to the Company under the Rose and Cohen note receivable. In 1993, the Company reached a settlement with Rose and Cohen of an adversary proceeding regarding a promissory note and personal guarantee. The settlement provided for Rose or his affiliate to pay the Company the sum of $25.0 million, all of which was paid into escrow in February 1994, plus proceeds from the sale of approximately 1.1 million shares of the Company's Common Stock held by Rose. FSA asserted that it was entitled to receive the settlement proceeds under the terms of an intercreditor agreement. Upon receipt of the Bankruptcy Court order in April 1994, the Company used the $25.0 million of settlement proceeds to retire its Senior Secured Notes. On April 21, 1994, FSA filed its notice of appeal of the Bankruptcy Court's order. The appeal was argued before the United States District Court in November 1994 and the decision of the District Court is pending. During 1994, Rose sold approximately 1.0 million shares of the Company's Common Stock under the terms of the settlement for net proceeds of approximately $6.2 million. Subject to further court order, the Company is required to use the stock proceeds principally to retire Senior Secured Notes. As the Rose and Cohen note had a book value of $25.0 million on the Company's balance sheet, approximately $6.2 million was recorded as income in the Company's statement of operations.
In December 1994, the Company obtained ownership of the Frenchman's Reef through a pre-negotiated plan of reorganization. The Company had previously reached an agreement in 1993 to restructure its mortgage notes receivable secured by the Frenchman's Reef with the general partner of Frenchman's Reef Beach Associates ("FRBA"), the owner of the hotel. In conjunction with the agreement, FRBA filed a pre-negotiated chapter 11 petition in September 1993. During the reorganization period, the Company continued to receive cash payments on its mortgage notes receivable under a cash collateral order approved by the Bankruptcy Court. Under the plan of reorganization, which was approved by the Bankruptcy Court on November 29, 1994, the Company obtained ownership and control of the hotel.
In addition, during 1994, the Company received $2.2 million in settlement of other mortgage notes receivable realizing a gain of $125,000. The Company also sold its fee interests in two hotels in 1994 for a combination of cash and notes of $2.5 million and realized gains of $1.0 million.
Item 8.


Item 8. Financial Statements and Supplementary Data.
See Index to Financial Statements included in Item 14.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and executive officers of the Company:
- ---------------
(1) Member of the Compensation and Audit Committee.
The following is a biographical summary of the experience of the directors and executive officers of the Company:
David A. Simon has been President, Chief Executive Officer and a Director since 1992 and Chairman of the Board of Directors of the Company since 1993. Mr. Simon was a director of PMI from 1990 to 1992. Mr. Simon was the Chief Executive Officer of PMI from 1990 to 1992 and was an executive officer in September 1990 when PMI filed for protection under chapter 11 of the United States Bankruptcy Code.
John M. Elwood has been a Director and Executive Vice President of the Company since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the Director of Reorganization of PMI from September 1990, when PMI filed for protection under chapter 11 of the United States Bankruptcy Code, through the Effective Date, and during 1990 was the Director of Reorganization of Allegheny International, Inc. prior to its emergence from chapter 11 bankruptcy protection that year.
Howard M. Lorber has been a Director and a member of the Compensation and Audit Committee since 1994. Mr. Lorber is Chairman of the Board of Directors of Nathan's Famous, Inc., Hallman & Lorber, Inc. and Skybox International, Inc., and a director of New Valley Corporation, United Capital Corp. and Alpine Lace Brands, Inc. Mr. Lorber has been Chief Executive Officer of Hallman & Lorber, Inc. for more than the past five years, President and Chief Operating Officer of New Valley Corporation since 1994, and Chief Executive Officer of Nathan's Famous, Inc. since 1993. Mr. Lorber has also been a general partner or shareholder of a corporate general partner of various limited partnerships organized to acquire and operate real estate properties. Several of these partnerships filed for protection under the federal bankruptcy laws in 1990 and 1991.
Herbert Lust, II has been a Director since 1992 and Chairman of the Compensation and Audit Committee of the Company since 1993. Mr. Lust was a member of the Committee of Unsecured Creditors of PMI from 1990 to 1992. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust.
Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum has been a senior partner and Co-Chairman of the law firm of Willkie Farr & Gallagher for more than the past five years. He also is a director of W.R. Berkley Corporation, The Topps Company, Inc., GEV Corporation, Signet Star Holdings, Inc., Republic New York Securities Corporation, and a director and a member of the Executive Committee of the New York City Economic Development Corporation.
Allen J. Ostroff has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Ostroff has been a Senior Vice President of the Prudential Realty Group, a subsidiary of the Prudential Insurance Company of America, for more than the last five years.
A.F. Petrocelli has been a Director since 1992 and a member of the Compensation and Audit Committee since 1993. Mr. Petrocelli has been the Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years.
Paul H. Hower has been an Executive Vice President of the Company since 1993. Mr. Hower was President of Integrity Hospitality Services from 1992 to 1993 and Vice President and Hotel Division Manager of B.F. Saul Co. from 1990 to 1991.
Timothy E. Aho has been a Senior Vice President of the Company since 1994. Mr. Aho was a Senior Vice President of Development for Boykin Management Company from 1993 to 1994 and Vice President of Development for Interstate Hotels Corporation from 1990 to 1993.
Denis W. Driscoll has been a Senior Vice President of the Company since 1993. Mr. Driscoll was President of Driscoll Associates, a human resources consulting organization, from 1990 to 1993.
John H. Leavitt has been a Senior Vice President of the Company since 1992. Mr. Leavitt was a Senior Vice President of PMI from 1991 to 1992 and a Senior Vice President of Medallion Hotel corporation from 1990 to 1991.
Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of the Company since 1992. Mr. Bernadino was an Assistant Secretary and Assistant General Counsel of PMI from 1990 to 1992 and held such position when PMI filed for chapter 11 bankrupcty protection.
Richard T. Szymanski has been a Vice President and Corporate Controller of the Company since 1992. Mr. Szymanski was Corporate Controller of PMI from 1990 to 1992 and held such position when PMI filed for chapter 11 bankrupcty protection.
Douglas W. Vicari has been a Vice President and Treasurer of the Company since 1992 and was Vice President and Treasurer of PMI during 1992. Mr. Vicari was the Director of Budget and Financial Analysis of PMI from 1990 to 1992 and held such position when PMI filed for chapter 11 bankrupcty protection.
Item 11.

Item 11. Executive Compensation
The following summary compensation table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to the persons who were, at December 31, 1994, the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company. The information shown reflects compensation for services in all capacities awarded to, earned by or paid to these persons for the years ending December 31, 1992, 1993 and 1994.
1. Represents $102 for premiums of Company-provided life insurance, $141 related to 401K matching contributions and $5,264 in value of use of Company-provided car. 2. Represents $102 for premiums for Company-provided life insurance, $3,045 in value of use of Company-provided car. 3. Represents $702 for premiums for Company-provided life insurance, $826 related to 401K matching contributions and $3,882 in value of use of Company-provided car. 4. Represents $280 for premiums for Company-provided life insurance and $679 related to 401K matching contributions. 5. Represents $87 for premiums for Company-provided life insurance and $527 related to 401K matching contributions.
Stock Option Grants During Year Ended December 31, 1994
The following table sets forth information concerning individual grants of stock options made during the year ending December 31, 1994 to each of the officers listed below. The Company did not grant any stock appreciation rights during such period.
(1) These stock options were granted to John M. Elwood under an employment contract dated January 24, 1994, which options vest in equal annual installments of 12,500 each on January 24, 1995, 1996, 1997 and 1998 and will continue to be exercisable through January 23, 2000. These options become immediately exercisable upon a change in control of the Company.
(2) These stock options vest with respect to one third of the grant on each of August 2, 1995, 1996, and 1997 and will continue to be exercisable through August 2, 2000. These options become immediately exercisable upon a change in control of the Company.
Aggregated Option Exercises in the Year Ended December 31, 1994 and Year-End Option Values
Employment Agreement Under the Plan
As provided in the PMI Second Amended Joint Plan of Reorganization (the "Plan"), Mr. Simon and the Company executed an employment agreement dated July 31, 1992 which provides for an initial term of three years, with automatic successive one-year extensions unless a prior election is made by either party not to extend the agreement.
The employment agreement provides for an annual base salary of $300,000 (which will increase annually based upon increases in the consumer price index), a discretionary annual bonus based on attainment of performance objectives set by the Board of Directors, a life insurance policy in an amount not less than $1,000,000, an automobile and other customary welfare benefits, including medical and disability insurance. The agreement also provides that, to the extent payments made by the Company for disability insurance, life insurance and the use of the automobile are subject to federal, state or local income taxes, the Company will pay Mr. Simon the amount of such additional taxes plus such additional amount as will be reasonable to hold him harmless from the obligation to pay such taxes.
Pursuant to this employment agreement, Mr. Simon was granted stock options on July 31, 1992 to purchase 330,000 shares of Common Stock. Such stock options are exercisable with respect to 110,000 shares at the end of each of the first, second and third years of his employment, provided his employment has not been terminated by such date.
This employment agreement may be terminated by the Company at any time, with or without cause. If the agreement is terminated by the Company prior to the expiration of the initial three-year term without cause, or if Mr. Simon resigns because of circumstances amounting to constructive termination of employment, severance would be paid in a single lump sum equal to one-year's base salary or, if greater, the base salary that would have been payable over the remainder of the initial term. All stock options would become fully vested and remain exercisable for 90 days after termination or, if longer, until the expiration of the initial three year term. Any bonus awarded for the year of termination would be prorated. If the Company does not terminate the agreement prior to the expiration thereof, but elects not to extend the agreement beyond the initial term, severance would be payable in a single lump sum equal to one-year's base salary. If the agreement is terminated by the Company for cause (as such term is defined in the employment agreement), or if Mr. Simon resigns voluntarily under circumstances not amounting to a constructive termination of employment, no benefits are payable other than accrued but unpaid salary.
Employment Agreements Subsequent to the Plan
As of January 24, 1994, Mr. Elwood and the Company executed an employment agreement which had a term of one year. This employment agreement provided for an annual base salary of $250,000, a discretionary annual bonus based on attainment of performance objectives set by the Board of Directors, a life insurance policy in the amount of $500,000 (of which the Company will not pay
premiums which exceed $5,000), an automobile, and other customary welfare benefits, including medical and disability insurance. Pursuant to the agreement, Mr. Elwood was granted stock options to purchase 50,000 shares of Common Stock pursuant to the 1992 Stock Option Plan, which options vest in equal annual installments of 12,500 shares each on January 24, 1995, 1996, 1997 and 1998. This employment agreement has expired. The Company intends to execute a new agreement with Mr. Elwood.
As of May 18, 1993, Mr. Paul H. Hower and the Company executed an employment agreement which terminated on June 30, 1994. This employment agreement provides for an annual base salary of $180,000, a cash bonus of $10,000, a discretionary annual bonus based on attainment of performance objectives set by the Board of Directors, a life insurance policy in an amount not less than $360,000, an automobile, and other customary welfare benefits, including medical and disability insurance. Pursuant to the agreement, Mr. Hower was granted stock options as of June 23, 1993 to purchase 20,000 shares of Common Stock.
Change in Control Agreements
As of February 15, 1995, the Company executed change in control agreements with ten officers of the Company, including each named executive officer. These agreements provide that, if within two years of a change in control of the Company, the officer's employment with the Company is terminated by the Company without cause or if the officer resigns for good reason (as defined in the agreements), the Company will pay the beneficiary two and one-half times the aggregate cash compensation earned by the beneficiary during the fiscal year immediately preceding the termination of employment. Such payments are to be reduced, however, to the extent necessary to avoid characterization as "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code. In addition, any outstanding options to purchase shares of the Company held by the officer will vest and become exercisable as of the date of the change in control.
Board of Directors Compensation and Benefits
Directors who are employees of the Company do not receive additional compensation for serving on the Board of Directors. Non-employee Directors receive $24,000 annually. In addition, each non-employee Director receives $1,500 for each Board of Directors meeting attended, $1,500 for each committee meeting attended and $500 for each telephonic meeting if such meeting extends beyond a period of 15 minutes. The Chairman of the Compensation and Audit Committee receives an additional $15,000 annually. The Directors' remuneration is paid quarterly. All Directors are reimbursed for their expenses.
Compensation and Audit Committee Interlocks and Insider Participation
The members of the Compensation and Audit Committee are Herbert Lust, II (Chairman), A. F. Petrocelli, Allen J. Ostroff and Howard M. Lorber. Mr. Petrocelli has certain business relationships with the Company, which are described under the heading "Certain Relationships and Related Transactions."
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of February 16, 1995, information with respect to the beneficial ownership of the Company's common stock by (i) each person known by the Company to own beneficially 5% or more of the Company's common stock, (ii) each director of the Company, (iii) the Company's Chief Executive Officer and each of the four remaining most highly compensated executive officers, and (iv) all executive officers and directors of the Company as a group.
(a) First Interstate Bank Corp. filed a Schedule 13G, dated February 10, 1995 with the Securities and Exchange Commission (the "SEC") reporting ownership of 2,271,500 shares of Common Stock, with sole voting power with respect to 1,443,400 shares and sole dispositive power with respect to 2,271,500 shares.
(b) Ingalls & Snyder filed a Schedule 13G, dated January 13, 1995 with the SEC reporting ownership of 1,983,179 shares of Common Stock, with sole voting power with respect to 168,286 shares and sole dispositive power with respect to 1,983,179 shares.
(c) Includes 151,726 shares owned by David A. Simon, 146 shares owned by his wife and 249 shares held by Mr. Simon as custodian for his children. Mr. Simon disclaims beneficial ownership of the shares owned by his wife and held as custodian for his children. Also includes warrants to purchase 5,510 shares with an exercise price of $2.71 per share owned by Mr. Simon, 467 warrants owned by his wife, and 797 warrants held as custodian for his children. Mr. Simon disclaims beneficial ownership of the warrants owned by his wife and held as custodian for his children. Also includes options to purchase 250,000 shares with an exercise price of $3.20 per share as to 30,000 shares and $2.71 as to 220,000 shares.
(d) Includes 47,000 shares, warrants to purchase 12,122 shares with an exercise price of $2.71 per share and options to purchase 20,000 shares at an exercise price of $3.81 per share, options to purchase 30,000 shares at an exercise price of $3.20 per share and options to purchase 12,500 at an exercise price of $7.38 per share.
(e) Includes 10,000 shares owned by Herbert Lust, 23,151 shares held by a trust under which Mr. Lust and his wife are co-trustees and beneficiaries and options held by Mr. Lust to purchase 20,000 shares with an exercise price of $3.20 per share.
(f) Includes 5,000 shares and options to purchase 30,000 shares with an exercise price of $3.20 per share.
(g) Includes 8,276 shares held by United Capital Corp. of which Mr. Petrocelli is Chairman of the Board of Directors and Chief Executive Officer and options held by Mr. Petrocelli to purchase 30,000 shares with an exercise price of $3.20 per share.
(h) Includes 10,000 shares and options to purchase 5,000 shares with an exercise price of $7.25 per share.
(i) Includes options to purchase 5,000 shares with an exercise price of $7.25 per share.
(j) Includes 26 shares, warrants to purchase 85 shares with an exercise price of $2.71 per share and options to purchase 2,666 shares with an exercise price of $3.63 per share.
(k) Includes 300 shares owned by his wife and options to purchase 20,000 shares with an exercise price of $4.00 per share.
(l) Includes 5,520 shares owned by Mr. Driscoll, 200 shares owned by his son and daughter, warrants to purchase 64 shares with an exercise price of $2.71 per share, and options to purchase 2,666 shares with an exercise price of $3.63 per share.
(m) Includes 1,000 shares and options to purchase 2,666 shares with an exercise price of $3.63 per share.
(n) Includes options to purchase 1,666 shares with an exercise price of $3.63 per share.
(o) Includes options to purchase 1,666 shares with an exercise price of $3.63 per share.
(p) With the exception of David Simon, the Directors and executive officers each owns less than one percent of the outstanding Common Stock and own approximately two percent of the outstanding Common Stock as a group. Percentages were based on 30,556,385 shares outstanding as of March 8, 1995.
Item 13.

Item 13. Certain Relationships and Related Transactions.
A.F. Petrocelli, a Director of the Company, is the Chairman of the Board and Chief Executive Officer of United Capital Corp. In March 1994, the Company entered into management agreements with the corporate owners of two hotels who are affiliates of United Capital Corp. The Company received $90,000 in management fees for the fiscal year ended 1994.
During 1989, a partnership in which Peter E. Simon, father of David A. Simon, is a partner acquired an interest in three hotels
from PMI. In partial payment PMI received non-recourse junior loans aggregating $21,590,000. As of December 31, 1994, the aggregate balance owed on these loans was $21,472,766. The interest rates on these loans ranged from 9 1/2% to 11% per annum. The Company has restructured these loans in order to obtain payment based upon the available cash flow of the hotels. During 1994, the Company recognized $853,000 of interest income related to these loans. The Company managed these three hotels for the partnership and received $523,000 in management fees for fiscal year 1994.
During 1989, this same partnership acquired PMI's interest in eight hotel properties. In partial payment PMI received a junior non-recourse mortgage note in the principal amount of $9,647,450. The Company restructured this transaction as of December 1, 1992 by (i) conveying to the partnership its interest in one hotel property, and (ii) amending the principal amount and interest rate of the note to $8,103,362 and 8.2% per annum, respectively. No debt payments were made on these loans during 1994. The Company managed these nine hotels for the partnership and received $329,000 in accounting and management fees for fiscal year 1994.
During February 1990, this same partnership purchased from PMI a note owed by a third party in the original principal amount of $3,255,380. This partnership paid PMI $488,318 in cash and granted PMI an 85% note participation. In partial settlement of its claim on the note, the Company acquired a hotel located in Miami, Florida in which the partnership has a 15% interest.
In December 1993, the Company entered into a management agreement with the corporate owner of a hotel in which Peter E. Simon is a stockholder. The Company received $40,000 in management fees for the fiscal year 1994.
In 1991, the Company entered into an agreement with ShoLodge, a company controlled by Leon Moore, a former director, whereby ShoLodge was appointed the exclusive agent to develop and manage certain hotel properties. The Company had loans payable to ShoLodge of $39,896,000 at December 31, 1994 related to the development of hotels. The Company also uses the ShoLodge reservation system for its Wellesley and AmeriSuites properties.
In February 1995, the Company entered into an agreement to acquire ShoLodge's option to purchase a 50% interest in 11 of the Company's AmeriSuites hotels and will also acquire the only AmeriSuites hotel not already owned by the Company. The total consideration payable by the Company in this transaction is $34,600,000 of which $16,100,000 will be paid in three cash installments during 1995 and the remaining $18,500,000 will be paid in notes maturing in 1997. As a result of this transaction, which
is scheduled to close on March 31, 1995, the Company will take over the management of these hotels.
The Company has a note receivable from John H. Leavitt, Senior Vice President - Sales and Marketing, with a balance of $39,163 at December 31, 1994. The note bears interest at 8.5% and is due in 2011.
The Company has retained Willkie Farr & Gallagher as its legal counsel involving certain matters during its last fiscal year and anticipates it will continue such relationship with the firm in this fiscal year. Mr. Nusbaum, Director of the Company, is a Senior Partner and Co-Chairman of the firm.
PART IV
Item 14

Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
The Financial Statements listed in the accompanying index to financial statements are filed as part of this Annual Report.
2. Exhibits
(2) (a) Reference is made to the Disclosure Statement for Debtors' Second Amended Joint Plan of Reorganization dated January 16, 1992, which includes the Debtors' Second Amended Plan of Reorganization as an exhibit thereto filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(3) (a) Reference is made to the Restated Certificate of Incorporation of the Company dated June 5, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(b) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by
reference.
(4) (a) Reference is made to the Form of 8.20% Fixed Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(b) Reference is made to the Form of Adjustable Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(c) Reference is made to the Form of 9.20% Junior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(d) Reference is made to the Form of 8.20% Tax Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(e) Reference is made to the Form of 10.20% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(f) Reference is made to the Form of 8% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(g) Reference is made to the Form of 9.20% OVR Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(h) Reference is made to the Collateral Agency Agreement among the Company, U.S. Trust and the Secured Parties, dated as of July 31, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(i) Reference is made to the Security Agreement between the Company and U.S. Trust, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(j) Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(k) Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(l) Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(m) Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(n) Reference is made to a Form 8-A of the Company as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference.
(10) (a) Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc. dated June 3, 1985, and its related agreements, each of which was included as Exhibits to the Form 8-K dated August 14, 1985 of PMI, which are incorporated herein by reference.
(b) Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q dated February 12, 1988 of PMI, which is incorporated herein by reference.
(c) Reference is made to the Employment Agreement dated as of July 31, 1992, between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(d) Reference is made to the 1992 Performance Incentive Stock Option Plan of the Company dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(e) Reference is made to the 1992 Stock Option Plan of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(f) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David A. Simon filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(g) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David L. Barsky filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(i) Reference is made to the Employment Agreement dated as of December 31, 1992 between John Elwood and the Company filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference.
(j) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and John Elwood filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference.
(k) Reference is made to the Employment Agreement dated as of May 18, 1993 between Paul Hower filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference.
(l) Reference is made to the Consolidated and Amended Settlement Agreement dated as of October 12, 1993 between Allan V. Rose and the Company filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference.
(m) Consent and Amendment to Prime Hospitality Corp. 9.20% Junior Secured Notes.
(n) Agreement dated February 6, 1995 among Suites of America, Inc., ShoLodge, Inc. and the Company.
(o) Change of Control Agreement dated February 15, 1995 between David A. Simon
and the Company.
(p) Change of Control Agreement dated February 15, 1995 between John M. Elwood and the Company.
(q) Change of Control Agreement dated February 15, 1995 between Paul H. Hower and the Company.
(r) Change of Control Agreement dated February 15, 1995 between John H. Leavitt and the Company.
(s) Change of Control Agreement dated February 15, 1995 between Denis W. Driscoll and the Company.
(t) Change of Control Agreement dated February 15, 1995 between Timothy E. Aho and the Company.
(u) Change of Control Agreement dated February 15, 1995 between Joseph Bernadino and the Company.
(v) Change of Control Agreement dated February 15, 1995 between Richard T. Szymanski and the Company.
(w) Change of Control Agreement dated February 15, 1995 between Douglas W. Vicari and the Company.
(x) Change of Control Agreement dated February 15, 1995 between Richard Moskal and the Company.
(11) Computation of Earnings Per Common Share.
(12) Computation of the Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the Company are as follows:
(b) Reports on Form 8-K: None
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
(ITEM 14(A))
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
Separate financial statements of 50% or less owned entities accounted for by the equity method have been omitted because such entities considered in the aggregate as a single subsidiary would not constitute a significant subsidiary.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Prime Hospitality Corp.:
We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries ("the Company") as of December 31, 1994 and 1993 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended and the five months ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for the years then ended and the five months ended December 31, 1992 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey February 2, 1995
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1994 (IN THOUSANDS, EXCEPT SHARE DATA)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1992, 1993 AND 1994
NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES:
Prime Hospitality Corp. (the "Company") is a hotel owner/operator with ownership or management of hotels in the United States and the U.S. Virgin Islands. The Company's hotels primarily provide moderately priced, quality accommodations in secondary markets, and operate under franchise agreements with national hotel chains or under the Company's proprietary Wellesley Inns or AmeriSuites brand names.
The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992 (the "Effective Date"). PMI and certain of its subsidiaries had filed for protection under Chapter 11 of the United States Bankruptcy Code in September of 1990. During the reorganization, PMI re-negotiated most of its leases, management agreements and debt commitments, resulting in the elimination of a substantial number of unprofitable contract relationships and excessive debt obligations.
BASIS OF PRESENTATION:
Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximate the present values of amounts to be paid determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company.
In accordance with SOP 90-7, financial statements covering periods prior to July 31, 1992 are not presented because such statements have been prepared on a different basis of accounting and are thus not comparable.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS:
Cash equivalents are highly liquid unrestricted investments with a maturity of three months or less when acquired.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH:
Restricted cash consists primarily of highly liquid investments that serve as collateral for debt obligations due within one year.
MORTGAGES AND NOTES RECEIVABLE:
Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted for payments and other advances since that date. The amount of interest income recognized on mortgages and notes receivable is generally based on the stated interest rate and the carrying value of the notes. The Company has a number of subordinated or junior mortgages which remit payment based on hotel cash flow. Because there is substantial doubt that the Company will recover their face value, these mortgages have not been valued in the Company's consolidated financial statements. Interest on cash flow mortgages and delinquent loans is generally recognized when cash is received.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Properties identified for disposal are stated at their estimated net realizable value.
INCOME TAXES:
The Company and its subsidiaries file a consolidated Federal income tax return. For financial reporting purposes, the Company follows Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 ("FAS 109"). In accordance with FAS 109, as well as SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized.
NET INCOME PER COMMON SHARE:
Net income per common share is computed based on the weighted average number of common shares and common share equivalents outstanding during each period. The weighted average number of common shares used in computing primary net income per share was 29,913,000 for the five months ended December 31, 1992 and 30,721,000 and 32,022,000 for the years ended December 31, 1993 and 1994, respectively. Net income per common shares was restated for all periods to reflect a 9.4% reduction in the number of shares distributed under PMI's Plan (See Note 10). The dilutive effect of stock warrants and options during the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 was not material (see Note 10).
RECLASSIFICATIONS:
Certain reclassifications have been made to the December 31, 1992 and 1993 consolidated financial statements to conform them to the December 31, 1994 presentation.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following (in thousands):
NOTE 3 -- MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are comprised of the following (in thousands):
- --------------- (a) The Company is the holder of mortgage notes receivable with a book value of $46,497,000 secured primarily by 10 hotel properties operated by the Company under management agreements and $14,112,000 in mortgages secured primarily by 4 properties operated under lease agreements. These notes currently bear interest at rates ranging from 8.5% to 13.5% and mature through 2017. The mortgages were primarily derived from the sales of hotel properties. Many of the managed properties were unable to pay in full the annual debt service required under the terms of the original mortgages. The Company has restructured approximately $33,000,000 of these loans to pay based upon available cash and a participation in the future excess cash flow of such hotel properties. The restructurings generally include a "senior portion" featuring defined payment terms, and a "junior portion" payable annually based on cash flow. The junior portion represents the difference between the original mortgage and the new senior portion and provides the Company the opportunity to recover that difference if the hotel's performance improves. In addition to the junior portion of the restructured mortgages, the Company holds junior or other cash flow mortgages and subordinated interests in other hotel properties operated by the Company under management agreements.
The Company's consolidated balance sheets do not reflect any value related to the junior portions of the restructured notes or the junior mortgages and subordinated interests on the other hotels as there is substantial doubt that the Company will recover any of their face value. During 1993 and 1994, the Company recognized $976,000 and $2,000,000, respectively, of interest income related to these mortgages.
(b) Other notes receivable currently bear interest at effective rates ranging from 4% to 10.5%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company.
(c) The mortgage notes secured by the Frenchman's Reef Resort Hotel ("Frenchman's Reef") consisted of first and second mortgages with face values of $53,383,000 and $25,613,000, respectively, with final scheduled principal payments of $51,976,000 and $25,613,000 due on July 31, 1995. In connection with the adoption of fresh start reporting, the Company valued the notes at $50,000,000.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the five months ended December 31, 1992, and years ended December 31, 1993 and 1994 the Company recognized $1,770,000, $4,250,000 and $4,586,000 of interest income on these notes, respectively, based on the level of cash flow generated from the hotel property available to service the notes.
In December 1994, the Company obtained ownership of Frenchman's Reef in satisfaction of the mortgage note receivable through a pre-negotiated plan of reorganization. The Company had previously reached an agreement in 1993 to restructure its mortgage notes receivable secured by Frenchman's Reef with the general partner of Frenchman's Reef Beach Associates ("FRBA"), the owner of the hotel. In conjunction with the agreement, FRBA filed a pre-negotiated chapter 11 petition in September 1993. During the reorganization period, the Company continued to receive cash payments on its mortgage notes receivable under a cash collateral order approved by the Bankruptcy Court. Under the plan of reorganization, which was approved by the Bankruptcy Court on December 16, 1994, the Company obtained ownership and control of the hotel. As a result of obtaining this control, the Company reallocated its basis in the mortgage note receivable to the various operating assets acquired (principally land, hotel building and furniture and fixtures) based upon their respective fair market value.
(d) The note receivable from Rose and Cohen represented the estimated fair market value as of July 31, 1992 of certain amounts loaned by PMI to entities controlled by Allan Rose and Arthur Cohen ("Rose and Cohen"). During 1993, the Company reached a settlement with Rose and Cohen of an adversary proceeding regarding a promissory note and personal guarantee, commenced by a subsidiary of PMI during 1991. The settlement provided for Rose or his affiliate to pay the Company the sum of $25 million, plus proceeds from approximately 1.1 million shares of the Company's common stock held by Rose.
Financial Security Assurance, Inc. ("FSA") asserted that it was entitled to receive the settlement proceeds under the terms of a certain intercreditor agreement. In April 1994, the Court approved the settlement and ruled that the Company had an exclusive right to the settlement proceeds. Upon receipt of the order, the Company used the $25 million of settlement proceeds to retire certain senior secured notes (see Note 6). On April 21, 1994, FSA filed its notice of appeal of the Court's order. During 1994, Rose sold approximately 1.0 million shares of the Company's common stock under the terms of the settlement for net proceeds of approximately $6.2 million. Since the Rose and Cohen note had a book value of $25 million at the time of the settlement, approximately $6.2 million was recorded as income in the Company's statement of operations.
All proceeds received pursuant to the settlement after April 21, 1994 have been held in escrow until an order on the appeal is received. The Company believes that FSA is unlikely to prevail on its claim, and as a result, does not believe it will have a material impact on the accompanying consolidated financial statements. Upon receipt of a favorable order from the Court, substantially all of the net proceeds are required to be used to retire additional debt (see Note 6).
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in thousands):
At December 31, 1994, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $8,074,000 pursuant to noncancelable operating leases expiring on various dates through 2013. Minimum future rentals under such leases are $10,132,000, of which $3,961,000 is scheduled to be received in the aggregate during the five-year period ending December 31, 1999.
Depreciation and amortization expense on property, equipment and leasehold improvements was $2,784,000 for the five months ended December 31, 1992 and $7,015,000 and $9,300,000 for the years ended December 31, 1993 and 1994, respectively.
During the years ended December 31, 1993 and 1994, the Company capitalized $0 and $836,000, respectively, of interest related to borrowings used to finance hotel construction.
NOTE 5 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- DEBT
Debt consists of the following (in thousands):
- --------------- (a) Pursuant to the Plan, the Company issued two classes of Secured Notes which are identified as "Senior Secured Notes" and "Junior Secured Notes". The aggregate principal amount of Senior Secured Notes issued under the Plan was $91,300,000, comprised of $30,100,000 of 8.20% Fixed Rate Senior Secured Notes and $61,200,000 of Adjustable Rate Senior Secured Notes. The aggregate principal amount of Junior Secured Notes issued under the Plan was approximately $70,000,000.
During 1994, the Company repurchased $6,527,000 of its Adjustable Rate Senior Secured Notes, $217,000 of its 8.20% Senior Secured Notes and $461,000 of its 9.20% Junior Secured Notes for an aggregate purchase price of $7,018,000. The repurchases resulted in pretax extraordinary gains of $187,000. In April 1994, the Company retired its Senior Secured Notes with a pre-payment of $26,408,000.
In addition to the repurchases described above, during 1994 the Company purchased through a third party agent approximately $5,200,000 of its Senior Secured Notes and Junior Secured Notes for aggregate consideration of approximately $4,800,000. These notes are currently held by the third party agent and have not been retired due to certain restrictions under the note agreements. The purchases were recorded as investments on the Company's balance sheet and no gain will be recorded on these transactions until the notes mature or are redeemed. In April 1994, approximately $1,100,000 of the notes were retired from the proceeds of the Rose and Cohen settlement (See Note 3) resulting in a pretax extraordinary gain of approximately $100,000. In August 1994, approximately $37,000 was retired resulting in a pretax extraordinary gain of $5,000. As of December 31, 1994, the Company had unrecognized holding gains of approximately $295,000 related to these securities.
In 1994, the Company received consents from the required holders of its Junior Secured Notes to remove certain debt covenants which placed limitations on the Company's hotel development spending. In consideration of the amendment consent, the Company agreed to increase the coupon interest rate from 9.2% to 10.0% and to shorten the maturity by one year, from July 31, 2000 to July 31, 1999. In addition, the designation of these notes was changed from Junior Secured Notes to Senior Secured Notes, as the original Senior Secured Notes were retired.
The collateral for the Secured Notes consists primarily of mortgages and notes receivable and real property, net of related liabilities (the "Secured Note Collateral"), with a book value of $92,215,000 as of December 31, 1994.
Interest on the Secured Notes is payable semi-annually. The Secured Notes require that 85% of the cash proceeds from the Secured Note Collateral be applied first to interest then to prepayment of principal. Aggregate principal payments on the Secured Notes are required in order that one-third of the principal balance outstanding on December 31, 1996 is paid by July 31, 1998 and all of the balance is paid by July 31, 1999. To the extent the cash proceeds from the Secured Note Collateral are insufficient to pay
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest or required principal payments on the Secured Notes, the Company will be obligated to pay any deficiency out of its general corporate funds.
The Secured Notes contain covenants which, among other things, require the Company to maintain a net worth of at least $100,000,000, and preclude cash distributions to stockholders, including dividends and redemptions, until the Secured Notes have been paid in full.
(b) The Company has mortgage and other notes payable of approximately $74,713,000 that are secured by mortgage notes receivable and hotel properties with a book value of $110,476,000. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1994 these notes bear interest at rates ranging from 4.68% to 12.45% and mature through 2008.
At December 31, 1994, the Company has outstanding loans in the amount of $39,896,000 payable to ShoLodge, Inc. ("ShoLodge"). The foregoing loans are secured by AmeriSuites hotel properties with an aggregate book value of $63,824,000. The notes bear interest at 10.25% and mature in April 1997. The Company expects to incur an additional $3,600,000 of debt in the first quarter of 1995 in connection with its purchase of ShoLodge's option to acquire a 50% interest in Suites of America, Inc., a wholly owned subsidiary of the Company (see Note 9).
The Company has $11,614,000 of notes restructured under the Plan which bear interest at rates ranging from 8.00% to 9.20% per annum payable semi-annually. Prior to maturity, principal amounts outstanding will be paid semi-annually based on a thirty-year amortization schedule. Each note matures on July 31, 2002 and is secured by a lien on mortgage notes receivable and hotel properties with a book value of $11,129,000 at December 31, 1994.
The Company has other notes of $3,156,000, which bear interest at rates ranging from 8.0% to 8.2% and mature through 1999.
In February 1995, the Company obtained $39 million of mortgage financing secured by hotels under two separate loan agreements. Both loans bear interest at variable rates (approximately 10.50% at December 31, 1994) and mature in 2000.
Maturities of long-term debt for the next five years ending December 31 are as follows (in thousands):
NOTE 7 -- LEASE COMMITMENTS AND CONTINGENCIES
Leases
The Company leases various hotels under lease agreements with initial terms expiring at various dates from 1995 through 2022. The Company has options to renew certain of the leases for periods ranging from 1 to 99 years. Rental payments are based on minimum rentals plus a percentage of the hotel properties' revenues in excess of stipulated amounts.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule, by year, of future minimum lease payments required under the remaining operating leases that have terms in excess of one year as of December 31, 1994 (in thousands):
Rental expense for all operating leases, including those with terms of less than one year, consist of the following for the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 (in thousands):
Employee Benefits
The Company does not provide any material post employment benefits to its current or former employees.
Contingent Claims
The Company is involved in various other proceedings incidental to the normal course of its business. The Company believes that the resolution of these contingencies will not have a material adverse effect on the Company's consolidated financial position or results of operations.
Financial Instruments and Concentration of Credit Risk
The Company's accounts receivable and mortgages and other notes receivable (see Note 3) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many of the same risks as the Company's operating hotel assets. A significant portion of the collateral is located in the Northeastern and Southeastern United States.
In addition to the hotel property related receivables referred to above, the Company's financial instruments include (i) assets; cash and cash equivalents and restricted cash investments and (ii) liabilities; trade and notes payable and long-term debt (see Note 6). As described in Note 1, in connection with the adoption of fresh start accounting as of July 31, 1992, the Company revalued its assets and liabilities at amounts approximating fair market value. Since there have been no substantive adverse changes in market conditions since the date of the revaluation and on the basis of market quotes and experience on recent redemption offers for the Company's long-term debt, the Company believes that the carrying amount of these financial instruments approximated their fair market value as of December 31, 1993 and 1994.
As a result of the reorganization proceedings and the rejection of certain leases, management contracts and other guarantees, the Company has no other material off-balance-sheet liabilities or credit risk as of December 31, 1994.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- INCOME TAXES
The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 (in thousands):
Income taxes are provided at the applicable federal and state statutory rates.
The tax effects of the temporary differences in the areas listed below resulted in deferred income tax provisions for the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 (in thousands):
At December 31, 1994, the Company had available federal net operating loss carryforwards of approximately $117,500,000 which will expire beginning in 2005 and continuing through 2007. Of this amount, $104,800,000 is subject to an annual limitation of $8,735,000 under the Internal Revenue Code due to a change in ownership of the Company upon consummation of the Plan. The Company also has potential state income tax benefits relating to net operating loss carryforwards of approximately $9,262,000 which will expire during various periods from 1995 to 2006. Certain of these potential benefits are subject to annual limitations similar to federal requirements due to factors such as the level of business conducted in each state and the amount of income subject to tax within each state's carryforward period.
In accordance with FAS 109, the Company has not recognized the future tax benefits associated with the net operating loss carryforwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $41,000,000 against the deferred tax asset as of December 31, 1994. To the extent any available carryforwards or other tax benefits are utilized, the amount of tax benefit realized will be treated as contribution to stockholders' equity and will have no effect on the income tax provision for
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial reporting purposes. For the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 the Company recognized $789,000, $4,525,000 and $5,861,000, respectively, of such tax benefits as a contribution to stockholders' equity. Additionally, the Company recognized $6,954,000 as a contribution to stockholders' equity for the years ended December 31, 1994, which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The following summarizes significant financial information with respect to transactions with present and former officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 (in thousands):
- ---------------
(a) The Company manages 15 hotels for partnerships in which related parties own various interests. The income amounts shown above primarily include transactions related to these hotel properties.
(b) In 1991, the Company entered into an agreement with ShoLodge, a company controlled by a former director, whereby ShoLodge was appointed the exclusive agent to develop and manage certain hotel properties. The Company had loans payable to ShoLodge of $39,896,000 at December 31, 1994 related to the development of hotels. The Company also uses the ShoLodge reservation system for its Wellesley and AmeriSuites properties.
In February 1995, the Company entered into an agreement to acquire ShoLodge's option to purchase a 50% interest in 11 of the Company's AmeriSuites hotels and will also acquire the only remaining AmeriSuites hotel not already owned by the Company. The total consideration payable by the Company in this transaction is $34,600,000 of which $16,100,000 will be paid in three cash installments during 1995 and the remaining $18,500,000 will be paid in notes maturing in 1997. As a result of this transaction, which is scheduled to close on March 31, 1995, the Company will take over the management of these hotels.
NOTE 10 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS
Pursuant to the Plan, on July 31, 1992 the Company began distributing shares of common stock to certain claimants and holders of PMI stock. The Plan provided for issuance of up to 33,000,000 shares of common stock; however, the number of shares ultimately distributed were 29,913,000. The consolidated financial statements had previously given full effect to the issuance of the maximum amount of 33,000,000 shares under the Plan. During 1994, when the Company resolved the final share distribution, it restated net income for all prior periods to reflect the 9.4% reduction in the number of shares. In addition to the shares distributed under the Plan, warrants to purchase 2,106,000 shares of the Company's common stock were issued to former shareholders of the Company's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share and expire five years after the date of grant. The exercise price was determined from the average per share daily closing price of the Company's common stock during the year following its reorganization on July 31, 1992. As of December 31, 1994 warrants to purchase 250,497 shares have been exercised.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 31, 1992, the Company adopted various stock option and performance incentive plans under which options to purchase up to 1,650,000 shares of common stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. During 1992, options to purchase 350,000 shares were granted to officers and directors, 240,000 of which are exercisable at December 31, 1994. In addition, options to purchase 330,000 shares were granted to a former officer in 1992. Such options are currently exercisable and expire on July 31, 1995. At December 31, 1994, 180,000 of these options were exercised. The exercise prices of the above options are based on the average market price one year from the date of grant which was determined to be $2.71 per share. Based on this exercise price, the amount of compensation expense attributable to these options was $225,000 and $60,000 for the years ended December 31, 1993 and 1994, respectively.
In June 1993, options to purchase 393,000 shares of common stock were granted to employees under the Company's stock option plan. The options were granted at $3.63, which approximates the fair market value at the date of grant. Generally, options can be exercised during a participant's employment with the Company in equal annual installments over a three-year period and expire six years after the date of grant. During 1994, 41,080 shares were exercised.
In August 1993, options to purchase 315,000 shares of common stock were granted to the members of the Company's Board of Directors. The options were granted at $3.20, which approximates the fair market value at the date of grant. One-third of these options became exercisable at the date of grant and the remaining options can be exercised in equal annual installments over a two-year period. The options expire six years after the date of grant. During 1994, 25,000 shares were exercised.
In January 1994, options to purchase 50,000 shares of common stock were granted to a member of the Company's Board of Directors. The options were granted at $7.375, which approximates the fair market value at the date of grant. The options can be exercised in equal annual installments over a four year period. The options expire six years after the date of grant.
In August 1994, options to purchase 317,100 shares of common stock were granted to employees under the Company's performance incentive plan. The options were granted at $7.625, which approximates the fair market value at the date of grant. Generally, options can be exercised during a participant's employment with the Company in equal annual installments over a three-year period and expire six years after the date of grant.
In December 1994, options to purchase 30,000 shares of common stock were granted to new members of the Company's Board of Directors. The options were granted at $7.125, which approximates the fair market value at the date of grant. One-third of these options became exercisable at the date of grant and the remaining options can be exercised in equal annual installments over a two year period. The options expire six years after the date of grant.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the various stock option plans:
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes non-cash investing and financing activities for the five months ended December 31, 1992 and the years ended December 31, 1993 and 1994 (in thousands):
Cash paid for interest was $2,981,000 for the five months ended December 31, 1992 and $16,347,000 and $15,503,769 for the years ended December 31, 1993 and 1994, respectively.
Cash paid for income taxes was $0 for the five months ended December 31, 1992 and $2,697,000 and $1,900,000 for the years ended December 31, 1993 and 1994, respectively.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Prime Hospitality Corp.:
We have audited the accompanying consolidated balance sheet of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries ("the Company") as of July 31, 1992 and the related consolidated statements of operations, stockholders' equity and cash flows for the one month then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of July 31, 1992 and the results of their operations and their cash flows for the one month then ended in conformity with generally accepted accounting principles.
As discussed in Note 8, the Company held an investment in a mortgage note receivable from certain entities with a face value of $100,890,000 that is valued at $25,000,000 at July 31, 1992. The realization of this investment is dependent primarily on the ability of the Company to recover such amount pursuant to the personal guarantees provided by two individuals who control the entities that are the obligors under the mortgage note and own the hotel properties that serve as the underlying collateral for the note. The Company has commenced a legal action to recover pursuant to such guarantees; however, the financial statements do not include any adjustments that might result from the outcome of this matter.
Roseland, New Jersey Arthur Andersen LLP March 10, 1993
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Prime Motor Inns, Inc. (Debtor-in-Possession)
We have audited the consolidated balance sheet of Prime Motor Inns, Inc. and Subsidiaries (Debtors-in-Possession) as of June 30, 1992, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Motor Inns, Inc. and Subsidiaries (Debtors-in-Possession) as of June 30, 1992, and their results of operations and cash flows for the year then ended, in conformity with generally accepted accounting principles.
As discussed in Note 7, the Company held an investment in a mortgage note receivable from certain entities with a face value of $100,890,000 that had been written down to $30,000,000 at June 30, 1992. The realization of the carrying value is dependent primarily on the ability of the Company to recover such amount pursuant to the personal guarantees provided by the two individuals who control the entities that are the obligors under the mortgage note and the owners of the hotel properties that serve as the underlying collateral for the loan. The Company has commenced a legal action to recover pursuant to such guarantees; however, the outcome of this action is not presently determinable.
As discussed in Note 11, the Company has reflected pre-petition and certain post-petition claims in the consolidated balance sheet as of June 30, 1992 as liabilities subject to compromise based on its estimate of the aggregate amount that will ultimately be allowable for settlement upon consummation of the plan of reorganization;
however, the aggregate amount claimed by creditors is substantially in excess of the liability recorded by the Company. The actual aggregate amount of allowable pre and post-petition claims cannot presently be determined.
As discussed in Note 14, the Company and certain of its present and former officers and directors are defendants in certain consolidated class action complaints alleging federal securities law violations and other claims. The ultimate outcome of such litigation cannot presently be determined.
The eventual outcome of the matters discussed in the three preceding paragraphs is not presently determinable and the consolidated financial statements as of June 30, 1992 and for the year then ended do not include any adjustments relating to the resolution of those uncertainties.
As discussed in Note 2, the Company's plan of reorganization became effective on July 31, 1992, and it will implement the guidance as to the accounting for entities emerging from Chapter 11 set forth in Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("Fresh Start Reporting") as of that date. The Company has not presently determined the amounts that will be recorded under Fresh Start Reporting. However, the implementation of Fresh Start Reporting as a result of the Company's emergence from Chapter 11 will materially change the amounts reported in consolidated financial statements as of and for periods ending subsequent to July 31, 1992. As a result of the reorganization and the implementation of Fresh Start Reporting, assets and liabilities will be recorded at fair values and outstanding obligations relating to the claims of creditors will be discharged primarily in exchange for cash, new indebtedness and equity. The accompanying consolidated financial statements as of June 30, 1992 and for the year then ended do not give effect to any adjustments that will be made as a result of the Company's reorganization and emergence from Chapter 11.
J.H. Cohn & Company
Roseland, New Jersey September 24, 1992
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
FRESH START REPORTING WAS IMPLEMENTED AND THE PURCHASE METHOD OF ACCOUNTING WAS APPLIED TO RECORD THE FAIR VALUE OF ASSETS AND ASSUMED LIABILITIES OF THE REORGANIZED COMPANY AT JULY 31, 1992. ACCORDINGLY, THE ACCOMPANYING BALANCE SHEET AS OF JULY 31, 1992 IS NOT COMPARABLE IN ALL MATERIAL RESPECTS TO SUCH STATEMENT AS OF ANY DATE PRIOR TO JULY 31, 1992 SINCE THE BALANCE SHEET IS THAT OF A NEW ENTITY.
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS, EXCEPT SHARE DATA)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
See Accompanying Notes to Consolidated Financial Statements.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30 AND JULY 31, 1992
Note 1 - Reorganization and Emergence From Chapter 11
Prime Hospitality Corp. became the successor corporation to Prime Motor Inns, Inc. on July 31, 1992. As used herein, the "Company" refers to Prime Hospitality Corp. and subsidiaries, "PMI" refers to Prime Motor Inns, Inc. and subsidiaries and "Prime Motor Inns" refers to Prime Motor Inns, Inc., the parent company only. The accompanying consolidated financial statements and notes thereto reflect the activities of the Company as of and subsequent to July 31, 1992 and PMI prior to July 31, 1992.
On September 18, 1990, Prime Motor Inns (predecessor to and former parent of the Company) and fifty of its subsidiaries (together with Prime Motor Inns, the "Debtors") filed voluntary petitions under title 11 of the United States Code ("Chapter 11") in the United States Bankruptcy Court, Southern District of Florida, Miami Division (the "Bankruptcy Court") and began operating as Debtors-In-Possession.
On September 23, 1991, the Debtors filed their Joint Plan of Reorganization. The Debtors filed their Disclosure Statement for Debtors' Amended Joint Plan of Reorganization and their Amended Joint Plan of Reorganization on November 15, 1991. These plans and the disclosure statement were further amended and restated by the Disclosure Statement and the Second Amended Joint Plan of Reorganization of the Debtors dated January 16, 1992 (the "Plan"). The Plan was confirmed by the Bankruptcy Court on April 6, 1992.
On July 31, 1992 (the "Effective Date"), the Debtors consummated the Plan and emerged from bankruptcy. On the Effective Date, Prime Motor Inns merged with and into the Company, which had been a wholly-owned subsidiary of Prime Motor Inns. The Company was the surviving corporation in the merger. In addition, certain of the Debtors and other subsidiaries of Prime Motor Inns that did not file petitions under Chapter 11 merged, consolidated or contributed substantially all of their assets to the Company or subsidiaries of the Company.
On the Effective Date, the Company assumed the obligations of each combining Debtor under the Plan. The Company has distributed Secured Notes and Restructured Notes and is in the process of distributing cash, Tax Notes, Common Stock and Warrants in settlement of pre-petition claims and
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interests as such claims and interests are processed and settled.
The American Institute of Certified Public Accountants has issued Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which provides guidance for financial reporting by Chapter 11 debtors during and following their Chapter 11 cases. The accompanying historical consolidated financial statements of PMI for the period from September 18, 1990 to the Effective Date have been prepared in accordance with SOP 90-7 on the following basis:
- - Liabilities subject to compromise are segregated. - - Transactions and events directly associated with the reorganization proceedings are reported separately. - - Interest expense is reported only to the extent it will be paid.
Also pursuant to SOP 90-7, the Company implemented Fresh Start Reporting (hereinafter defined) upon the emergence of the Debtors from bankruptcy as of the Effective Date (see Note 2).
Note 2 - Fresh Start Reporting
SOP 90-7 provides for the implementation of Fresh Start Reporting upon the emergence of debtors from bankruptcy if the reorganization value (the approximate fair value) of the assets of the emerging entity immediately prior to emergence is less than the total of all post-petition liabilities and allowed pre-petition claims, and if the holders of existing voting shares immediately before the emergence from bankruptcy receive less than 50% of the voting shares of the emerging entity. A Fresh Start balance sheet reflects assets at their estimated fair value upon the emergence from bankruptcy and liabilities, other than deferred taxes, at the present value of amounts to be paid determined at appropriate current interest rates. The Company met the criteria for implementation of, and implemented Fresh Start Reporting as of the Effective Date.
Under Fresh Start Reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the Company. Since Fresh Start Reporting has been reflected in the accompanying consolidated balance sheet as of July 31, 1992, this
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consolidated balance sheet is not comparable in all material respects to any such financial statements as of any prior date or for any period prior to July 31, 1992, since the consolidated balance sheet as of July 31, 1992 is that of a new entity.
The estimated reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry.
Reorganization liabilities, consisting of Tax Notes, Restructured and Reinstated Notes, Senior Secured Notes and Junior Secured Notes distributed as of the Effective Date, have been recorded based on face values, which approximate the present values of amounts to be paid determined at appropriate current interest rates. Common Stock has been valued at the excess of the fair value of identifiable assets of the Company over the present value of liabilities.
Other current liabilities, consisting of those arising from post-petition operating and other expenses not paid as of the Effective Date and obligations arising from certain loans to finance construction, will be paid in full under their original terms and have been presented in the following balance sheet at their historical carrying values.
The effects of consummating the Plan and implementing Fresh Start Reporting are set forth on PMI's historical consolidated balance sheet as of July 31, 1992 as follows:
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED FRESH START BALANCE SHEET AS OF JULY 31, 1992 (IN THOUSANDS, EXCEPT SHARE DATA)
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED FRESH START BALANCE SHEET AS OF JULY 31, 1992 (IN THOUSANDS, EXCEPT SHARE DATA)
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FRESH START BALANCE SHEET
(a) Reflects cash payments of $38,800,000 to creditors on or after the Effective Date in accordance with the terms of the Plan.
(b) Represents mortgage notes, other notes receivable and property, which are offset against creditor claims on the Effective Date in accordance with the terms of the Plan.
(c) Represents long-term debt in the principal amount of $257,300,000 distributed to creditors on or after the Effective Date in accordance with the terms of the Plan and the recognition of $6,500,000 of related gain on discharge of indebtedness. As part of the Plan, the Company distributed approximately $1,400,000 of Tax Notes, approximately $94,600,000 of Restructured and Reinstated Notes, approximately $91,300,000 of Senior Secured Notes and approximately $70,000,000 of Junior Secured Notes. Additionally, approximately $15,000,000 of construction financing related to hotel property development outstanding prior to consummation will be paid based on original terms.
(d) Represents 32,300,000 shares of Common Stock with an estimated fair value of $132,800,000, which will be distributed to creditors on or after the Effective Date in accordance with the terms of the Plan and the recognition of $249,600,000 of related gain on discharge of indebtedness.
(e) Represents 700,000 shares of Common Stock with an estimated fair value of $2,800,000, which was exchanged for all of the shares of Prime's old common stock outstanding on the Effective Date.
(f) Represents adjustments to: record at fair value operating property, equipment and leasehold improvements, certain mortgages and other notes receivable and certain other assets and related liabilities; eliminate deferred income; and eliminate accumulated deficit in accordance with the provisions of SOP 90-7 for Fresh Start Reporting.
The gain on discharge of indebtedness of $249,600,000 has been presented as an "Extraordinary Item" in the accompanying consolidated statement of operations for the one month ended July 31, 1992.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3 - Summary of Significant Accounting Policies
A summary of the significant accounting policies used by the Company and PMI in the preparation of the accompanying consolidated financial statements follows:
Business activities: The Company focuses on three types of business activities: operation of owned and leased hotel properties; management services provided to hotel properties owned by third parties; and management of its portfolio of mortgages, notes and other financial assets. The Company retains all the revenues and pays all the expenses with respect to the owned and leased hotel properties. The Company derives management fees from the hotel properties it manages based on a fixed percentage of gross revenues, fees for services rendered and performance-related incentive payments. The Company's portfolio of mortgages, notes and other assets primarily are associated with hotel properties currently managed or formerly owned by the Company and PMI.
The majority of the Company's hotel properties are moderately priced hotels comprised of 100 to 150 rooms primarily located in the Northeast and Florida, which are designed to attract business and leisure travelers desiring quality accommodations at affordable prices. The Company operates or manages many of the restaurants and cocktail lounges at its full service hotels. Its limited service hotels, such as Wellesley Inns and AmeriSuites hotels, generally do not have restaurants or cocktail lounges.
Most of the hotel properties are operated or managed by the Company in accordance with franchise agreements with national hotel chains, including Howard Johnson, Ramada, Marriott, Holiday Inn, Sheraton, Days Inn and Radisson. Additionally, the Company operates or manages the Wellesley hotel properties under its trademark "Wellesley Inns." The Company owns the trademark "AmeriSuites", and all of these hotel properties are managed for the Company by a related party.
Principles of consolidation: The consolidated financial statements include the accounts of
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company and PMI and all of their majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Cash equivalents: Cash equivalents are highly liquid unrestricted investments with a maturity of three months or less when acquired.
Restricted cash: Restricted cash consists primarily of highly liquid investments that serve as collateral for debt obligations included in liabilities subject to compromise and is classified as either short-term or long-term depending on the date the obligation is due.
Mortgages and other notes receivable: Mortgages and other notes receivable are reflected at the lower of face or market value at July 31, 1992. Generally, the carrying amount of the portfolio of mortgages and other notes receivable is reduced through write-offs and by maintaining an aggregate loan valuation reserve at a level that, in the opinion of management, is adequate to absorb potential losses in the portfolio. To determine the appropriate level for the loan valuation reserve, management evaluates various factors including: general and regional economic conditions; the credit worthiness of the borrower; the nature and level of any delinquencies in the payment of principal or interest; and the adequacy of the collateral. Interest on delinquent loans (including impaired loans that have required writedowns or specific reserves) is only recognized when cash is received. The amount of interest income recognized on mortgages and other notes receivable is generally based on the loan's effective interest rate and adjusted carrying value of the note.
Property, equipment and leasehold improvements: Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at cost less accumulated depreciation and amortization at June 30, 1992 and at fair market value a of July 31, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company intends to sell or otherwise dispose of those remaining operating and non-operating properties that have generated losses or insufficient returns on investment. Properties identified for disposal are stated at their estimated net realizable value through valuation reserves or writedowns.
Income recognition on property sales and deferred income: Income is generally recognized when properties used in the hotel business are sold. However, income is deferred and recognized under installment or other appropriate methods when collectibility of the sales price is not reasonably assured or other criteria for immediate profit recognition under generally accepted accounting principles are not satisfied. Gains from sales of properties under sale and leaseback transactions that are generally deferred pursuant to applicable accounting rules are amortized over the lives of the related leases. Gains from sales of properties and certain other assets acquired through business combinations accounted for as purchases are generally offset against the carrying value of the remaining purchased assets if the sale takes place within the allocation period (generally a period of one year or less) following the purchase.
Construction income recognition and deferred income: Revenues under long-term construction contracts are generally recognized under the percentage-of-completion method and include a portion of the earnings expected to be realized on the contract in the ratio of costs incurred to estimated total costs. Under certain circumstances, the recognition of income is deferred until continuing involvement, in the form of operating guarantees made to the owners of the hotel property subject to the contract, has expired.
Income taxes: The Company and its subsidiaries file a consolidated Federal income tax return. PMI adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes, " by applying FAS 109 to its consolidated financial statements commencing July 1, 1991. Adoption of FAS 109 did
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not have a material effect on the consolidated financial statements. Deferred taxes have not been provided as of June 30, 1992 and July 31, 1992 due to the availability of significant net operating loss carryforwards and the uncertainty surrounding the ultimate realization of the future benefits, if any, to be derived from the temporary differences between the financial reporting basis and the tax basis of assets and liabilities.
Income (loss) per common share: Primary net income (loss) per common share is computed based on the weighted-average number of common shares and common share equivalents (stock options) outstanding during each year. The weighted-average number of common shares and common share equivalents used in computing primary net income (loss) per share was 33,028,000 for the year ended June 30, 1992 and the month ended July 31, 1992. Fully diluted net income (loss) per common share includes, when dilutive, the effects of the elimination of interest expense and the issuance of additional common shares from the assumed conversion of the 6-5/8% convertible subordinated debentures due 2011 and the 7% convertible subordinated debentures due 2013 (collectively, the "Debentures"). The Debentures are included in the consolidated balance sheet as of June 30, 1992 as liabilities subject to compromise. The effects of assuming the conversion of the Debentures were not dilutive for the year ended June 30, 1992 and the one month ended July 31, 1992.
Reclassifications: Certain reclassifications have been made to the consolidated financial statements to conform them to the July 31, 1992 classifications.
Note 4 - Acquisitions and Dispositions
In December 1989, PMI consummated its agreement with New World Development Co. Ltd. ("New World") to participate with and assist New World in its acquisition of the hotel business of Ramada, Inc. ("Ramada"). Under the agreement, PMI loaned approximately $58,000,000 to New World (see Note 7) and acquired certain real estate, notes receivable, the Rodeway International Franchise System ("Rodeway") and certain other assets, and assumed certain
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities, for aggregate cash consideration of approximately $54,000,000 plus closing adjustments. Such assets were sold in fiscal 1991. PMI entered into a license agreement to operate the domestic Ramada franchise system and agreed to indemnify New World for certain potential tax liabilities associated with the license. The potential tax liabilities to New World, and all other claims by New World and PMI against each other, were settled on August 4, 1992 (see Note 7).
Note 5 - Cash and Cash Equivalents
Cash and cash equivalents are comprised of the following (in thousands):
Note 6 - Restricted Cash - Long Term
Restricted cash consists primarily of commercial paper of $43,947,000 at June 30, 1992. Restricted cash consists of cash in bank of $360,000 and commercial paper of $872,000 at July 31, 1992.
Note 7 - Mortgages and Other Notes Receivable
Mortgages and other notes receivable are comprised of the following and are stated at face value, net of writedowns and valuation reserves as of June 30, 1992. As of July 31, 1992, these assets have been valued at their fair market value (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(a) The mortgage notes are secured by the Frenchman's Reef resort hotel, which is managed by the Company, and consist of first and second mortgages with face values of $53,383,000 and $25,613,000, respectively, with final scheduled principal payments of $51,976,000 and $25,613,000 due on July 31, 1995. The notes bear interest at a stated rate of 13%. Interest and principal payments on the first mortgage are payable in monthly installments. Interest and scheduled principal payments on the second mortgage note are payable only to the extent of available cash flow, as defined, with any unpaid interest due at maturity. Based on a valuation of the property, PMI wrote down the second mortgage to $11,400,000 as of June 30, 1990 and discontinued the accrual of interest. As a result of the continuing decline in economic conditions and operating cash flows, the balance of the second mortgage was written off in fiscal 1992. In connection with the adoption of Fresh Start Reporting at July 31, 1992, the Company has valued these notes at $50,000,000.
During the one month ended July 31, 1992, the Company recognized $345,000 of interest income on these notes (an effective rate of approximately 8.3%), based on the current levels of cash flows generated from the property available to service the notes. The Company is in the process of renegotiating the terms of these notes based on the current
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
level of cash flow generated by the property.
(b) From 1988 through 1990, PMI loaned entities controlled by Allan Rose and Arthur Cohen (the "Rose and Cohen entities"), who at such time were significant Howard Johnson franchisees, an aggregate of $100,890,000 fully secured initially by property and/or personal guarantees. PMI was committed to make additional loans, also on a fully secured basis, to the Rose and Cohen entities of up to an aggregate of $130,000,000 if values of, and/or revenues generated by, certain hotel properties controlled by the Rose and Cohen entities attained specified levels. PMI was to receive a minimum annual return of 10% on all loans made to the Rose and Cohen entities and a maximum return of 20%. All loans and unpaid interest are payable on December 31, 1997.
Due to the decline in value of the hotel properties pledged as collateral for the loan and the continuing decline in the hotel real estate market, PMI discontinued funding additional loans in fiscal 1990. Further, based on PMI's estimate of the value of the collateral and the personal guarantees of Rose and Cohen and discussions related to the possible early payment of the loan, PMI wrote down the loan to $50,000,000 as of June 30, 1990 and discontinued the accrual of interest.
In 1992, certain of the Rose and Cohen entities owning a portion of the collateral that secures the loans filed for Chapter 11 protection in the United States Bankruptcy Court, Southern District of New York. Also during 1992, the Company commenced an adversary proceeding against Rose and Cohen. The complaint seeks to recover jointly and severally on the personal guarantees of $50,000,000 given by Rose and Cohen as part of the loan agreement. As a result of further evaluation of the collateral and the personal guarantees, PMI wrote down the loan to $30,000,000 as of June 30, 1992 and $25,000,000 as of July 31, 1992.
(c) In April 1989, PMI loaned FCD Hospitality, Inc. ("FCD"), an unaffiliated company, approximately $74,000,000 in cash for the purpose of financing FCD's acquisition of the outstanding common stock of Servico, Inc. ("Servico"), an operator of hotels. The loan was secured by the common stock of Servico,
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FCD and certain FCD affiliates, and was originally due prior to June 30, 1990. Interest was due at the prime rate plus 1%. PMI also entered into an agreement with FCD pursuant to which PMI would provide management consulting services for approximately $63,000,000 through June 1990. Additionally, in April 1989, PMI purchased approximately $80,000,000 of Servico's outstanding 12-1/4% subordinated notes due April 15, 1997 for approximately $64,000,000 (80% of par value).
Subsequent to April 1989, PMI entered into certain other transactions including working capital loans and the sale of certain hotels to Servico. Servico also pledged a substantial portion of its hotel properties and mortgage notes receivable on hotel properties as collateral and/or in satisfaction of its commitments on the loan to FCD and the consulting agreement.
On September 18, 1990, Servico and certain of its subsidiaries filed for Chapter 11 protection. After an extensive valuation and recovery analysis performed by PMI and Servico, PMI agreed to settle all claims and disputes with Servico and FCD in June 1991. Under the terms of the agreement, which was approved by the Bankruptcy Court, the FCD loan, the subordinated notes, loans related to sales of properties and working capital and all accrued interest relating to these notes and loans with a face value of $166,210,000 were forgiven. As part of the settlement, PMI retained ownership of certain mortgage notes receivable with a face value of approximately $30,000,000 that are secured by three hotel properties. The entity that owns one of the properties filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in December 1990. Subsequent to July 31, 1992, the Company has restructured the note receivable to receive payments based on the property's available cash flow.
Based on the valuation of the mortgage notes on the three properties, PMI wrote down the FCD Loan and Servico notes to $16,757,000 as of June 30, 1990 and discontinued the accrual of interest. In connection with the adoption of Fresh Start Reporting, the Company has valued the notes at $19,756,000 at July 31, 1992.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) In connection with the Ramada acquisition in December 1989, PMI agreed to loan New World $58,000,000 (see Note 4). Interest was payable quarterly at a rate of 11%. Principal was to be paid in installments beginning in 1995 with a final scheduled payment of $55,499,000 due on March 31, 2005. On August 4, 1992, after extensive negotiation and approval of a settlement by the Bankruptcy Court, the Company collected net proceeds of $42,000,000 plus accrued interest in full satisfaction of the $58,000,000 loan balance offset by liabilities subject to compromise related to the Ramada acquisition with a net carrying value of $16,000,000. The net proceeds were used to prepay a portion of the Senior Secured Notes issued on the Effective Date.
(e) At July 31, 1992, the Company held mortgages and other notes receivable secured by 33 hotel properties operated by the Company under management or lease agreements. These notes currently bear interest at rates ranging from 8.5% to 14% and mature through 2014.
The mortgages were primarily derived from the sales of hotel properties. Many of these properties had been unable to pay in full the annual debt service required under the terms of the original mortgages. The Company has restructured $33,530,000 of these mortgages to receive the majority of available cash and to receive a participation in the future excess cash flow of such hotel properties. The Company is also in process of restructuring another $9,500,000 of these mortgages.
(f) Other notes receivable bear interest at effective rates ranging from 8% to 12%, mature through 2001 and are secured primarily by hotel properties.
Note 8 - Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the following and are stated at cost (other than properties held for sale) at June 30, 1992 and at fair market value as of July 31, 1992 (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At July 31, 1992, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $12,338,000 pursuant to noncancelable operating leases expiring on various dates through 2013. Minimum future rentals under such leases are $8,095,000, of which $3,449,000 is to be received during the five year period ending June 30, 1997.
Depreciation and amortization expense on property, equipment and leasehold improvements was $6,867,000 and $569,000 for the year ended June 30, 1992 and for the one month ended July 31, 1992, respectively.
Capitalized interest was $139,000 and $0 for the year ended June 30, 1992 and for the one month ended July 31, 1992, respectively.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 - Other Current Liabilities
Other current liabilities consist of obligations for the following (in thousands):
Note 10 - Notes Payable
Notes payable consist of the following (in thousands):
(a) Notes payable to related party are payable to ShoLodge, Inc. ("ShoLodge"), a company controlled by a director. The notes are secured by three hotel properties with a book value of $17,354,000 that were constructed in 1992 and 1991. Interest is payable monthly at variable rates ranging from the prime interest rate (6% at July 31, 1992) plus 1% to the prime rate plus 2%. One promissory note for $3,000,000 is due in May 1993 and the remainder is due on demand (see Note 21).
(b) Other notes payable are secured by a hotel property. Interest is payable at the prime rate plus 2%. The notes are due in
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
May 1993.
Note 11 - Liabilities Subject to Compromise
As a result of the Chapter 11 filing (see Note 1), enforcement of certain unsecured claims against the Debtors in existence prior to the petition date were stayed while the Debtors continued business operations as debtors-in-possession. These claims are reflected in the accompanying consolidated balance sheets as of June 30, 1992, as liabilities subject to compromise. Additional unsecured claims classified as liabilities subject to compromise arose subsequent to the Petition Date resulting from rejection of executory contracts, including lease, management and franchise agreements, and from the determination by the Bankruptcy Court (or agreements by the parties in interest) to allow claims for contingencies and other disputed amounts. Enforcement of claims secured against the Debtors' assets ("secured claims") were also stayed although the holders of such claims have the right to move the Court for relief from the stay. Secured claims are secured primarily by liens on the Debtors' property, equipment and leasehold improvements and certain mortgages and other notes receivable.
Creditors have asserted pre- and post-petition claims against the Debtors alleging liabilities of approximately $9 billion plus unliquidated amounts. The Company projects that the claims asserted against the Debtors will be resolved and reduced to an amount that approximates PMI's estimate of $706,250,000 recognized as liabilities subject to compromise as of June 30, 1992. PMI has filed motions objecting to those claims that are: (a) duplicative; (b) superseded by amended claims; (c) erroneously asserted against multiple Debtors; (d) not obligations of any of the Debtors; or (e) filed after the Bar Date (as hereinafter defined). Additionally, PMI otherwise has disputed a substantial number of the claims asserted against the Debtors and has filed objections to such claims. The Bankruptcy Court established May 15, 1991 (the "Bar Date") as the deadline for filing proofs of claim, except certain specified claims, against the Debtors.
A significant number of the bankruptcy claims have been resolved. As of March 1, 1993, unresolved bankruptcy claims of approximately $1 billion have been asserted against PMI.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Approximately $767 million of these unresolved claims were filed by entities controlled by Allan Rose and Arthur Cohen (see Note 7).
The Company has disputed a substantial number of these unresolved bankruptcy claims and has filed objections to such claims. In addition, a number of these claims have been resolved with the claimant and are awaiting approval by the Bankruptcy Court.
The Company believes that substantially all of these claims will be dismissed, disallowed or deemed paid pursuant to the Plan and estimates that unresolved bankruptcy claims will be allowed in the amount of approximately $27 million. These claims will be settled as follows: claims of $18 million will be satisfied through the issuance of Secured Notes, Restructured Notes and Tax Notes; claims of $8 million will be satisfied through the distribution of the Company's Common Stock; and claims of $1 million will be satisfied through cash payments.
In accordance with SOP 90-7, the July 31, 1992 consolidated financial statements have given full effect to the issuance of these Secured Notes, Restructured Notes and Tax Notes and the distribution of the Company's Common Stock. Liabilities have been provided for the anticipated cash payments.
PMI's liabilities subject to compromise, stated at management's estimate of the total amount of allowed claims and not at the amounts for which claims will be settled, consist of the following (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amounts listed above may be subject to future adjustments depending on further developments with respect to disputes or unresolved claims. Information as to the terms of the settlement of liabilities subject to compromise under the Plan as of or subsequent to the Effective Date through the distribution of cash, new indebtedness, new equity securities and/or offset against certain assets reflected in the accompanying consolidated balance sheets is set forth in Note 2.
PMI discontinued accruing interest on certain debt obligations as of the date such obligations were determined to be subject to compromise. Contractual interest not accrued and not reflected as an expense in the consolidated statements of operations, as a result of the Debtors' Chapter 11 filing, amounted to approximately $28,000,000 for the year ended June 30, 1992 and $2,300,000 for the one month ended July 31, 1992. Total contractual interest is disclosed in the accompanying consolidated statements of operations.
Note 12 - Long-term Debt
As a result of the Chapter 11 filing (see Notes 1 and 11), all long-term obligations of the Debtors in existence prior to the Petition Date were stayed and have been classified as liabilities subject to compromise at June 30, 1992. Long-term debt consists of the following (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(a) Pursuant to the Plan, the Company issued two classes of Secured Notes which are identified as "Senior Secured Notes" and "Junior Secured Notes". Senior Secured Notes were issued in two series of notes which are identified as the "8.20% Fixed Rate Senior Secured Notes" and the "Adjustable Rate Senior Secured Notes" (collectively, the "Senior Secured Notes"). Each series is identical except that the interest rate on the Adjustable Rate Senior Secured Notes will be periodically adjusted to one-half of one percent over the daily "prime rate" reported by Chemical Bank, with a maximum interest rate of 10.0% per annum. The aggregate principal amount of Senior Secured Notes issued under the Plan was $91,300,000, comprised of $30,100,000 of 8.20% Fixed Rate Secured Notes and $61,200,000 of Adjustable Rate Senior Notes. On August 11, 1992, the Company prepaid $17,900,000 of the 8.20% Fixed Rate Senior Secured Notes and $36,400,000 of the Adjustable Rate Senior Secured Notes from the proceeds of collections of portions of the collateral for the Senior Secured Notes. The prepaid amounts of $54,300,000 have been classified as current at July 31, 1992.
The other class of Secured Notes issued to satisfy claims was comprised of Junior Secured Notes that bear interest at a rate of 9.20% per annum and will mature on July 31, 2000. The aggregate principal amount of Junior Secured Notes issued
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under the Plan was $70,000,000.
The collateral for the Secured Notes consists primarily of mortgages and other notes receivable and real property (the "Secured Note Collateral") with a book value of $143,191,000 as of July 31, 1992.
Interest on the Secured Notes is payable semi-annually commencing January 31, 1993. The Secured Notes require that 85% of the cash proceeds from the Secured Note Collateral be applied first to interest, second to prepayment of the Senior Secured Notes and third to prepayment of the Junior Secured Notes. Any remaining principal balance of the Senior Secured Notes is due July 31, 1997. Aggregate principal payments on the Junior Secured Notes are required in order that one-third of the principal balance outstanding on December 31, 1996 is paid by July 31, 1998; two-thirds of that balance is paid by July 31, 1999; and all of that balance is paid by July 31, 2000. To the extent the cash proceeds from the Secured Note Collateral are insufficient to pay interest or required principal payments on the Secured Notes, the Company will be obligated to pay any deficiency out of its general corporate funds.
The Secured Notes contain covenants which, among other things, require the Company to maintain a net worth of at least $100,000,000, limit expenditures related to the development of hotel properties through December 31, 1996 and preclude cash distributions to stockholders, including dividends and redemptions, until the Secured Notes have been paid in full.
During March 1993, the Company repurchased $9,500,000 of the Junior Secured Notes for a purchase price of $7,400,000. The repurchase resulted in an extraordinary gain of $2,100,000, which will be reflected in the Company's first quarter 1993 consolidated financial statements. These notes have been classified as long-term debt at July 31, 1992 in accordance with their terms, as repurchase was not contemplated at the balance sheet date.
(b) Claims of taxing authorities were paid in Tax Notes or cash. Each Tax Note is in a face amount equal to the allowed claim
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and provides for annual payments of principal and interest until maturity on July 31, 1998. Such payments will be made in equal principal installments, plus simple interest from July 31, 1992 at the rate of 8.20% per annum, with payments to commence on July 31, 1993 and with additional payments to be made on each July 31 thereafter.
(c) The Company has $20,734,000 of restructured notes issued to holders of oversecured and undersecured bankruptcy claims. Each restructured note matures on July 31, 2002 and is secured by a lien on the collateral which secured the underlying claim prior to bankruptcy. The notes are secured by mortgage notes receivable and hotel properties with a book value of $16,981,000 at July 31, 1992.
The oversecured restructured notes bear interest at a rate of 9.20% per annum payable semi-annually in cash. Prior to maturity, principal amounts outstanding will be paid semi-annually based on a thirty-year amortization schedule. The Company has approximately $7,173,000 of these notes outstanding at July 31, 1992.
During January 1993, the Company repurchased $1,700,000 of the oversecured restructured notes for a purchase price of $1,300,000. The repurchase resulted in an extraordinary gain of $400,000, which will be reflected in the Company's first quarter 1993 consolidated financial statements. These notes have been classified as current at July 31, 1992.
The undersecured restructured notes bear interest at a rate of 8% per annum with interest payable semi-annually in cash. Semi-annual principal payments begin on July 31, 1996 based on a thirty-year amortization schedule. The Company has approximately $13,561,000 of these notes outstanding at July 31, 1992.
The Company has other mortgage notes and bonds payable of approximately $73,905,000 which are due through April 1, 2008 and bear interest at rates ranging from 4.68% to 10.5% at July 31, 1992. The notes are secured by mortgage notes receivable and hotel properties with a book value of $83,577,000 at July 31, 1992.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) Construction financing obligations primarily consist of two loans payable to banks with an aggregate balance of $5,193,000 and a loan payable to ShoLodge of $3,570,000 at July 31, 1992. The loans payable to banks are secured by mortgages on two hotel properties with a book value of $13,963,000 at July 31, 1992. Principal is payable in monthly installments with the balances due by June 1994. Interest is payable monthly at the prime rate plus 2%. The loan payable to ShoLodge is secured by a hotel with a book value of $7,670,000 at July 31, 1992. Principal is payable in September 1993. Interest is payable monthly at the prime rate plus 2% (see Note 21).
(e) At June 30, 1992, PMI's 6-5/8% convertible subordinated debentures due 2011 and 7% convertible subordinated debentures due 2013 were convertible at any time prior to maturity into common stock at $40.568 per share and $43.95 per share, respectively, and 5,451,342 shares of common stock were reserved for issuance upon such conversion. Sinking fund payments of $5,750,000 annually were required commencing April 1, 1997 for the 6-5/8% Debentures and June 1, 1999 for the 7% Debentures. All Debentures were subordinated to all existing and future senior indebtedness of PMI.
(f) In April 1989, PMI borrowed approximately $140,000,000 from Morgan Bank pursuant to a demand note (the "Morgan Loan") with interest at the prime rate. The note was secured by the notes receivable from FCD and Servico and certain other assets.
In September 1989, PMI entered into a $263,000,000 secured bank credit agreement (the "Credit Agreement"), expiring March 1991, in which borrowings (the "Bank Group Loan") were fully utilized by December 1989. Borrowings bear interest at the prime rate plus 1/2%. The borrowings were principally incurred to extinguish the Morgan Loan issued in connection with the Servico transaction ("Tranche A") and to finance PMI's portion of the Ramada acquisition ("Tranche B"). The Bank Group Loan was secured by the notes receivable from FCD and Servico, the net assets and common stock of subsidiaries acquired in the Ramada acquisition, the New World note, certain other mortgage notes receivable and certain other assets.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1990, PMI prepaid $1,000,000 of the Bank Group Loan with the proceeds of previously pledged mortgage notes receivable.
In May 1990, PMI prepaid $40,000,000 of the Bank Group Loan from proceeds from the collection of a receivable related to the sale of a hotel property in fiscal 1989. In June 1990, PMI prepaid $1,000,000 of the Bank Group Loan with the proceeds of certain previously pledged mortgage notes receivable.
In July 1990, PMI prepaid approximately $171,200,000 of the Bank Group Loan from the proceeds of the sale of the Howard Johnson, Ramada and Rodeway franchise businesses. In July 1990, the Credit Agreement was amended to convert $60,000,000 of $65,000,000 of unsecured demand loans then outstanding, which had been borrowed in fiscal 1990 to fund construction, into secured term loans ("Tranche C"). In addition, certain unsecured letter of credit reimbursement obligations were converted into Tranche C secured obligations. PMI also pledged additional collateral and certain then-existing defaults under the Bank Credit Agreement were waived.
In July 1990, PMI paid the remaining $5,000,000 of unsecured demand notes then outstanding.
(g) Other mortgage notes and bonds payable consist of debt secured by properties operated by PMI or notes receivable held by PMI. Principal is due in installments through 2009. Interest rates are generally variable ranging from 5% to 15% at June 30, 1992.
(h) Other debt as of June 30, 1992 consists of an unsecured note bearing interest at the rate of 17%.
At July 31, 1992, maturities of long-term debt for the next five years ending July 31 are as follows (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Lease Commitments
The Company leases various hotels under lease agreements with initial terms expiring at various dates from 1998 through 2019. The Company has options to renew certain of the leases for periods ranging from 1 to 94 years. Rental payments are based on minimum rentals plus a percentage of the hotel's revenues in excess of stipulated amounts. As a result of the Chapter 11 filing, all lease contracts were reviewed during 1991 and a determination was made as to whether to accept or reject these contracts. The commitments shown below reflect those lease contracts which the Company has assumed.
The following is a schedule by year of future minimum lease payments required under the remaining operating leases for core properties that have terms in excess of one year as of July 31, 1992 (in thousands):
Rental expense for all operating leases, including those with terms of less than one year, is comprised as follows (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 14 - Contingencies
PMI and certain of its present and former officers and directors were named as defendants in purported class action lawsuits on behalf of purchasers of PMI's common stock and debentures. The lawsuits allege that PMI made materially false and misleading statements and omissions regarding its financial condition in violation of Federal securities laws and other claims. A settlement was consummated in February 1993 which was funded through insurance proceeds.
The Company has responded to informal requests for information by the Staff of the United States Securities and Exchange Commission's Division of Enforcement relating to a number of significant transactions of PMI for the years 1985 through 1991. However, no formal allegations have been made by the Staff.
In addition to the foregoing legal proceedings, the Company is involved in various other proceedings incidental to the normal course of its business.
The Company believes that the resolutions of these contingencies will not have a material adverse effect on the Company's consolidated financial position or results of operations.
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 15 - Reorganization Expenses
The net expenses incurred as a result of the Debtors' Chapter 11 filing on September 18, 1990 and subsequent reorganization efforts have been segregated from normal operating expenses and presented as reorganization expenses in the accompanying consolidated statements of income for the year ended June 30, 1992 and for the one month ended July 31, 1992.
Reorganization expenses are comprised of the following (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The valuation writedowns and reserves for the year ended June 30, 1992 shown above were all recognized in the fourth quarter.
In addition to the above, valuation writedowns and reserves of $20,578,000 and $-0- were charged against deferred income for the year ended June 30, 1992 and for the one month ended July 31, 1992, respectively.
Note 17 - Income Taxes
Income taxes have been provided as follows (in thousands):
The difference between total income taxes and the amount computed by applying the Federal statutory income tax rate of 34% to income (loss) from operations before income taxes are as follows (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of the temporary differences in the areas listed below resulted in deferred income tax provisions (credits) (in thousands):
No Federal income tax was payable at July 31, 1992 due primarily to the utilization of net operating loss carryforwards.
At July 31, 1992, the Company had net operating loss carryforwards of approximately $347,000,000 for Federal income tax purposes. Such tax net operating loss carryforwards, if not used as offsets to future taxable income, will expire beginning in 2005 and continuing through 2007. The amount of net operating loss carryforwards available for future utilization is limited to
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$130,500,000 during the carryforward period as a result of the change in ownership of the Company upon consummation of the Plan.
In accordance with FAS 109, the Company has not recognized the future tax benefits associated with the net operating loss carryforwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $44,000,000 against the deferred tax assets as of June 30, 1992 and July 31, 1992. To the extent any available carryforwards or other benefits are utilized in periods subsequent to July 31, 1992, the tax benefit realized will be treated as a contribution to stockholders' equity and will have no effect on the income tax provision for financial reporting purposes.
PMI's Federal income tax returns for the years 1987 through 1991 are currently under examination by the Internal Revenue Service. The Company does not believe there will be any material adverse effects on the consolidated financial statements as a result of this examination.
Note 18 - Common Stock and Common Stock Equivalents
Pursuant to the Plan, on July 31, 1992, the Company began distributing 33,000,000 shares of Common Stock to certain claimants and holders of PMI stock. At March 2, 1993, 22,623,100 shares of Common Stock were distributed. The remaining shares are to be distributed semi-annually to holders of previously allowed claims and pending final resolution of disputed claims (see Note 11). In addition, holders of PMI stock will receive Warrants to purchase Common Stock exercisable into an aggregate of approximately 2,100,000 shares at an exercise price equal to the average per share daily closing price during the year ending July 31, 1993.
On July 31, 1992, the Company adopted a stock option plan under which options to purchase up to 1,320,000 shares of Common Stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. During 1992, options to purchase 350,000 shares were granted to officers and directors none of which are exercisable at July 31, 1992. In addition, options to purchase 330,000 shares were granted to a former officer. Such options are currently exercisable and expire on July 31, 1995. The exercise prices of the above options are dependent
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on the average market price one year from the date of grant and are, therefore, currently undeterminable.
On July 31, 1992, the Company adopted a performance incentive plan under which stock options covering an additional 330,000 shares of Common Stock were reserved for grants to key employees at the discretion of management. No options have been issued under this plan.
PMI had an employee incentive stock option plan which provided for grants of stock options covering an aggregate of 3,520,000 shares of common stock to officers and key employees. Under the terms of the plan, which expired on November 23, 1991, options were granted at a price not less than 100% of fair market value on the date of grant. Options generally were exercisable in cumulative installments of 33-1/3% after the option has been outstanding 18, 32 and 46 months from the date of grant and expired five years after the date of grant.
A summary of the transactions under this plan follows:
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 19 - Interest and Dividend Income
Included in interest and dividend income are the following (in thousands):
Note 20 - Other Revenues
Included in other revenues are the following (in thousands):
Note 21 - Related Party Transactions
The following summarizes significant financial information with respect to transactions with present and former officers, directors, their relatives and certain entities they control or in which they have a beneficial interest (in thousands):
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(a) During 1990, PMI sold eight hotel properties to partnerships controlled by former officers and/or directors for aggregate consideration of $52,500,000 resulting in deferred gains of $4,000,000. The Company held mortgages and other notes receivable with a face value of $44,992,000 at July 31, 1992, which arose primarily from those hotel sales. The mortgages mature through 2005 and bear interest at rates ranging from 9.5% to 12.5%. At July 31, 1992, the carrying value of those mortgages was reduced to $6,081,000. The income amounts shown above primarily include transactions related to these properties.
(b) In 1991, PMI entered into an agreement with ShoLodge, whereby Sholodge was appointed the exclusive agent to develop and manage certain hotel properties. Six hotels have been developed and opened to date. Development fees earned by ShoLodge of $586,000 and $-0- have been capitalized into property, equipment and leasehold improvements for the year ended June 1992 and the one month ended July 1992, respectively. The Company has demand notes and loans payable to ShoLodge of $2,706,000 and $3,570,000, respectively, at July 31, 1992 concerning the development of hotels.
Effective June 1992, the Company commenced using the ShoLodge reservation system for its Wellesley and AmeriSuite hotels.
Note 22 - Supplemental Cash Flow Information
PMI generally received mortgages and other notes as a portion of the total consideration paid by purchasers in connection with
PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sales of hotel properties and as consideration for certain construction and development activities. Such noncash consideration is not reflected in the accompanying consolidated statements of cash flows. Investing activities involving such noncash proceeds are summarized below (in thousands):
Noncash proceeds consisted of the following (in thousands):
Cash paid for interest net of amounts capitalized, was $6,432,000 for the year ended June 30, 1992 and $4,407,000 for the one month ended July 31, 1992.
Cash paid for income taxes was $1,460,000 for the year ended June 30, 1992 and $2,000 for the one month ended July 31, 1992.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 9, 1995.
Exhibit Index -------------
(2) (a) Reference is made to the Disclosure Statement for Debtors' Second Amended Joint Plan of Reorganization dated January 16, 1992, which includes the Debtors' Second Amended Plan of Reorganization as an exhibit thereto filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(3) (a) Reference is made to the Restated Certificate of Incorporation of the Company dated June 5, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(b) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by
Exhibit Index (continued) -------------------------
reference.
(4) (a) Reference is made to the Form of 8.20% Fixed Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(b) Reference is made to the Form of Adjustable Rate Senior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(c) Reference is made to the Form of 9.20% Junior Secured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(d) Reference is made to the Form of 8.20% Tax Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(e) Reference is made to the Form of 10.20% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(f) Reference is made to the Form of 8% Secured UND Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(g) Reference is made to the Form of 9.20% OVR Restructured Note of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
Exhibit Index (continued) -------------------------
(h) Reference is made to the Collateral Agency Agreement among the Company, U.S. Trust and the Secured Parties, dated as of July 31, 1992 filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(i) Reference is made to the Security Agreement between the Company and U.S. Trust, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(j) Reference is made to the Subsidiary Guaranty from FR Delaware, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(k) Reference is made to the Security Agreement between FR Delaware, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(l) Reference is made to the Subsidiary Guaranty from Prime Note Collections Company, Inc. to United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(m) Reference is made to the Security Agreement between Prime Note Collections Company, Inc. and United States Trust Company of New York, dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
Exhibit Index (Continued) -------------------------
(n) Reference is made to a Form 8-A of the Company as filed on June 5, 1992 with the Securities and Exchange Commission, as amended by Amendment No. 1 and Amendment No. 2, which is incorporated herein by reference.
(10) (a) Reference is made to the Agreement of Purchase and Sale between Flamboyant Investment Company, Ltd. and VMS Realty, Inc. dated June 3, 1985, and its related agreements, each of which was included as Exhibits to the Form 8-K dated August 14, 1985 of PMI, which are incorporated herein by reference.
(b) Reference is made to PMI's Flexible Benefit Plan, filed as an Exhibit to the Form 10-Q dated February 12, 1988 of PMI, which is incorporated herein by reference.
(c) Reference is made to the Employment Agreement dated as of July 31, 1992, between David A. Simon and the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(d) Reference is made to the 1992 Performance Incentive Stock Option Plan of the Company dated as of July 31, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(e) Reference is made to the 1992 Stock Option Plan of the Company filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(f) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David A. Simon filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
Exhibit Index -------------
(g) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and David L. Barsky filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference.
(i) Reference is made to the Employment Agreement dated as of December 31, 1992 between John Elwood and the Company filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference.
(j) Reference is made to the 1992 Non-Qualified Stock Option Agreement between the Company and John Elwood filed as an Exhibit to the Company's Form 10-K dated March 26, 1993, which is incorporated herein by reference.
(k) Reference is made to the Employment Agreement dated as of May 18, 1993 between Paul Hower filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference.
(l) Reference is made to the Consolidated and Amended Settlement Agreement dated as of October 12, 1993 between Allan V. Rose and the Company filed as an Exhibit to the Company's Form 10-K dated March 25, 1994, which is incorporated herein by reference.
(m) Consent and Amendment to Prime Hospitality Corp. 9.20% Junior Secured Notes.
(n) Agreement dated February 6, 1995 among Suites of America, Inc., ShoLodge, Inc. and the Company.
(o) Change of Control Agreement dated February 15, 1995 between David A. Simon
Exhibit Index -------------
and the Company.
(p) Change of Control Agreement dated February 15, 1995 between John M. Elwood and the Company.
(q) Change of Control Agreement dated February 15, 1995 between Paul H. Hower and the Company.
(r) Change of Control Agreement dated February 15, 1995 between John H. Leavitt and the Company.
(s) Change of Control Agreement dated February 15, 1995 between Denis W. Driscoll and the Company.
(t) Change of Control Agreement dated February 15, 1995 between Timothy E. Aho and the Company.
(u) Change of Control Agreement dated February 15, 1995 between Joseph Bernadino and the Company.
(v) Change of Control Agreement dated February 15, 1995 between Richard T. Szymanski and the Company.
(w) Change of Control Agreement dated February 15, 1995 between Douglas W. Vicari and the Company.
(x) Change of Control Agreement dated February 15, 1995 between Richard Moskal and the Company.
(11) Computation of Earnings Per Common Share.
(12) Computation of the Ratio of Earnings to Fixed Charges.
(21) Subsidiaries of the Company are as follows:
(23) (a) Consent of Arthur Andersen LLP (b) Consent of J.H. Cohn & Company
(27) Financial Data Schedule.