-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NZAEbzwGmGz76FBDaxfUfk79U3WZyONBysdD2kTWBb9+LH2ln9dl2xJNj4/W4DaL oHCB0iRkzcrttIM9YzzmLA== 0000950123-00-002923.txt : 20000411 0000950123-00-002923.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950123-00-002923 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME HOSPITALITY CORP CENTRAL INDEX KEY: 0000080293 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 222640625 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06869 FILM NUMBER: 583523 BUSINESS ADDRESS: STREET 1: 700 RTE 46 E CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 9738821010 MAIL ADDRESS: STREET 1: 700 RTE 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 FORMER COMPANY: FORMER CONFORMED NAME: PRIME MOTOR INNS INC DATE OF NAME CHANGE: 19920609 FORMER COMPANY: FORMER CONFORMED NAME: PRIME EQUITIES INC DATE OF NAME CHANGE: 19731120 10-K405 1 PRIME HOSPITALITY 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-6869 --------------- PRIME HOSPITALITY CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 22-2640625 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 700 Route 46 East, 07004 Fairfield, New Jersey (address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 882-1010 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Par Value $.01 Per Share, Common Stock New York Stock Exchange 9 1/4% First Mortgage Notes Due 2006 New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-k or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's common stock held by non-affiliates on March 20, 2000 based on the last sale price as reported by the National Quotation Bureau, Inc. On that date was approximately $405,360,283. The Registrant had 47,689,445 shares of Common Stock outstanding as of March 20, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement prepared for the 2000 annual meeting of shareholders are incorporated by reference into Part III of this report. ================================================================================ 2 References in this report to the "Company" or "Prime" are to Prime Hospitality Corp. and its subsidiaries. EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by the Company for the purpose of analyzing its operating performance, leverage and liquidity. Hotel EBITDA represents EBITDA generated from the operations of owned hotels. Hotel EBITDA excludes management fee income, interest income from mortgages and notes receivable, general and administrative expenses and other revenues and expenses which do not directly relate to operations of owned hotels. EBITDA and Hotel EBITDA are not measures of financial performance under accounting principles generally accepted in the United States and should not be considered as alternatives to net income as an indicator of the Company's operating performance or as alternatives to cash flows as a measure of liquidity. Unless otherwise indicated, industry data is based on reports of Smith Travel Research. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES THE COMPANY Prime is an owner, operator, manager and franchisor of hotels, with 205 hotels in operation containing 27,029 rooms located in 32 states (the "Portfolio") as of March 20, 2000. Prime controls two hotel brands -- AmeriSuites (R) and Wellesley Inn & Suites (R) -- as well as a portfolio of upscale, full-service hotels operated under franchise agreements with national hotel chains. As of March 20, 2000, the Company owned and operated 149 hotels (the "Owned Hotels"), operated 28 hotels under lease agreements with real estate investment trusts (the "Leased Hotels"), managed 17 hotels for third parties (the "Managed Hotels"), and franchised 11 hotels which it does not operate (the "Franchised Hotels"). Included in the Portfolio are 31 AmeriSuites hotels owned by third parties which are operated pursuant to franchise agreements, 20 of which are operated by Prime under lease or management agreements. Prime's portfolio consists primarily of new, well- maintained hotels, with an average age of approximately 7 years. The Company's strategy is to develop its proprietary AmeriSuites and Wellesley Inn & Suites brands primarily through franchising. The Company currently has 99 AmeriSuites and 66 Wellesley Inn & Suites in operation, with 31 of these AmeriSuites operated under franchise agreements. Through the development of its proprietary brands, the Company is transforming itself from an owner/operator into a franchisor and manager and has positioned itself to generate additional revenues with minimal capital investment. The Company currently has 57 executed franchise agreements for new AmeriSuites to be built with 16 applications pending. In 2000, the first two franchisee constructed AmeriSuites were opened. The previous franchise agreements on opened hotels were generated pursuant to asset sales. Prime's strategy is also focused on growing the operating profits of its Portfolio. With over 200 hotels in operation, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets. On November 1, 1999, the Company converted 38 of its 43 extended-stay HomeGate hotels into its limited-service Wellesley Inn & Suites brand. In 2000, the Company sold the remaining five HomeGate hotels and the Company's rights to the HomeGate brand name. The conversion changed the hotels' customer base from extended-stay to transient. The Company believes this will enhance the value of its existing hotels, create efficiencies by adding critical mass to the chain and improve its franchising prospects for the Wellesley Inn & Suites brand. 1 3 Over the past three years, Prime has achieved rapid growth in the Portfolio, from 15,479 rooms at March 1, 1997 to 27,029 rooms at March 20, 2000. Prime's focus on brand development has resulted in the growth of the number of hotels operated under Prime's proprietary brands from 68 hotels at February 28, 1997 to 165 hotels during the same period. At the same time, the Company's EBITDA has grown at a compound annual rate of 19.0%, from $125.0 million in 1997 to $177.0 million in 1999, while recurring net income has grown at a compound annual rate of 16.6%, from $40.0 million to $54.4 million over the same period. Prime's hotels serve three major lodging industry segments: the all-suites segment, under Prime's AmeriSuites brand; the limited-service segment, primarily under Prime's Wellesley Inn & Suites brand and the full-service segment, under major national franchises. All-Suites: There are 99 all-suite hotels in operation under the AmeriSuites brand name. Prime owns and operates 68 of these hotels and franchises the operation of the remaining 31 hotels, 20 of which are operated by Prime. There are also nine AmeriSuites currently under construction, with an additional 50 AmeriSuites to be developed pursuant to franchise agreements. AmeriSuites are upscale, all-suite hotels containing approximately 128 suites and are located in 30 states. The hotels are situated, primarily, near suburban commercial centers, corporate office parks and other travel destinations, with close proximity to dining, shopping and entertainment amenities. In 1999, AmeriSuites contributed approximately $87.7 million, or 51.3%, of the Company's Hotel EBITDA. Limited-Service: Prime operates 75 limited-service hotels, 66 under the Wellesley Inn & Suites brand. The Company owns and operates all of the Wellesley Inn & Suites, which compete primarily in the mid-price segment. The Wellesley Inn & Suites are located in 21 states primarily in the Southeast, Northeast and Southwest. The remaining nine limited-service hotels consist of six Managed Hotels and three Owned Hotels and are operated under franchise agreements with national chains. Prime plans to convert the three owned limited-service hotels to the Wellesley Inn & Suites brand. In 1999, the Company's limited-service hotels contributed approximately $41.9 million, or 24.6%, of the Company's Hotel EBITDA. Full-Service: Prime operates 31 full-service hotels, twelve of which are owned, primarily in the upscale segment with food and beverage service and banquet facilities under franchise agreements with national hotel brands such as Hilton, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. The hotels are located primarily in the Northeast. In 1999, the Company's full- service hotels contributed approximately $41.2 million, or 24.1%, of the Company's Hotel EBITDA. ASSET DIVESTITURES The Company has also undertaken a strategic initiative to dispose of hotel real estate and to utilize proceeds to repurchase stock, retire debt or invest in the growth of its brands. During 1999, the Company sold eight AmeriSuites for $80.2 million in proceeds and certain other assets for an additional $6.5 million in cash proceeds. The Company retained the franchise rights on all the sold AmeriSuites under franchise agreements with terms ranging from 10 to 20 years. In addition to AmeriSuites sales, the Company will be looking to sell selected Wellesley and full-service hotels in the future. The combination of cash flow from operations and proceeds from asset sales in 1999 2 4 provided the funds to lower the Company's leverage and reduce the shares outstanding. During 1999, the Company repurchased 5.8 million shares of its common stock at an average price of $9.34 per share and reduced its debt from $597.8 million at December 31, 1998 to $549.0 million at December 31, 1999. In October 1999, the Company initiated a new stock buyback program and amended its bank covenants to provide for an additional $100 million of share repurchases to be funded by 50% of asset sale proceeds. Under this program, through March 20, 2000 the Company has repurchased $9.9 million of its stock ($3.0 million in 1999 and $6.9 million in 2000). RECENT EVENTS Subsequent to year end, the Company sold the Frenchman's Reef Marriott Resort in St. Thomas U.S.V.I. for $73.0 million, the remaining five HomeGate hotels and the Company's rights to the HomeGate brand name for $17.7 million and an additional AmeriSuites for $10.8 million. The Company utilized the proceeds to retire or transfer $57.4 million of debt encumbering the hotels with the remainder available for the repurchase of the Company's common stock and/or the retirement of debt. In March 2000, the Company signed an agreement with Sholodge, Inc. ("Sholodge") to acquire its leasehold interests in 27 Sumner Suites hotels for net consideration of $2.0 million. Pursuant to the agreement, the Company will convert these hotels to its AmeriSuites brand and will operate the hotels under lease agreements with Hospitality Properities Trust ("HPT") and Sholodge. The Company will also purchase two land sites from Sholodge to develop two additional AmeriSuites hotels. The transaction is expected to close in mid-April and is subject to certain due diligence items and approval by HPT. Under the agreement, a subsidiary of Prime will assume Sholodge's interest in an existing lease for 20 hotels with HPT, subject to HPT's consent, and enter into new lease agreements on the seven remaining hotels. As part of the transaction, Prime will also purchase land from Sholodge in Mt. Laurel, NJ and in Sterling, VA, near Dulles Airport. An affiliate of Sholodge will then construct AmeriSuites hotels on these sites. The hotels are located in 12 states, primarily in the Southeast, Midwest and Southwest regions of the country. The hotels were all recently constructed by Sholodge, with an average age of 2.8 years. Sholodge has prior experience developing AmeriSuites hotels as 15 current AmeriSuites hotels were constructed by Sholodge. The Company will operate the hotels as Sumner Suites until the conversion process is complete. INDUSTRY OVERVIEW In 1999, industry-wide percentage growth in supply exceeded industry-wide percentage growth in room demand (4.2% versus 3.3%), continuing a trend that began in 1997. This resulted in a slight decline in overall occupancy levels from 63.8% in 1998 to 63.3% in 1999. However, due to the relatively high levels of occupancy, the industry as a whole has been able to increase the average daily rate ("ADR") by 4.0% from $78.15 in 1998 to $81.27 in 1999, resulting in a REVPAR increase of 3.1%. Historical performance, however, may not be indicative of future results. The following table was compiled from industry operating data as reported by Smith Travel Research and highlights industry data for the United States and the regions in which most of the 3 5 Company's hotels are located: the Middle Atlantic region, which is comprised of New Jersey, New York and Pennsylvania; the South Atlantic region, which is comprised of Florida, Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware and; the West South Central Region which is composed of Texas, Oklahoma, Arkansas and Louisiana. The table also includes operating data concerning the two price levels (of the five price levels classified by Smith Travel Research) in which the Company competes: upscale and mid-price. REVPAR data was calculated by the Company based on occupancy and ADR data supplied by Smith Travel Research.
% CHANGE IN: ROOM SUPPLY ROOM DEMAND REVPAR ----------- ----------- ------ 1997 V. 1998 V. 1999 V. 1997 V. 1998 V. 1999 V. 1997 V. 1998 V. 1999 V. 1996 1997 1998 1996 1997 1998 1996 1997 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- United States..................... 3.4% 4.0% 4.2% 2.5% 3.1% 3.3% 5.3% 3.6% 3.1% BY REGION: Middle Atlantic................... 1.7 2.3 2.9 2.5 3.1 2.2 9.6 7.3 4.0 South Atlantic.................... 3.4 4.3 4.6 2.4 2.8 3.8 4.7 2.7 3.1 West South Central................ 4.9 5.1 5.4 4.0 5.2 3.1 4.3 4.5 0.3 BY SERVICE (PRICE LEVEL): Upscale........................... 4.0 5.0 4.8 3.7 4.2 3.6 4.7 2.9 1.3 Mid-Price......................... 4.6 6.2 5.8 3.5 4.7 4.5 4.9 3.4 2.9
4 6 PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Portfolio as of March 20, 2000:
OWNED LEASED MANAGED FRANCHISED TOTAL ----- ------ ------- ---------- ----- (1) (2) (3) (4) (5) ---- ---- ---- ---- ---- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- All-Suites: AmeriSuites 68 8,786 19 2,403 1 128 11 1,404 99 12,721 LIMITED-SERVICE: Comfort Inn & Suites 2 179 2 179 Days Inn 1 113 1 113 Howard Johnson 3 337 2 285 5 622 Ramada Limited 1 119 1 119 Wellesley Inn & Suites 66 7,475 66 7,475 ----- ------- ----- ------ ----- ------- Total Limited-Service 69 7,812 6 696 75 8,508 FULL-SERVICE: Country Inn & Suites 2 210 2 210 Comfort Inn 1 162 1 162 Crowne Plaza 2 362 2 362 Hilton 1 355 1 408 2 763 Holiday Inn 2 390 1 160 3 550 Howard Johnson 1 116 1 116 Independent 1 149 1 149 Quality Inn 1 106 1 106 Radisson 3 627 3 627 Ramada 5 823 3 444 3 552 11 1,819 Sheraton 1 240 2 349 1 347 4 936 ----- ------- --- ------ ----- ------ ----- ------- Total Full-Service 12 2,435 9 1,464 10 1,901 31 5,800 Total 149 19,033 28 3,867 17 2,725 11 1,404 205 27,029 ===== ======= === ====== ===== ====== === ====== ===== =======
(1) The Owned Hotels represent those hotels in which the Company owns significant economic interests. The Company owns the land and building on all but 11 hotels which are operated under ground or building lease agreements. The ground and building leases covering the Company's leased hotels provide for fixed base rents and, in most instances, additional percentage rents based on a percentage of room revenues. (2) The Leased Hotels provide for minimum rents which increase annually by the inflation rate and percentage rents based on a percentage of room, food and beverage and other revenue. The percentage lease calculations are designed to provide the Company with revenue streams equal to approximately 2.5% to 3.0% of hotel revenues. The 19 AmeriSuites hotels in this category are operated pursuant to franchise agreements which also provide the Company with franchise fees. (3) Of the 17 Managed Hotels, the Company operates one AmeriSuites hotel which also provides Prime with franchise fees. (4) Franchised Hotels are hotels operated by third parties under AmeriSuites franchise agreements. (5) In addition to the above, as of March 2000, Prime has two AmeriSuites comprising 275 rooms under construction, while franchisees are constructing an additional seven AmeriSuites comprising 935 rooms. 5 7 The following table sets forth the location of the Portfolio as of March 20, 2000:
OWNED LEASED MANAGED FRANCHISED TOTAL ----- ------ ------- ---------- ----- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Alabama 1 128 1 128 2 256 Arizona 6 780 1 117 1 128 8 1,025 Arkansas 1 130 1 130 California 1 128 3 306 2 256 6 690 Colorado 5 662 5 662 Connecticut 4 492 2 305 6 797 Florida 27 3,074 4 431 31 3,505 Georgia 10 1,246 1 189 11 1,435 Idaho 1 128 1 128 Illinois 5 649 3 380 8 1,029 Indiana 2 260 1 126 3 386 Kansas 3 374 1 126 4 500 Kentucky 2 251 2 251 Louisiana 1 128 1 128 Maine 1 130 1 130 Maryland 1 137 1 128 2 265 Massachusetts 1 158 1 158 Michigan 3 394 3 394 Minnesota 1 125 1 128 5 604 7 857 Nevada 1 125 3 552 4 677 New Jersey 16 2,604 4 648 6 1,423 26 4,675 New Mexico 2 237 1 128 3 365 New York 8 932 8 932 North Carolina 5 648 1 75 6 723 Ohio 4 460 3 379 7 839 Oklahoma 3 384 3 384 Oregon 1 137 1 161 2 298 Pennsylvania 4 632 4 632 South Carolina 4 455 4 455 Tennessee 4 503 2 256 6 759 Texas 19 2,356 5 638 24 2,994 Virginia 4 444 1 126 5 570 ----- ------ --- ------ --- ------ ---- ------ ----- ------ Total 149 19,033 28 3,867 17 2,725 11 1,404 205 27,029 ===== ====== === ====== === ====== ==== ====== ===== ======
6 8 The following table sets forth for the five years ended December 31, 1999 operating data for the hotels in the Portfolio as of December 31, 1999. Operating data for the Owned Hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of the Marriott Frenchman's Reef Hotel (the "Frenchman's Reef"), and the five HomeGate hotels sold in 2000 have been excluded from the table. For purposes of showing operating trends, the results of Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1995....... 51 6,557 76 10,433 1996....... 59 7,581 88 11,906 1997....... 91 11,710 125 16,735 1998....... 129 16,618 165 21,913 1999....... 150 19,161 203 26,779
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ 1995....... 68.7% $61.94 $42.54 70.0% $66.36 $46.44 1996....... 68.7 67.85 46.63 70.9 72.39 51.30 1997....... 67.6 73.31 49.55 69.3 77.18 53.49 1998....... 64.8 76.49 49.55 66.5 80.13 53.28 1999....... 63.5 77.05 48.89 65.1 80.00 52.07
AMERISUITES The Company currently has 99 AmeriSuites in operation and there are nine AmeriSuites hotels under construction. Prime also has an additional 50 executed AmeriSuites franchise agreements and has 16 applications pending for additional hotels. Prime also intends to add 29 hotels to the AmeriSuites brand through its proposed transaction with Sholodge, Inc. (See "Recent Events"). While the majority of the current AmeriSuites hotels were developed with Prime's capital, the Company intends to develop AmeriSuites on a more limited scale with the bulk of new development coming from franchisees. AmeriSuites are positioned in the upscale segment of the lodging industry, competing predominantly with other upscale and mid-price brands such as Courtyard by Marriott, Hilton Garden Inns and Holiday Inn. The average age of the AmeriSuites hotels as of March 20, 2000 was approximately 3.4 years. The Company is committed to the expansion of the AmeriSuites brand due to its attractive investment returns, rapid stabilization, broad customer appeal and positioning in the fast-growing all-suites segment. AmeriSuites are all-suites, upscale hotels which offer guests an attractively designed suite, a complimentary continental breakfast in a spacious lobby cafe, remote-control cable television, fully-equipped business centers, fitness centers and pool facilities. The hotels provide group meeting space, but do not include restaurant or lounge facilities. AmeriSuites attract customers principally because of the size and quality of the guest suites which contain approximately 420 square feet, approximately 25% larger than a standard hotel room. The suites offer distinct living, sleeping and kitchen areas with microwave, refrigerators, in-room coffee makers, ironing boards and hair dryers. 7 9 AmeriSuites hotels also offer business suites marketed under the name "TCB (Taking Care of Business) Suites". TCB Suites were developed specifically for the business traveler and feature a well-equipped, in-suite office, including an oversized desk with executive chair, dual phone lines, easy chair and ottoman, in addition to voice mail, data ports, speaker phones and other amenities. The typical AmeriSuites contains approximately 128 suites, including 20-30 TCB Suites, and two to four meeting rooms. AmeriSuites are primarily located near suburban commercial centers, corporate office parks and other travel destinations, with close proximity to dining, shopping and entertainment amenities. The target customer is primarily the business traveler, with an average length of stay of two to three nights, and leisure or weekend travelers. AmeriSuites are marketed primarily through direct sales, national marketing programs and a central reservation system. Since 1997, the Company has utilized a central reservation system for the AmeriSuites brand developed and operated by REZsolutions, Inc. In 1999, the REVPAR contribution from the central reservation system for AmeriSuites hotels was approximately 32% of revenues. The following table sets forth for the five years ended December 31, 1999 operating data for the owned AmeriSuites hotels in the Portfolio as of December 31, 1999. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations.
OWNED TOTAL ----- ----- HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1995....... 10 1,208 19 2,320 1996....... 18 2,232 31 3,793 1997....... 41 5,254 59 7,455 1998....... 58 7,515 78 10,046 1999....... 69 8,914 97 12,471
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ 1995....... 67.7% $67.27 $45.52 67.2% $65.45 $43.98 1996....... 63.5 73.95 46.98 66.4 72.13 47.90 1997....... 63.0 75.87 47.76 65.2 75.79 49.41 1998....... 64.9 81.85 53.09 65.9 81.01 53.38 1999....... 65.1 82.21 53.51 66.4 81.28 53.98
WELLESLEY INN & SUITES The Company's limited-service hotels consist primarily of 66 Wellesley Inn & Suites, all of which are owned and operated by the Company. The brand is comprised of 28 original Wellesley Inns and 38 Wellesley Inn & Suites which, in addition to Wellesley Inn features, also contain suite rooms. The Company intends to develop this brand primarily through franchisees and believes that conversion opportunities from other brands exist in this segment. Wellesley Inn & Suites are positioned in the mid-price segment of the industry and compete with other chains such as Hampton Inn & Suites, La Quinta Inn & Suites, Holiday Inn Express and Comfort Inn & Suites. The average age of the chain's hotels is 6.2 years. The target customer is the transient business traveler, although approximately 25% of the customers stay on an extended basis. Of the Company's 28 original Wellesley Inns, 15 are located in Florida and the remainder in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has approximately 100 rooms and is distinguished by its classic stucco exterior, spacious lobby and 8 10 amenities such as pool facilities, complimentary continental breakfast, remote control cable television with free movie channels and in-room coffee makers. Marketing efforts for the Wellesley Inns chain rely heavily on direct marketing and billboard advertising. In Florida, where the population has grown rapidly, the Company has built a geographically concentrated group of Wellesley Inns, thereby developing strong regional brand name recognition. The Company's 38 new Wellesley Inn & Suites were formed from the conversion of 38 former HomeGate hotels in November 1999. Wellesley Inn & Suites are located primarily in the Southwest, Midwest and Southeast. The typical Wellesley Inn & Suites consists of approximately 110 to 130 rooms. In addition to the amenities of a typical Wellesley Inn, the Wellesley Inn & Suites hotels offer suite accomodations in approximately half of the guest rooms. The suites contain approximately 450 square feet offering separate living, sleeping and eating areas. The suite rooms also contain kitchenettes with stove tops, refrigerators and microwaves. The Wellesley Inn & Suites utilize the same reservation system, developed by REZsolutions, Inc., used by AmeriSuites. The system contributed approximately 21% of revenues in 1999. The following table sets forth for the five years ended December 31, 1999 operating data for Wellesley Inns as of December 31, 1999. Due to the conversion of the 38 hotels into Wellesley Inn & Suites in November 1999, operating data has been presented for the 28 comparable hotels as well as the total. For purposes of showing operating trends, the results of 14 Owned Hotels that were managed by the Company prior to their acquisition by the Company are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
COMPARABLE TOTAL ---------- ----- HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1995....... 28 2,807 28 2,807 1996....... 28 2,807 28 2,807 1997....... 28 2,807 36 3,824 1998....... 28 2,807 57 6,411 1999....... 28 2,807 66 7,475
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ 1995....... 75.3% $52.11 $39.25 75.3% $52.11 $39.25 1996....... 73.8 53.80 39.72 73.8 53.80 39.72 1997....... 73.6 58.29 42.87 71.3 56.88 40.56 1998....... 70.8 61.13 43.26 62.6 56.75 35.52 1999....... 71.0 60.90 43.26 59.8 59.15 35.38
The Company's other limited-service hotels consist of nine hotels operated under franchise agreements, six of which are managed for third parties. The Company plans to convert the three Owned Hotels to its Wellesley Inn & Suites brand. The hotels have an average of between 100 and 120 rooms and offer complimentary continental breakfast, remote control cable television, pool facilities and facsimile services. They are designed to appeal primarily to business travelers. FULL-SERVICE HOTELS The Company operates 31 full-service hotels primarily in the upscale segment with food and beverage service and banquet facilities under franchise agreements with Hilton, Radisson, Sheraton, 9 11 Crowne Plaza, Holiday Inn and Ramada. The full-service hotels are concentrated in the Northeast. The Company owns 12 of these hotels, operates nine hotels under lease agreements with REITs and manages 10 hotels for third parties. The hotels are generally positioned along major highways within close proximity to corporate headquarters, office parks, airports, convention or trade centers and other major facilities. The customer base for full-service hotels consists primarily of business travelers. In addition, the Company's sales force actively markets meeting and banquet services to groups and individuals for seminars, business meetings, holiday parties and weddings. The hotels are also marketed through national franchisor programs, central reservation systems and the Company's national sales group. The Company's full-service hotels generally have between 150 and 300 rooms and pool, restaurant, lounge, banquet and meeting facilities. Other amenities include fitness rooms, room service, remote-control cable television and business centers. In order to enhance guest satisfaction, the Company also has theme concept lounges in a number of its hotels. In recent years, the Company has received recognition from various franchisors and associations for its hotel quality and service. The Company owned and operated one resort hotel, the 504-room Marriott's Frenchman's Reef Hotel in St. Thomas, U.S. Virgin Islands, which was sold in March 2000. In the future, the Company intends to divest certain of its remaining 12 owned full-service hotels. Prime intends to capitalize on its ability to effectively manage hotels in this segment. While Prime does not intend to acquire full-service hotels, it does plan to invest capital to pursue management opportunities. The following table sets forth for the five years ended December 31, 1999 operating data for the full-service hotels in the Company's portfolio as of December 31, 1999. For purposes of showing operating trends, the results of the Frenchman's Reef, which was sold in March 2000, have been excluded from the table. Operating data for the hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of three Owned Hotels that were managed by the Company prior to their acquisition by the Company during the five-year period are presented as if they had been Owned Hotels from the dates the Company began managing the hotels.
OWNED TOTAL ----- ----- HOTELS ROOMS HOTELS ROOMS ------ ----- ------ ----- 1995....... 11 2,285 25 4,764 1996....... 11 2,285 25 4,764 1997....... 12 2,435 26 4,914 1998....... 12 2,435 26 4,914 1999....... 12 2,435 31 5,800
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- --- ------ --------- --- ------ 1995....... 61.8% $75.83 $46.89 68.0% $78.56 $53.44 1996....... 67.4 83.94 56.54 71.9 85.86 61.75 1997....... 71.6 92.28 66.02 73.7 93.22 68.69 1998....... 70.7 101.95 72.03 72.7 101.77 74.00 1999....... 70.8 106.02 75.06 70.8 102.76 72.79
10 12 BRAND INFRASTRUCTURE As Prime continues to evolve into a franchisor, it has undertaken a number of brand initiatives. These include the following: Brand Advertising - Prime increased its national brand advertising expenditures by 47% from 1998 to $4.1 million in 1999 and plans to further increase brand advertising expenditures by 30%-35% in 2000. The program has expanded to include national publications such as USA Today and Sports Illustrated, radio promotions in key markets and a sponsorship of a race car on the NASCAR circuit. Central Reservation System - Prime and REZsolutions, its central reservation system operator, are making several enhancements to the central reservation system. Utilizing fiber optic technology, the Company implemented a seamless two-way interface between the hotels and the reservation system which provides for instant inventory updates for customer and agents. Other initiatives in process include an easy access booking screen for travel agents and an improved customer database. National Accounts - The number of national companies listing AmeriSuites and Wellesley Inn & Suites as preferred hotel providers increased in 1999 by 50% over the prior year. Prime now has over 200 national accounts which include leading companies throughout the country. High Speed Internet Access - In November, the Company signed an agreement with CAIS Internet to provide high speed internet access to all the hotels. Customers will be able to instantly access the internet in their rooms through their laptops. Prime expects to begin installation in April 2000 and be completed by the summer of 2000. Rewards Programs - During 1999, the Company increased its AmeriSuites and Wellesley club membership by 88% to approximately 52,000 members. Frequent customers can currently earn rewards such as a free night's stay or an American Express gift certificate. As Prime expands its brands, it will also be expanding its reward offerings. Prime intends to team up with major travel and retail partners to upgrade this program. E-Commerce - Recognizing the potential impact that the internet can have on hotel bookings, Prime increased the presence of its brands on the web this year. Customers can now book hotel rooms not only through its proprietary websites (AmeriSuites.com and Wellesley.com) but also through popular travel web sites such as TravelScape, Priceline, Expedia and Travelocity. In the future, the Company plans to increase its distribution channels, create web based marketing alliances and develop business to business booking and marketing relationships. Management believes that the growing brand infrastructure, consisting of elements such as improved frequent stay programs, an enhanced central reservations system, increased advertising and marketing programs and the heightened visibility from the increase in the chains' number of hotels in the past year will permit its brands to achieve critical mass and outperform its older, more established competitors. 11 13 FRANCHISING Prime intends to grow its brands primarily through franchising. The Company began its franchise sales efforts in mid-1998 when it obtained all the necessary statutory approvals to begin franchising its AmeriSuites and Wellesley brands. Prime currently has a franchise sales team of eight professionals which include a senior vice president and seven regional vice presidents. In addition to their direct sales effort, the franchise sales team also develops the franchise marketing programs which include advertising in industry and business publications, attending various trade shows and producing brochures and other collateral material. Prime has also formed a franchise services team which has developed a variety of programs to guide its franchisees through the various phases of opening and operating a hotel. These include training, pre-opening, construction management and purchasing services. Prime also offers its franchisees an internet based communications system which provides brand updates, operating standards and manuals and other important communications. Since it began its franchising program in mid-1998, the Company has executed 59 new AmeriSuites franchise agreements and has 16 AmeriSuites franchise applications pending. The first two franchisee-constructed AmeriSuites opened in 2000 in Grapevine, TX and Peoria, IL. As of March 20, 2000, there are seven AmeriSuites under construction by franchisees and six AmeriSuites hotels are scheduled to begin construction within 90 days. In addition to the two newly constructed franchised AmeriSuites, Prime has 29 other franchised AmeriSuites in operation. These franchise agreements were executed pursuant to sales of these hotels. Equity Inns, Inc. owns 19 of these hotels. As of March 20, 2000, the Company has two Wellesley Inn & Suites franchise applications pending. Prime believes that the conversion of the former HomeGate hotels to its Wellesley brand will improve the chain's future franchising prospects by adding critical mass to the brand. As part of its franchising initiatives, Wellesley Inn & Suites became a founding sponsor of the Asian American Hotel Owners' Association in January 2000, a group representing a substantial number of owners in this segment. Prime's AmeriSuites and Wellesley franchise agreements typically provide for terms of between ten and twenty years and require the franchisee to maintain certain operating and product standards. The franchise fees are generally comprised of an initial application fee, plus monthly fees based on a percentage of hotel revenues. The monthly fees cover royalties and the cost of marketing and reservation services. Prime also offers additional services including purchasing and design services. The standard monthly fees as a percentage of room sales are as follows:
ROYALTY MARKETING RESERVATION FEE FEE FEE ------- --------- ----------- AmeriSuites................... 5.0% 2.0% 1.5% Wellesley Inn & Suites....... 4.5% 1.5% 1.5%
12 14 DEVELOPMENT While the Company has developed the majority of its existing AmeriSuites and Wellesley Inn & Suites, it intends to rely on franchisees for the majority of future development of its hotels. As of March 20, 2000, Prime has two hotels under construction in the Baltimore and Orlando markets. In addition, Prime may construct AmeriSuites hotels on three additional land sites it already owns in the Detroit, San Jose and San Francisco areas and two sites it may purchase from Sholodge in Mt. Laurel, NJ and Virginia, near Dulles Airport. Prime intends to focus any future development efforts in the Northeast and West Coast, or in other areas where the development process is more difficult and higher barriers to entry exist. The Company intends to fund new development with internally generated cash flow. The Company's Wellesley Inn & Suites development effort will focus on the conversion of other limited-service hotels to its brands. The Company plans to convert three limited-service hotels that it already owns or leases (two in New Jersey and one in Florida) to its Wellesley brand in 2000. OPERATIONS As a leading domestic hotel operating company, the Company enjoys a number of operating advantages over other lodging companies. With over 200 hotels under management covering a number of price points and broad geographic regions, the Company possesses the critical mass to support sophisticated operating, marketing and financial systems. The Company believes that its broad array of central services permits on-site hotel general managers to effectively focus on providing guest services, resulting in economies of scale and leading to above-market hotel profit margins. As a result of these operating strategies, the Company's comparable hotels generated average operating profit margins that exceeded industry averages for 1998, the most current data available from industry sources, by approximately 18% for full-service hotels and 6% for limited-service hotels. The Company's operating strategy combines operating service and guidance from its central management team with decentralized decision-making authority delegated to each hotel's on-site management. The on-site hotel management teams consist of a general manager and, depending on the hotel's size and market position, managers of sales and marketing, food and beverage, front desk services, housekeeping and engineering. The Company's operating objective is to exceed guest expectations by providing quality services and comfortable accommodations at a fair value. On-site hotel management is responsible for efficient expense controls and uses operating standards provided by the Company. Within parameters established in the operating and capital planning process, on-site management possesses broad decision-making authority on operating issues such as guest services, marketing strategies, hiring practices and incentive programs. Each hotel's management team is empowered to take all necessary steps to ensure guest satisfaction within established guidelines. Key on-site personnel participate in an incentive program based on hotel revenues and profits. The central management team is located in Fairfield, New Jersey, with an AmeriSuites operations office in Atlanta, Georgia. Central management provides four major categories of services: (i) operations management, (ii) sales and marketing management, (iii) financial reporting and control and (iv) hotel support services. 13 15 Operations Management. Operations management consists of the development, implementation and monitoring of hotel operating standards and is provided by a network of regional operating officers who are each responsible for the operations of 10 to 30 hotels. They are supported by training, food and beverage and human resources departments, each staffed full-time by specialized professionals. The Company's training efforts focus on sales, housekeeping, food service, front desk services and leadership. The Company believes these efforts increase employee effectiveness, reduce turnover and improve the level of guest services. Sales and Marketing Management. Sales and marketing management is directed by a corporate staff of 20 professionals, including regional marketing directors who are responsible for each hotel's sales and marketing strategies, and the Company's national sales group, Market Segments, Inc. ("MSI"). In cooperation with the regional marketing staff, on-site sales management develops and implements short and intermediate-term marketing plans. The Company focuses on yield management techniques, which optimize the relationship between hotel rates and occupancies and seek to maximize profitability. Complementing regional and on-site marketing efforts, MSI's marketing team targets specific hotel room demand generators including tour operators, major national corporate accounts, athletic teams, religious groups and others with segment-specialized sales initiatives. MSI's primary objective is to book hotel rooms at the Company's hotels and its secondary objective is to market its services on a commission basis to hotels throughout the industry. Sales activities on behalf of non-affiliated hotels increase the number of hotels where bookings can be made to support marketing efforts and defray the costs of the marketing organization. The Company's brand advertising programs are developed at the central office. As the AmeriSuites chain has grown, the Company has rapidly increased its brand marketing expenditures, spending approximately 2% of revenues. The Company has also developed marketing clubs targeted for frequent travelers and other customer groups. In addition, the Company has formed a national sales group which markets its hotels to major companies which produce a high volume of room nights. Financial Reporting and Control. The Company's system of centralized financial reporting and control permits management to closely monitor decentralized hotel operations without the cost of financial personnel on site. Centralized accounting personnel produce detailed financial and operating reports for each hotel. Additionally, central management directs budgeting and analysis, processes payroll, handles accounts payable, manages each hotel's cash, oversees credit and collection activities and conducts on-site hotel audits. Hotel Support Services. The Company's hotel support services combine a number of technical functions in central, specialized management teams to attain economies of scale and minimize costs. Central management handles purchasing, directs construction and maintenance and provides design services. Technical staff teams support each hotel's information and communication systems needs. Additionally, the Company directs safety/risk management activities and provides central legal services. 14 16 CAPITAL IMPROVEMENTS The Company continuously refurbishes its Owned Hotels in order to maintain consistent quality standards. The Company generally spends between 3% to 6% of hotel revenue on capital improvements at its Owned Hotels and typically refurbishes each hotel approximately every five years. The Company believes that its Owned Hotels are in generally good physical condition, with over half of the Owned Hotels being five years old or less. The Company recommends refurbishment and repair projects on its Managed Hotels and Leased Hotels, although spending amounts vary based on the plans of such hotels' owners and the Company's role as the franchisor. In addition to making normal capital improvements, the Company reviews, on an on-going basis, each hotel's competitive position in the local market in order to decide the types of product that will best meet the market's demand characteristics. During the past three years, the Company has repositioned several of its Owned Hotels. Repositioning a hotel generally requires renovation and refurbishment of the exterior and interior of the building and may result in a change of brand name. LEASED HOTELS As of March 20, 2000, the Company operated 28 hotels under lease agreements with REITs. These are comprised of 19 AmeriSuites hotels owned by Equity Inns, Inc., eight full-service hotels owned by MeriStar Hospitality, Inc. and one full-service hotel owned by Winston Hotels. The leases have terms of 10 years expiring from 2007 to 2008 with certain renewal options. The Leased Hotels provide for base rents which increase annually by the inflation rate and percentage rents based on a percentage of room, food and beverage and other revenue. The percentage lease calculations are designed to provide the Company with revenue streams equal to approximately 2.5% to 3.0% of hotel revenues. The Company also operates 19 of the 28 Leased Hotels, pursuant to AmeriSuites franchise agreements which also provide the Company with franchise fees. The remaining Leased Hotels are operated under franchise agreements with national chains. MANAGED HOTELS As of March 20, 2000, the Company provided hotel management services to third party hotel owners of 17 Managed Hotels. Management fees are based on fixed percentages of the property's total revenues and incentive payments based on certain measures of hotel income. Additional fees are also generated from the rendering of specific services such as accounting services, construction services, design services and sales commissions. The Company's fixed management fee percentages average 3.5% of total revenues before giving consideration to performance related incentive payments. Terms of the management agreements vary with expiration dates ranging from 2000 to 2014. The Company intends to pursue new management opportunities to capitalize on its present management infrastructure, particularly in the full-service segment. AGREEMENTS AS FRANCHISEE The Company has entered into franchise licensing agreements primarily with full-service franchisors, which agreements typically have a ten year term and allow the Company to benefit from franchise brand recognition and loyalty. The franchise agreements require the Company to pay monthly fees, to maintain certain standards and to implement certain capital programs. The payment 15 17 of monthly fees, which typically total 7% to 8% of room revenues, cover royalties and the costs of marketing and reservation services provided by the franchisors. Franchise agreements, when initiated, generally provide for an initial fee in addition to monthly fees payable to the franchisor. The Company believes it currently enjoys good relationships with its franchisors. WORKING CAPITAL The Company's operating cash flow is sufficient to cover its current operational and capital needs. The Company also intends to generate proceeds from asset sales, to be utilized for repayment of debt and/or the repurchase of its common shares. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SEASONALITY The impact of seasonality on the Company as a whole is relatively modest due to the seasonal balance achieved from the geographical location of the Company's hotel properties. The second and third quarters of the year are generally the strongest due to business travel patterns. COMPETITION The Company operates and manages hotel properties in areas that contain numerous other hotels, some of which are affiliated with national or regional brands. The Company competes with other hotels primarily on the basis of price, physical facilities and customer service. EMPLOYEES As of December 31, 1999, the Company employed approximately 7,100 employees. Certain of the Company's employees are covered by collective bargaining agreements. The Company believes that relations with its employees are generally good. ENVIRONMENTAL MATTERS The Hotels are subject to environmental regulations under Federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. The Company does not believe that it is subject to any environmental liability that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows. ITEM 3. LEGAL PROCEEDINGS The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows. 16 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fiscal quarter ended December 31, 1999, to a vote of the security holders of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, par value $.01 per share, trades on the New York Stock Exchange (the "NYSE") under the symbol "PDQ." As of March 20, 2000 there were 47,689,445 shares of common stock outstanding. The following table sets forth the reported high and low closing sales prices of, and the dividends per share on, the common stock on the NYSE.
HIGH LOW DIVIDEND/SHARE ---- --- -------------- Year Ended December 31, 1998 First Quarter.................... 20 5/8 17 1/4 0 Second Quarter................... 21 1/4 17 1/16 0 Third Quarter.................... 18 3/4 5 5/8 0 Fourth Quarter................... 10 15/16 4 0 Year Ended December 31, 1999 First Quarter.................... 11 1/8 9 1/16 0 Second Quarter................... 12 15/16 10 3/8 0 Third Quarter.................... 12 1/8 7 15/16 0 Fourth Quarter................... 9 7 5/8 0
As of March 20, 2000, the closing sales price of the common stock on the NYSE was $8 1/2 per share, and there were approximately 1,888 holders of record of common stock. The Company has not declared any cash dividends on its common stock during the two prior fiscal years and does not currently anticipate paying any dividends on the common stock in the foreseeable future. The Company currently anticipates that it will retain any future earnings for use in its business. In addition, the Company is prohibited by the terms of certain debt agreements from paying cash dividends. 17 19 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The table below presents selected consolidated financial data derived from the Company's historical financial statements for the five years ended December 31, 1999. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Total revenues..................................................... $205,628 $271,100 $340,961 $469,405 $552,732 Income from continuing operations before extraordinary items and the cumulative effect of change in accounting principle......................................................... 17,465 30,048 25,931 53,847 40,197 Extraordinary items-gains on discharge of indebtedness (Net of income taxes)............................................. 104 202 --- --- --- Cumulative effect of a change in accounting principle (net of income taxes).................................................. --- --- --- --- (5,315) (a) Pro-forma effect of change in accounting principle (net of income taxes) (b).............................................. (157) (1,260) (255) (3,788) --- Net income........................................................ 17,569 30,250 25,931 53,847 34,882 Pro-forma net income after taxes (b)............................... 17,412 28,990 25,676 50,059 --- NET INCOME PER COMMON SHARE: Basic.............................................................. $.57 $.74 $.56 $1.04 $.68 Diluted............................................................ $.54 $.68 $.54 $1.00 $.67 PRO-FORMA NET INCOME PER COMMON SHARE (b): Basic.............................................................. $.57 $.71 $.55 $.97 --- Diluted............................................................ $.54 $.66 $.53 $.94 --- BALANCE SHEET DATA: Total assets....................................................... $573,241 $877,100 $1,196,666 $1,408,398 $1,328,779 Long-term debt, net of current portion............................. 276,920 319,836 554,500 582,031 543,485 Stockholders' equity............................................... 232,916 484,584 524,413 641,045 632,000
(a) Cumulative effect of a change in accounting principle of $5.3 million (net of income taxes) in 1999, relates to the adoption by the Company of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5"). The Company adopted SOP 98-5 on January 1, 1999, and was required to write-off any unamortized pre-opening costs that remained on the balance sheet. (b) Pro-forma amounts reflect the effect on net income and earnings per share had the company written off pre-opening costs pursuant to SOP-98-5 in 1995-1998. 18 20 Unaudited selected consolidated quarterly financial data for the years ending December 31, 1998 and 1999, follow (in thousands, except per share amounts).
THREE MONTHS ENDED ------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 ---- ---- ---- ---- Total revenue ...................................... $103,288 $122,947 $121,045 $122,125 Operating income ................................... 21,125 24,641 18,908 24,287 Net income before the cumulative effect of a change in accounting principle .................... 10,291 23,571 8,943 11,042 Cumulative effect of a change in accounting principle (net of income taxes)................... --- --- --- --- Net income ......................................... 10,291 23,571 8,943 11,042 Earnings per common share: Basic: Income before cumulative effect of a change in accounting principle (net of income taxes)..... $0.22 $0.45 $0.17 $0.20 Cumulative effect of a change in accounting principle (net of income taxes)................... --- --- --- --- ----------- ----------- ----------- ----------- Earnings per share ................................. $0.22 $0.45 $0.17 $0.20 =========== =========== =========== =========== Diluted: Income before cumulative effect of a change in accounting principle (net of income taxes)...... $0.20 $0.43 $0.17 $0.20 Cumulative effect of a change in accounting principle (net of income taxes)................... --- --- --- --- ----------- ----------- ----------- ----------- Earnings per share ................................. $0.20 $0.43 $0.17 $0.20 =========== =========== =========== ===========
THREE MONTHS ENDED ------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1999 1999 1999 1999 ---- ---- ---- ---- Total revenue ...................................... $133,300 $146,021 $140,832 $132,579 Operating income ................................... 24,677 36,093 10,645 29,321 Net income before the cumulative effect of a change in accounting principle ................... 11,516 16,264 1,393 11,024 Cumulative effect of a change in accounting principle (net of income taxes)................... (5,315) --- --- --- Net income ......................................... 6,201 16,264 1,393 11,024 Earnings per common share: Basic: Income before cumulative effect of a change in accounting principle (net of income taxes)........ $0.22 $0.32 $0.03 $0.22 Cumulative effect of a change in accounting principle (net of income taxes)................... (0.11) -- -- -- ----------- ----------- ----------- ----------- Earnings per share ................................. $0.11 $0.32 $0.03 $0.22 =========== =========== =========== =========== Diluted: Income before cumulative effect of a change in accounting principle (net of income taxes)........ $0.22 $0.31 $0.03 $0.21 Cumulative effect of a change in accounting principle (net of income taxes)................... (0.10) -- -- -- ----------- ----------- ----------- ----------- Earnings per share ................................. $0.12 $0.31 $0.03 $0.21 =========== =========== =========== ===========
19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Prime is an owner, operator, manager and franchisor of hotels, with 205 hotels in operation containing 27,029 rooms located in 32 states (the "Portfolio") as of March 20, 2000. Prime controls two hotel brands -- AmeriSuites (R) and Wellesley Inn & Suites (R) -- as well as a portfolio of upscale, full-service hotels operated under franchise agreements with national hotel chains. As of March 20, 2000, the Company owned and operated 149 hotels (the "Owned Hotels"), operated 28 hotels under lease agreements with real estate investment trusts (the "Leased Hotels"), managed 17 hotels for third parties (the "Managed Hotels"), and franchised 11 hotels which it does not operate (the "Franchised Hotels"). Included in the Portfolio are 31 AmeriSuites hotels owned by third parties which are operated pursuant to franchise agreements, 20 of which are operated by Prime under lease or management agreements. Prime's portfolio consists primarily of new, well- maintained hotels, with an average age of approximately 7 years. The Company's strategy is to develop its proprietary AmeriSuites and Wellesley Inn & Suites brands primarily through franchising. The Company currently has 99 AmeriSuites and 66 Wellesley Inn & Suites in operation, with 31 of these AmeriSuites operated under franchise agreements. Through the development of its proprietary brands, the Company is transforming itself from an owner/operator into a franchisor and manager and has positioned itself to generate additional revenues with minimal capital investment. The Company currently has 57 executed franchise agreements for new AmeriSuites to be built with 16 applications pending. In 2000, the first two franchisee constructed AmeriSuites have been opened. The previous franchise agreements on opened hotels were generated pursuant to asset sales. Prime's strategy is also focused on growing the operating profits of its Portfolio. With over 200 hotels in operation, Prime believes it possesses the hotel management expertise to maximize the profitability and value of its hotel assets. On November 1, 1999, the Company converted 38 of its 43 extended-stay HomeGate hotels into its limited-service Wellesley Inn & Suites brand. In 2000, the Company sold the remaining five HomeGate hotels and the Company's rights to the HomeGate brand name. The conversion changed the hotels' customer base from extended-stay to transient. The Company believes this will enhance the value of its existing hotels, create efficiencies by adding critical mass to the chain and improve its franchising prospects for the Wellesley Inn & Suites brand. In March 2000, the Company signed an agreement with Sholodge, Inc. ("Sholodge") to acquire its leasehold interests in 27 Sumner Suites hotels for net consideration of $2.0 million. Pursuant to the agreement, the Company will convert these hotels to its AmeriSuites brand and will operate the hotels under lease agreements with Hospitality Properties Trust ("HPT") and Sholodge. The Company will also purchase two land sites from Sholodge to develop two additional AmeriSuites hotels. The transaction is expected to close in mid-April and is subject to certain due diligence items and approval by HPT. Under the agreement, a subsidiary of Prime will assume Sholodge's interest in an existing lease for 20 hotels with HPT, subject to HPT's consent, and enter into new lease agreements on the 20 22 seven remaining hotels. As part of the transaction, Prime will also purchase land from Sholodge in Mt. Laurel, NJ and in Sterling, VA, near Dulles Airport. An affiliate of Sholodge will then construct AmeriSuites hotels on these sites. The Company's EBITDA increased by $28.7 million, or 19.4%, from $148.3 million in 1998 to $177.0 million in 1999, and Hotel EBITDA increased by $28.8 million, or 20.3%, from $142.0 million in 1998 to $170.8 million in 1999. EBITDA represents earnings before extraordinary items, interest, taxes, depreciation and amortization. Hotel EBITDA represents EBITDA generated from the operations of Owned Hotels. Hotel EBITDA excludes management fee income, interest income from mortgages and notes receivable, general and administrative expenses and other revenues and expenses which do not directly relate to the operations of Owned Hotels. The Company's hotels operate in three segments of the industry: the upscale all-suites segment, under the Company's proprietary AmeriSuites brand; the upscale full-service segment, under major national franchises; and the mid-price limited-service segment, primarily under the Company's proprietary Wellesley Inn & Suites brand. The following table illustrates the Hotel EBITDA contribution from each segment (in thousands):
1998 1999 ---- ---- AMOUNT % OF TOTAL AMOUNT % OF TOTAL ------ ---------- ------ ---------- All-suites........... $ 71,658 50.5% $ 87,714 51.3% Full-service......... 39,111 27.5 41,200 24.1 Limited-service...... 31,225 22.0 41,925 24.6 -------- ----- -------- ----- Total...... $141,994 100.0% $170,839 100.0% ======== ===== ======== =====
Hotel EBITDA for 1999 reflects the shifting mix in the Company's hotel portfolio toward its proprietary brands. Based on the Company's strategic plan, the Company expects the relative contribution from its all-suite AmeriSuites hotels and limited-service Wellesley Inn & Suites hotels to continue to increase in 2000. The Company evaluates the performance of its segments based primarily on EBITDA generated by the operations of its hotels. EBITDA and Hotel EBITDA are not measures of financial performance under accounting principles generally accepted in the United States and should not be considered as alternatives to net income as an indicator of the Company's operating performance or as alternatives to cash flows as a measure of liquidity. Certain statements in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information about Prime's possible or assumed future results of operations and statements preceded by, followed by or that include the words "believe," "except," "anticipate," "intend," "plan," "estimate," or similar expressions, or the negative thereof. Actual results may differ materially from those expressed in these forward-looking 21 23 statements. Readers of this Form 10-K are cautioned not to unduly rely on any forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Form 10-K or incorporated herein by reference, could cause results to differ materially from those expressed in such forward-looking statements: competition within each of the Company's business segments in areas such as access, location, quality or accommodations and room rate structures; the balance between supply of and demand for hotel rooms and accommodations; the Company's continued ability to obtain new operating contracts and franchise agreements; the Company's ability to develop and maintain positive relations with current and potential hotel owners and other industry participants; the level of rates and occupancy that can be achieved by such properties and the availability and terms of financing; the ability of the Company or its franchisees to maintain the properties in a first-class manner, including meeting capital expenditure requirements; changes in travel patterns, taxes and government regulations which influence or determine wages, prices, construction procedures and costs; the effect of international, national and regional economic conditions that will affect, among other things, demand for products and services at the Company's hotels; government approvals, actions and initiatives including the need for compliance with environmental and safety requirements, and change in laws and regulations or the interpretation thereof and the potential effects of tax legislative action; and other risks described from time to time in our filings with the SEC. Although the Company believes the expectations reflected in these forward-looking statements are based upon reasonable assumptions, no assurance can be given that Prime will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, the Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 22 24 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $83.3 million, or 21.2%, from $394.0 million in 1998 to $477.3 million in 1999. The increase was primarily due to incremental revenues of $77.7 million from new hotels added during 1998 and 1999, growth in revenues at comparable Owned Hotels of $4.3 million and an increase in revenues at the Frenchman's Reef of $3.3 million over the prior year. Frenchman's Reef has been sold as of March 2000 and will not impact future periods. These increases in revenues were partially offset by a decrease in revenues from disposed properties. The following table illustrates the REVPAR growth, by segments, in 1999 from the 94 Owned Hotels which were operated for comparable periods in 1998 and 1999.
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 % ---- ---- --- AMERISUITES Occupancy 66.2% 68.4% ADR $81.85 $81.70 REVPAR $53.87 $55.88 3.7% FULL-SERVICE Occupancy 70.7% 70.8% ADR $101.95 $106.02 REVPAR $72.03 $75.06 4.2% WELLESLEY INN & SUITES Occupancy 70.8% 71.0% ADR $61.13 $60.90 REVPAR $43.26 $43.26 0.0% TOTAL Occupancy 68.0% 69.4% ADR $80.89 $81.65 REVPAR $54.96 $56.67 3.1%
The REVPAR increases reflect the results of continued favorable industry trends in the full-service segment which is concentrated in the Northeast and growing recognition of AmeriSuites as a leading brand in the fast-growing all-suites segment. The limited-service segment did not show growth due to additional hotel supply in this segment, particularly in Florida, where a majority of the Wellesley Inns are located. The improvements in REVPAR at comparable Owned Hotels were generated by increases in ADR, which rose by 1.0% and an increase in occupancy which rose by 2.1%. 23 25 Food and beverage revenues increased by $2.0 million, or 3.8%, from $53.4 million in 1998 to $55.4 million in 1999 primarily due to the increase in revenues at the Frenchman's Reef of $2.4 million. Frenchman's Reef has been sold as of March 2000 and will not impact future periods. Management, franchise and other fees consist primarily of base and incentive fees earned under management agreements, royalties earned under franchise agreements, sales commissions earned by the Company's national sales group and rental income. Management, franchise and other fees increased by $4.0 million, or 30.0%, from $13.4 million in 1998 to $17.4 million in 1999. The increase was primarily due to increased base and incentive management fees associated with the Managed Hotels and franchise royalty fees derived from hotels sold to franchisees. Interest on mortgages and notes receivable primarily relates to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $2.1 million, or 44.0%, from $4.7 million in 1998 to $2.6 million in 1999 due to the settlement of various cash flow mortgages and notes receivable in 1998 and 1999. Business interruption insurance revenue is based on the settlement of the Company's claim related to the hurricane damage at the Frenchman's Reef caused by Hurricane Bertha in July 1996. In 1998, the Company recognized $4.0 million related to this settlement. Direct lodging expenses increased by $23.7 million, or 24.1%, from $98.4 million in 1998 to $122.1 million in 1999, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue increased to 25.6% in 1999 from 25.0% in 1998 due primarily to increased labor costs. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 74.5% in 1998 to 71.1% in 1999 due to improved margins at the Frenchman's Reef. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $14.7 million, or 14.8%, from $99.4 million in 1998 to $114.1 million in 1999, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses decreased from 22.2% in 1998 to 21.4% in 1999 due, primarily, to a change in insurance carriers resulting in lower liability insurance costs. Occupancy and other operating expenses consist primarily of property insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $13.8 million, or 24.2%, from $57.1 million in 1998 to $70.9 million in 1999, primarily due to the full year's rent associated with the sale/leaseback of 9 hotels to Equity Inns, Inc. ("Equity Inns") and 8 hotels to MeriStar Hospitality Corporation ("MeriStar") in 1998. As a percentage of hotel revenues, occupancy and other operating expenses increased from 12.8% in 1998 to 13.3% in 1999, primarily due to the rent associated with the Leased Hotels. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating the hotels and general corporate expenses. General and administrative expenses 24 26 increased by $2.7 million, or 10.2%, from $26.5 million in 1998 to $29.2 million in 1999, due to increased brand advertising, payroll and training costs associated with opening new AmeriSuites and Wellesley Inn & Suites hotels and the costs related to the development of the Company's franchising business. As a percentage of total revenues, general and administrative expenses decreased from 5.6% in 1998 to 5.3% in 1999 due primarily to decreased operating leverage. Depreciation and amortization expense increased by $3.8 million, or 9.2%, from $42.0 million in 1998 to $45.8 million in 1999, due primarily to the impact of new hotel properties. Valuation and other charges in 1999 consist of a $7.1 million valuation allowance related to five HomeGate properties, a $22.0 million valuation allowance related to Frenchmen's Reef and $1.4 million for severance charges related to a restructuring of the Company's corporate and regional offices. Valuation and other charges in 1998 consist of a $10.0 million valuation allowance related to certain non-prototype HomeGate properties, a charge of $4.0 million for costs associated with the terminating hotel development projects under contract, $2.4 million for severance charges related to the resignations of the Company's chief executive officer and chief operating officer, and a $1.0 million charge for hurricane damage at the Frenchman's Reef. Investment income decreased by $1.9 million, or 53.7%, from $3.5 million in 1998 to $1.6 million in 1999 primarily due to sales of marketable securities resulting in a decrease in dividend income and lower average cash balances. Interest expense increased by $19.7 million, or 82.5%, from $23.9 million in 1998 to $43.6 million in 1999, primarily due to decreases in capitalized interest related to the construction of new hotels. The Company capitalized $26.7 million and $11.0 million of interest in 1998 and 1999, respectively. Other income/loss consists of property transactions and other items which are not part of the Company's recurring operations. Other income in 1999 consisted of a $4.0 million fee for the termination of a hotel sale agreement, net gains on disposition of property of $8.0 million and losses of $4.8 million on the sales of marketable securities. For the year ended December 31, 1998, other income consisted of gains associated with the settlement of notes receivable of $18.4 million, net gains on property sales of $1.1 million and a net loss on the sale of marketable securities of $1.3 million. Cumulative effect of a change in accounting principle of $5.3 million (net of income taxes) in 1999, relates to the adoption by the Company of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5"). The Company adopted SOP 98-5, on January 1, 1999 and was required to write-off any unamortized pre-opening costs that remained on the balance sheet. 25 27 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $121.7 million, or 44.7%, from $272.3 million in 1997 to $394.0 million in 1998. The increase was primarily due to incremental revenues of $96.5 million from the new hotels added during 1997 and 1998, and growth in revenues at comparable Owned Hotels of $7.3 million. In addition, revenues at the Frenchman's Reef increased by $14.8 million over the prior year as the hotel was closed for most of 1997 for renovation. The following table illustrates the REVPAR growth, by segment, in 1998 from the 77 Owned Hotels operated for comparable periods in 1998 and 1997.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 % ---- ---- --- AMERISUITES Occupancy 66.1% 68.4% ADR $75.50 $79.52 REVPAR $49.88 $54.35 9.0% FULL-SERVICE Occupancy 71.7% 70.6% ADR $92.33 $101.56 REVPAR $66.19 $71.67 8.3% WELLESLEY INNS Occupancy 73.6% 70.8% ADR $58.29 $61.13 REVPAR $42.87 $43.26 0.9% TOTAL Occupancy 69.8% 69.6% ADR $74.32 $79.61 REVPAR $51.88 $55.43 6.8%
The REVPAR increases reflect the results of continued favorable industry trends in the full-service segment which is concentrated in the Northeast and growing recognition of AmeriSuites as a leading brand in the fast-growing all-suites segment. The improvements in REVPAR at comparable Owned Hotels were generated by increases in ADR, which rose by 7.1%. Food and beverage revenues increased by $11.4 million, or 27.2%, from $42.0 million in 1997 to $53.4 million in 1998 primarily due to the increase in revenues at the Frenchman's Reef of $8.1 million. 26 28 Management, franchise and other revenue consist primarily of base and incentive fees earned under management agreements, royalties earned under franchise agreements, sales commissions earned by the Company's national sales group and rental income. Management, franchise and other revenue increased by $3.7 million, or 37.6%, from $9.7 million in 1997 to $13.4 million in 1998. The increase was primarily due to increased base and incentive management fees associated with the Managed Hotels and franchise royalty fees derived from hotels sold to franchisees. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable decreased by $1.4 million, or 23.5%, from $6.1 million in 1997 to $4.7 million in 1998 due to the settlement of various cash flow mortgages and note receivables in 1997 and 1998. Business interruption insurance revenue is based on the settlement of the Company's claim related to the hurricane damage at the Frenchman's Reef caused by Hurricane Marilyn in September 1995 and Hurricane Bertha in July 1996. Business interruption insurance revenue decreased by $6.9 million, or 63.4%, from $10.9 million in 1997 to $4.0 million in 1998 due to higher operating losses in 1997. Direct lodging expenses increased by $30.3 million, or 44.6%, from $68.1 million in 1997 to $98.4 million in 1998, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, remained constant at 25.0% in 1998 and 1997. Direct food and beverage expenses increased by $8.8 million, or 28.1%, from $31.0 million in 1997 to $39.8 million in 1998, primarily due to the full year operation of the Frenchman's Reef outlets which reopened in December 1997 and other new restaurant outlets added in 1997. As a percentage of food and beverage revenues, direct food and beverage expenses increased from 74.0% in 1997 to 74.5% in 1998 due to the impact of the Frenchman's Reef. Direct hotel selling and general expenses consist primarily of hotel expenses for Owned Hotels which are not specifically allocated to rooms or food and beverage activities, such as administration, selling and advertising, utilities, repairs and maintenance. Direct hotel selling and general expenses increased by $29.2 million, or 41.5%, from $70.2 million in 1997 to $99.4 million in 1998, due primarily to the addition of new hotels. As a percentage of hotel revenues (defined as lodging and food and beverage revenues), direct hotel selling and general expenses decreased slightly from 22.3% in 1997 to 22.2% in 1998. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $33.4 million, or 141.1%, from $23.7 million in 1997 to $57.1 million in 1998, primarily due to the rent associated with the sale/leaseback of 19 hotels to Equity Inns and 8 hotels to MeriStar. As a percentage of hotel revenues, occupancy and other operating expenses increased from 7.5% in 1997 to 12.8% in 1998, primarily due to the rent associated with the Leased Hotels. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating the hotels and general corporate expenses. General and administrative expenses increased by $3.6 million, or 15.6%, from $22.9 million in 1997 to $26.5 million in 1998, due to 27 29 increased brand advertising, payroll and training costs associated with opening new AmeriSuites and HomeGate hotels. As a percentage of total revenues, general and administrative expenses decreased from 6.7% in 1997 to 5.6% in 1998 due to operating leverage. Depreciation and amortization expense increased by $7.8 million, or 22.7%, from $34.2 million in 1997 to $42.0 million in 1998, due to the impact of new hotel properties. Other charges in 1998 consist of a $10.0 million valuation allowance related to certain non- prototype HomeGate properties, a charge of $4.0 million for costs associated with the terminating hotel development projects under contract, $2.4 million for severance charges related to the resignations of the Company's chief executive officer and chief operating officer, and a $1.0 million charge for hurricane damage at the Frenchman's Reef. Investment income increased by $.3 million, or 9.0%, from $3.2 million in 1997 to $3.5 million in 1998 primarily due to higher average cash balances generated by the new borrowing. Interest expense decreased by $3.0 million, or 11.1%, from $26.9 million in 1997 to $23.9 million in 1998, primarily due to increases in capitalized interest related to the construction of new hotels. This increase was offset by interest expense related to increased borrowings under the Company's Revolving Credit Facility and the issuance of the $200 Million Senior Subordinated Notes in March 1997. The Company capitalized $18.2 million and $26.7 million of interest in 1997 and 1998, respectively. Other income consists of items which are not part of the Company's recurring operations. For the year ended December 31, 1998, other income consisted of gains associated with the settlement of notes receivable of $18.4 million, net gains on property sales of $1.1 million and a net loss on the sale of marketable securities of $1.3 million. Other income for the year ended December 31, 1997, consisted of net gains on property sales of $2.1 million and a $123,000 gain on the retirement of debt. Merger expenses of $18.6 million in 1997 represent costs associated with the merger with HomeGate Hospitality, Inc. Merger expenses consist of $12.0 million for costs associated with the termination of management agreements, $5.2 million of transaction costs which included investment banking, legal and other professional fees and $1.4 million of transition costs which included the cost of consolidating operations, severance and other related benefits. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had cash, cash equivalents and current marketable securities of $15.5 million. In addition, at December 31, 1999, the Company had $56.0 million available to it under the Revolving Credit Facility. The Company's major sources of cash for 1999 were borrowings of $22.4 million, net proceeds from the sales of hotels of $86.7 million and cash flows from operations of $99.8 million. The Company's major uses of cash during the period were capital expenditures of $108.4 million relating primarily to the development of new hotels, debt repayments of $70.7 million and the repurchases of its common stock totaling $54.1 million. 28 30 Cash flow from operations was positively impacted by the utilization of net operating loss carryforwards ("NOLs") and other tax basis differences of $5.0 million in 1998 and $3.9 million in 1999. At December 31, 1999, the Company had federal NOLs relating primarily to its predecessor, Prime Motor Inns, Inc. ("PMI"), of approximately $61.1 million which are subject to annual utilization limitations and expire in 2006. Sources of Capital. The Company has undertaken a strategic initiative to dispose of hotel real estate and to invest the proceeds in the growth of its proprietary brands, the repurchase of the Company's common stock or the reduction of debt. During 1999, the Company sold eight of its AmeriSuites hotels under various sales agreements for $80.2 million in cash. The transactions generated a net gain of $10.0 million. Under the terms of its sales agreements, the Company will receive franchise fees under ten to twenty year franchise agreements. In addition to AmeriSuites sales, the Company intends to sell certain Wellesley and full-service hotels in 2000. During 1999, the Company also sold three land parcels, one HomeGate hotel and an apartment building for $6.5 million in cash, recognizing $2.0 million in net losses. In February 2000, the Company sold its remaining five HomeGate hotels and its rights to the HomeGate brand name for approximately $17.7 million, including the assumption of $17.4 million of debt associated with these properties. In March 2000, the Company sold its Frenchman's Reef hotel in St. Thomas, USVI for $73.0 million. A portion of the net proceeds from this transaction were used to repay $40 million of first mortgage debt. The Company intends to utilize the remaining proceeds to reduce debt under its Revolving Credit Facility and to repurchase its common stock. In March 2000, the Company also sold its Chicago/Warrenville AmeriSuites hotel for $10.8 million. The Company will realize a gain of approximately $1.0 million on the sale and will be entitled to franchise fees in the future, pursuant to a 20 year franchise agreement. The Company had a contract to sell and lease back nine additional full service hotels to MeriStar not later than March 31, 1999. In February 1999, MeriStar informed the Company that it was unable to fulfill its contractual obligation. Under the terms of its contract, the Company received a $4.0 million contract termination fee in February 1999. The Company has a $200.0 million Revolving Credit Facility which bears interest at LIBOR plus 2%. The facility is available through 2001 and may be extended for an additional year. The aggregate amount of the Revolving Credit Facility will be reduced to $175.0 million in December 2000 and to $125.0 million in December 2001. Borrowings under the facility are secured by certain of the Company's hotels with recourse to the Company. Additional properties may be added subject to the approval of the lenders. Availability under the facility is subject to a borrowing base test and certain other covenants. At December 31, 1999, the Company had outstanding borrowings of $125.0 million under the facility and further availability of $56.0 million. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and limitations on the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations 29 31 and any change of control of the Company. In October 1999, the Revolving Credit Facility was amended to allow an additional $100.0 million of share repurchases to be funded by 50% of the proceeds from asset sales. Uses of Capital. The Company's capital spending in 1999 focused on the completion of its 1998 AmeriSuites and Wellesley Inn & Suites (formally HomeGate) pipeline. During 1999, the Company opened 21 new hotels and spent $88.0 million on new construction in completing the pipeline. The Company intends to continue the growth of its brands, primarily through franchising. The Company has resumed limited new corporate development with the commencement of construction of two AmeriSuites hotels. The Company plans to spend approximately $35.0 to $40.0 million on these and other new AmeriSuites during 2000, to be funded by internally generated cash flow. In addition, during 1999, the Company also spent approximately $20.4 million on capital improvements at its Owned Hotels, which includes the Company's conversion of its HomeGates Studio and Suites to Wellesley Inn & Suites. The Company expects to spend a similar amount in 2000 which will include the conversion of three limited-service hotels to Wellesley Inn & Suites. Under its stock repurchase program, in 1999 the Company repurchased approximately 5.8 million shares of its common stock at an average price of $9.34 per share. In October 1999, the Company's Board of Directors approved the repurchase of an additional $100.0 million of its common stock. In October 1999, the Revolving Credit Facility was amended to allow the repurchase of the additional $100.0 million of the Company's common stock. The purchase of these additional shares are limited to 50% of the proceeds from asset sales. From January 1, 2000 through March 20, 2000, the Company has repurchased approximately 850,000 shares at an average price of $8.05 per share. In order to facilitate future tax-deferred exchanges of hotel properties, the Company from time to time enters into arrangements with an unaffiliated third party under Section 1031 of the Internal Revenue Code of 1986, as amended. As of December 31, 1999, the Company had advances of approximately $215.0 million to such third party, which advances are classified as property, equipment and leasehold improvements in the Company's accompanying financial statements. Year 2000 Readiness. In prior years, the Company discussed the nature and progress of it plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $1.0 million during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This table presents descriptions of the financial instruments and derivative instrument that are held by the Company at December 31, 1999, and which are sensitive to changes in interest rates. The Company has entered into a derivative financial instrument transaction in order to manage or 30 32 reduce market risk. Under the interest-rate swap, the Company agreed with another party to exchange monthly the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. The Company has not entered into any derivative financial instrument transactions for speculative purposes. For the debt, the table represents principal cash flows that exist by maturity date and the related average interest rate. For the swaps, the table presents the notional amounts and expected interest rates that exist by contractual dates; the notional amount is used to calculate the contractual payments to be exchanged under the contract. The variable rates are estimated based upon applicable LIBOR or Prime rates. All amounts are reflected in thousands of dollars.
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE ---- ---- ---- ---- ---- ---------- ----- ---------- LIABILITIES Fixed Rate. . . . . . . . $1,247 $1,302 $7,520 $1,321 $1,397 $349,752 $362,539 $352,337 Average Interest Rate . . 9.48% 9.48% 9.50% 9.52% 9.52% 9.58% 9.58% Variable Rate . . . . . . $4,300 $7,020 $141,717 $3,275 $3,275 $26,906 $186,493 $198,494 Average Interest Rate. . . 8.10% 8.10% 8.12% 8.22% 8.23% 8.21% 8.13% INTEREST-RATE DERIVATIVES Variable to fixed: Notional Amount. . . . . $40,000 $40,000 $ --- $ --- $ --- $ --- $ --- $388 Average Pay Rate . . . . 6.03% 6.03% --- --- --- --- --- Average Receive Rate . .. 6.13% 6.86% --- --- --- --- ---
In October 1999, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.03% and receives a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement commenced in October 1999 and expires in October 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements included in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES In August 1999, the Company announced a change in auditors from Arthur Andersen LLP to Ernst and Young LLP. There were no disagreements with the prior accountants on any accounting and financial matters. See Form 8-K filed on August 17, 1999 for further information. 31 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages and positions of the directors and executive officers of the Company:
NAME AGE POSITIONS - -------------------------------- --- ------------------------------------------------------------------- A.F. Petrocelli............... 56 President, Chief Executive Officer and Chairman of the Board of Directors Lawrence N. Friedland(1)...... 77 Director Howard M. Lorber(1)........... 51 Director Herbert Lust, II(1)........... 73 Director Jack H. Nusbaum............... 59 Director Douglas W. Vicari............. 40 Director, Senior Vice President and Chief Financial Officer Joseph Bernadino.............. 53 Senior Vice President, Secretary and General Counsel Edward J. Dykes............... 49 Senior Vice President/Hotel Operations Stephen M. Kronick............ 45 Senior Vice President/Hotel Operations John H. Leavitt............... 47 Senior Vice President/Sales and Marketing Terry P. O'Leary.............. 44 Senior Vice President/Franchising J. David Johnson.............. 50 Senior Vice President/Administration Richard T. Szymanski.......... 42 Vice President/Finance
(1) Member of the Compensation and Audit Committee. The following is a biographical summary of the experience of the directors and executive officers of the Company: A.F. Petrocelli was a Director since 1992 and a member of the Compensation and Audit Committee from 1993 to 1998. Mr. Petrocelli has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since 1998. Mr. Petrocelli has been Chairman of the Board of Directors and Chief Executive Officer of United Capital Corp. for more than the past five years. He is also a director of Nathan's Famous, Inc., Boyar Value Fund, Inc. and Philips International Realty Corp. Lawrence N. Friedland has been a Director of the Company since August, 1998. Mr. Friedland has been a partner in the law firm of Hoffinger Friedland Dobrish & Stern, P.C. for more than the past 25 years. He has been a director of the Apple Bank for Savings since 1990, a director of Lutron Electronics Co., Inc. since 1961, a member of the Advisory Committee of Brown Harris Stevens, LLC since 1995 and a general partner, manager or director of numerous real estate entities. Howard M. Lorber has been a Director of the Company and a member since 1994 and Chairman since 1998 of the Compensation and Audit Committee. Mr. Lorber has been Chairman of the Board and Chief Executive Officer of Nathan's Famous, Inc. for more than the past five years and Chairman of the Board of Directors and Chief Executive Officer of Hallman & Lorber Associates, Inc., for over five years. He has been a director, President and Chief Operating Officer of New Valley Corporation for more than five years. He has been a director of and member of the Audit Committee of United Capital Corp. for more than the past five years, and he has been a director of PLM International, Inc. since January 1999. 32 34 Herbert Lust, II has been a Director since 1992 and a member of the Compensation and Audit Committee of the Company since 1993. Mr. Lust has been a private investor and President of Private Water Supply Inc. for more than the past five years. Mr. Lust is a director of BRT Realty Trust. Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman of the law firm of Willkie Farr & Gallagher, where he has been a partner for more than the past twenty-five years. He also is a director of W.R. Berkley Corporation, Neuberger Berman, Inc., Pioneer Companies, Inc., Strategic Distribution, Inc. and The Topps Company, Inc. Douglas W. Vicari became a Director of the Company in 1999 and became a Senior Vice President and Chief Financial Officer of the Company in 1998. Prior to that he had been a Vice President and Treasurer of the Company for more than five years. Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of the Company since 1992. Edward J. Dykes has been a Senior Vice President of the Company since 1999. Prior to that he held the position of Vice President of the Company for more than five years. Stephen M. Kronick has been a Senior Vice President of the Company since 1999. Prior to that he held the position of Vice President of the Company for more than five years. John H. Leavitt has been a Senior Vice President of the Company since 1992. Terry P. O'Leary has been a Senior Vice President of the Company since 1998 and was Vice President of Food and Beverage since 1995. Mr. O'Leary was an area manager and corporate director with B.F. Saul Co. from 1993 to 1995. J. David Johnson has been a Senior Vice President of the Company since 1999. Prior to that he held the position of Vice President of Hotel Operation Services from 1997 to 1999. Prior to that he was Vice President of Strategic Sourcing for Crown Vantage for more than five years. Richard T. Szymanski has been a Vice President of the Company for more than five years. ITEM 11. EXECUTIVE COMPENSATION There are incorporated in this Item 11 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Executive Compensation," "Compensation Pursuant to Plans," "Other Compensation," "Compensation of Directors," and "Termination of Employment and Change of Control Agreements". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There are incorporated in this Item 12 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Principal Shareholders" and "Security Ownership of Management." 33 35 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are incorporated in this Item 13 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the caption "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The Financial Statements listed in the accompanying index to financial statements are filed as part of this Annual Report. 2. Exhibits 2 (a) Reference is made to the Contract of Purchase and Sale between Hillsborough Associates, Meriden Hotel Associates, L.P., Wellesley I, L.P., Multi-Wellesley Limited Partnership and the Company, dated March 6, 1996, filed as an Exhibit to the Company's 8-K dated March 21, 1996, which is incorporated herein by reference. (b) Reference is made to Consent of the Holders Thereof to the Purchase by the Company of the Outstanding First Mortgage Notes filed as an Exhibit to the Company's 8-K, dated March 21, 1996, which is incorporated herein by reference. (c) Reference is made to the Agreement and Plan of Merger as of July 25, 1997 by and among Prime Hospitality Corp., PH Sub Corporation and Homegate Hospitality, Inc. filed as an Exhibit to the Company's Form S-4, dated October 24, 1997, which is incorporated herein by reference. (d) Reference is made to the form of Amended and Restated Purchase and Sale Agreement between Prime Hospitality Corp., as seller and Equity Inns Partnership, L.P., as purchaser, dated December 2, 1997, filed as an Exhibit to the Company's Form 8-K dated December 11, 1997, which is incorporated herein by reference. (e) Reference is made to the form of Amended and Restated Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and American General Hospitality Operating Partnership, L.P., as purchaser, dated January 7, 1998 filed as an Exhibit to the Company's Form 8-K dated January 7, 1998, which is incorporated herein by refernce. (f) Reference is made to the form of Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and Equity Inns Partnership, L.P., as purchaser, dated June 26, 1998, filed as an Exhibit to Company's Form 10-Q, dated June 30, 1998, which is incorporated herein by reference. (g) Purchase and Sale Agreement between Prime Hospitality Corp., as seller, and Marriott International, Inc. as purchaser, dated September 15, 1999. (h) First Amendment dated December 18, 1999, to Purchase and Sale Agreement between Prime Hospitality Corp. and Marriott International, Inc., dated September 15, 1999. 34 36 (i) Sale and Purchase Agreement between Prime Hospitality Inc. and Sholodge, Inc., dated March 16, 2000. 3(a) Reference is made to the Restated Certificate of Incorporation of the Company, dated June 5, 1992, filed as an Exhibit to the Company's Form 10-K dated September 25, 1992, which is incorporated herein by reference. (b) Reference is made to the restated Certificate of Incorporation, As Amended, filed as an Exhibit to the Company's Form 10-QA, dated April 30, 1996, which is incorporated herein by reference. (c) Reference is made to the Restated Bylaws of the Company filed as an Exhibit to the Company's Form 10-K, dated September 25, 1992, which is incorporated herein by reference. 4(a) Reference is made to the Form of 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. (b) 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. (c) 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. (d) 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. (e) Reference is made to an Indenture, dated January 23, 1996, between the Company and the Trustee related to 9 1/4% First Mortgage Notes due 2006, filed as an Exhibit to the Company's Form 10-K dated March 21, 1996, which is incorporated herein by reference. (f) Reference is made to the Senior Secured Revolving Credit Agreement, dated as of June 26, 1996, among the Company and the Lenders Party hereto, and Credit Lyonnais New York Branch, as Documentation Agent, and Bankers Trust Company, as Agent, filed as an Exhibit to the Company's Amendment No.1 to Form S-3 dated July 26, 1996, which is incorporated herein by reference. (g) Reference is made to the 9 3/4% Senior Subordinated Notes due 2007, dated March 21, 1997, filed as an Exhibit to the Company's Form S-4, dated April 2, 1997, which is incorporated herein by reference. (h) Reference is made to the Amended and Restated Senior Secured Revolving Credit Agreement, dated as of December 17, 1997, among Prime Hospitality Corp., and The Lenders Party hereto, and Societe generale, Southwest Agency, as Documentation Agent, and Credit Lyonnais New York Branch, as Syndication Agent, and bankers Trust Company, as Agents filed as an Exhibit to the Company's Form 10-K, dated December 31, 1997, which is incorporated herein by reference. (i) Reference is made to the Second Amendment to the Senior Secured Revolving Credit Agreement, dated September 30, 1998, among Prime Hospitality Corp., Societe Generale Southwest Agency, as Documentation Agent, Credit Lyonnais New York Bank, as Syndication Agent and Bankers Trust Company as Agent for Lenders filed as an Exhibit to the Company's Form 10-Q dated November 6, 1998, which is incorporated herein by reference. 35 37 (j) Third Amendment to the Senior Secured Revolving Credit Agreement, Dated October 27, 1999, among Prime Hospitality Corp., Societe Generale Southwest Agency, as Documentation Agent, Credit Lyonnais New York Bank, as Syndication Agent and Bankers Trust Company as Agent for Lenders filed as an exhibit to the Company's Form 10-K dated December 31, 1999, which is incorporated herein by reference. 10(a) 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. (b) 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. (c) 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. (d) 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. (e) 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. (f) Reference is made to an Amendment regarding the 1995 Employee and Non-Employee Stock Option Plans, incorporated in the Company's proxy statement dated April 13, 1998, whereby $ 1.8 million shares were made available for distribution. (g) Reference is made to Change of Control Agreement, dated May 14, 1998, between John H. Leavitt and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999. (h) Reference is made to Change of Control Agreement, dated May 14, 1998, between Joseph Bernadino and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999. (i) Reference is made to Change of Control Agreement, dated May 14, 1998, between Richard T. Szymanski and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999. (j) Reference is made to Change of Control Agreement, dated May 14, 1998, between Douglas W. Vicari and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999. (k) Reference is made to Change of Control Agreement, dated May 14, 1998, between Terry P. O'Leary and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999. (l) Reference is made to Employment Agreement, dated September 14, 1998, between Attilio F. Petrocelli and the Company. 36 38 (m) Reference is made to Change of Control Agreement, dated September 14, 1998, between Atillio F. Petrocelli and the Company filed as an Exhibit to the Company's Form 10-K, dated March 26, 1999. (n) Reference is made to the Nonqualified Stock Option Agreement dated October 14, 1998 between A.F. Petrocelli and the Company. (o) Change in Control Agreement, dated October 25, 1999, between Terry P. O'Leary and the Company. (p) Change in Control Agreement, dated October 25, 1999, between Stephen Kronick and the Company. (q) Change in Control Agreement, dated October 25, 1999, between J.David Johnson and the Company. (r) Amendment to Change in Control Agreement, dated March 18, 1999, between A.F. Petrocelli and the Company. (16) Letter RE: Change in certifying accountant: Reference is made to Form 8K filed on August 17, 1999. 37 39 (21) Subsidiaries of the Company are as follows:
JURISDICTION OF NAME INCORPORATION - ---------------------------------------------- --------------- AmeriSuites Franchising, Inc. ................ Delaware Budd Holding Corp. ........................... Delaware Caldwell Holding Corp. ....................... Delaware Clifton Holding Corp. ........................ Delaware Dynamic Marketing Group, Inc. ................ Delaware Fairfield Holding Corp. ...................... Delaware Fairfield-Meridian Claims Service, Inc. ...... Delaware Flanders Holding Corp. ....................... Delaware Haledon Holding Corp. ........................ Delaware HomeGate Hospitality, Inc. ................... Delaware KSA Management, Inc. ......................... Kansas Landing Holding Corp. ........................ Delaware Mahwah Holding Corp. ......................... Delaware Market Segments, Incorporated ................ Delaware Maywood Holding Corp. ........................ Delaware Prime-American Realty Corp. .................. Delaware Prime Hospitality Franchising, Inc. .......... Delaware Prime Hospitality Management Co., Inc. ....... Delaware Prime-O-Lene, Inc. ........................... New Jersey Republic Motor Inns, Inc. .................... Virginia Roxbury Holding Corp. ........................ Delaware Secaucus Holding Corp. ....................... Delaware VPS, Inc. .................................... Delaware Wayne Holding Corp. .......................... Delaware Wellesley Inn & Suites Franchising, Inc. ..... Delaware
(23) Consent of independent auditors. (27) Financial data schedule. Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have not been filed in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish a copy of such instruments to the Commission upon request. 38 40 PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (ITEM 14(a))
PAGE ---- Report of Independent Auditors.............................................................. F-2 Consolidated Financial Statements: Balance Sheets at December 31, 1998 and 1999.............................................. F-3 Statements of Income for the Years Ended December 31, 1997, 1998 and 1999................. F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999... F-5 Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999............. F-6 Notes to Consolidated Financial Statements.................................................. F-7
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. F-1 41 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Prime Hospitality Corp.: We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 1998 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1998 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", which required the expensing of unamortized pre-opening costs in 1999. ERNST & YOUNG LLP New York, New York February 9, 2000 except, for Note 1 (Business Activities) and Note 20 as to which the date is March 20, 2000 F-2 42 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents............................................................... $12,534 $7,240 Marketable securities available for sale................................................ 12,460 8,262 Accounts receivable, net of reserves of $732 and $954 in 1998 and 1999, respectively.................................................... 20,816 21,379 Current portion of mortgages and notes receivable....................................... 797 1,920 Other current assets.................................................................... 28,791 16,879 ------ ------ Total current assets............................................................... 75,398 55,680 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization......................................................... 1,281,378 1,093,123 Assets held for sale.................................................................... -- 134,596 Mortgages and notes receivable, net of current portion.................................. 14,688 11,750 Other assets............................................................................ 36,934 33,630 ------ ------ Total Assets....................................................................... $1,408,398 $1,328,779 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt................................................................. $15,762 $5,547 Current portion of deferred income...................................................... 10,322 10,322 Other current liabilities............................................................... 72,445 61,225 ------ ------ Total current liabilities.......................................................... 98,529 77,094 Long-term debt, net of current portion.................................................. 582,031 543,485 Deferred income, net of current portion................................................. 80,553 70,977 Other liabilities....................................................................... 6,240 5,223 ----- ----- Total liabilities.................................................................. 767,353 696,779 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.10 per share; 20,000,000 shares authorized; none issued............................................................ -- -- Common stock, par value $.01 per share; 75,000,000 shares authorized; 55,202,253 and 55,747,340 shares issued and outstanding in 1998 and 1999, respectively....................................................................... 552 557 Capital in excess of par value.......................................................... 511,981 519,834 Retained earnings....................................................................... 159,584 194,466 Accumulated other comprehensive loss, net of taxes..................................... (4,993) (2,694) Treasury stock, at cost (1,470,439 and 7,263,578 shares in 1998 and 1999, respectively)................................................................ (26,079) (80,163) -------- -------- Total stockholders' equity......................................................... 641,045 632,000 ------- ------- Total Liabilities and Stockholders' Equity................................... $1,408,398 $1,328,779 ========== ==========
See Accompanying Notes to Consolidated Financial Statements. F-3 43 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1997 1998 1999 --------------- --------------- ------------- Revenues: Lodging............................................................. $272,267 $393,988 $477,329 Food and beverage................................................... 41,968 53,391 55,417 Management, franchise and other fees................................ 9,708 13,362 17,372 Interest on mortgages and notes receivable.......................... 6,097 4,664 2,614 Business interruption insurance..................................... 10,921 4,000 -- ------- ------- ------- Total revenues.............................................. 340,961 469,405 552,732 ------- ------- ------- Costs and expenses: Direct hotel operating expenses: Lodging.......................................................... 68,072 98,400 122,130 Food and beverage................................................ 31,036 39,771 39,412 Selling and general.............................................. 70,225 99,361 114,101 Occupancy and other operating......................................... 23,669 57,067 70,862 General and administrative............................................ 22,923 26,509 29,200 Depreciation and amortization......................................... 34,198 41,975 45,835 Valuation and other charges........................................... -- 17,361 30,456 ------- ------- ------- Total costs and expenses.................................... 250,123 380,444 451,996 ------- ------- ------- Operating income...................................................... 90,838 88,961 100,736 Investment income..................................................... 3,197 3,486 1,613 Interest expense...................................................... (26,893) (23,914) (43,634) Other income, net..................................................... 2,200 18,132 7,182 Merger costs.......................................................... (18,555) -- -- ------- ------- ------- Income before income taxes and the cumulative effect of a change in accounting principle.................................... 50,787 86,665 65,897 Provision for income taxes............................................ 24,856 32,818 25,700 ------- ------- ------- Income before the cumulative effect of a change in accounting principle................................................ 25,931 53,847 40,197 Cumulative effect of a change in accounting principle (net of income taxes of $3,398)......................................... -- -- (5,315) ------- ------- ------- Net income............................................................ $25,931 $53,847 $34,882 ======= ======= ======= Basic earnings per Common Share: Income before the cumulative effect of a change in accounting principle................................................ $.56 $1.04 $.79 Cumulative effect of a change in accounting principle................. -- -- (.11) ------- ------- ------- Net income per common share........................................... $.56 $1.04 $.68 ======= ======= ======= Diluted earnings per Common Share: Income before the cumulative effect of a change in accounting principle............................................... $.54 $1.00 $.77 Cumulative effect of a change in accounting principle................. -- -- (.10) ------- ------- ------- Net income per common share........................................... $.54 $1.00 $.67 ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements. F-4 44 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED CAPITAL IN OTHER COMMON STOCK EXCESS OF RETAINED COMPREHENSIVE SHARES AMOUNT PAR VALUE EARNINGS LOSS ------ ------ --------- -------- ---- Balance December 31, 1996 .............................. 46,317,917 $463 $404,315 $79,806 $ -- Net income .............................................. -- -- -- 25,931 -- Utilization of net operating loss carryforwards ......... -- -- 4,141 -- -- Amortization of pre-fresh start tax basis differences .......................................... -- -- 102 -- -- Proceeds from exercise of stock options ................. 576,908 6 5,771 -- -- Proceeds from exercise of stock warrants ................ 338,186 3 913 -- -- Treasury stock purchases ................................ (50,039) -- -- -- -- Contribution from shareholder .......................... -- -- 4,000 -- -- Comprehensive income .................................... -- -- -- -- ---------- ----- -------- -------- ------- Balance December 31, 1997 ............................ 47,182,972 472 419,242 105,737 -- Net income .............................................. -- -- -- 53,847 -- Utilization of net operating loss carryforwards ......... -- -- 3,956 -- -- Amortization of pre-fresh start tax basis differences ........................................... -- -- 1,005 -- -- Proceeds from exercise of stock options ................. 146,167 2 1,906 -- -- Proceeds from exercise of stock warrants ................ 637,524 6 1,712 -- -- Unrealized loss on marketable securities available for sale (net of income taxes) ............. -- -- -- -- (4,993) Treasury stock purchases ................................ (1,420,400) -- -- -- -- Conversion of long-term debt ............................ 7,185,551 72 84,160 -- -- Comprehensive income .................................... -- -- -- -- ---------- ----- -------- -------- ------- Balance December 31, 1998 .............................. 53,731,814 552 511,981 159,584 (4,993) Net income .............................................. -- -- -- 34,882 -- Utilization of net operating loss carryforwards ......... -- -- 3,425 -- -- Amortization of pre-fresh start tax basis differences ... -- -- 484 -- -- Proceeds from exercise of stock options ................. 545,087 5 3,944 -- -- Unrealized gain on marketable securites available for sale (net of income taxes) ............ -- -- -- -- 2,299 Treasury stock purchases ................................ (5,793,139) -- -- -- -- Comprehensive income .................................... -- -- -- -- ---------- ----- -------- -------- ------- Balance December 31, 1999 .............................. 48,483,762 $557 $519,834 $194,466 $(2,694) ========== ===== ======== ======== =======
TREASURY COMPREHENSIVE STOCK TOTAL INCOME ----- ----- ------ Balance December 31, 1996 .............................. $ -- $484,584 $ -- Net income .............................................. -- 25,931 25,931 Utilization of net operating loss carryforwards ......... -- 4,141 -- Amortization of pre-fresh start tax basis differences .......................................... -- 102 -- Proceeds from exercise of stock options ................. -- 5,777 -- Proceeds from exercise of stock warrants ................ -- 916 -- Treasury stock purchases ................................ (1,038) (1,038) -- Contribution from shareholder .......................... -- 4,000 -- Comprehensive income .................................... -- -- $25,931 -------- -------- ======= Balance December 31, 1997 ............................ (1,038) 524,413 $ -- Net income .............................................. -- 53,847 53,847 Utilization of net operating loss carryforwards ......... -- 3,956 -- Amortization of pre-fresh start tax basis differences ........................................... -- 1,005 -- Proceeds from exercise of stock options ................. -- 1,908 -- Proceeds from exercise of stock warrants ................ -- 1,718 -- Unrealized loss on marketable securities available for sale (net of income taxes) ............. -- (4,993) (4,993) Treasury stock purchases ................................ (25,041) (25,041) -- Conversion of long-term debt ............................ -- 84,232 -- Comprehensive income .................................... -- -- $48,854 -------- -------- ======= Balance December 31, 1998 .............................. (26,079) 641,045 $ -- Net income .............................................. -- 34,882 34,882 Utilization of net operating loss carryforwards ......... -- 3,425 -- Amortization of pre-fresh start tax basis differences ... -- 484 -- Proceeds from exercise of stock options ................. -- 3,949 -- Unrealized gain on marketable securites available for sale (net of income taxes) ............ -- 2,299 2,299 Treasury stock purchases ................................ (54,084) (54,084) -- Comprehensive income .................................... -- -- $37,181 -------- -------- ======= Balance December 31, 1999 .............................. $(80,163) $632,000 ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-5 45 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------ Cash flows from operating activities: 1997 1998 1999 ---- ---- ---- Net income .................................................. $25,931 $53,847 $34,882 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................... 34,198 41,975 45,835 Valuation adjustment on properties held for sale ....... -- 10,000 29,045 Amortization of deferred financing costs ............... 2,874 3,109 3,113 Utilization of net operating loss carryforwards ........ 4,141 3,956 3,425 Amortization of pre-fresh start tax basis differences .. 102 1,005 484 Net gains on sales of assets ........................... (2,200) (18,132) (3,182) Cumulative effect of a change in accounting principle... -- -- 8,713 Amortization of deferred income ........................ (150) (9,421) (10,028) Deferred income taxes .................................. 2,479 (4,259) (7,858) Reserve for hurricane damages .......................... -- 1,000 -- Merger expenses funded by shareholder .................. 4,000 -- -- Increase (decrease) from changes in other operating assets and liabilities: Accounts receivable .................................... (3,423) (4,498) (564) Other current assets ................................... (21,079) (1,554) 9,306 Other liabilities ...................................... 25,744 5,405 (13,379) --------- --------- --------- Net cash provided by operating activities ............ 72,617 82,433 99,792 Cash flows from investing activities: Net proceeds from mortgages and notes receivable ....... 3,543 26,320 785 Disbursements for mortgages and notes receivable ....... (1,194) (1,541) (1,771) Proceeds from sales of property, equipment and leasehold 100,820 223,773 86,660 Purchases of property, equipment and leasehold improvements (107,868) (28,473) (20,384) Construction of new hotels ............................. (341,439) (402,288) (88,013) Decrease/(increase) in restricted cash ................. 3,596 (7,012) 8,580 Proceeds from insurance settlement ..................... 2,500 3,782 4,706 Proceeds from sales of marketable securities ........... 238 1,906 7,725 Purchase of marketable securities ...................... -- (350) (4,702) Other .................................................. (1,597) (3,298) (176) --------- --------- --------- Net cash used in investing activities ................ (341,401) (187,181) (6,590) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of debt ..................... 390,769 203,552 22,352 Payments of debt ....................................... (170,100) (69,870) (70,713) Proceeds from the exercise of stock options and warrants 6,693 3,628 3,949 Purchase of treasury stock ............................. (1,038) (25,041) (54,084) --------- --------- --------- Net cash provided by/(used in) financing activities .. 226,324 112,269 (98,496) --------- --------- --------- Net (decrease)/increase in cash and cash equivalents ........ (42,460) 7,521 (5,294) Cash and cash equivalents at beginning of year .............. 47,473 5,013 12,534 --------- --------- --------- Cash and cash equivalents at end of year .................... $5,013 $12,534 $7,240 ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements. F-6 46 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998 AND 1999 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES Prime is an owner, operator, manager and franchisor of hotels, with 205 hotels in operation containing 27,029 rooms located in 32 states (the "Portfolio") as of March 20, 2000. Prime controls two hotel brands -- AmeriSuites (R) and Wellesley Inn & Suites (R) -- as well as a portfolio of upscale, full-service hotels operated under franchise agreements with national hotel chains. As of March 20, 2000, the Company owned and operated 149 hotels (the "Owned Hotels"), operated 28 hotels under lease agreements with real estate investment trusts (the "Leased Hotels"), managed 17 hotels for third parties (the "Managed Hotels"), and franchised 11 hotels which it does not operate (the "Franchised Hotels"). Included in the Portfolio are 31 AmeriSuites hotels owned by third parties which are operated pursuant to franchise agreements, 20 of which are operated by Prime under lease or management agreements. Prime's portfolio consists primarily of new, well-maintained hotels, with an average age of approximately 7 years. BASIS OF PRESENTATION The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992. Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximated the present values of amounts to be paid, determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. F-7 47 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents are highly liquid, unrestricted investments with a maturity of three months or less when acquired. At December 31, 1998 and 1999, cash and cash equivalents were comprised of approximately $500,000 and $644,000, respectively, of cash, and $12.0 million and $6.6 million, respectively, of commercial paper and other cash equivalents. MARKETABLE SECURITIES Marketable securities consist of equity securities which are available for sale within one year. Marketable securities are valued at current market value. The differences between the historical cost of the marketable securities available for sale and the current market value are reflected in stockholders'equity, net of income taxes. Realized gains and losses are determined using the cost basis of the security recorded at the time of purchase. 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. Construction in progress represents costs incurred in the development of hotels. Such costs include construction costs and capitalized interest. The Company reviews each of its assets held for use for which indicators of impairment are present to determine whether the carrying amount of the asset will be recovered. The Company recognizes impairment if the future undiscounted cash flows (before interest charges) are less than the carrying amount. Assets held for sale are recorded at the lower of carrying value or fair value less costs to sell (See Notes 2 and 20). MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted F-8 48 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. Interest income on cash flow mortgages and delinquent notes receivable is generally recognized when cash is received. The Company measures impairment of its mortgages and notes receivable based on the present value of expected future cash flows (net of estimated costs to sell) discounted at the effective interest rate. Impairment can also be measured based on observable market price or the fair value of collateral, if the mortgages and notes receivable are collateral dependent. If the measure of the impaired mortgage or note receivable is less than the recorded investment, the Company will establish a valuation allowance, or adjust existing valuation allowances, with a corresponding charge or credit to operations. Based upon its evaluation, the Company determined that no impairment had occurred as of December 31, 1999, 1998 and 1997. OTHER ASSETS Other assets consist primarily of deferred issuance costs related to the Company's debt obligations. Deferred issuance costs are amortized over the respective terms of the loans using the straight line method. INSURANCE PROGRAMS The Company uses an incurred loss retrospective insurance plan for general and auto liability and workers' compensation. Predetermined loss limits have been arranged with insurance companies to limit the Company's per occurrence and aggregate cash outlay. The Company maintains a self-insurance program for major medical and hospitalization coverage for employees and dependents which is partially funded by payroll deductions. Payments for major medical and hospitalization below specified aggregate annual amounts are self-insured by the Company. Claims for benefits in excess of these amounts are covered by insurance purchased by the Company. Provisions have been made in the consolidated financial statements which represent the expected future payments based on the estimated ultimate cost for incidents incurred through the balance sheet date and are included in other current liabilities. REVENUE RECOGNITION Room revenue and other revenues are recognized when earned. Management and franchise fee revenues are recognized when all material services or conditions relating to the respective property or franchisee have been substantially performed or satisfied by the Company. Such revenues, when recognized, are included in management, franchise and other fees on the accompanying consolidated financial statements. Gains and losses resulting from sales of hotels are recorded in full when title is conveyed to F-9 49 the buyer and when various criteria are met relating to the buyer's financial commitment and any subsequent involvement by the Company with respect to the hotels being sold. The Company's sales of hotels are sometimes accompanied by a leaseback of the facilities under operating lease arrangements. Such sales are recognized when the above sales criteria are met and certain specific criteria are met relating to the lease terms. Related profit is deferred and is recognized as income over the remaining lease term. INCOME TAXES The Company files a consolidated Federal income tax return. For financial reporting purposes, the Company follows Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". In accordance with SFAS 109, as well as SOP 90-7, income taxes have been provided at statutory rates in effect during the period. Tax benefits associated with net operating loss carryforwards and other temporary differences that existed at the time fresh start reporting was adopted are reflected as a contribution to stockholders' equity in the period in which they are realized. PRE-OPENING COSTS In January 1999, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5"). The Company recorded a $5.3 million charge, net of income taxes, for the cumulative effect of a change in accounting principle to write off the unamortized pre-opening costs that remained on the balance sheet at the date of adoption. Additionally, subsequent to the adoption of this new standard, all future pre-opening costs are being expensed as incurred. Prior to the Company's adoption of SOP 98-5, non-capital expenditures incurred before the opening of new or renovated hotels, such as payroll and operating supplies, were deferred and expensed within one year after opening. Pre-opening costs charged to expense were $3.3 million and $6.7 million for the years ended December 31, 1997 and 1998, respectively. Had the Company adopted SOP 98-5 at the beginning of 1997 and 1998 net income before taxes would have been reduced by $500,000 and $6.1 million, respectively and diluted earnings per share would have been reduced by $.01 and $.06, respectively. DEFERRED INCOME Deferred income consists of gains related to the sale of properties under sale/leaseback transactions. These gains are being amortized over the life of their respective leases as a reduction of rent expense. INTEREST RATE AGREEMENTS The Company has an interest rate swap agreement with a major financial institution which reduces the Company's exposure to interest rate fluctuations on its variable rate debt. The amount F-10 50 paid or received in connection with this agreement is accrued and recognized as an adjustment of interest expense (the accrual method of accounting). In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not yet quantified the impact of adopting SFAS 133 on its financial statements, however, the Company expects the impact to be immaterial due to its limited derivative activity. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1997 and 1998 consolidated financial statements to conform them to the December 31, 1999 presentation. NOTE 2 -- HOTEL DISPOSITIONS SALE/LEASEBACK TRANSACTIONS In January 1998, the Company completed the sale/leaseback of eight full-service hotels to MeriStar Hospitality Corp. ("MeriStar"), formally known as American General Hospitality, Inc., for total consideration of $138.4 million. The Company is operating the hotels under an operating lease agreement which has a term of ten years. The transaction generated a net gain of approximately $64.9 million which was deferred and is being recognized as a reduction of rent expense over the life of the lease. As of December 31, 1999, $13.0 million of this gain had been amortized. The Company also had a contract to sell and lease back nine additional full-service hotels from MeriStar not later than March 31, 1999. In February 1999, MeriStar informed the Company that it was unable to fulfill its contractual obligation. Under the terms of the contract, the Company received a $4.0 million contract termination fee in February 1999. Such amount is included in other income in the accompanying consolidated financial statements. On September 22, 1997, the Company entered into strategic alliance with Equity Inns, Inc. ("Equity Inns"), a real estate investment trust for the purpose of financing its brand development through the sale/leaseback of AmeriSuites hotels. Under the agreement, Equity Inns has certain rights to acquire AmeriSuites hotels developed by Prime through September 2000. In December 1997, the Company completed the sale and leaseback of 10 hotels to Equity Inns for total consideration of $87.0 million. The Company will continue to operate the hotels under an operating lease agreement for a term of 10 years with certain renewal options. The Company is F-11 51 also generating franchise fees under a ten year franchise agreement. The sale generated a gain of approximately $20.8 million which was deferred and is being recognized over the life of the lease. As of December 31, 1999, $4.3 million of this gain had been amortized. In June 1998, the Company sold nine AmeriSuites hotels to Equity Inns for total consideration of $97.0 million. The Company is operating the hotels under a lease agreement for a ten-year term with certain renewal options. The Company is also generating franchise fees under a ten-year franchise agreement. The transaction generated a net gain of $15.2 million, which was deferred and is being recognized as a reduction of rent expense over the life of the lease. As of December 31, 1999, $2.3 million of this gain had been amortized. The amortization of the gains are included in occupancy and other operating expenses in the accompanying consolidated financial statements. OTHER DISPOSITIONS The Company's long-term objective is to transform itself from an owner/operator into a franchisor and manager. In accordance with those objectives, the Company disposed of eight AmeriSuites for $ 80.2 million. The transactions generated net gains of $ 10.0 million and provide for the Company to generate franchise fees under ten to twenty year franchise agreements. During 1999, the Company sold one HomeGate Studios and Suites hotel, an apartment building and three vacant land parcels for total proceeds of $6.5 million. The transactions generated a net loss of $2.0 million. In addition to the hotels sold in 1999, the Company has fifteen hotels that are currently being marketed for sale with a carrying value of $134.6 million as of December 31, 1999. The Company anticipates the sale of the properties to be completed during 2000. In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Assets and for Long-Lived Assets to Be Disposed Of," the Company has discontinued depreciating these assets while they are held for sale. F-12 52 NOTE 3 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, ------------ YEARS OF 1998 1999 USEFUL LIFE -------------- -------------- -------------- Land and land leased to others(a)....................... $202,444 $164,770 Hotels.................................................. 821,737 800,354 20 to 40 Furniture, fixtures and autos........................... 148,602 166,047 3 to 10 Leasehold improvements.................................. 64,856 68,282 3 to 40 Construction in progress................................ 130,726 11,981 ------- ------ Sub-total 1,368,365 1,211,434 Less accumulated depreciation and amortization.......... (86,987) (118,311) ------- ------ Totals........................................ $1,281,378 $1,093,123 ========== ==========
(a) Included in land at December 31, 1998 and 1999, was $47.9 million and $5.8 million, respectively, of land associated with hotels under construction. At December 31, 1999, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $11.0 million pursuant to noncancelable operating leases expiring on various dates through 2010. Minimum future rent under such leases for each of the next 5 years subsequent to December 31, 1999, and thereafter are approximately $2.8 million and $300,000 respectively. Depreciation and amortization expense on property, equipment and leasehold improvements was $31.1 million, $36.7 million and $45.4 million for the years ended December 31, 1997, 1998 and 1999, respectively. During the years ended December 31, 1997, 1998 and 1999, the Company capitalized $18.2 million, $26.7 million and $11.0 million, respectively, of interest related to borrowings used to finance hotel construction. F-13 53 NOTE 4 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
DECEMBER 31, ------------ 1998 1999 ------------- ------------- Properties operated by the Company(a)......... $ 13,325 $ 10,200 Other(b)...................................... 2,160 3,470 ----- ----- Total............................... 15,485 13,670 Less current portion.......................... (797) (1,920) ----- ------- Long-term portion............................. $ 14,688 $ 11,750 ======== ========
(a) At December 31, 1999, the Company is the holder of mortgage notes receivable with a book value of $10.2 million secured by the Company's leasehold position in three hotels operated under lease agreements. These notes bear interest at rates ranging from 8.0% to 13.0% and mature on various dates from 2000 through 2015. The mortgages were derived from the sales of hotel properties. During 1997, 1998 and 1999, the Company recognized $3.3 million, $3.3 million and $1.2 million, respectively, of interest income related to mortgages which pay interest based on excess cash flow. During 1999, all remaining cash flow notes were settled. (b) Other notes receivable currently bear interest at effective rates ranging from 4.0% to 12.0%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company. F-14 54 NOTE 5 -- DEBT Debt consists of the following (in thousands):
DECEMBER 31, ------------ 1998 1999 --------- -------- 9.75% Senior Subordinated Notes(a) ........................ $200,000 $200,000 Revolving Credit Facility(b) .............................. 165,000 125,000 9.25% First Mortgage Notes(c) ............................ 120,000 120,000 Mortgages and other notes payable(d) ...................... 112,793 104,032 --------- --------- Total debt ................................................ 597,793 549,032 Less current maturities ................................... (15,762) (5,547) --------- --------- Long-Term debt, net of current portion .................... $582,031 $543,485 ========= =========
(a) In March 1997, the Company issued $200.0 million 9.75% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes") in reliance upon Rule 144A under the Securities Act of 1933, as amended. Interest on the notes is paid semi-annually on April 1 and October 1. The notes are unsecured obligations of the Company and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company on or after April 1, 2002 at premiums to principal which decline on each anniversary date. (b) The Company established a revolving credit facility (the "Revolving Credit Facility") in 1996 with a group of financial institutions providing for availability of funds up to the lesser of $100.0 million or a borrowing base determined under the agreement. In December 1997, the Revolving Credit Facility was amended and the availability of funds was increased to $200.0 million. The aggregate amount of the Revolving Credit Facility will be reduced to $175.0 million in December 2000 and $125.0 million in December 2001. The Revolving Credit Facility is secured by first liens on certain of the Company's hotels with recourse to the Company. Availability under the facility is subject to a borrowing base test and certain other covenants. The Revolving Credit Facility bears interest at LIBOR plus 2.0% which is paid monthly (weighted average for 1999 was 7.3%) and is available through December 2001 with a one year extension. The Revolving Credit Facility contains covenants requiring the Company to maintain certain financial ratios and limitations on the incurrence of debt, liens, dividend payments, stock repurchases, certain investments, transactions with affiliates, asset sales, mergers and consolidations and any change of control of the Company. In October 1999, the Revolving Credit Facility was amended to allow an additional $100 million of share repurchases. The purchase of these additional shares are limited to 50% of the proceeds from asset sales. During 1999, the Company had gross borrowings and repayments of $10.0 million and $50.0 million, respectively, under the Revolving Credit Facility. As of December 31, 1999, the Company had outstanding borrowings of $125.0 million under this facility and had additional borrowing capacity of $56.0 million. (c) During 1996, the Company issued $120 million of 9.25% First Mortgage Notes due 2006. Interest on the notes is payable semi-annually on January 15 and July 15. At December 31, 1999, the notes are secured by first liens on 17 hotels and contain certain covenants including F-15 55 limitations on the incurrence of debt, dividend payments, certain investments, transactions with affiliates, asset sales and mergers and consolidations. These notes are redeemable, in whole or in part, at the option of the Company after January 15, 2001 at premiums to principal which decline on each anniversary date. (d) The Company has mortgage and other notes payable of approximately $104.0 million that are secured by mortgage notes receivable and hotel properties with a book value of $182.1 million. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1999 these notes bear interest at rates ranging from 6.6% to 9.7%, with a weighted average interest rate of 9.0%, and mature from 2000 through 2009. In October 1999, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.03% and receives a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement commenced in October 1999 and expires in October 2001. Maturities of long-term debt subsequent to December 31, 1999 are as follows (in thousands): 2000 .................................... $5,547 2001 .................................... 8,322 2002 .................................... 149,237 2003 .................................... 4,596 2004 .................................... 4,672 Thereafter ............................... 376,658 ------- Total .................................... $549,032 ========
In connection with certain covenants related the Company's Senior Subordinated Notes, Revolving Credit Facility and 9.25% First Mortgage Notes due 2006, Homegate, a wholly-owned subsidiary of the Company is listed as a guarantor. F-16 56 The following is the separate financial information of Homegate for the years ended December 31, 1998 and 1999 (in thousands):
Balance Sheet Data: 1998 1999 -------- -------- Total current assets $9,554 $7,047 Noncurrent assets 244,229 307,241 ------- ------- Total assets $253,783 $314,288 ======== ======== Total current liabilities $ 4,422 $6,213 Noncurrent liabilities 210,235 261,499 ------- ------- Total liabilities $214,657 $267,712 ======== ======== Stockholder's equity $39,126 $46,576 Operating Results: Net sales $29,419 $57,088 Operating income/(loss) (3,785) 11,115 Net income/(loss) $(7,834) $7,450
Total noncurrent liabilities includes $165.4 million and $225.9 million of intercompany liabilities at December 31, 1998 and 1999, respectively. Included in operating income in 1999 is a $7.1 million valuation reserve. (See Note 12). NOTE 6 -- OTHER CURRENT ASSETS/LIABILITIES Other current assets consist of the following (in thousands):
DECEMBER 31, ------------ 1998 1999 ------------ ------------ Hotel inventories ...................................... $12,083 $13,338 Pre-opening expense ................................... 8,713 -- Accrued interest receivable ............................ 1,854 486 Prepaid expenses ...................................... 3,350 1,428 Other .................................................. 2,791 1,627 ------- ------- Totals ....................................... $28,791 $16,879 ======= =======
Other current liabilities consist of the following (in thousands):
DECEMBER 31, ------------ 1998 1999 ------------ ------------ Accounts payable .............................................. $10,904 $9,793 Construction payables ......................................... 9,209 825 Interest payable .............................................. 11,248 10,860 Accrued payroll and related benefits ......................... 6,576 6,121 Accrued expenses .............................................. 16,783 16,881 Accrued income taxes .......................................... 5,613 6,467 Accrued sales and use taxes ................................... 5,389 3,557 Insurance reserves ............................................ 5,298 4,583 Other ......................................................... 1,425 2,138 ------- ------- Totals .............................................. $72,445 $61,225 ======= =======
F-17 57 NOTE 7 -- LEASE COMMITMENTS AND CONTINGENCIES LEASES The Company leases various hotels under lease agreements with initial terms expiring at various dates from 2000 through 2061. The Company has options to renew certain of the leases for periods ranging from 1 to 99 years. Rental payments are based on minimum rentals plus a percentage of the hotel properties' revenues in excess of stipulated amounts. In addition, the Company leases 28 hotels under lease agreements with real estate investment trusts ("REITS"). The leases have terms of 10 years expiring from 2007 to 2008 with certain renewal options. Rental payments are based on minimum rentals plus a percentage of the hotel properties' revenues in excess of stipulated amounts. The percentage rent calculations are designed to provide the Company with income streams from these hotels equal to 2.5 % to 3.0% of hotel revenues. 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, 1999, (in thousands): 2000 .................................... $40,511 2001 .................................... 40,034 2002 .................................... 40,097 2003 .................................... 40,110 2004 .................................... 39,859 Thereafter ............................... 166,502 -------- Total .................................... $367,113 ========
Rental expense for all operating leases, including those with terms of less than one year, consist of the following for the years ended December 31, 1997, 1998 and 1999 (in thousands):
DECEMBER 31, ------------ 1997 1998 1999 ---- ---- ---- Rentals ............................................ $8,131 $41,237 $43,397 Contingent rentals ................................. 1,608 7,010 12,826 ------- ------- ------- Rental expense ............................ $9,739 $48,247 $56,223 ======= ======= =======
Such amounts are included in occupancy and other operating expenses in the accompanying consolidated financial statements. EMPLOYEE BENEFITS The Company does not provide any material post employment benefits to its current or former employees. F-18 58 NOTE 8 -- INCOME TAXES The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 1997, 1998 and 1999 (in thousands):
DECEMBER 31, ------------ 1997 1998 1999 ---- ---- ---- Current: Federal ................................................... $13,133 $33,391 $24,362 State ..................................................... 1,450 4,500 5,800 -------- -------- -------- 14,583 37,891 30,162 Deferred: Federal ................................................... 9,174 (4,573) (6,560) State ..................................................... 1,099 (500) (1,300) -------- -------- -------- 10,273 (5,073) (7,860) -------- -------- -------- Total .......................................... $24,856 $32,818 $22,302 ======== ======== ========
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 years ended December 31, 1997, 1998 and 1999 (in thousands):
DECEMBER 31, ------------ 1997 1998 1999 ---- ---- ---- Utilization of net operating loss ...................................... $4,141 $3,956 $3,425 Amortization of pre-fresh start basis differences -- properties and notes .............................................................. 102 1,005 484 Depreciation ........................................................... 650 1,066 968 Compensation expense ................................................... 3,552 152 -- Property sales ......................................................... (1,273) (10,822) (10,825) Note settlement ........................................................ -- 1,104 -- Other .................................................................. 3,101 (1,534) (1,912) ------- ------- ------- Total ........................................................ $10,273 $(5,073) $(7,860) ======= ======= =======
The following is a reconciliation of the statutory Federal tax rate to the Company's effective income tax rate:
1997 1998 1999 ---- ---- ---- Statutory Federal tax rate ................................. 35.0% 35.0% 35.0% State income taxes, net of Federal tax benefit .................................. 3.3% 5.1% 5.1% Other, net ................................................. 10.6% (2.2)% (1.1)% ---- ---- ---- Effective income tax rate ........................ 48.9% 37.9% 39.0% ==== ==== ====
At December 31, 1999, the Company had available federal net operating loss carryforwards related to PMI of approximately $61.1 million which will expire in 2006. This amount is subject to an annual utilization limitation of $8.7 million under the Internal Revenue Code due to a change in ownership of the Company upon consummation of the Plan. In accordance with SAS 109, the Company has not recognized the future tax benefits F-19 59 associated with the net operating loss carry forwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $21.4 million against the deferred tax asset as of December 31, 1999. To the extent any available carryforwards or other tax benefits related to PMI are utilized, the amount of tax benefit realized will be treated as a contribution to stockholders' equity and will have no effect on the income tax provision for financial reporting purposes. For the years ended December 31, 1997, 1998 and 1999, the Company recognized $4.1 million, $4.0 million and $3.4 million, respectively, of such benefits as a contribution to stockholders' equity. Additionally, the Company recognized $102,000, $1.0 million and $484,000 as a contribution to stockholders' equity for the years ended December 31, 1997, 1998 and 1999, respectively, which represents the amortization of pre-fresh start tax basis differences related to properties and notes receivable. As a result of reflecting substantially all of the deferred tax provisions as a contribution to stockholders' equity, the Company had no material deferred tax assets or liabilities as of December 31, 1998 and 1999. NOTE 9 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS COMMON STOCK During 1999, the Company repurchased approximately 5.8 million shares of its common stock at an average price of $9.34 per share. In October 1999, the Company's Board of Directors approved the repurchase of an additional $100.0 million of its stock. Under this plan through March 20, 2000, the Company repurchased $9.9 million of its common stock ($3.0 million on 1999 and $6.9 million in 2000). STOCK OPTIONS The Company has adopted various stock option and performance incentive plans under which options to purchase shares of common stock may be granted to directors, officers or key employees under terms determined by the Board of Directors. At December 31, 1999, a total of 4.0 million options were outstanding under various plans with another 2.9 million options available to be issued. On October 14, 1998, the Board of Directors granted options to purchase 1,750,000 shares to the Company's president and CEO at $5.91 per share, which approximated market value at the date of grant. These options vest ratably over a 5 year period with respect to 1,000,000 of the options. The additional 750,000 options vest as certain performance criteria are met or, if the criteria are not met, the options vest eight years after the original grant date. Under the 1995 Employee Stock Option Plan, options to purchase shares of common stock may be granted at the fair market value of the common stock at the date of grant. Options can generally be exercised during a participant's employment with the Company in equal annual installments over a three-year period and expire ten years from the date of grant. During 1998 and 1999, respectively, options to purchase 2,653,000 and 544,000 shares of common stock were granted under this plan. F-20 60 Under the 1995 Non-Employee Director Stock Option Plan, options to purchase 10,000 shares of common stock are automatically granted to each non-employee director at the fair market value of the common stock at the date of grant. All options will be fully vested and exercisable one year after the date of grant and will expire ten years after the date of grant, or earlier if the non-employee director ceases to be a director. Options to purchase 190,000 shares of common stock were granted under this plan in 1998. Options to purchase 310,000 shares of common stock were issued to HomeGate employees in 1996 and 1997 under HomeGate's 1996 Stock Option Plan to company officers, key employees and company advisors. These options were converted to the Company's plan at an exercise price consistent with the fixed exchange rate used for the common shares in connection with the merger. Of the total shares issued, 106,000 options issued to Company advisors vested immediately upon consummation of the merger and expired on May 30, 1998. The remaining 204,000 shares issued to company officers and key employees vested immediately upon consummation of the merger and expire over a period of ten years from the date of the grant. Under the Company's 1992 Stock Option and Performance Incentive Plans, options to purchase 40,000 shares of common stock were outstanding at December 31, 1999. The options were granted at prices which approximate fair market value at the date of grant ranging from $7.25 to $9.88 and expire from 2001 to 2002. During 1998, the Company repriced certain outstanding options. Approximately 290,000 options issued pursuant to the non-employee director plans were repriced, as were options to purchase approximately 868,000 shares which had been issued under the various employee stock option plans. These options were repriced to allow exercise at a price of $10.00 per share, an amount in excess of the fair market value of the Company's stock at the date of repricing. The options had originally had exercise prices of between $11.13 per share and $20.16 per share. Effective January 1, 1996, the Company adopted the provisions of SFAS 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards, which was not significant. Had the fair value method of accounting been applied to the Company's stock plans, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, net income would have been reduced by $3.2 million, or $.07 per share in 1997, $6.5 million, or $.12 per share in 1998 and $2.9 million, or $.06 per share in 1999. This pro forma impact only takes into account options granted since January 1, 1997 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The weighted average fair value of options granted during 1997, 1998 and 1999 was $7.02, $3.49 and $5.92, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $18.57 in 1997, $8.49 in 1998 and $11.25 in 1999 and the following weighted average assumptions: risk-free interest rate of 6.21% in 1997, 4.72% in F-21 61 1998, and 6.23% in 1999, volatility of 30.8% for 1997, 40.4% in 1998, and 42.3% in 1999, and dividend yield of 0.0% for 1997, 1998 and 1999. The following is a summary of the stock options outstanding:
NUMBER OPTION PRICE OF SHARES PER SHARE --------- --------- Outstanding at December 31, 1996 ............................ 2,576,000 Granted ................................................. 998,000 $13.78-$20.16 Exercised ............................................... (579,000) $2.71-$16.63 Canceled ................................................ (119,000) $7.63-$19.09 -------- Outstanding at December 31, 1997 ............................ 2,876,000 Granted ................................................. 4,403,000 $4.72-$18.44 Exercised ............................................... (146,000) $3.63-$18.94 Canceled ................................................ (1,765,000) $4.72-$19.09 ---------- Outstanding at December 31, 1998 ............................ 5,368,000 Granted ................................................. 544,000 $11.25-$11.25 Exercised ............................................... (545,000) $3.20-$10.00 Canceled ................................................ (1,375,000) $3.63-$20.16 ---------- Outstanding at December 31, 1999 ............................ 3,992,000 $4.72-$13.78 ========= Exercisable at December 31, 1999 ............................ 1,413,000 $4.72-$13.78 =========
WARRANTS Pursuant to the Plan, warrants to purchase 2,053,583 shares of the Company's common stock were issued to former shareholders of the Company's predecessor, PMI, in partial settlement of their bankruptcy interests. The warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per share and expired in August 1998. F-22 62 NOTE 10 -- EARNINGS PER SHARE
FOR THE YEAR ENDED, DECEMBER 31, 1997 ------------------------------------- PER-SHARE --------- INCOME SHARES AMOUNT ------ ------ ------ Basic Earnings per Share Net income ......................................... $25,931 46,755 $.56 ==== Diluted Earnings per Share Options and warrants issued ........................ -- 1,545 Conversion of debt ................................. -- -- ------- ------ Net income plus assumed conversions ................ $25,931 48,300 $.54 ======= ====== ====
FOR THE YEAR ENDED, DECEMBER 31, 1998 ------------------------------------- PER-SHARE --------- INCOME SHARES AMOUNT ------ ------ ------ Basic Earnings per Share Net income ......................................... $53,847 51,749 $1.04 ===== Diluted Earnings per Share Options and warrants issued ........................ -- 902 Conversion of debt ................................. 1,142 2,108 ----- ----- Net income plus assumed conversions ................ $54,989 54,759 $1.00 ======= ====== =====
FOR THE YEAR ENDED, DECEMBER 31, 1999 ------------------------------------- PER-SHARE --------- INCOME SHARES AMOUNT ------ ------ ------ Basic Earnings per Share Net income ......................................... $34,882 50,966 $.68 ==== Diluted Earnings per Share Options and warrants issued ........................ -- 1,028 Net income plus assumed conversions ................ $34,882 51,994 $.67 ======= ====== ====
Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. For the year ended December 31, 1997, the effects of the 7% convertible subordinated notes due 2002 were not included in the calculation of diluted earnings per share due to the fact that their conversion would be antidilutive. The 7% convertible subordinated notes due 2002 were called and converted into common stock in April 1998. F-23 63 NOTE 11 -- BUSINESS INTERRUPTION INSURANCE In July 1996, the Frenchman's Reef suffered damage when Hurricane Bertha struck the U.S. Virgin Islands. In March 1998, the Company settled its insurance claim with respect to Hurricane Bertha for $16.4 million. The Company received $2.5 million in 1997 and received the remaining portion, net of deductibles, in April 1998. The impact of the hurricanes caused operating profits to decline from prior year levels. In 1997 and 1998, the Company, in addition to recording the operating revenues and expenses of the Frenchman's Reef, recorded business interruption insurance revenue of $10.9 million and $4.0 million, respectively. NOTE 12 -- VALUATION AND OTHER CHARGES Valuation and other charges in 1999 consist of a $29.1 million valuation allowance related to certain non-prototype HomeGate properties and the Frenchman's Reef hotel and $1.4 million for severance charges. Valuation and other charges in 1998 consist of a $10.0 million valuation allowance related to certain non-prototype HomeGate properties, charges of $4.0 million for costs associated with terminating hotel development projects under contract, $2.4 million for severance charges primarily related to the resignations of the Company's chief executive officer and chief operating officer and $1.0 million for hurricane damage at the Frenchman's Reef. NOTE 13 -- OTHER INCOME, NET Other income consists of items which are not considered part of the Company's recurring operations and is composed of the following as of December 31, 1997, 1998 and 1999 (in thousands):
DECEMBER 31, --------------------------------------- 1997 1998 1999 ---- ---- ---- Gains on sales of properties ............................... $2,200 $1,060 $7,993 Gains on settlements of notes receivable ................... -- 18,353 -- Contract termination fee ................................... -- -- 4,000 Loss on the sale of marketable securities .................. -- (1,281) (4,811) ------- ------ ------ Total $2,200 $18,132 $7,182 ======= ======= ======
F-24 64 NOTE 14 -- OTHER COMPREHENSIVE INCOME For the twelve months ended December 31, 1999 and 1998, comprehensive income consisted of the following (in thousands):
1998 1999 ---- ---- Net income ......................................... $53,847 $34,882 Unrealized (loss) gain on marketable securities, (net of income taxes of $3,060 in 1998 and $1,338 in 1999) .............................. (4,993) 2,299 ------- ----- Total .................................... $48,854 $37,181 ======= =======
NOTE 15 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The fair values of non-current financial assets and liabilities and other financial instruments are shown below (in thousands). The fair values of current assets and current liabilities approximate their reported carrying amounts.
DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Mortgage and notes receivable ...................... $ 14,688 $ 28,864 $ 11,750 $ 11,750 Long-term debt ..................................... 582,031 590,981 543,485 533,285 Interest rate swap agreement ....................... -- (397) -- 388
The fair value for mortgages and notes receivable is based on the valuation of the underlying collateral utilizing discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or current rates available to the Company for debt of the same maturities. The fair values of the interest rate swap agreement is based on the estimated amounts the Company would pay to terminate the agreement. The Company's mortgages and other notes receivable (See Note 4) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many of the same risks as the Company's operating hotel assets. A significant portion of the collateral is located in the Northeastern United States. NOTE 16 -- RELATED PARTY TRANSACTIONS The following summarizes significant financial information with respect to transactions with present officers, directors, their relatives and certain entities they control or in which they have a beneficial interest for the years ended December 31, 1997, 1998 and 1999 (in thousands):
DECEMBER 31, ------------ 1997 1998 1999 ---- ---- ---- Management and other fee income .................... $144 $138 $136
F-25 65 The amounts above relate to two hotels managed by the Company for an entity controlled by the Company's Chairman and Chief Executive Officer. NOTE 17 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 1997, 1998 and 1999 (in thousands):
DECEMBER 31, ------------------------------------ 1997 1998 1999 ---- ---- ---- Hotels received in settlements of mortgage notes receivable .............. $ -- $ -- $ 2,800 Land received in settlements of mortgage notes receivable ................ 3,094 -- -- Marketable securities received in connection with the sale of hotels ..... 8,697 13,841 --
Cash paid for interest was $36.7 million, $48.5 million and $51.5 million for the years ended December 31, 1997, 1998 and 1999, respectively. Cash paid for income taxes was $14.4 million, $17.7 million and $31.0 million for the years ended December 31, 1997, 1998 and 1999, respectively. NOTE 18 -- GEOGRAPHIC AND BUSINESS INFORMATION The Company's hotels currently service three major lodging industry segments: the all-suites segment, under its AmeriSuites brand; the limited-service segment, primarily under its Wellesley Inn & Suites brand and the full-service segment under major national franchises. The Company's 99 AmeriSuites are upscale, all-suite limited service hotels containing approximately 128 suites and are located in 30 states throughout the United States. The 66 Wellesley Inn & Suites hotels compete in the mid-price segment, and are primarily located in the Northeast, Texas and Florida regions of the United States. A Wellesley Inn & Suites has between 100 to 140 rooms and suites and includes amenities such as pool facilities, complimentary continental breakfast, remote control television and facsimile services. Certain of the larger Wellesley Inn & Suites have fully equipped kitchens, upscale furnishings and separation between cooking, living and sleeping areas. The Company also operates 28 upscale full-service hotels with food service and banquet facilities under franchise agreements with national hotel brands. The Company's full-service hotels are primarily located in the northeastern region of the United States. On November 1, 1999, the Company converted 38 of its 43 extended-stay HomeGate hotels into its limited-service Wellesley Inn & Suites brand. The conversion changed the customer base from extended-stay to transient. In March 2000, the Company sold the remaining five HomeGate hotels and all its rights to the HomeGate brand name. The Company no longer operates in the extended-stay segment. As a result, segment information for prior periods has been restated to conform to this change. The Company evaluates the performance of its segments based primarily on earnings before interest, taxes and depreciation and amortization ("Hotel EBITDA") generated by the operations of its Owned Hotels. Interest expense is primarily related to debt incurred by the Company through its corporate obligations and collateralized by certain of its hotel properties. F-26 66 The Company's taxes are included in the consolidated Federal income tax return of the Company and are allocated based upon the relative contribution to the Company's consolidated taxable income/losses and changes in temporary differences. The allocation of interest expense and taxes is not evaluated at the segment level and is not believed to be material to these consolidated statements. The following table presents revenues and other financial information by business segment for the years ended December 31, 1997, 1998 and 1999 (in thousands):
--------------------------------------------------------------------------- LIMITED FULL ALL-SUITES SERVICE SERVICE CONSOLIDATED ---------- ------- ------- ------------ Revenues ................................... $238,656 $105,437 $188,653 $532,746 Hotel EBITDA ............................... 87,714 41,925 41,200 170,839 Depreciation and amortization ............................. 20,876 13,898 10,125 44,899 Capital expenditures ....................... 50,750 39,270 10,506 100,526 Total Assets ............................... 590,579 429,395 196,123 1,216,097 --------------------------------------------------------------------------- LIMITED FULL ALL-SUITES SERVICE SERVICE CONSOLIDATED ---------- ------- ------- ------------ Revenues ................................... $191,690 $76,716 $178,973 $447,379 Hotel EBITDA ............................... 71,658 31,225 39,111 141,994 Depreciation and amortization ............................. 20,967 8,865 11,992 41,824 Capital expenditures ....................... 224,282 178,219 18,489 420,990 Total Assets ............................... 554,253 367,971 228,385 1,150,609 --------------------------------------------------------------------------- LIMITED FULL ALL-SUITES SERVICE SERVICE CONSOLIDATED ---------- ------- ------- ------------ Revenues ................................... $113,412 $58,857 $141,966 $314,235 Hotel EBITDA ............................... 52,377 26,891 53,861 133,129 Depreciation and amortization ............................. 15,289 5,653 12,122 33,064 Capital expenditures ....................... 265,956 39,525 68,664 374,145 Total Assets ............................... 431,673 275,073 286,487 993,233
F-27 67 NOTE 19 -- MERGER On December 1, 1997, the Company merged with Homegate Hospitality, Inc. ("Homegate"), a provider of mid-price extended-stay hotels. Pursuant to the merger, the Company issued approximately 6.5 million shares of common stock based upon a fixed exchange ratio of 0.6073 per share of the Company's common stock for each of the approximately 10.7 million outstanding shares of Homegate. The transaction was accounted for as a pooling of interests. Under pooling of interests accounting, all transaction costs are expensed as incurred and the historical consolidated statements of operations of the companies are restated on a combined basis without giving effect to operating synergies. For the year ended December 31, 1997, merger expenses consisted of the following (in thousands): Cost of terminating the management agreement . . . . . . . . . . . . $12,000 Transaction related costs . . . . . . . . . . . . . . . . . . . . . 5,168 Transition costs . . . . . . . . . . . . . . . . . . . . . . . . . . 1,387 ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $18,555 =======
Costs to terminate the management agreement represent amounts paid to Wyndham Hotel Corporation pursuant to the termination agreement. These amounts were funded: $8.0 million by the Company and $4.0 million by a shareholder of Homegate. The amount paid by the shareholder has been reflected as a contribution to capital. Transaction related costs primarily represent fees paid for investment banking, legal, accounting and other professional services. Transition costs represent costs associated with the merging of the Company's and Homegate's operations, including the combining of systems, facilities and management resources. In November 1999, the Company converted 38 of its 43 extended-stay Homegate hotels into its limited-service Wellesley Inn & Suites brand. NOTE 20 -- SUBSEQUENT EVENTS In February 2000, five non-prototype Homegate hotels and the Company's rights to the HomeGate brand name, were sold for approximately $17.7 million, including the assumption of debt by the purchaser, of approximately $17.4 million related to these properties. During 1998, the Company recorded an impairment loss in the amount of $10.0 million relating to five non-prototype HomeGate properties as future undiscounted cash flows (before interest charges) were less than the carrying amount. Such loss provision is included in valuation and other charges in the accompanying financial statements (See Note 12). In 1999, the Company classified the aforementioned HomeGate properties as held for sale and recognized an additional impairment loss of approximately $7.1 million. During 1999, these properties generated net losses, before income tax benefits, of approximately $370,000, which are included in the accompanying financial statements. F-28 68 The Company also reclassified its Frenchman's Reef hotel in St. Thomas, U.S.V.I. (Frenchman's Reef) as held for sale in 1999. For the year ended December 31, 1999, the Company recognized a valuation loss of $22.0 million which reduced the property's carrying value to approximately $71.1 million. In March 2000, the Frenchman's Reef was sold. The carrying amount at December 31, 1999 reflected the selling price less closing costs. The net proceeds of this transaction were used to repay $40.0 million of first mortgage debt and the remainder will be used for the repayment of debt and the repurchase of the Company's common stock. For the year ended December 31, 1999, this hotel generated income, before income taxes, of approximately $3.2 million, which is included in the accompanying financial statements. On March 16, 2000, the Company signed an agreement with Sholodge, Inc. ("Sholodge") to acquire its leasehold interests in 27 Sumner Suites hotels for net consideration of $2.0 million. Pursuant to the agreement, the Company will convert these hotels to its AmeriSuites brand and will operate the hotels under lease agreements with Hospitality Properties Trust ("HPT") and Sholodge. The Company will also purchase two land sites from Sholodge to develop two additional AmeriSuites hotels. The transaction is expected to close in mid-April and is subject to certain due diligence items and approval by HPT. Under the agreement, a subsidiary of Prime will assume Sholodge's interest in an existing lease for 20 hotels with HPT, subject to HPT's consent, and enter into new lease agreements on the seven remaining hotels. As part of the transaction, Prime will also purchase land from Sholodge in Mt. Laurel, NJ and in Sterling, VA, near Dulles Airport. An affiliate of Sholodge will then construct AmeriSuites hotels on these sites. The hotels are located in 12 states, primarily in the Southeast, Midwest and Southwest regions of the country. The hotels were all recently constructed by Sholodge, with an average age of 2.8 years. Sholodge has prior experience developing AmeriSuites hotels as 15 current AmeriSuites hotels were constructed by Sholodge. The Company will operate the hotels as Sumner Suites until the conversion process is complete. On March 17, 2000, the Company also sold its AmeriSuites hotel in Warrenville, IL for $10.8 million. The transaction generated a net gain of approximately $1.0 million and provides for the Company to receive franchise fees under a twenty-year franchise agreement. F-29 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRIME HOSPITALITY CORP. By: /s/ A.F. Petrocelli ------------------------------------- A.F. Petrocelli, Chairman of the Board of Directors, President and Chief Executive Officer DATE: March 29, 2000 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 29, 2000.
Signature Title - ----------------------------------------- ------------------------------------------------------- /s/ A.F. Petrocelli - ----------------------------------------- A.F. Petrocelli Chairman of Board of Directors, President and Chief Executive Officer /s/ Douglas Vicari - ----------------------------------------- Douglas Vicari Senior Vice President and Chief Financial Officer /s/ Lawrence Friedland - ----------------------------------------- Lawrence Friedland Director /s/ Howard M. Lorber - ----------------------------------------- Howard M. Lorber Director /s/ Herbert Lust, II - ----------------------------------------- Herbert Lust, II Director /s/ Jack H. Nusbaum - ----------------------------------------- Jack H. Nusbaum Director
EX-2.G 2 PURCHASE AND SALE AGREEMENT 1 EXHIBIT 2(g) Frenchman's Reef PURCHASE AND SALE AGREEMENT by and among PRIME HOSPITALITY CORP., as Seller, and MARRIOTT INTERNATIONAL, INC., as Purchaser ---------------------- September 15, 1999 2 TABLE OF CONTENTS
PAGE ---- 1. Agreement to Sell and Purchase Subject Property......................... 2. Purchase Price and Terms................................................ 3. Allocation of Purchase Price............................................ 4. Transaction Taxes....................................................... 5. Environmental........................................................... 6. Debts and Liabilities................................................... 7. Representations and Warranties of Seller................................ 8. Title and Survey........................................................ 9. Conditions Precedent to Closing......................................... 10. Closing................................................................. 11. Risk of Loss............................................................ 12. Indemnification......................................................... 13. Inventory of Personal Property.......................................... 14. Union/Contract/Contract Employees....................................... 15. Default................................................................. 16. Notice ................................................................. 17. Brokers................................................................. 18. Publicity............................................................... 19. Purchaser's Right of Entry.............................................. 20. Assignment..............................................................
- i - 3 21. No Third Party Beneficiaries............................................ 22. Attorney's Fees......................................................... 23. Time.................................................................... 24. Severability............................................................ 25. Counterparts; Facsimile Signatures...................................... 26. Binding Effect, Etc..................................................... 27. Further Assurances...................................................... 28. [Intentionally Deleted]................................................. 29. Exclusivity.............................................................
- ii - 4 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), made and entered into this _____ day of September, 1999, by and between PRIME HOSPITALITY CORP, a Delaware corporation (hereby referred to as "Seller"), and MARRIOTT INTERNATIONAL, INC., its successor or assigns (hereinafter referred to as "Purchaser"). WITNESSETH: WHEREAS, Seller desires to sell, convey, transfer, assign and deliver to Purchaser, and Purchaser desires to purchase from Seller: (i) those certain parcels of real property situated in St. Thomas in the Territory of the U.S. Virgin Islands, more particularly described on Exhibit A attached hereto, together with all structures, improvements and fixtures located thereon, and together with all hereditaments, appurtenances, easements, and other rights and interests belonging or incident thereto (the "Real Property"); and (ii) all of the assets of the resort businesses conducted by Seller on the above-described Real Property under the trade names "Frenchman's Reef Beach Resort" and "Morning Star Beach Resort" (collectively hereinafter referred to as the "Resorts"), including without limitation the rights, title, and interest to the name and trademarks "Frenchman's Reef Beach Resort" and "Morning Star Beach Resort;" and all registrations for such names (the "Names") to the extent assignable, all goodwill of the businesses, all furniture, vehicles, appliances, televisions and other video equipment, furnishings, floor and wall coverings, fixtures (including lighting, heating, plumbing, and ventilating fixtures, and everything attached in any manner to walls, ceilings or floors), all fixed assets and supplies and inventories (as such terms are defined in the Uniform System of Accounts for the Lodging Industry, Ninth Revised Edition), appliances, equipment, machinery, security and alarm and telephone and sprinkler and computer systems, supplies, advance room reservations and deposits, (such deposits being referred to as "Room Reservation Deposits") any and all telephone and telecopy numbers related to and used in the operation of the Resorts, Seller's right, title and interest in all leases or services contracts listed on Exhibit E hereto, all permits and licenses related to the operation of the Real Property and Resorts, and all other tangible and intangible personal property owned by Seller and presently located upon or within the Real Property or otherwise used in connection with the operation of the 5 Resorts or the operation and maintenance of the Real Property, building plans and specifications, equipment warranties and the like, and copies of all financial and operating records of the business (other than personnel files) and of the Real Property, specifically including without limitation all those tangible assets to be listed on Exhibit B pursuant to the terms of Section 13 hereto, but specifically excluding all cash, bank accounts, accounts receivable, and liabilities of any kind or nature, except for the Room Reservation Deposits and liabilities specifically assumed herein (said Real Property and Business Assets being hereinafter collectively referred to as the "Subject Property"); and WHEREAS, Purchaser desires to acquire the Subject Property from Seller, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements herein contained, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO SELL AND PURCHASE SUBJECT PROPERTY. Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from Seller all of the above-described Subject Property, subject to the terms and conditions herein contained. It is expressly understood that this transaction does not include any of Seller's cash, bank accounts or accounts receivable, other than any Room Reservation Deposits, and that, other than as expressly set forth in this Agreement, Purchaser shall not assume nor be liable or responsible in any manner for any of the liabilities or obligations of Seller of any kind or nature relating to the Subject Property, the Resorts' business, or any other matter whatsoever, existing or accrued or otherwise arising prior to the date of Closing hereunder. Purchaser will be obligated to honor advance room reservations, to assume Seller's yellow pages advertising contracts, and to assume those space leases, leases on equipment, machinery and items of personal property, and service contracts identified on Exhibit E hereto (collectively, the "Leases and Contracts"), and to assume the other obligations as may be expressly set forth in this Agreement. 2. PURCHASE PRICE AND TERMS. The purchase price for the Subject Property shall be Seventy Five Million Dollars ($75,000,000). The total purchase price shall be payable by Purchaser as follows: (a) Earnest Money Deposit: A $2,000,000 earnest money deposit (this deposit, and all interest thereon, the "Earnest Money Deposit") will be delivered to Chicago Title Insurance Company ("Escrow Agent"), within five business days following receipt by Purchaser of a fully-executed copy of this Agreement, such sum to be promptly deposited by -2- 6 Escrow Agent in an interest-bearing money market escrow account at a federally insured banking institution, and to be held by Escrow Agent in such account pursuant to the terms of this Agreement. If Purchaser fails to deliver the Earnest Money Deposit by said deadline, this Agreement shall be null and void and the parties shall be relieved of all further rights or responsibilities hereunder. At the time of the making of such Earnest Money Deposit, Seller, Purchaser and Escrow Agent shall execute an Escrow Instruction Letter substantially in the form of Exhibit C hereof. (b) Balance: The balance of the Purchase Price (subject to customary closing adjustments and those adjustments set forth herein) shall be delivered by Purchaser to Escrow Agent in the form of wired funds at the Closing. Title company escrow and closing fees shall be shared equally between the parties. Any monetary lien or encumbrance on the Subject Property or any part thereof shall be paid in full by Seller at Closing, and shall be released/terminated of record prior to or at Closing. (c) Apportionments. (i) Seller shall be entitled to and responsible for all income, cost and expense which accrues up to the day preceding Closing with respect to the Subject Property. Purchaser shall be entitled to and responsible for all income, cost and expense accruing as of the date of Closing and thereafter with respect to the Subject Property. In accordance with the foregoing, closing adjustments for the Subject Property will be made as follows: a. All real estate taxes, personal property taxes, gross receipt taxes, ad valorem taxes and assessments and other state, county or city taxes, fees, charges and assessments affecting the Subject Property shall be prorated as of the Closing on an accrual basis based on the most recent ascertainable amounts of or other reliable information in respect to each such item of income and expense. Franchise fees and all other expenses due Purchaser or its affiliates (in its capacity as franchisor) shall be paid by Seller based upon all revenues due Seller through Closing. Any net credit due to Seller as a result of such prorations shall be paid in cash by Purchaser at Closing. Any net credit due to Purchaser as a result of such prorations shall be credited against the Purchase Price. b. The following items shall be prorated as of the Closing on an accrual basis based on the most recent ascertainable -3- 7 amounts of or other reliable information in respect to each such item of income and expense: (i) Utility charges. (ii) Income, if any, from the operation of the Resorts including, but not limited to, leases and concession agreements with third parties, room rentals, restaurant, telephone, room service and other charges due from guests or other customers (Seller and Purchaser shall each be entitled to receive a credit equal to one-half of the amount of all transient guest revenues for the full night preceding the Closing). (iii) Commission of rental agents, travel agents, credit organizations and others, provided, however, that commissions respecting guest room rentals for the night preceding the Closing shall be treated in the same fashion as guest room rentals. (iv) Seller's prepayments of purchase orders, and other prepaid items. (v) Amounts paid or payable under the Leases and Contracts, if any, assigned to Purchaser at the Closing. All security deposits shall be transferred to Purchaser. (vi) All other costs and expenses in connection with operation of the Resorts, which are customarily and usually apportioned on the purchase or transfer of a hotel property. (vii) Laundry, valet and vending machines income. (ii) At the Closing, Purchaser shall pay to Seller for all unopened items of food, beverage and operating supplies which are in good and usable condition for the purposes of the operation of the Resorts, as further described by category on Exhibit F hereto, and which are in quantities normal and customary for resorts of the nature and size of the Resorts. The payment shall be in the amount of Seller's cost for such items. (iii) Seller shall be entitled to all accounts receivable accruing, but not realized, prior to 11:59 p.m. on the night preceding Closing. Payments relating to such accounts receivable realized after Closing shall be the sole property of Seller and to the extent Purchaser receives any such payments, it will promptly remit them -4- 8 to Seller. Purchaser will cooperate with Seller in connection with Seller's efforts to collect its account receivables. (iv) Accounting: Except as otherwise expressly provided herein, all apportionments and adjustments shall be made on an accural basis in accordance with generally accepted accounting principles. The computation of the adjustments shall be jointly prepared by Seller and Purchaser, and, upon the request of either Purchaser or Seller, shall be reviewed by a reputable accounting firm mutually selected by Seller and Purchaser (the "Accountants") and reviewed by representatives of both Purchaser and Seller. To the extent the exact amount of any adjustment item provided for in this Agreement cannot be precisely determined on the Closing, the Seller and Purchaser (or, if either elects, the Accountants) shall estimate the amount thereof, for purposes of computing the net amount due Seller or Purchaser pursuant to this Agreement and shall determine the exact amount thereof not later than sixty (60) days after the Closing. The determinations made by the Accountants shall be binding on both Seller and Purchaser. The fees and expenses of the Accountants shall be borne by the party requesting the use of the Accountants. (v) The parties hereto will agree at Closing to adjust and/or apportion the Purchase Price, as necessary due to the assumption by Purchaser of a settlement agreement reached by and between Seller and Armando and Dana Santucci, as more particularly set forth in that certain letter agreement dated August 3, 1999. 3. ALLOCATION OF PURCHASE PRICE. Set forth on Exhibit D hereof is the agreed upon allocation of the total Purchase Price; such allocation being made only among land, buildings, fixtures, personal property and good will. The parties further agree that each of them will timely file IRS Form 8594 with the Internal Revenue Service, reflecting the allocation set forth above. 4. TRANSACTION TAXES. All documentary fees/stamps/taxes and real property and transfer taxes shall be paid 50% by Seller and 50% by Purchaser. Purchaser shall pay for all other recording taxes and any sales or use taxes imposed upon the sale of any personal property. 5. ENVIRONMENTAL. Purchaser has delivered to Seller that certain Phase I Environmental Site Assessment dated June, 1999 prepared by Parsons Engineering Science, Inc. (the "Environmental Report"). Seller agrees that prior to Closing, it shall undertake and complete, to Purchaser's reasonable satisfaction, the items specified under Section 6.2 of the report, a copy of which is attached hereto as Exhibit G. Purchaser will inspect Seller's work within fifteen (15) days of Seller's written notice that -5- 9 such work is complete. No later than four (4) days after the expiration of said fifteen (15) day period Purchaser will notify Seller in writing of any corrections it requires in order for the work to be completed in accordance with industry standards for resorts of a similar nature. Seller shall promptly make any such corrections. Upon Seller's final completion of the work required under Section 5, Seller shall have no further responsibility or liability with respect to the correction of items specified in Section 6.2 of the Environmental Report. 6. DEBTS AND LIABILITIES. Other than as expressly set forth in this Agreement, it is expressly understood that Purchaser shall not assume or pay, perform or discharge or cause to be paid, performed or discharged any obligation or liability of Seller. Purchaser agrees to honor advance room reservations made by Seller prior to Closing in the ordinary course of business, to assume Seller's yellow pages advertising contracts, and to accept the assignment of and to assume the Leases and Contracts. Other than as expressly set forth in this Agreement, Seller agrees to pay all debts and liabilities relating to the Subject Property and the Resorts business at or prior to the Closing hereunder. The parties agree that Purchaser shall acquire title, ownership and possession of the Subject Property free and clear of all claims of any kind or nature whatsoever (excepting (a) advance room reservations, (b) Room Reservation Deposits, (c) obligations pursuant to the leases and service contracts set forth on Exhibit E hereto, and (d) all matters of record). 7. REPRESENTATIONS AND WARRANTIES OF SELLER. (a) Seller hereby makes the following additional representations and warranties to Purchaser as of the date of this Agreement, continuing throughout the term of this Agreement, and as of the date and time of Closing hereunder, with the knowledge that Purchaser is acting in full reliance thereon; (i) Seller possesses full power and authority to enter into and perform this Agreement and the execution, delivery, or performance of this Agreement will not conflict with or violate the terms or provisions of any loan agreement (excepting those which will be discharged at the Closing hereunder), contract, other agreement, court order, decree, statute, rule or regulation by which Seller is bound or affected. This Agreement is a valid and binding obligation of Seller, and is enforceable against Seller in accordance with its terms. Seller is duly organized, validly existing and in good standing under the laws of the state of formation, has all requisite power and authority under the laws of such state and by proper corporate proceedings to execute and consummate this Agreement and the transactions contemplated hereby, and shall deliver to -6- 10 Purchaser prior to Closing a certificate of good standing and copies of such corporate authorizations. (ii) Seller is the owner of, both beneficially and of record, and has good and marketable title to, all of the Subject Property, and at the Closing will convey and assign to Purchaser good and marketable title to all of the Subject Property free and clear of all encumbrances, covenants, easements, leases and restrictions, excepting (a) those items set forth on the Title Commitment (as defined in Section 8 hereof) (the "Permitted Exceptions"), and (b) those rights of governmental entities pursuant to the terms of the Coastal Zone Permit No. C2T-1-81W and C2T-12-90W, (c) monetary liens, judgments and mechanic's liens, which will be satisfied and released at Closing and (d) those leases and service contracts set forth on Exhibit E hereto. Seller has no ownership or other direct or indirect interest in any strip or parcel of land which adjoins the Real Property. To the best of Seller's knowledge and belief, no further consent of any person or entity, and no license, approval, or authorization of, or registration or declaration with, any governmental authority is required in connection with the execution and delivery of or performance by Seller of its obligations under this Agreement. (iii) Seller holds Federal Trademark No. 1,976,397 and 1,973,749 for the names "Frenchman's Reef Beach Resort" and "Morning Star Beach Resort." (iv) Seller shall continue to be solely responsible for and shall pay as and when due all of Seller's obligations, debts and liabilities which are associated in any way with the Subject Property and/or the Resorts business accruing prior to the Closing, and not otherwise expressly assumed by Purchaser. (v) Within the times and in the manner prescribed by law, Seller has filed all federal, state and local tax returns required by law and has paid all applicable sales, use, withholding, real and personal property, income, FICA, employment and other taxes, assessments and penalties due and payable, in connection with the Subject Property and the Resorts business. There are no proceedings pending, or to the best of Seller's knowledge, threatened with or by any taxing authorities as to taxes of any nature payable by -7- 11 Seller in connection with the Subject Property or the Resorts business. (vi) There are no outstanding judgments against Seller, and there is no suit, action, claim, demand, arbitration, or legal, administrative or other proceedings pending or, to the best of Seller's knowledge, threatened against or affecting the Subject Property or the Resorts business, and Seller does not know or have reasonable grounds to know of any basis for any such action or claim. (vii) Other than as set forth in Exhibit M, to the best of Seller's knowledge and belief, Seller has complied with, and is not in violation of, any applicable federal, state or local statutes, laws, rules and regulations affecting the Subject Property or the Resorts business. (viii) Other than documents recorded in the public records, the Leases and Contracts to be assigned to Purchaser pursuant to the terms of this Agreement, the Coastal Zone Permit No. C2T-1-81W and C2T-12-90W and agreements and easements with governmental bodies and utility companies which are customary reasonably necessary for the development and operation of the Subject Property and the Resorts business (and of which true and complete copies have been supplied by Seller to Purchaser), Seller is not a party to or bound by any agreements, contracts, employment arrangements, leases, subleases or commitments relating to the Subject Property or any part or portion thereof or the Resorts business which will extend beyond or survive the Closing hereunder. (ix) Seller has received no written notice that the present development, improvement, use and operation of the Subject Property and of the Resorts business are not in compliance with or violate any local, state or federal laws, ordinances, resolutions, codes, regulations or requirements of any kind or nature, including, without limitation, zoning, adequacy of parking, land use laws and building codes, or any private covenants, restrictions, or setbacks. There are presently, and at the date of Closing there will be, in effect all material licenses, permits and other authorizations necessary for the Seller's use, occupancy and operation of the Subject Property and the Resorts business as it is currently being used. -8- 12 (x) To the best of Seller's knowledge, Seller is in compliance and in good standing with all permits, approvals, licenses, grants and other similar items from governmental entities relating to, or affecting the Property, (including, without limitation, liquor licenses, coastal zone management permits and industrial development credit agreements) (collectively, "Governmental Permits and Grants"). Set forth on Exhibit I hereto is a complete list of all Governmental Permits and Grants. (xi) There are no unpaid ad valorem taxes on the Real Property (except to the extent current taxes are not yet due and payable) or governmental or special district assessments or levies for sewer, sidewalk, curb, gutter, water, paving, electrical, gas, storm drainage, park dedication fees, or other such impositions related to the Real Property, matured or unmatured, and Seller does not know of any such threatened assessments or levies. (xii) Seller has not received written notice of any pending or threatened condemnation proceeding, proposed change of zoning, or other proposed land use regulation or action affecting the Real Property. (xiii) All bills for work done or materials furnished with respect to the Real Property have been paid in full or will be paid in full and discharged by Seller at or prior to Closing. (xiv) Seller is not a party to any oral or written employment contracts or agreements with respect to the Property other than those set forth on Exhibit H hereto (the "Employment Agreements"). To the best of Seller's knowledge, no party is in default under any Employment Agreement. (xv) There are no property interests, buildings, structures or other improvements or personal property that are owned or leased by Seller which are necessary for the operation of the Subject Property that are not being conveyed pursuant to this Agreement. (xvi) Seller has not received written notice from any insurance carrier of defects or inadequacies in the Subject Property which, if uncorrected, would result in a termination of insurance coverage or an increase in the premiums charged therefor. -9- 13 (xvii) All space leases, leases and service contracts for any space, property services or advance room contracts relating to the Subject Property and/or the Resort are listed on Exhibit E hereto, and Seller has supplied to Purchaser true and complete copies of all such documents. (xviii) Exhibit H sets forth and describes in detail, as to each employee, all accrued but unpaid vacation pay and sick leave, a description of whether any of Seller's employees are participating in a Seller group health plan, and all other fringe benefits, as well as a schedule of employees, showing salaries and duties, with a statement of the length of service of each such employee, such Exhibit to be brought current to the date of Closing. (xix) Other than as set forth in Exhibit M, to the best of knowledge of Seller, there are no Hazardous Materials upon or in any way affecting the Real Property. As used herein, "Hazardous Materials" shall mean any chemical, material or substance to which exposure is prohibited, limited, or regulated by any federal, state, county or regional authority and/or which is known to pose a hazard to the health and/or safety of humans, animals or the environment. (xx) Between the date of this Agreement and the Closing, Seller: (a) Shall not transfer or otherwise dispose of any interest in the Subject Property or any part thereof and shall not create or suffer the imposition of any further liens or encumbrances or restrictions on the Subject Property or any interest therein. (b) Shall maintain all existing policies of insurance on the Subject Property. (c) Shall maintain the Subject Property and all mechanical, heating, plumbing, electrical and other utility systems which serve the Real Property in such repair and order as existed on the date of this Agreement. (d) Shall conduct the Resorts' business only in the normal and ordinary course thereof, consistent with past practices, and in compliance with the law and shall continue to use its reasonable and good faith efforts to take guest room reservations and to otherwise promote the -10- 14 business of the subject property in the same manner as Seller did prior to the execution of this Agreement; and shall maintain the level of fixed assets and supplies and inventories as has been its practice within the past one (1) year from the date of this Agreement. (e) Shall not make any material alterations in the Subject Property. (f) Shall not enter into any contracts, agreements or leases affecting the Subject Property which will survive the Closing hereunder. (g) Shall not take any actions of any kind which might interfere with the performance by any party hereto of the obligations and responsibilities set forth herein or the enjoyment by any party hereto of the rights created hereby. (h) Shall use and operate the Subject Property in compliance with all applicable laws, rules, regulations of any applicable governmental agency and the requirements of any mortgage, operating agreement or insurance policy affecting the Subject Property. (i) Shall file for and obtain, at Seller's expense, any federal, state or local authorizations, consents, approvals, or clearances, which may be required in connection with Seller's conveyance of the Subject Property to Purchaser. (xxi) Seller has terminated the employment of Nick Pourzal and Nick Pourzal no longer has any rights to live on the Subject Property. (xxii) Seller has no knowledge of any impediment to the issuance of the Second Certificate (as defined in Section 9(a)(v) Conditions Precedent to Closing hereof) other than the normal governmental requirements for such issuance. (b) To the best of Seller's knowledge: (i) the information that has been furnished to Purchaser by Seller pursuant to this Agreement does not contain any material misrepresentation as to any material fact; and (ii) Seller has not omitted any material fact or information which would reasonably affect a prudent investor's decision to purchase the Subject Property and the Resorts business in the manner herein set forth. -11- 15 (c) To Seller's "best knowledge" or similar qualification means to the actual knowledge of Joseph Bernadino, General Counsel; Steven Siegel, vice president - construction; and Andrew HeLal, General Manager, without independent inquiry other than to the internal files of Seller. (d) All representations, warranties, and covenants contained in this Section 7 shall survive closing for a period of three (3) months from the date of Closing. (e) Purchaser acknowledges that it is relying on its independent investigation of the condition of the Subject Property (including the physical and the environmental condition of the Subject Property), that it has not relied upon any statement, representation or warranty, written or otherwise, of Seller, other than as expressly set forth in this Agreement, or of any employee or agent of Seller and that it is purchasing the Subject Property "as is." Purchaser acknowledges that any budgets or forecasts of financial results provided to it are estimates only, that such budgets and forecasts do not constitute guaranties of future performance and that future performance of the Subject Property may vary substantially from such budgets and forecasts. Purchaser warrants and represents that it has no knowledge of any fact which would render any representation, warranty or covenant contained in this Section 7 to be false or incorrect or cause Seller to be in breach thereof. (f) Seller agrees that if any deed, Leases and Service Contracts or Governmental Permits and Grants or other document to be assigned or conveyed to Purchaser is not in the name of "Prime Hospitality Corp.," but instead is in the name of Frenchman's Reef Beach Associates or other similar name ("Beach Associates"), Seller shall undertake such acts as may be necessary to assign and/or convey the interest in such documents(s) to Purchaser. (g) The limitations to the representations and warranties contained in Sections 7(c); 7(d) and the last sentence of 7(e) shall apply to and be incorporated by referenced in each and every warranty and representation given by Seller anywhere in this Agreement. 8. TITLE AND SURVEY. (a) Attached hereto as Exhibit J is a current commitment for a title insurance policy covering the Real Property, issued by Escrow Agent, in the amount of the purchase price (the "Title Commitment"). As a condition to Closing, the Escrow Agent will deliver to Purchaser an endorsement to the title commitment which extends the effective date -12- 16 thereof to the date of Closing and which discloses no further exceptions to title, as well as such other endorsements as Purchaser may reasonably request. In addition, Seller shall cooperate with Purchaser's efforts to produce such agreements, affidavits or other documents as may be reasonably required by the Escrow Agent to issue the owner's title policy. Finally, Seller agrees that on the date of Closing it will deliver to Purchaser evidence reasonably satisfactory to Purchaser and Escrow Agent, by Certificate or otherwise, which discloses no unpaid taxes or assessments on the Real Property except those pertaining to the year of Closing, it being mutually understood that Seller will have paid in full all prior years' taxes and assessments as well as all taxes and assessments allocated to the date of Closing, on or before the date of Closing. (b) Attached hereto as Exhibit K is a survey of the Real Property (the "Existing Survey"). Within sixty (60) days from the date of this Agreement, Purchaser shall obtain, at its expense, an updated survey, certified by a licensed surveyor for the express benefit of Purchaser and the Escrow Agent depicting all property corners, improvements, fences, roads, driveways, parking areas, easements and rights-of-way, encroachments on or off the Real Property, utility lines, restrictions of record, and setbacks, existing upon the Real Property (the "Improvement Survey"). The Improvement Survey shall be in form and content sufficient to cause the Escrow Agent as title company to issue an endorsement to its title commitment agreeing to delete from Schedule B, Section 2, of its to-be-issued title policy, the standard printed exceptions (including exceptions 2 and 3) and the exception for parties in possession (exception 1). If the Improvement Survey depicts any condition different than the conditions shown on the Existing Survey which causes the Escrow Agent as title company to add any additional exceptions or conditions to its Title Commitment that substantially, adversely affect the utility of the Subject Property as currently used, or substantially diminishes its value, Purchaser shall have the option in its sole discretion of (i) terminating this Agreement by written notice to Seller and receiving a prompt refund of the Earnest Money Deposit, in which case the parties shall be deemed relieved of all further rights or responsibilities hereunder, or (ii) waiving such right to terminate and proceeding to Closing in accordance with the terms and provisions of this Agreement. 9. CONDITIONS PRECEDENT TO CLOSING (a) It shall be an express condition to Purchaser's obligation to purchase the Subject Property that each and every one of the following conditions shall have been satisfied as of the date of Closing (or waived by Purchaser): -13- 17 (i) Representations and Warranties. Each of Seller's representations and warranties shall be true and accurate, in all material respects, as if made on and as of the Closing. (ii) Covenants of Seller. All actions Seller covenants herein to take shall have been completed in all material respects, including those obligations set forth in Section 5. Environmental hereto. (iii) Permits; No Impediments. Purchaser shall have been able to obtain all Governmental Permits and Grants (including a liquor license) necessary to operate the Subject Property on and subsequent to the Closing, or such permits shall have been applied for and Purchaser is satisfied will be issued in the normal course and the absence thereof as of Closing will not interfere with the operation of the Subject Property immediately subsequent to the Closing, in all material respects. There shall be no impediments to reissuance to Purchaser of any Permits required for the ongoing uninterrupted operation of the Subject Property immediately following the Closing, if transfer of such Permits is not allowed. (iv) Title and Survey. Purchaser shall be able to obtain a policy of title insurance in conformance with the provisions of Section 8 hereof, and shall obtain an Improvement Survey in conformance of the provisions of Section 8 hereof. (v) Transfer of Industrial Development Certificate and Industrial Development Benefits. Purchaser shall have been able to obtain a transfer of (i) that certain Industrial Development Certificate (the "First Certificate") and any and all benefits including, without limitation, Industrial Development benefits, pursuant to the First Certificate issued by the Virgin Islands Industrial Development Commission ("Commission") and currently benefiting Seller until March 31, 2001, by virtue of that certain Transfer of Certificate from Frenchman's Reef Beach Associates to Seller dated March 18, 1998, and (ii) that certain Industrial Development Certificate (the "Second Certificate") and any and all benefits including, without limitation, Industrial Development benefits, pursuant to the Second Certificate issued or to be issued by the Commission for the benefit of Seller for a period of 10 years commencing April 1, 2001. It is the requirement of Purchaser that transfer of the First Certificate and the -14- 18 Second Certificate provide for the following exemptions from taxes and duties through March 31, 2011: - Gross Receipt Taxes 100% exemption - USVI Income Taxes 90% exemption - Dividend Withholding Taxes 80% exemption - Interest Withholding Taxes 100% exemption - USVI Real Property Taxes 100% exemption on real property used for operating a hotel - Customs Duties Customs duty capped at 1% ad valorem assessment on certain items - Excise Taxes 100% exemption Purchaser agrees to use its reasonable efforts to comply with and complete all preconditions set by the Commission for the transfer of the First and Second Certificates. Seller agrees to cooperate with Purchaser to obtain the Commission's approval to transfer the First Certificate and the Second Certificate and all of the benefits pursuant thereto (including, without limitation, benefits relating to income taxes, gross receipt taxes, and excise taxes) to Purchaser. In addition, Seller agrees to use its reasonable efforts to obtain the issuance of the Second Certificate. (vi) Environmental. Seller shall have completed the work required to be completed pursuant to Section 5 hereof. (vii) Documents/Agreements. Seller shall have delivered at Closing all of the documents, agreements and instruments required under Section 10 hereof. (b) Failure of Condition. In the event of the failure of any condition precedent set forth above, Purchaser, at its sole election, may (a) terminate this Agreement (and receive a return of the Earnest Money Deposit); (b) waive the condition and proceed to Closing; (c) extend the date of Closing for an additional period of thirty (30) days to allow Purchaser to remedy such failure; and/or (d) if such failure arises from Seller's breach of this Agreement, avail itself of any remedies provided in herein. 10. CLOSING. The purchase and sale of the Subject Property shall close on the date which Seller and Purchaser shall mutually agree upon and designate in writing, but in no event later than the earlier of (a) fifteen (15) days from the date on which all of the conditions precedent set forth in Section 9 hereinabove have been satisfied or (b) one hundred twenty (120) days from the date of this Agreement (the "Closing"), provided, however, if Closing would otherwise occur during the period of -15- 19 December 24, 1999 to and including January 3, 2000, the Closing shall occur on January 4, 2000. The Closing shall be held at 10:00 a.m., at the offices of Escrow Agent on St. Thomas or at such other location, time and date as may be mutually agreed upon by the parties. At the Closing the following shall occur: (a) Seller shall deliver to Purchaser a duly executed and acknowledged Special Warranty Deed, or its local equivalent in proper statutory form for recording, covering the Real Property free and clear of all taxes, liens, encumbrances, restrictions or claims of any kind or nature except the Permitted Exceptions. (b) Seller shall deliver to Purchaser a duly executed and acknowledged Bill of Sale with full warranty of title covering the Business Assets (to the extent the same are not leased) and all architectural and other plans, specifications, studies, reports and other materials owned by Seller pertaining in any way to the existing or potential use, development, expansion or alteration of the Real Property or any part thereof, free and clear of all taxes, liens, encumbrances, restrictions or claims of any kind or nature except the Permitted Exceptions. Seller and Purchaser shall each execute and deliver to the other, assignments and assumptions in form and content set forth in Exhibit L wherein Seller assigns and Purchaser assumes the Leases and Contracts. (c) Seller shall deliver to Purchaser such documentation as Purchaser may reasonably request to evidence the sale and transfer of the Federal Trademarks for the names "Frenchman's Reef Beach Resort" and "Morning Star Beach Resort." (d) Seller shall deliver to Purchaser a duly executed and acknowledged Assignment covering all warranties which Seller may have on the equipment, appliances, fixtures or other of the Business Assets being conveyed to Purchaser. (e) Seller shall deliver to the Escrow Agent a duly executed and acknowledged Mechanic's Lien Affidavit and Indemnity Agreement indemnifying Purchaser and Escrow Agent against any claims or demands for work performed or materials furnished for the benefit of the Real Property. (f) Seller shall execute and deliver to Purchaser and Escrow Agent a FIRPTA Non-Withholding Certificate in the name of the Seller from the Virgin Islands Internal Revenue Bureau, in form and content reasonably acceptable to Purchaser. -16- 20 (g) Purchaser shall deliver to Escrow Agent the balance of the Purchase Price (subject to any contract credits and closing adjustments) in the form of wired funds. (h) Purchaser and Seller shall execute Statements of Settlement prepared by Escrow Agent which reflect the purchase price and all credits and other adjustments thereto. (i) Seller and Purchaser shall execute and deliver such other documents as may be necessary or appropriate to effectuate the intent and purpose of this Agreement and the transactions contemplated hereby. (j) Seller shall cause possession and management of the Subject Property and of the Resorts business to be delivered to Purchaser, in a clean condition and free and clear of any leases or tenancies other than the Leases and Contracts, and the advance room reservations taken by Seller in the ordinary course of business; and the Subject Property shall contain and include all fixed assets and supplies and inventory as are designated on Exhibit B hereto (as amended pursuant to Section 13 hereof) all in the same condition and repair as they are on the date of this Agreement, reasonable wear and tear accepted. (k) Any franchise agreements for the Resorts between Seller and Purchaser, or Purchaser's affiliates, will be terminated without payment of any penalty or termination fee, provided that payment of all fees under such franchise agreements, other than any penalty or termination fees, have been paid in full by Seller prior to Closing. 11. RISK OF LOSS. The risk of loss to the Subject Property or any part or portion thereof shall remain with Seller until the Closing hereunder has been completed, and Purchaser shall have the option to either cancel this Agreement without further obligation (and receive a prompt refund of all Earnest Money Deposit) or to close without adjustment in price and to receive from Seller an assignment of all property loss insurance other than business interruption insurance or similar coverage or other proceeds or awards in the event of any material loss, destruction, damage or taking to or of the Subject Property or any part or portion thereof by reason of fire, other casualty or condemnation prior to Closing. As used in this Paragraph 11, the term "material" shall mean any damage or destruction to the Subject Property which cannot be fully repaired by Seller prior to the Closing, or the commencement of a condemnation proceeding involving any part of the Property. Such option must be exercised by Purchaser by written notice given to Seller no later than thirty (30) days following the occurrence of the event which causes the loss, damage or taking. If no such notice is timely given, Purchaser shall be deemed to have elected to close without adjustment in price and to -17- 21 receive an assignment of all proceeds or awards. If the Closing falls within the said thirty (30) day notice period, the Closing shall be extended to the fifth business day following the expiration of said thirty (30) day period. 12. INDEMNIFICATION. Seller agrees to and does hereby indemnify, defend (including reasonable attorneys' fees), save and hold harmless Purchaser against and in respect of any and all claims, demands, losses, costs, expenses, injuries, liabilities, obligations or damages which may be asserted against, incurred or suffered by Purchaser ("Purchaser's Loss") caused by or arising out of Seller's ownership and/or operation of the Subject Property prior to the date of Closing, including losses caused by liability to third parties for personal injuries occurring prior to the date of Closing, but excluding any loss caused by or arising out of any physical, environmental or other condition of the Subject Property existing prior to the date of Closing, except with respect to personal injuries if such injuries occurred prior to the date of Closing. The foregoing indemnity shall include all attorneys' fees incurred by Purchaser in prosecuting or defending any claim, cause of action, or lawsuit within the scope of the indemnity, including any suit that may be necessary to enforce the indemnity, and shall survive the Closing hereunder and remain in full force and effect. In addition to the indemnifications set forth in the immediately preceding paragraph, Seller agrees to and does hereby indemnify, defend (including reasonable attorneys' fees), save and hold harmless Purchaser against and in respect to any claims, demands, losses, costs, expenses, injuries, liabilities, obligations or damages which may be asserted against, incurred by or suffered by Purchaser or the Subject Property, which relate to any rights, title, interest or other claims, of any type or nature (including any right, title or interest or other claim relating to the Subject Property) by Nick Pourzal and/or his spouse (collectively and individually, the "Pourzals") or any business entity in which the Pourzals have an interest (collectively, "Pourzals' Claims") to the extent and only to the extent, such Pourzals' Claims relate to conditions, facts or events alleged or existing prior to the date of Closing and arise from acts or omissions by Seller or any predecessor in interest to Seller of the Subject Property. The foregoing indemnity shall include all attorneys' fees incurred by Purchaser in any suit that may be necessary to enforce the indemnity, and shall survive the Closing hereunder and remain in full force and effect. Purchaser agrees that Seller may (a) retain counsel on behalf of Purchaser, such counsel to be reasonably acceptable to Purchaser, and (b) direct the course of any litigation, and negotiate any settlement, provided such course and negotiations are consistent with the reasonable goals of MI and provided that the cost of such counsel, litigation and settlement shall be borne solely by Seller. Purchaser agrees to and does hereby indemnify, defend (including reasonable attorneys' fees), save and hold harmless Seller against and in respect of any and all claims, demands, losses, costs, expenses, injuries, liabilities, obligations or damages which may be asserted against, incurred or suffered by Seller, caused by or arising out of Purchaser's ownership or operation of the Real Property and Resorts after the date of Closing. In addition, except for any rights it may have (i) for breach of any representation or warranty contained in this Agreement and (ii) related to the work to be -18- 22 performed by Seller pursuant to Section 5 hereof, Purchaser agrees to and does hereby waive and release Seller from any claim Purchaser may have against Seller relating to or caused by any physical, environmental or other conditions of the Subject Property existing prior to the date of Closing, including any liability arising from any claim of a third party against Purchaser with respect to any such physical, environmental or other condition of the Subject Property. The foregoing indemnity shall include all attorneys' fees incurred by Seller in prosecuting or defending any claim, cause of action, or lawsuit within the scope of the indemnity, including any suit that may be necessary to enforce the indemnity. This paragraph shall survive the Closing hereunder and remain in full force and effect. The rights which Purchaser may have for breach of any representation or warranty contained in this Agreement are subject to the terms of Section 7(d) of this Agreement, relating to the period of survival of the representations and warranties. The rights of Purchaser relating to the work to be performed by Seller pursuant to Section 5 hereof are subject to Seller's release of liability for such work upon final completion of the work, as set forth in the last sentence of Section 5 hereto. 13. INVENTORY OF PERSONAL PROPERTY. An inventory of the personal property, including fixed supplies, supplies and inventory, located on the Real Property and Resorts shall be performed by Seller and Purchaser within thirty (30) days of the date of the execution of this Agreement and attached hereto as Exhibit B hereto. Purchaser and Seller will amend Exhibit B to reflect such inventory as of the date of Closing. 14. UNION CONTRACT/CONTRACT EMPLOYEES. (a) Union Employees. On the date of Closing, Purchaser agrees to assume the collective Bargaining Agreement dated June 27, 1997 between Seller and United States of America AFL-CIO ("Union") ("Union Contract"). Seller shall reasonably cooperate with Purchaser to assist Purchaser in making such modifications to the Union Contract as may be reasonably necessary to provide equivalent benefits thereunder (i.e., to account for the fact that Purchaser may be unable to duplicate Prime's benefits but can provide equivalent Marriott benefits), provided that no such modification shall be a condition to Closing. Seller represents that it is not a party to any union or other collective bargaining agreement with employees employed in connection with the Subject Property, other than the Union Contract, and that there are no amendments to or modifications of the Union Contract and that the copy of the Union Contract provided to Purchaser is true, correct and complete in all respects. Seller represents that, to its knowledge and except as provided on Exhibit H, there are no grievances or similar claims pending or threatened pursuant to the Union Contract. Purchaser assumes all liability and agrees to indemnify Seller against any liability, including any severance costs and liabilities imposed by law, arising out of Purchaser's -19- 23 failure to hire any union employee at closing or termination of any union employee subsequent to the closing date. (b) Non-Union Employees. Purchaser will hire all employees not subject to the Union Contract, subject to Purchaser's standard ninety-day probationary period for new employees, provided that Purchaser assumes all liability and agrees to indemnify Seller against all liability, including any severance costs and liabilities imposed by law arising out of Purchaser's failure to hire any employee at closing or termination of any employee within the ninety (90) day probationary period for new employees, and further provided that the employment of the individuals identified on Exhibit H is provided for in subsection (f) below. (c) Benefits. With respect to all Union employees and all non-union employees, Seller shall pay to Purchaser at Closing all costs and expenses associated with accrued but unpaid or unearned costs associated with the following, calculated through the date of Closing: salary, vacation leave, sick leave, medical, pension, and welfare benefits and employee fringe benefits (collectively, the "Employee Plans"). Purchaser agrees to promptly pay when due all amounts due to employees under the Employee Plans. (d) Mutual Indemnity. Seller shall indemnify and hold harmless Purchaser, from and against any and all claims, causes of action, proceedings, judgments, damages, penalties and liabilities made, assessed or rendered against Purchaser or its affiliates and any and all costs and expenses (including reasonable attorneys fees and expenses) incurred by Purchaser or its affiliates with respect to (i) any termination of any employee prior to the Closing Date, (ii) any grievances, claims, or actions of any employees of the Property occurring or relating to periods on or prior to Closing, any employee benefits pursuant to any Employee Plans accrued or earned as of the Closing Date, payment for which Seller has failed to make to Purchaser pursuant to subsection (c) above. Purchaser shall indemnify and hold harmless Seller, from and against any and all claims, causes of action, proceedings, judgments, damages, penalties and liabilities made, assessed or rendered against Seller or its affiliates and any and all costs and expenses (including reasonable attorneys fees and expenses) incurred by Seller or its affiliates (i) with respect to any employee benefits pursuant to any Employee Plans accrued or earned after the Closing Date, (ii) with respect to any employee benefits pursuant to any Employee Plans for which Seller has made payment to Purchaser pursuant to subsection (c) above, and (iii) the termination of any employee after the Closing Date (other than with respect to the employees -20- 24 identified on Exhibit H, which are provided for in subsection (f) below). (e) Access to Employees. Seller will cooperate reasonably in connection with Purchaser's interviewing of employees at the Hotel and, upon Purchaser's request, provide Purchaser with access to wage and benefits information. Purchaser shall indemnify and hold harmless Seller, from and against any and all claims, causes of action, proceedings, judgments, damages, penalties and liabilities made, assessed or rendered against Seller or its affiliates and any and all costs and expenses (including reasonable attorneys fees and expenses) incurred by Seller or its affiliates with respect to its interviewing employees or with respect to any employment decisions made with respect to such interviews. Seller agrees that it will not make any promise, commitment or representation to any non-Union employee regarding possible employment with Purchaser, other than the employees listed on Exhibit H. (f) Designated Employees. Purchaser agrees to assume the Employment Agreements for those six (6) employees identified as "Designated Employees," which employees and agreements are described on Exhibit H ("Designated Employees' Agreements"). Each Designated Employee has consented to this assumption pursuant to the executed Consents attached hereto as Exhibit H-2 (such consents being known as the "Designated Employee's Consent"). (g) Purchaser's/Seller's Obligations. Purchaser's assumption of the Designated Employees' Agreement shall be subject to the following terms: (i) If Purchaser notifies Seller of Purchaser's election to terminate the employment of any Designated Employee between the 180th day and the 210th day after the date of Closing (the "Termination Period"), Seller shall conclusively be deemed to have accepted a reassignment and reassumption of such Designated Employee Agreement. In the event that any Designated Employee receives a bonus for the calendar year of the reassignment pursuant to the terms of the Designated Employee Agreement, Purchaser shall reimburse Seller for a portion of such bonus equal to the portion of such year which expired prior to the date of reassignment. Purchaser may not reassign a Designated Employee Agreement before the 180th day after the date of Closing. -21- 25 (ii) If Purchaser reassigns the Designated Employee Agreement of any Designated Employee to Seller during the Termination Period, and as a result of such reassignment or subsequent termination by Seller Designated Employee has any claim or cause of action against Purchaser or is entitled to any payment under the Designated Employee's Agreement or pursuant to law (including any payment required pursuant to the U.S. Virgin Islands Wrongful Discharge Act), Seller agrees to indemnify and hold Purchaser harmless form any such claims, damages or expenses, including all reasonable legal fees incurred by Purchaser. Seller's foregoing indemnification shall not extend to any claim or cause of action resulting from any act or omission taken by Purchaser during the course of Purchaser's employment of the Designated Employee. (iii) If Purchaser terminates the employment of any Designated Employee at any time or attempts to reassign the Designated Employee Agreement to Seller before or after the Termination Period, and as a result of such termination or attempted reassignment by Purchaser, Designated Employee has any claim or cause of action against Seller or is entitled to any payment under the Designated Employees' Agreement or pursuant to law (including any payment required pursuant to the U.S. Virgin Island Wrongful Discharge Act), Purchaser agrees to indemnify and hold Seller harmless from any such claims, damages or expenses, including all reasonable legal fees incurred by Seller. Purchaser agrees to defend and indemnify Seller against, and agrees to hold it harmless from, any and all claims or losses incurred to suffered by Seller as a result of (i) any breach or claims of breach of any Designated Employee Agreement by Purchaser and (ii) any claim by the Designated Employee resulting from or relating to any actions or omissions of Purchaser and its employees or agents, including without limitation, any claim of discrimination, unfair labor practices, or violation of labor or employment laws or regulations. Purchaser's foregoing indemnifications shall not extend to any claim or cause of action resulting from any act or omission taken by Seller during the course of Seller's employment of the Designated Employee. (iv) Purchaser shall pay to Seller all sums which seller had previously paid to Purchaser pursuant to the terms of this subsection for any Designated Employee whose Designated -22- 26 Employee Agreement the Purchaser reassigned to Seller or who is otherwise terminated at any time by Purchaser and thereafter prior to the expiration of the stated term of the Designated Employee Agreement either Purchaser (or any subsidiary in which Purchaser owns all or substantially all of the voting interests) hires or otherwise retains the services of such Designated Employee in connection with the management, ownership or operation of any hotel in the U.S. Virgin Islands. 15. DEFAULT. If Purchaser fails or refuses to perform or tender any of its closing obligations hereunder, which default Seller elects not to waive, the Earnest Money Deposit and accrued interest shall be forfeited by Purchaser and retained by Seller and both parties shall thereafter be released from all obligations and responsibilities hereunder. It is agreed that such forfeited earnest monies and interest are liquidated damages and are Seller's sole and only remedy for Purchaser's failure to perform or tender its closing obligations under this Agreement. Seller expressly waives the remedies of specific performance and additional damages. In the event that during the term of this Agreement (i) any of Seller's representations or warranties are (or become prior to Closing) untrue or incapable of performance, or (ii) Seller shall fail or refuse to perform any of its obligations hereunder, which default Purchaser elects not to waive, Purchaser shall have the option of (aa) declaring this Agreement terminated, in which event Purchaser shall be entitled to a prompt refund of the Earnest Money Deposit and the parties shall be deemed discharged from any further rights or responsibilities hereunder, or (bb) treating this Agreement as being in full force and effect and suing for the specific performance hereof, or damages, or both. Such option shall be exercised by written notice provided by Purchaser to Seller. 16. NOTICE. All notices provided for herein shall be in writing and shall either be delivered personally or sent by facsimile transmission, by Federal Express, or by certified mail, return receipt requested, postage prepaid, addressed to the party for whom intended at the address set forth below. Any party may change its address by written notice to the other party. To the Seller: Prime Hospitality Corp 700 Route 46 East Fairfield, New Jersey 07004 Attn: President With a copy to: Joseph Bernadino, Esquire (which shall not 700 Route 46 East constitute notice) Fairfield, New Jersey 07004 Attn: General Counsel -23- 27 To the Purchaser: Marriott International, Inc. 10400 Fernwood Road Lodging Development Bethesda, Maryland 20817 Attn: Wendell Ward Fax: (301) 530-2918 With a copy to: James D. Wright, Esquire (which shall not Venable, Baetjer and Howard, LLP constitute notice) Two Hopkins Plaza, Suite 1800 Baltimore, Maryland 21201 Fax No. (410) 244-7742 Each such notice shall be deemed given on the date personally delivered or faxed, on the date following the date of delivery to Federal Express, or two days after mailing by certified mail, return receipt requested. 17. BROKERS. Seller agrees to indemnify and hold harmless Purchaser with respect to all commissions and fees due to or claims by CIBC Oppenheimer and any other brokers employed by Seller who may claim a commission, in connection with this transaction. Purchaser represents and warrants to the other that it has not employed or used the services of any broker or finder in connection with this transaction. Each of said parties agrees to and does hereby indemnify, defend (including attorney's fees), save and hold harmless the other from and against any and all claims, demands, costs, expenses and liability arising out of any claims for a brokerage commission or other compensation made by any broker or brokers (other than those identified above) purporting to represent the indemnifying party or claiming by, through or under the indemnifying party in connection with this transaction. 18. PUBLICITY. The parties agree that no party shall, with respect to this Agreement and the transactions contemplated hereby, contact or conduct negotiations with public officials, make any public pronouncements, issue press releases or otherwise furnish information regarding this Agreement or the transactions contemplated hereby to any third party without the consent of the other parties, except as may be required by law or as may be reasonably necessary, on a confidential basis, to inform any rating agencies, potential sources of financing, financial analysts, or to entities involved with a sale of a controlling interest in the Seller, the Purchaser or any of their affiliates or to receive legal, accounting and/or tax advice; provided, however, that, if such information is required to be disclosed by law, the party so disclosing the information will use reasonable efforts to give notice to the other parties as soon as such party learns that is must make such disclosure. 19. PURCHASER'S RIGHT OF ENTRY. Throughout the term of this Agreement Purchaser and Purchaser's authorized representatives shall have the right, upon the giving of reasonable notice to Seller, to enter upon the Real Property and to undertake such activities to prepare to operate the Resorts on and after the Closing; -24- 28 provided that no activity of Purchaser or its authorized representative on the Real Property will unreasonably interfere with the normal operation of business by Seller. 20. ASSIGNMENT. Purchaser may assign or transfer its interest in this Agreement to any other person or entity which assumes Purchaser's rights and obligations hereunder, without the consent of the Seller being required. 21. NO THIRD PARTY BENEFICIARIES. None of the terms, covenants, obligations or rights contained in this Agreement is or shall be deemed to be for the benefit of any person or entity not a party hereto. 22. ATTORNEY'S FEES. In the event of any litigation between Seller and Purchaser involving the interpretation and/or enforcement of this Agreement or any provisions hereof or any other element of this transaction, including the indemnification contained in Paragraph 11 above, the prevailing party shall be entitled to an award of its costs and expenses (including reasonable costs and attorney's fees) incurred therein as a part of the judgment or stipulated settlement entered in such litigation. 23. TIME. Time is of the essence hereof. In the event the day or last day specified or permitted for the performance of any act required or allowed under this Agreement falls on a Saturday, Sunday, or legal holiday, the time for such performance shall be extended to the next succeeding business day. 24. SEVERABILITY. If any provisions of this Agreement shall be invalid, illegal or unenforceable, it shall not affect or impair the validity, legality or enforceability of this Agreement itself or of any other provisions hereof, and there shall be substituted for the affected provision, a valid and enforceable provision as similar as possible to the affected provision. For purposes of avoiding the rule against perpetuities, no provision of this Agreement shall be effective, and no closing or conveyance shall occur, after 20 years from the date of this Agreement. 25. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed in one instrument, signed by all parties, or in counterparts, in which case all such counterparts together shall constitute one and the same instrument and Agreement, binding on all of the parties thereto, notwithstanding that all of the parties are not signatory to the original or the same counterpart. Facsimile signatures shall be treated as original signatures hereon, but not on closing documents. 26. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, and shall be construed in accordance with and governed by the laws of the Territory of the U.S. Virgin Islands. This Agreement contains the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior arrangements, writings, representations, and negotiations relating thereto. Finally, this Agreement may not be amended or modified except by an instrument in writing signed by all of the parties. -25- 29 27. FURTHER ASSURANCES. Each party hereto shall from time to time execute and deliver such additional instruments or do such additional acts as the other party may reasonably request in order to effectuate the full intent of this Agreement. 28. ACCEPTANCE DEADLINE. In the event this Agreement has not been fully executed and copies thereof delivered to Purchaser by __________________ the offer of Purchaser represented by this Agreement shall be deemed withdrawn at that time, and this Agreement shall no longer be capable of acceptance by Seller. 29. EXCLUSIVITY. During the pendency of this Agreement, Seller agrees not to seek, negotiate or accept any other offers or agreements for the sale of the Subject Project, or any portion thereof, with any prospective purchaser(s) other than the Purchaser under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SELLER: PRIME HOSPITALITY CORP By: /s/ DOUGLAS VICARI, ----------------------------------- Its: Douglas Vicari, Sr. V.P. ---------------------------------- PURCHASER: MARRIOTT INTERNATIONAL, INC. By: /s/ JAMES M. SULLUS ----------------------------------- Its: Executive Vice President ---------------------------------- -26- 30 LIST OF EXHIBITS A Description of Real Property B Business Assets C Escrow Instruction Letter D Allocation of Total Purchase Price E Leases and Service Contracts To Be Assumed by Purchaser F Categories of Unopened Food, Beverage and Operating Supplies G Environmental Report H Employment Agreements/Designated Employees Agreements I List of Governmental Permits and Grants J Title Commitment K Existing Survey L Form of Assignment and Assumption Agreement of Leases and Service Contracts 31 EXHIBIT A DESCRIPTION OF REAL PROPERTY Property A: Parcel of P1 Bakkero (a/k/a "East Point" "The Quarantine Station" and "Muhlenfeldt Point") No. 5a Frenchman's Bay Quarter St. Thomas Virgin Islands as shown on PWD D9-167-T48 Property B: Muhlenfeldt Point Light Station Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD D3-30-T34 Property C: Parcel No. 2K Estate Bakkero and Elisenlund No. 3 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD G9-554-T60 Property D: Parcel No. 4B Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD F9-3593-T78 Property E: Parcel No. 4 Remainder Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD D9-1418-T78, excluding the following parcels: (1) Parcel No. 4A Estate Bakkero No.5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD No. F3-33-T75 (2) Parcel No. 4B Estate Bakkero No. 5 Frenchman's Bay Quarter St Thomas, Virgin Islands as shown on PWD No. F9-3593-T78 (3) Parcel No. 4C Remainder Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD No. F9-3594-T78 excluding: Parcel No. 4C-1 Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD No. D9-3040-T85 32 Property F: Parcel No. 4C Remainder Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD No. F9-3594-T78 excluding: Parcel No. 4C Remainder Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD No. D9-3040-T85 Property G: Parcel No. 1-42 Estate Bakkero Section AA No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD A9-88-T68 Property H: Parcel No. 4C-1 Estate Bakkero No. 5 Frenchman's Bay Quarter St. Thomas, Virgin Islands as shown on PWD D9-3040-T85 33 EXHIBIT D ALLOCATION OF TOTAL PURCHASE PRICE Land $ 4,700,000 ----------- Buildings 61,000,000 ----------- Fixtures 7,300,000 ----------- Personal Property -- ----------- Good Will -- ----------------------- ----------- TOTAL $73,000,000 =========== 34 EXHIBIT L FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT OF LEASES AND SERVICE CONTRACTS THIS ASSIGNMENT OF LEASES AND SERVICE CONTRACTS ("this Assignment") made the ___ day of_____________ , ____, by and between PRIME HOSPITALITY CORP, a Delaware corporation (hereby referred to as "Assignor"), and MARRIOTT INTERNATIONAL, INC., its successor or assigns (hereinafter referred to as "Assignee"). EXPLANATORY STATEMENT A. Assignor is the owner of those certain parcels of real property situated in St. Thomas in the Territory of the U.S. Virgin Islands, more particularly described on Schedule A attached hereto (the "Property"), a portion of which Property is improved by two (2) resorts operating under the trade names "Frenchman's Reef Beach Resort" and "Morning Star Beach Resort" (collectively, the "Resorts"). B. Pursuant to a Purchase and Sale Agreement dated __________, ______________ by and between Assignor and Assignee (the "Agreement"), Assignee has contracted to purchase the Property from Assignor. C. Pursuant to the terms of the Agreement, Assignor has agreed to assign, transfer, sell, and convey unto Assignee, all of Assignor's right, title, and interest in, to, and under a variety of leases and service contracts to which Assignor is a party, which leases and service contracts are required or desirable for the orderly operation and maintenance of the Property and the Resorts. NOW, THEREFORE, in consideration of the foregoing Explanatory Statement, the covenants and agreements set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Explanatory Statement. The Explanatory Statement portion of this Assignment forms an integral part of this Assignment and is hereby incorporated by reference. All terms used herein shall be given the meaning assigned to them in the Agreement, unless expressly assigned a different meaning in this Assignment. 2. Assignment. Assignor does hereby assign, transfer, sell, and convey unto Assignee and does hereby confirm the assignment, transfer, sale, and conveyance unto Assignee of all of Assignor's right, title, and interest in, to, and under those leases and service contracts set forth and described on Schedule B attached hereto (collectively, the "Leases and Service Contracts") Assignor acknowledges and agrees that its obligations 35 3. Assumption. By execution hereof, Assignee does hereby, from and after the date of this Assignment, assume and agree to perform all duties, obligations, and responsibilities of Assignor under the Leases and Service Contracts. 4. Indemnification. Assignee does hereby agree to defend, indemnify, and hold Assignor harmless from and against any and all causes, claims, demands, losses, liabilities, costs, damages, expenses, and fees (including, but not limited to, reasonable attorneys' fees) incurred or suffered by Assignor as a result of Assignee's failure to perform, after the date of this Assignment, any or all of Assignee's obligations under the Leases and Service Contracts. Assignor does hereby agree to defend, indemnify, and hold Assignee harmless from and against any and all causes, claims, demands, losses, liabilities, costs, damages, expenses, and fees (including, but not limited to, reasonable attorneys' fees) incurred or suffered by Assignee as a result of Assignor's failure to perform, prior to and through the date of this Assignment, any or all of Assignor's obligations under the Leases and Service Contacts. 5. Representations by Assignor. 5.1 Assignor, for itself and its legal representatives, successors, and assigns, covenants and represents to Assignee and agrees that (a) Assignor has full right, authority, and power to assign its rights and interests in and under the Leases and Service Contracts, subject to any consents which may be required pursuant to the terms of such Leases or Service Contracts, (b) no other assignment of the Leases and Service Contracts has been made by Assignor, and the rights and interests of Assignor in and under the Leases and Service Contracts are now and will, on the date hereof, be free and clear of any liens and encumbrances made by Assignor, and (c) as of the date hereof, to its best knowledge, there exist no outstanding material defaults under the Leases and Service Contracts. The limitation contained in Section 7(c), 7(d), and the last sentence of Section 7(e) of the Agreement shall apply to and is incorporated into this Section 5. 5.2 Notwithstanding any term herein to the contrary, Assignee hereby waives any and all rights, claims, causes or demands (collectively, the "CLAIMS") against Assignor as the grantor of the Special Warranty Deed (the "DEED") to be executed and delivered by Assignee in connection with the consummation of the sale of the Property from Assignor to Assignee pursuant to the terms of the Agreement, to the extent the Claims relate to the Leases and Service Contracts. 5.3 Notwithstanding any term herein to the contrary, Assignee hereby waives any and all Claims against Assignor as the grantor of the Deed to the extent the Claims related to any and all matters, encroachments, and conditions set forth on that certain Survey of the Property revised as of January 1, 2000 as prepared by William H. Byam. 6. Representations by Assignee. Assignee, for itself and its legal representatives, successors and assigns, covenants and represents to Assignor and agrees -2- 36 under the Leases and Service Contracts arising before the date of this Assignment shall remain the sole responsibility of Assignor. 3. Assumption. By execution hereof, Assignee does hereby, from and after the date of this Assignment, assume and agree to perform all duties, obligations, and responsibilities of Assignor under the Leases and Service Contracts. 4. Indemnification. Assignee does hereby agree to defend, indemnify, and hold Assignor harmless from and against any and all causes, claims, demands, losses, liabilities, costs, damages, expenses, and fees (including, but not limited to, reasonable attorneys' fees) incurred or suffered by Assignor as a result of Assignee's failure to perform, after the date of this Assignment, any or all of Assignee's obligations under the Leases and Service Contracts. Assignor does hereby agree to defend, indemnify, and hold Assignee harmless from and against any and all cases, claims, demands, losses, liabilities, costs, damages, expenses, and fees (including, but not limited to, reasonable attorneys' fees) incurred or suffered by Assignee as a result of Assignor's failure to perform, prior to and through the date of this Assignment, any or all of Assignor's obligations under the Leases and Service Contracts. 5. Representations by Assignor. Assignor, for itself and its legal representatives, successors, and assigns, covenants and represents to Assignee and agrees that (a) Assignor has full right, authority, and power to assign its rights and interests in and under the Leases and Service Contracts, subject to any consents which may be required pursuant to the terms of such Leases or Service Contracts, (b) no other assignment of the Leases and Service Contracts has been made by Assignor, and the rights and interests of Assignor in and under the Leases and Service Contracts are now and will, on the date hereof, be free and clear of any liens and encumbrances made by Assignor, and (c) as of the date hereof, to its best knowledge, there exist no outstanding material defaults under the Leases and Service Contracts. The limitation contained in Section 7(c), 7(d), and the last sentence of Section 7(e) of the Agreement shall apply to and is incorporated into this Section 5. 6. Representations by Assignee. Assignee, for itself and its legal representatives, successors and assigns, covenants and represents to Assignor and agrees that all payments required by the terms of the Leases and Service Contracts, which become due and payable on and after the date hereof, shall be made by Assignee in accordance with the terms of the respective Leases and Service Contracts and sent directly to the respective named contractor thereunder or as otherwise directed in writing by such contractor. 7. Governing Law. This Assignment shall be construed, interpreted and enforced in accordance with and governed by the laws of the Territory of the U.S. Virgin Islands, without regard to principles of conflict of laws. 37 8. No Partnership. Nothing in this Assignment shall be deemed in any way to create between the parties hereto any relationship of partnership, joint venture, or association, and the parties hereto hereby disclaim the existence of any such relationship. IN WITNESS WHEREOF, the parties hereto have each caused this Assignment to be executed on its behalf by its duly authorized representative with the specific intention of creating a document under seal. WITNESS: ASSIGNOR: PRIME HOSPITALITY CORP. - ------------------------ By: (SEAL) ------------------- Name: ------------------------ Title: ----------------------- WITNESS: ASSIGNEE: MARRIOTT INTERNATIONAL, INC. - ------------------------ By: (SEAL) -------------------- Name: ------------------------ Title: ------------------------ 38 SCHEDULE A DESCRIPTION OF PROPERTY 39 SCHEDULE B LIST OF LEASES AND SERVICE CONTRACTS 40 LISTING OF EXHIBITS INTENTIONALLY OMMITTED EXHIBIT B BUSINESS ASSETS EXHIBIT C ESCROW INSTRUCTION LETTER EXHIBIT E LEASES AND SERVICE CONTRACTS TO BE ASSUMED BY PURCHASER EXHIBIT F CATEGORIES OF UNOPENING FOOD, BEVERAGE, AND OPERATING SUPPLIES EXHIBIT G ENVIRONMENTAL REPORT EXHIBIT H EMPLOYMENT AGREEMENTS/DESIGNATED EMPLOYEES AGREEMENTS EXHIBIT I LIST OF GOVERNMENTAL PERMITS AND GRANTS EXHIBIT J TITLE COMMITMENT EXHIBIT K EXISTING SURVEY EXHIBIT M VIOLATIONS EX-2.H 3 FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT 1 FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT THIS FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT (this "AMENDMENT") made as of the 17th day of December, 1999, by and between PRIME HOSPITALITY CORP., a Delaware corporation ("SELLER"), and MARRIOTT INTERNATIONAL INC., its successor or assigns ("PURCHASER"). EXPLANATORY STATEMENT A. By Purchase and Sale Agreement dated September 15, 1999 between Seller and Purchaser (the "ORIGINAL AGREEMENT"), Seller agreed to sell to Purchaser and Purchaser agreed to buy from Seller those certain parcels of Real Property situated in St. Thomas in the Territory of the U.S. Virgin Islands and the Business Assets of the Resorts operating thereon (collectively, the "SUBJECT PROPERTY"), all as more particularly described in the Original Agreement, on to terms and conditions set forth therein. B. Under the terms of the Original Agreement, it is a condition precedent to Purchaser's obligation to close on the Subject Property for Purchaser to obtain from the Virgin Islands Industrial Development Commission (the "COMMISSION") a transfer of those certain Industrial Development Certificates and any and all benefits pursuant thereto (including, without limitation, benefits relating to income taxes, gross receipt taxes, and excise taxes), issued by the Commission and benefiting, or intended to benefit, Seller through March 31, 2011 as set forth in the Original Agreement (referred to in the Original Agreement as the First Certificate and the Second Certificate, and hereinafter collectively referred to as the "CERTIFICATES"). C. Purchaser and Seller have agreed to an alternative approach to satisfy the condition precedent relating to the transfer of the Certificates whereby Purchaser shall, as a new applicant, make application for and attempt to obtain from the Commission a new Industrial Development Certificate (the "New Certificate") to be issued in the name of Purchaser and to take effect on the date of transfer of the Subject Property from Seller to Purchaser. D. To memorialize the foregoing understanding and agreement, Seller and Purchaser have agreed to amend the Original Agreement as hereinafter set forth (the Original Agreement and this Amendment, hereafter this "AGREEMENT"). NOW, THEREFORE, WITNESSETH, that Seller and Purchaser, in consideration of Explanatory Statement which is hereby incorporated by reference, the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agree as follows: 1. Defined Terms. Capitalized terms used in this Amendment shall have the meaning ascribed to them in the Original Agreement. 2 2. Conditions Precedent to Closing. As of the effective date of this Amendment, Section 9(a)(v) of the Original Agreement shall be amended to read as follows: (v) Industrial Development Certificate and Industrial Benefits. Purchaser shall have been able either to (1) obtain a transfer of those certain Industrial Development Certificates as more particularly hereinafter set forth in subsection (A), or (2) obtain the issuance of an Industrial Development Certificate as more particularly hereinafter set forth in subsection (B). (A) Transfer of Industrial Development Certificate and Industrial Development Benefits. Purchaser shall have been able to obtain a transfer of (i) that certain Industrial Development Certificate (the "First Certificate") and any and all benefits including, without limitation, Industrial Development benefits, pursuant to the First Certificate issued by the Virgin Islands Industrial Development Commission ("Commission") and currently benefiting Seller until March 31, 2001, by virtue of that certain Transfer of Certificate from Frenchman's Reef Beach Associates to Seller dated March 18, 1998, and (ii) that certain Industrial Development Certificate (the "Second Certificate") and any and all benefits including, without limitation, Industrial Development benefits, pursuant to the Second Certificate issued or to be issued by the Commission for the benefit of Seller for a period of 10 years commencing April 1, 2001. It is the requirement of Purchaser that transfer of the First Certificate and the Second Certificate provide for the following exemptions from taxes and duties through March 31, 2011: - Gloss Receipt Taxes 100% exemption - USVI Income Taxes 90% exemption - Dividend Withholding Taxes 80% exemption - Interest Withholding Taxes 100% exemption - USVI Real Property Taxes 100% exemption on real property used for operating a hotel - Customs Duties Customs duty capped at 1% ad valorem assessment on certain items - Excise Taxes 100% exemption
Purchaser agrees to use its reasonable efforts to comply with and complete all preconditions set by the Commission for the transfer of the First and Second Certificates. Seller agrees to cooperate with Purchaser to obtain the Commission's approval to transfer the First Certificate and the Second Certificate and all of the benefits pursuant thereto (including, without limitation, benefits relating to -2- 3 income taxes, gross receipt taxes, and excise taxes) to Purchaser. (B) Industrial Development Certificate and Industrial Development Benefits. The Virgin Islands Industrial Development Commission (the "Commission") shall approve and issue directly to Purchaser, in Purchaser's name, an Industrial Development Certificate (the "New IDC Certificate") providing benefits and exemptions equivalent to those afforded Seller pursuant to the First Certificate and Second Certificate but for a period from the date of Closing through the ten (10) year anniversary date of Closing, including, without limitation, the following exemptions from taxes and duties: Gross Receipt Taxes 100% exemption USVI Income Taxes 90% exemption Dividend Withholding Taxes 80% exemption Interest Withholding Taxes 100% exemption USVI Real Property Taxes 100% exemption on real property used for operating a hotel Customs Duties Customs duty capped at 1% ad valorem assessment on certain items Excise Taxes 100% exemption
(C) Purchaser agrees to use its reasonable efforts to comply with and complete all preconditions set by the Commission either for the transfer specified in Section 9(a)(v)(A) or the issuance of the New IDC Certificate specified in Section 9(a)(v)(B). Seller agrees to cooperate with Purchaser, if necessary, to obtain the Commission's approval to issue the New IDC Certificate and all of the benefits pursuant thereto (including, without limitation, benefits relating to income taxes, gross receipt taxes, and excise taxes) to Purchaser. 3. Purchase Price. As of the effective date of this Amendment, Section 2 of the Original Agreement shall be amended to incorporate the following provision, to be inserted after the first sentence of paragraph 2: Notwithstanding any term or provision in this Agreement to the contrary, if Purchaser obtains the issuance of the New IDC Certificate as more particularly set forth in Section 9(a)(v)(B) of this Agreement but does not obtain the transfer as more particularly set forth in Section 9(a)(v)(A), the purchase price for the Subject Property shall be Seventy Three Million Dollars ($73,000,000), it being agreed among the parties hereto that said reduction in purchase price is necessary to account for the loss of benefits provided under the First and Second Certificates. -3- 4 4. Closing. As of the effective date of this Amendment, Section 10 of the Original Agreement shall be amended to incorporate the following provision, to be inserted after the second sentence of the first paragraph: Notwithstanding any term or provision in this Agreement to the contrary, if Purchaser obtains the issuance of the New IDC Certificate as more particularly set forth in Section 9(a)(v)(B) of this Agreement but does not obtain the transfer as more particularly set forth in Section 9(a)(v)(A), the purchase and sale of the Subject Property shall close in accordance with the terms and conditions set forth in the Original Agreement but in no event earlier than January 31, 2000. 5. No Other Amendments. In all other respects, each and every term, covenant, agreement and condition of the Agreement shall remain in full force and effect and binding on the parties thereto, except as amended herein. 6. Multiple Counterparts and Facsimile Signature. This Amendment may be executed in a number of identical counterparts and by exchange of facsimile signatures. If so executed, each of such facsimile executed counterparts shall, collectively, constitute one agreement; but in making proof of this Amendment, it shall not be necessary to produce or account for more than one such counterpart. IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto have executed this Amendment, with the intention that this Amendment constitute a sealed instrument, as of the date first above written. SELLER: PRIME HOSPITALITY CORP. Dated: 12/17/99 By: /s/ DOUGLAS VICACI [SEAL] ----------- -------------------- Name: DOUGLAS VICACI ------------------ Title: SVP & CFO ----------------- -4- 5 PURCHASER: MARRIOTT INTERNATIONAL, INC. Dated: December 17, 1999 By: /s/ WENDELL B. WARD [SEAL] ----------------- -------------------------- Name: WENDELL WARD ------------------------ Title: VICE PRESIDENT ---------------------- -5- 6 LISTING OF EXHIBITS INTENTIONALLY OMMITTED EXHIBIT B BUSINESS ASSETS EXHIBIT C ESCROW INSTRUCTION LETTER EXHIBIT E LEASES AND SERVICE CONTRACTS TO BE ASSUMED BY PURCHASER EXHIBIT F CATEGORIES OF UNOPENING FOOD, BEVERAGE, AND OPERATING SUPPLIES EXHIBIT G ENVIRONMENTAL REPORT EXHIBIT H EMPLOYMENT AGREEMENTS/DESIGNATED EMPLOYEES AGREEMENTS EXHIBIT I LIST OF GOVERNMENTAL PERMITS AND GRANTS EXHIBIT J TITLE COMMITMENT EXHIBIT K EXISTING SURVEY EXHIBIT M VIOLATIONS EX-2.I 4 SALE AND PURCHASE AGREEMENT 1 EXHIBIT 2(i) SALE AND PURCHASE AGREEMENT THIS SALE AND PURCHASE AGREEMENT (the "Agreement") is made and entered into this 16th day of March, 2000, by and between SHOLODGE, INC., a Tennessee corporation (herein "ShoLodge"), and PRIME HOSPITALITY CORP., a Delaware corporation (herein "Prime"). W I T N E S S E T H: WHEREAS, Prime and ShoLodge desire (i) that a wholly-owned subsidiary of Prime acquire a leasehold interest in (A) twenty (20) Sumner Suites hotels which are currently leased from HPT Suite Properties Trust, a Maryland real estate investment trust, to Suite Tenant, Inc., a Tennessee corporation and a wholly-owned subsidiary of ShoLodge, and (B) seven (7) existing Sumner Suites hotels currently owned by wholly-owned subsidiaries of ShoLodge, and (ii) that Prime acquire two (2) sites currently owned by wholly-owned subsidiaries of ShoLodge for development as AmeriSuites hotels. NOW, THEREFORE, in consideration of One Hundred Dollars ($100) paid from Prime to ShoLodge as initial consideration as described herein, the mutual terms and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms shall have the following meanings: "Additional Advance Payments" shall have the meaning set forth in Section 3.2(b). "Additional Buildings" shall have the meaning set forth in Section 3.1. "Additional Equipment" shall have the meaning set forth in Section 3.1. "Additional Hotel Operating Assets" shall have the meaning set forth in Section 3.2. "Additional Hotel Operating Assets Transfer Documents" shall have the meaning set forth in Section 3.4 2 "Additional Hotel Subsidiaries" means the wholly-owned subsidiaries of ShoLodge which own the Additional HPT Hotels, identified by site as follows:
Owner Site ----- ---- Carolina Inns, Inc. Pine Knoll Shores, North Carolina Midwest Inns, Inc. Indianapolis, Indiana Midwest Inns, Inc. Kansas City, Missouri Sunshine Inns, Inc. Orlando, Florida
"Additional HPT Hotels" means the Sumner Suites hotels currently operated on the Additional Land. "Additional Inventory" shall have the meaning set forth in Section 3.2(a). "Additional Land" shall have the meaning set forth in Section 3.1. "Additional Operating Agreements" shall have the meaning set forth in Section 3.2(c). "Additional Property" shall have the meaning set forth in Section 3.1. "Additional Property Documents" shall have the meaning set forth in Section 3.3. "Advance Payments" means the STI Advance Payments, the Additional Advance Payments and the Texas Advance Payments. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of shares, options, warrants, interests, participations or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended), by contract or otherwise. "Agreement" means this Sale and Purchase Agreement. "Assets" means collectively the STI Assets, the Additional Property, the Additional Hotel Operating Assets, the Texas Property, the Texas Hotel Operating Assets and the Development Sites. "Benefit Plan" shall have the meaning set forth in Section 15.5. -2- 3 "Buildings" means the STI Buildings, the Additional Buildings and the Texas Buildings. "Closing" shall mean the conference to be held at 10:00 a.m., New York, New York time, on the Closing Date, at the offices of Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York, or at such other time and place on the Closing Date as the parties may mutually agree to in writing, at which time the transactions contemplated by this Agreement shall be consummated, or, if permitted as set forth in Section 17.1, at which time one (1) or more of the transactions contemplated by this Agreement shall be consummated. "Closing Date" shall mean the date on which the Closing occurs, and, if the Closing with respect to all transactions contemplated herein does not occur on the same date as contemplated in Section 17.1, the term "Closing Date" with respect to each transaction contemplated herein shall mean the date of the actual Closing with respect to each such transaction. "Closing Documents" means all documents to be executed by Prime, a Prime Subsidiary, ShoLodge or a ShoLodge Subsidiary to consummate the transactions contemplated in this Agreement, including, without limitation, the STI Transfer Documents, the Additional Property Documents, the Additional Hotel Operating Assets Transfer Documents, the Texas Lease, the Texas Hotel Operating Assets Transfer Documents, the Development Site Transfer Documents, the Construction Contract and the Reservation Agreement; provided, however, in the event there is more than one (1) Closing Date as contemplated in Section 17.1, "Closing Documents" for each such Closing Date means only such of the documents as described above as are necessary to consummate the transactions contemplated in this Agreement being closed on such Closing Date. "Code" means the Internal Revenue Code of 1986, as amended. "Construction Contract" shall have the meaning set forth in Section 7.1. "Development Site Purchase Price" shall have the meaning set forth in Section 6.2. "Development Site Subsidiaries" means the wholly-owned subsidiaries of ShoLodge which own the Development Sites, identified by site as follows:
Owner Site ----- ---- Delaware Inns, Inc. Mt. Laurel, New Jersey Virginia Inns, Inc. Fairfax County, Virginia
"Development Site Transfer Documents" shall have the meaning set forth in Section 5.2. "Development Sites" shall have the meaning set forth in Section 5.1. -3- 4 "Due Diligence Period" means the thirty (30) day period commencing on the Effective Date. "Effective Date" shall mean the date this Agreement is fully executed by ShoLodge and Prime. "Encumbrance" means any security interest, pledge, mortgage, lien (including environmental liens), personal property lease, charge, adverse claim or restriction of any kind, including encumbrances or imperfections of title of whatever nature. "Equipment" means the STI Equipment, the Additional Equipment and the Texas Equipment. "ERISA" shall have the meaning set forth in Section 15.5. "Existing HPT Hotels" means the Sumner Suites hotels currently operated on the STI Land. "Financial Information" shall have the meaning set forth in Section 15.19. "Hendersonville Restriction" shall have the meaning set forth in Section 17.6. "Hotel" and "Hotels" shall mean individually one of the Existing HPT Hotels or one of the Additional HPT Hotels or one of the Texas Hotels and collectively the Existing HPT Hotels, the Additional HPT Hotels and the Texas Hotels. "HPT" means Hospitality Properties Trust, a Maryland real estate investment trust, and its successors and assigns. "HPT Assignment and Security Agreement" means that certain Assignment and Security Agreement dated as of November 19, 1997 between STI and Landlord, as amended by that certain Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI, together with such subsequent amendments, modifications and supplements thereto as shall have been approved by Prime in writing prior to execution by STI, such approval not to be unreasonably withheld, delayed or conditioned. "HPT Documents" means the HPT Lease and the HPT Incidental Documents. "HPT Estoppel Certificate" means the estoppel certificate from HPT in favor of Prime and the Prime HPT Subsidiary substantially in the form of Exhibit H attached hereto and incorporated herein by this reference. "HPT Incidental Documents" means the HPT Lease Guaranty, the HPT Security Agreement, the HPT Stock Pledge and the HPT Assignment and Security Agreement. -4- 5 "HPT Lease" means that certain Lease Agreement dated as of November 19, 1997 between Landlord and STI, as amended by that certain First Amendment to Lease Agreement dated as of March 5, 1999 between Landlord and STI, by that certain Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI and by that certain Third Amendment to Lease Agreement dated as of March 3, 2000 between Landlord and STI, together with such subsequent amendments, modifications and supplements thereto as shall have been approved by Prime in writing prior to execution by STI, such approval not to be unreasonably withheld, delayed or conditioned. "HPT Lease Amendment" shall have the meaning set forth in Section 11.6. "HPT Lease Guaranty" means that certain Limited Guaranty Agreement dated as of November 19, 1997 executed by ShoLodge in favor of HPT and Landlord, as amended by that certain Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI, together with such subsequent amendments, modifications and supplements thereto as shall have been approved by Prime in writing prior to execution by ShoLodge, such approval not to be unreasonably withheld, delayed or conditioned. "HPT Lease Guaranty Deposit" means the "Guaranty Deposit" in the amount of Fourteen Million and No/100 Dollars ($14,000,000.00) deposited by ShoLodge with HPT and Landlord to secure the obligations of ShoLodge under the HPT Lease Guaranty. "HPT Lease Security Deposit" means the "Retained Funds" in the amount of Twenty-One Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00) deposited by STI with Landlord to secure the obligations of STI under the HPT Lease. "HPT Real Property" means the STI Land, the STI Buildings, the Additional Land and the Additional Buildings. "HPT Security Agreement" means that certain Security Agreement dated as of November 19, 1997 between STI and Landlord, as amended by that certain Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI and by that certain Second Amendment to Security Agreement dated as of March 3, 2000 between Landlord and STI, together with such subsequent amendments, modifications and supplements thereto as shall have been approved by Prime in writing prior to execution by STI, such approval not to be unreasonably withheld, delayed or conditioned. "HPT Stock Pledge" means that certain Stock Pledge dated as of November 19, 1997 made by ShoLodge in favor of Landlord, as amended by that certain Second Amendment to Lease Agreement and First Amendment to Incidental Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI, together with such subsequent amendments, modifications and supplements thereto as shall have been approved by Prime in writing prior to execution by ShoLodge, such approval not to be unreasonably withheld, delayed or conditioned. -5- 6 "Indemnified Party" shall have the meaning set forth in Section 19.4. "Indemnifying Party" shall have the meaning set forth in Section 19.4. "Initial Consideration" shall have the meaning set forth in Section 9.3. "Inventory" means the STI Inventory, the Additional Inventory and the Texas Inventory. "Landlord" means HPT Suite Properties Trust, a Maryland real estate investment trust, and its successors and assigns. "Moore" means Moore and Associates, Inc., a Tennessee corporation and a wholly-owned subsidiary of ShoLodge, and its successors and assigns. "Operating Agreements" means the STI Operating Agreements, the Additional Operating Agreements and the Texas Operating Agreements. "Permitted Exceptions" means (a) with respect to all Assets, (i) liens for taxes, assessments and governmental charges with respect to an Asset not yet due and payable or due and payable but not yet delinquent or as to which adequate reserves are provided therefor, (ii) those Encumbrances contemplated in this Agreement, and (iii) such other Encumbrances as shall be approved or deemed approved by Prime pursuant to Section 12.1; (b) with respect to the HPT Real Property only, the HPT Lease; (c) with respect to the Additional Property only, the HPT Lease as amended or a separate lease as contemplated in Section 3.3 and in Section 3.8, if applicable; (d) with respect to the Texas Property only, the Texas Lease; (e) with respect to the Hendersonville, Tennessee Hotel only, the Hendersonville Restriction; and (f) with respect to the Real Property only, applicable zoning regulations and ordinances provided the same do not prohibit or impair in any material respect use of such Real Property as a hotel as currently operated or constructed or, as to the Development Sites, as proposed to be operated or constructed. "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts and other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Post Termination Obligations" shall have the meaning set forth in Section 14.1. "Prime" means Prime Hospitality Corp., a Delaware corporation, and its successors and permitted assigns. "Prime Subsidiaries" means the Prime HPT Subsidiary and the Prime Texas Subsidiary. -6- 7 "Prime HPT Subsidiary" means the wholly-owned subsidiary of Prime which acquires the STI Assets and the Additional Hotel Operating Assets and which leases the Additional Property pursuant to this Agreement, and its successors and permitted assigns. "Prime Texas Subsidiary" means the wholly-owned subsidiary of Prime which acquires the Texas Hotel Operating Assets and which leases the Texas Property pursuant to this Agreement, and its successors and permitted assigns. "Purchase Price" shall have the meaning set forth in Section 6.1. "Real Property" means the STI Land, the STI Buildings, the Additional Land, the Additional Buildings, the Texas Land, the Texas Buildings and the Development Sites. "Reservation Agreement" shall have the meaning set forth in Section 8.1. "ShoLodge" means ShoLodge, Inc., a Tennessee corporation, and its successors and assigns. "ShoLodge Subsidiaries" means STI, the Additional Hotel Subsidiaries, Southeast, the Development Site Subsidiaries and Moore. "Southeast" means Southeast Texas Inns, Inc., a Tennessee corporation and a wholly-owned subsidiary of ShoLodge, and its successors and assigns. "STI" means Suite Tenant, Inc., a Tennessee corporation and a wholly-owned subsidiary of ShoLodge, and its successors and assigns. "STI Advance Payments" shall have the meaning set forth in Section 2.1(c). "STI Assets" shall have the meaning set forth in Section 2.1. "STI Buildings" shall have the meaning set forth in Section 2.1(a). "STI Equipment" shall have the meaning set forth in Section 2.1(a). "STI Inventory" shall have the meaning set forth in Section 2.1(b). "STI Operating Agreements" shall have the meaning set forth in Section 2.1(d). "STI Land" shall have the meaning set forth in Section 2.1(a). "STI Leased Property" shall have the meaning set forth in Section 2.1(a). "STI Transfer Documents" shall have the meaning set forth in Section 2.2. -7- 8 "Texas Advance Payments" shall have the meaning set forth in Section 4.2(b). "Texas Buildings" shall have the meaning set forth in Section 4.1. "Texas Equipment" shall have the meaning set forth in Section 4.1. "Texas Hotel Operating Assets" shall have the meaning set forth in Section 4.2. "Texas Hotel Operating Assets Transfer Documents" shall have the meaning set forth in Section 4.4. "Texas Hotels" means the Sumner Suites hotels currently operated on the Texas Land. "Texas Inventory" shall have the meaning set forth in Section 4.2(a). "Texas Land" shall have the meaning set forth in Section 4.1. "Texas Lease" shall have the meaning set forth in Section 4.3. "Texas Operating Agreements" shall have the meaning set forth in Section 4.2(c). "Texas Property" shall have the meaning set forth in Section 4.1. "Texas Real Property" means the Texas Land and the Texas Buildings. ARTICLE II SALE OF EXISTING HPT HOTELS 2.1 Sale of STI Assets. ShoLodge hereby agrees to cause STI, at the Closing and in the manner specified in Section 2.2 of this Agreement, to sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary, and Prime hereby agrees to cause the Prime HPT Subsidiary, at the Closing and in the manner specified in Section 2.2 of this Agreement, to purchase from STI, all the following (collectively, the "STI Assets"): (a) all right, title and interest of STI in and to the HPT Lease, including, without limitation, the HPT Lease Security Deposit and, except as limited in the last paragraph of Section 19.3, the "FF&E Reserve" created pursuant to the HPT Lease, and in and to (i) that certain real property more particularly described on Exhibit A attached hereto and incorporated herein by this reference (the "STI Land"); (ii) any and all buildings, structures and similar improvements erected on, over, upon or under the STI Land on the Closing Date (the "STI Buildings"); and (iii) all furniture, fixtures and equipment located thereon or therein on the Closing Date (the "STI Equipment") (the STI Land, the STI Buildings and the STI Equipment are referred to herein collectively as the "STI Leased Property"); -8- 9 (b) all merchandise, inventories, materials and supplies used or intended for use or held for use in connection with and located on the Closing Date at the STI Land (collectively, the "STI Inventory"); (c) all reservation and advance booking deposits and guest security deposits (including interest, if any, accrued thereon) for guests or future guests of the Existing HPT Hotels existing on the Closing Date (the "STI Advance Payments"); (d) to the extent assignable, all of STI's right, title and interest, if any, in and to all service contracts, vendor agreements, maintenance agreements, utility contracts, cable service agreements, advertising agreements, equipment leases and similar operating agreements relating to the Existing HPT Hotels and in effect on the Closing Date (collectively, the "STI Operating Agreements"); (e) to the extent assignable, all of STI's right, title and interest, if any, in and to all licenses and permits for the sale and on-premises consumption of liquor and other alcoholic beverages at the Existing HPT Hotels in effect on the Closing Date; and (f) all vehicles owned by STI and located at and used in connection with the Existing HPT Hotels on the Closing Date. 2.2 Transfer of STI Assets. The sale, conveyance, transfer, assignment and delivery of the STI Assets hereunder will be effected by the delivery by STI to the Prime HPT Subsidiary at the Closing of the Assignment and Assumption of Lease Agreement in the form of Exhibit E attached hereto and incorporated herein by this reference, the Bill of Sale in the form of Exhibit F attached hereto and incorporated herein by this reference, the Assignment and Assumption of Contracts in the form of Exhibit G attached hereto and incorporated herein by this reference and such other instruments of sale, transfer, assignment and conveyance as STI and the Prime HPT Subsidiary shall reasonably request in form and substance reasonably satisfactory to STI and the Prime HPT Subsidiary (which shall include an assumption by the Prime HPT Subsidiary of all liabilities of STI under the HPT Security Agreement and under the HPT Assignment and Security Agreement which first accrue after the Closing Date) (such documents being referred to herein as the "STI Transfer Documents"). The STI Assets shall be transferred free and clear of all Encumbrances, but subject to the Permitted Exceptions which relate to the STI Assets and to the STI Operating Agreements. From and after Closing, all liabilities of STI under the STI Operating Agreements and under the instruments creating the Permitted Exceptions which relate to the STI Assets and which first accrue after the Closing Date shall be the responsibility of the Prime HPT Subsidiary. 2.3 HPT Lease Guaranty. As a condition to the transfer of the STI Assets from STI to the Prime HPT Subsidiary, Prime will assume all obligations of ShoLodge under the HPT Lease Guaranty which first accrue from and after the Closing Date. ShoLodge will use its best efforts to obtain from HPT and/or Landlord the return of the HPT Lease Guaranty Deposit. If ShoLodge is unable to obtain the return of the HPT Lease Guaranty Deposit from HPT and/or Landlord, Prime will pay to ShoLodge at Closing the sum of Fourteen Million and No/100 Dollars -9- 10 ($14,000,000.00) in cash or other immediately available funds in exchange for the absolute assignment by ShoLodge to Prime of all right, title and interest of ShoLodge in and to the HPT Lease Guaranty Deposit, so long as HPT and Landlord agree or consent to such assignment and so long as the HPT Estoppel Certificate acknowledges that (i) there are no existing defaults nor events which with the giving of notice or the passage of time may become defaults by STI under the HPT Lease nor any cause for HPT or Landlord to offset any obligation of STI under the HPT Lease against the HPT Lease Guaranty Deposit, and (ii) as of the date of the HPT Estoppel Certificate, the HPT Lease Security Deposit is Twenty-One Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00) and the HPT Lease Guaranty Deposit is Fourteen Million and No/100 Dollars ($14,000,000.00). 2.4 Further Assurances. ShoLodge covenants that at the Closing and from time to time after the Closing, it will, upon the reasonable request of the Prime HPT Subsidiary or Prime, cause STI to execute, acknowledge and deliver, and to do or cause to be done, executed, acknowledged and delivered, all such additional documents or actions as may be reasonably required by the Prime HPT Subsidiary or Prime, in order more effectively to sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary the STI Assets in the manner described in Sections 2.1 and 2.2 above, and to carry out the intention and purposes of this Article II and the transactions contemplated hereby and to evidence and preserve the ownership by the Prime HPT Subsidiary of the STI Assets, provided neither ShoLodge nor STI shall incur any liability, cost or expense not contemplated by this Agreement. The provisions of this Section 2.4 shall survive the Closing. 2.5 Sumner Suites Name. The Prime HPT Subsidiary shall be allowed to continue operating each of the Existing HPT Hotels as a "Sumner Suites" for a period of not more than nine (9) months from the Closing Date, at which time all Existing HPT Hotels must be converted to another flag at the sole cost and expense of the Prime HPT Subsidiary. The provisions of this Section 2.5 shall survive the Closing. ARTICLE III SALE OF ADDITIONAL HPT HOTELS 3.1 Sale of Additional Property to Landlord. ShoLodge hereby agrees (i) to cause the Additional Hotel Subsidiaries, at the Closing and in the manner specified in Section 3.3 of this Agreement, to sell, convey, transfer, assign and deliver to Landlord all right, title and interest of the Additional Hotel Subsidiaries in and to (A) that certain real property more particularly described on Exhibit B attached hereto and incorporated herein by this reference (the "Additional Land"); (B) any and all buildings, structures and similar improvements erected on, over, upon or under the Additional Land on the Closing Date (the "Additional Buildings"); and (C) all furniture, fixtures and equipment located thereon or therein on the Closing Date (the "Additional Equipment") (the Additional Land, the Additional Buildings and the Additional Equipment are referred to herein collectively as the "Additional Property"); and (ii) to use its best efforts to cause Landlord to lease the Additional Property to the Prime HPT Subsidiary, and, if Landlord agrees to the same, Prime hereby agrees to cause the Prime HPT Subsidiary, at the -10- 11 Closing and in the manner specified in Section 3.3 of this Agreement, to lease the Additional Property from Landlord. 3.2 Sale of Additional Hotel Operating Assets. ShoLodge hereby agrees to cause the Additional Hotel Subsidiaries, at the Closing and in the manner specified in Section 3.4 of this Agreement, to sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary, and Prime hereby agrees to cause the Prime HPT Subsidiary, at the Closing and in the manner specified in Section 3.4 of this Agreement, to purchase from the Additional Hotel Subsidiaries, all the following (collectively, the "Additional Hotel Operating Assets"): (a) all merchandise, inventories, materials and supplies used or intended for use or held for use in connection with and located on the Closing Date at the Additional Land (collectively, the "Additional Inventory"); (b) all reservation and advance booking deposits and guest deposits (including interest, if any, accrued thereon) for guests or future guests of the Additional HPT Hotels existing on the Closing Date (the "Additional Advance Payments"); (c) to the extent assignable, all of the right, title and interest of the Additional Hotel Subsidiaries, if any, in and to all service contracts, vendor agreements, maintenance agreements, utility contracts, cable service agreements, advertising agreements, equipment leases and similar operating agreements relating to the Additional HPT Hotels and in effect on the Closing Date (collectively, the "Additional Operating Agreements"); (d) to the extent assignable, all of the right, title and interest of the Additional Hotel Subsidiaries, if any, in and to licenses and permits for the sale and on-premises consumption of liquor and other alcoholic beverages at the Additional HPT Hotels in effect on the Closing Date; and (e) all vehicles owned by the Additional Hotel Subsidiaries and located at and used in connection with the Additional HPT Hotels on the Closing Date. Notwithstanding the foregoing, the obligation of the Prime HPT Subsidiary to accept the transfer of any or all of the Additional Hotel Operating Assets shall be conditioned upon the lease of the corresponding Additional Property by the Prime HPT Subsidiary as contemplated in Sections 3.1 and 3.3. 3.3 Transfer of Additional Property. The sale, conveyance, transfer, assignment and delivery of the Additional Property hereunder will be effected by the delivery by the Additional Hotel Subsidiaries to Landlord at the Closing of instruments of sale, transfer, assignment and conveyance in form and substance reasonably satisfactory to the Additional Hotel Subsidiaries and Landlord, and the lease of the Additional Property from Landlord to the Prime HPT Subsidiary shall be effected either by an amendment to the HPT Lease or by separate lease which contains terms and provisions reasonably satisfactory to Prime, but Prime shall not have reason to object to any terms and provisions which are in the HPT Lease unless an objection to -11- 12 such terms and provisions is made in accordance with the provisions of Section 12.1; provided, however, the minimum annual rent under such lease with respect to the Additional Property shall be Four Million Three Hundred Sixty-Five Thousand and No/100 Dollars ($4,365,000.00), allocated as set forth in Exhibit P attached hereto and incorporated herein by this reference (such documents being referred to herein as the "Additional Property Documents"). Notwithstanding the foregoing, ShoLodge, by written notice to Prime, may adjust the minimum annual rent for the Additional Property and the allocation thereof by up to ten percent (10%) of the amount thereof per Hotel as long as (i) the aggregate minimum annual rent for the Additional Property and the Texas Property does not exceed Seven Million Four Hundred Twenty-Three Thousand and No/100 Dollars ($7,423,000.00), and (ii) the lease of the Additional Property and the Texas Property shall have the same initial term and renewal options as provided in the HPT Lease. The Additional Property shall be transferred to Landlord and leased by the Prime HPT Subsidiary free and clear of all Encumbrances, but subject to the Permitted Exceptions which relate to the Additional Property and to the Additional Operating Agreements. From and after Closing, all liabilities of the Additional Hotel Subsidiaries under the Additional Operating Agreements and under the instruments creating the Permitted Exceptions which relate to the Additional Property and which first accrue after the Closing Date shall be the responsibility of the Prime HPT Subsidiary. 3.4 Transfer of Additional Hotel Operating Assets. The sale, conveyance, transfer, assignment and delivery of the Additional Hotel Operating Assets hereunder will be effected by the delivery by the Additional Hotel Subsidiaries to the Prime HPT Subsidiary at the Closing of the Bill of Sale in the form of Exhibit F attached hereto and incorporated herein by this reference, the Assignment and Assumption of Contracts in the form of Exhibit G attached hereto and incorporated herein by this reference and such other instruments of sale, transfer, assignment and conveyance as an Additional Hotel Subsidiary or the Prime HPT Subsidiary shall reasonably request in form and substance reasonably satisfactory to the Additional Hotel Subsidiaries and the Prime HPT Subsidiary (such documents being referred to herein as the "Additional Hotel Operating Assets Transfer Documents"). The Additional Hotel Operating Assets shall be transferred free and clear of all Encumbrances, but subject to the Permitted Exceptions which relate to the Additional Hotel Operating Assets and to the Additional Operating Agreements. From and after Closing, all liabilities of the Additional Hotel Subsidiaries under the Additional Operating Agreements and under the instruments creating the Permitted Exceptions which relate to the Additional Hotel Operating Assets and which first accrue after the Closing Date shall be the responsibility of the Prime HPT Subsidiary. 3.5 Prime Guaranty. Prime will guarantee all obligations of the Prime HPT Subsidiary with respect to the lease of the Additional Property pursuant to an amendment to the HPT Lease Guaranty or a separate instrument which contains terms and provisions reasonably satisfactory to Prime, but Prime shall not have reason to object to any terms and provisions which are in the HPT Lease Guaranty unless an objection to such terms and provisions is made in accordance with the provisions of Section 12.1; provided, however, that (i) the liability of Prime thereunder shall be limited to an amount equal to minimum annual rent for the Additional Property for one (1) year, and (ii) Prime shall not be required to increase the HPT Lease Guaranty Deposit pursuant to the HPT Lease Guaranty (as amended in connection with such transaction) or to deposit a "Guaranty Deposit" in connection with a separate guaranty. -12- 13 3.6 Further Assurances. ShoLodge covenants that at the Closing and from time to time after the Closing, it will, upon the reasonable request of the Prime HPT Subsidiary or Prime, cause the Additional Hotel Subsidiaries to execute, acknowledge and deliver, and to do or cause to be done, executed, acknowledged and delivered, all such additional documents or actions as may be reasonably required by the Prime HPT Subsidiary or Prime, in order more effectively to sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary the Additional Hotel Operating Assets in the manner described in Sections 3.2 and 3.4 above, and to carry out the intention and purposes of this Article III and the transactions contemplated hereby and to evidence and preserve the ownership by the Prime HPT Subsidiary of the Additional Hotel Operating Assets and the lease by the Prime HPT Subsidiary of the Additional Property, provided neither ShoLodge nor the Additional Hotel Subsidiaries shall incur any liability, cost or expense not contemplated by this Agreement. The provisions of this Section 3.6 shall survive the Closing. 3.7 Sumner Suites Name. The Prime HPT Subsidiary shall be allowed to continue operating each of the Additional HPT Hotels as a "Sumner Suites" for a period of not more than nine (9) months from the Closing Date, at which time all Additional HPT Hotels must be converted to another flag at the sole cost and expense of the Prime HPT Subsidiary. The provisions of this Section 3.7 shall survive the Closing. 3.8 Advance HPT Closing. ShoLodge, at its option, may proceed to close the transfer of the Additional Property from the Additional Hotel Subsidiaries to Landlord as contemplated in part (i) of Section 3.1 prior to the Closing. In such event, the Additional Property will be leased from Landlord to STI either by an amendment to the HPT Lease or by separate lease identical to the amendment or separate lease contemplated in Section 3.3 (but with STI as the tenant), and at Closing the interest of STI in the Additional Property will be transferred to the Prime HPT Subsidiary in the same manner as the transfer of the STI Leased Assets contemplated in Article II, including, without limitation, with the same further assurances as set forth in Section 2.4. Without limiting the generality of the foregoing, in such event, ShoLodge agrees to cause STI to sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary, and Prime agrees to cause the Prime HPT Subsidiary, at the Closing, to purchase from STI, all right, title and interest of STI in and to the HPT Lease (as so amended) or the separate lease, as applicable, including without limitation, the amount added to the "Retained Funds" under the HPT Lease if so amended or the "Retained Funds" under such separate lease, as applicable, and, except as limited in the last paragraph of Section 19.3, the "FF&E Reserve" created pursuant to the HPT Lease (as so amended) or the separate lease, as applicable, and in and to the Additional Property, such sale, conveyance, transfer, assignment and delivery of the Additional Property to be effected by the delivery by STI to the Prime HPT Subsidiary at the Closing of the Assignment and Assumption of Lease Agreement in the form of Exhibit E attached hereto and incorporated herein by this reference. Further, in such event, any guaranty by ShoLodge of the lease to STI of the Additional Property (whether by virtue of an amendment to the HPT Lease Guaranty or by separate instrument) shall be treated like the HPT Lease Guaranty as described in Section 2.3 to the extent any such guaranty by ShoLodge is consistent with Section 3.5. At least ten (10) days prior to execution, ShoLodge shall deliver to Prime a copy of the amendment to the HPT Lease or separate lease and a copy of the amendment to the HPT Lease Guaranty or separate instrument as contemplated in this Section 3.8 for Prime's written approval, such approval not to be -13- 14 unreasonably withheld, delayed or conditioned. In no event shall ShoLodge or any ShoLodge Subsidiary execute any such amendment to the HPT Lease or separate lease without Prime's prior written approval. 3.9 Direct Lease. ShoLodge, at its option, may cause the Additional Property (or one (1) or more, but less than all, of the Additional HPT Hotels and the portion of the Additional Land, the Additional Buildings and the Additional Equipment relating thereto) to be leased to the Prime Texas Subsidiary by the Additional Hotel Subsidiaries (or the appropriate Additional Hotel Subsidiary or Subsidiaries, if only a portion of the Additional Property is so leased) in the same manner as the Texas Property is leased to the Prime Texas Subsidiary pursuant to Article IV, but with the terms of such lease being consistent with Section 3.3. In such event, all applicable references to the Texas Property in this Agreement shall be deemed to include the Additional Property (or such Additional HPT Hotel or such Additional HPT Hotels and the portion of the Additional Land, the Additional Buildings and the Additional Equipment relating thereto), and all applicable references to Southeast in this Agreement shall be deemed to include the appropriate Additional Hotel Subsidiary or Subsidiaries. ARTICLE IV SALE OF TEXAS HOTELS 4.1 Lease of Texas Property. ShoLodge hereby agrees to cause Southeast, at the Closing and in the manner specified in Section 4.3 of this Agreement, to lease to the Prime Texas Subsidiary, and Prime hereby agrees to cause the Prime Texas Subsidiary, at the Closing and in the manner specified in Section 4.3 of this Agreement, to lease from Southeast, (A) that certain real property more particularly described on Exhibit C attached hereto and incorporated herein by this reference (the "Texas Land"); (B) any and all buildings, structures and similar improvements erected on, over, upon or under the Texas Land on the Closing Date (the "Texas Buildings"); and (C) all furniture, fixtures and equipment located thereon or therein on the Closing Date (the "Texas Equipment") (the Texas Land, the Texas Buildings and the Texas Equipment are referred to herein collectively as the "Texas Property"). 4.2 Sale of Texas Hotel Operating Assets. ShoLodge hereby agrees to cause Southeast, at the Closing and in the manner specified in Section 4.4 of this Agreement, to sell, convey, transfer, assign and deliver to the Prime Texas Subsidiary, and Prime hereby agrees to cause the Prime Texas Subsidiary, at the Closing and in the manner specified in Section 4.4 of this Agreement, to purchase from Southeast, all the following (collectively, the "Texas Hotel Operating Assets"): (a) all merchandise, inventories, materials and supplies used or intended for use or held for use in connection with and located on the Closing Date at the Texas Land (collectively, the "Texas Inventory"); (b) all reservation and advance booking deposits and guest deposits (including interest, if any, accrued thereon) for guests or future guests of the Texas Hotels existing on the Closing Date (the "Texas Advance Payments"); -14- 15 (c) to the extent assignable, all of the right, title and interest of Southeast, if any, in and to all service contracts, vendor agreements, maintenance agreements, utility contracts, cable service agreements, advertising agreements, equipment leases and similar operating agreements relating to the Texas Hotels and in effect on the Closing Date (collectively, the "Texas Operating Agreements"); (d) to the extent assignable, all of the right, title and interest of Southeast, if any, in and to licenses and permits for the sale and on-premises consumption of liquor and other alcoholic beverages at the Texas Hotels in effect on the Closing Date; and (e) all vehicles owned by Southeast and located at and used in connection with the Texas Hotels on the Closing Date. Notwithstanding the foregoing, the obligation of the Prime Texas Subsidiary to accept the transfer of any or all of the Texas Hotel Operating Assets shall be conditioned upon the lease of the Texas Property by the Prime Texas Subsidiary as contemplated in Sections 4.1 and 4.3. 4.3 Lease of Texas Property. The lease of the Texas Property from Southeast to the Prime Texas Subsidiary shall be effected by lease (the "Texas Lease") which contains terms and provisions reasonably satisfactory to Prime, but Prime shall not have reason to object to any terms and provisions which are in the HPT Lease unless an objection to such terms and provisions is made in accordance with the provisions of Section 12.1; provided, however, (i) the Prime Texas Subsidiary shall be deemed to have deposited "Retained Funds" in an amount equal to the same multiple of the minimum annual rent under such lease with respect to the Texas Property as is required by Landlord with respect to the Additional Property pursuant to an amendment to the HPT Lease or a separate lease as contemplated in Section 3.3, and (ii) the minimum annual rent under such lease with respect to the Texas Property shall be Three Million Fifty-Eight Thousand and No/100 Dollars ($3,058,000.00), allocated as set forth in Exhibit P attached hereto and incorporated herein by this reference. Notwithstanding the foregoing, ShoLodge, by written notice to Prime, may adjust the minimum annual rent for the Texas Property and the allocation thereof by up to ten percent (10%) of the amount thereof per Hotel as long as (i) the aggregate minimum annual rent for the Additional Property and the Texas Property does not exceed Seven Million Four Hundred Twenty-Three Thousand and No/100 Dollars ($7,423,000.00), and (ii) the lease of the Additional Property and the Texas Property shall have the same initial term and renewal options as provided in the HPT Lease. The obligations of the Prime Texas Subsidiary under the Texas Lease shall be secured by a security interest in the personal property located at the Texas Real Property and in the "FF&E Reserve" created pursuant to the Texas Lease and by a pledge of the stock of the Prime Texas Subsidiary pursuant to documents which contain terms and provisions reasonably satisfactory to Prime, but Prime shall not have reason to object to any terms and provisions which are in the HPT Security Agreement, the HPT Assignment and Security Agreement or the HPT Stock Pledge unless an objection to such terms and provisions is made in accordance with the provisions of Section 12.1. The Texas Property shall be leased by the Prime Texas Subsidiary free and clear of all Encumbrances, but subject to the Permitted Exceptions which relate to the Texas Property and to the Texas Operating Agreements. From and after Closing, all liabilities of Southeast under the Texas Operating Agreements and under the -15- 16 instruments creating the Permitted Exceptions which relate to the Texas Property and which first accrue after the Closing Date shall be the responsibility of the Prime Texas Subsidiary. The obligation of Southeast to deliver the "Retained Funds" upon the expiration of the Texas Lease pursuant to the terms thereof shall be guaranteed by ShoLodge pursuant to an instrument in form and substance reasonably satisfactory to Prime and ShoLodge, but such undertaking by ShoLodge shall terminate upon the transfer of the Texas Property to HPT or an Affiliate of HPT or to another Person whose financial condition is equivalent to or better than that of HPT on the date of such transfer, provided that such transferee has assumed the obligation of Southeast to deliver the "Retained Funds" upon the expiration of the Texas Lease. 4.4 Transfer of Texas Hotel Operating Assets. The sale, conveyance, transfer, assignment and delivery of the Texas Hotel Operating Assets hereunder will be effected by the delivery by Southeast to the Prime Texas Subsidiary at the Closing of the Bill of Sale in the form of Exhibit F attached hereto and incorporated herein by this reference, the Assignment and Assumption of Contracts in the form of Exhibit G attached hereto and incorporated herein by this reference and such other instruments of sale, transfer, assignment and conveyance as Southeast or the Prime Texas Subsidiary shall reasonably request in form and substance reasonably satisfactory to Southeast and the Prime Texas Subsidiary (such documents being referred to herein as the "Texas Hotel Operating Assets Transfer Documents"). The Texas Hotel Operating Assets shall be transferred free and clear of all Encumbrances, but subject to the Permitted Exceptions which relate to the Texas Hotel Operating Assets and to the Texas Operating Agreements. From and after Closing, all liabilities of Southeast under the Texas Operating Agreements and under the instruments creating the Permitted Exceptions which relate to the Texas Hotel Operating Assets and which first accrue after the Closing Date shall be the responsibility of the Prime Texas Subsidiary. 4.5 Prime Guaranty. Prime will guarantee all obligations of the Prime Texas Subsidiary with respect to the lease of the Texas Property pursuant to an instrument which contains terms and provisions reasonably satisfactory to Prime, but Prime shall not have reason to object to any terms and provisions which are in the HPT Lease Guaranty unless an objection to such terms and provisions is made in accordance with the provisions of Section 12.1; provided, however, that (i) the liability of Prime thereunder shall be limited to an amount equal to minimum annual rent for the Texas Property for one (1) year, and (ii) Prime shall not be required to deposit a "Guaranty Deposit" in connection with such guaranty. 4.6 Further Assurances. ShoLodge covenants that at the Closing and from time to time after the Closing, it will, upon the reasonable request of the Prime Texas Subsidiary or Prime, cause Southeast to execute, acknowledge and deliver, and to do or cause to be done, executed, acknowledged and delivered, all such additional documents or actions as may be reasonably required by the Prime Texas Subsidiary or Prime, in order more effectively to sell, convey, transfer, assign and deliver to the Prime Texas Subsidiary the Texas Hotel Operating Assets in the manner described in Sections 4.2 and 4.4 above, and to carry out the intention and purposes of this Article IV and the transactions contemplated hereby and to evidence and preserve the ownership by the Prime Texas Subsidiary of the Texas Hotel Operating Assets and the lease by the Prime Texas Subsidiary of the Texas Property, provided neither ShoLodge nor Southeast -16- 17 shall incur any liability, cost or expense not contemplated by this Agreement. The provisions of this Section 4.6 shall survive the Closing. 4.7 Sumner Suites Name. The Prime Texas Subsidiary shall be allowed to continue operating each of the Texas Hotels as a "Sumner Suites" for a period of not more than nine (9) months from the Closing Date, at which time all Texas Hotels must be converted to another flag at the sole cost and expense of the Prime Texas Subsidiary. The provisions of this Section 4.7 shall survive the Closing. 4.8 AmeriSuites Name. In the event that the Texas Lease is terminated prior to the expiration of the term thereof due to a breach or default by the Prime Texas Subsidiary, Prime and Southeast shall enter into a license or franchise agreement whereby Southeast is given the right to operate the Texas Hotels as "AmeriSuites" hotels, which agreement shall be the standard license or franchise agreement, if any, then used, or most recently used if a standard license or franchise agreement is not then being used, by Prime to franchise "AmeriSuites" hotels, but with (i) a minimum term of ten (10) years, (ii) a royalty equal to one-half (1/2) of the standard royalty for "AmeriSuites" franchisees (provided Southeast shall pay full marketing and reservation fees), and (iii) no "initial" fee or "license" fee due upon signing such agreement. The provisions of this Section 4.8 shall survive the Closing. 4.9 HPT Lease. ShoLodge, at its option, may cause the Texas Property (or one (1) or more, but less than all, of the Texas Hotels and the portion of the Texas Land, the Texas Buildings and the Texas Equipment relating thereto) to be leased to the Prime HPT Subsidiary by Landlord as if the Texas Property (or the portion thereof) were Additional Property, but with the terms of such lease being consistent with Section 4.3. In such event, all applicable references to the Additional Property in this Agreement shall be deemed to include the Texas Property (or such Texas Hotel or Texas Hotels and the portion of the Texas Land, the Texas Buildings and the Texas Equipment relating thereto), and all applicable references to the Additional Hotel Subsidiaries in this Agreement shall be deemed to include Southeast. The failure of Landlord to lease the Texas Property (or portion thereof) to the Prime HPT Subsidiary, however, shall not constitute a condition precedent to the obligation of ShoLodge to close pursuant to Section 10.6. ARTICLE V SALE OF DEVELOPMENT SITES 5.1 Sale of Development Sites. ShoLodge hereby agrees to cause the Development Site Subsidiaries, at the Closing and in the manner specified in Section 5.2 of this Agreement, to sell, convey, transfer, assign and deliver to Prime, and Prime hereby agrees, at the Closing and in the manner specified in Section 5.2 of this Agreement, to purchase from the Development Site Subsidiaries, all right, title and interest of the Development Site Subsidiaries in and to that certain real property more particularly described on Exhibit D attached hereto and incorporated herein by this reference (the "Development Sites"). -17- 18 5.2 Transfer of Development Sites. The sale, conveyance, transfer, assignment and delivery of the Development Sites hereunder will be effected by the delivery by the Development Site Subsidiaries to Prime at the Closing of a special warranty deed for each site in the form of Exhibit I attached hereto and incorporated herein by this reference as to the Mt. Laurel, New Jersey site and in the form of Exhibit J attached hereto and incorporated herein by this reference as to the Fairfax County, Virginia site (such deeds being referred to herein as the "Development Site Transfer Documents"). The Development Sites shall be transferred free and clear of all Encumbrances, but subject to the Permitted Exceptions which relate to the Development Sites. From and after Closing, all liabilities of the Development Site Subsidiaries under the instruments creating the Permitted Exceptions which relate to the Development Sites and which first accrue after the Closing Date shall be the responsibility of Prime. ARTICLE VI CONSIDERATION 6.1 Purchase Price. The total purchase price for the STI Assets, the Additional Hotel Operating Assets, the Texas Hotel Operating Assets and, if applicable, the interest of STI in the Additional Property and the interest of Southeast in the Texas Property shall be Two Million and No/100 Dollars ($2,000,000.00) (the "Purchase Price"). Prime shall pay or cause a Prime Subsidiary, as applicable, to pay the Purchase Price on the Closing Date as follows: (a) Three Hundred Fifty-Two Thousand Eight Hundred Eighty and No/100 Dollars ($352,880.00) in cash or other immediately available funds, to an account or accounts designated by ShoLodge prior to Closing; and (b) One Million Six Hundred Forty-Seven Thousand One Hundred Twenty and No/100 Dollars ($1,647,120.00) by the delivery to ShoLodge or to such other Person as designated by ShoLodge of ShoLodge debt securities which are held currently by Prime or an Affiliate of Prime as follows: (1) Two Hundred Thirty-Eight Thousand and No/100 Dollars ($238,000.00) face value of 9 3/4% senior subordinated notes at 68% of face value; (2) Four Hundred Sixty-One Thousand and No/100 Dollars ($461,000.00) face value of 9.55% senior subordinated notes at 68% of face value; and (3) One Million Eight Hundred Sixty Thousand and No/100 Dollars ($1,860,000.00) face value of 7 1/2% convertible subordinated debentures at 63% of face value. The Purchase Price shall be allocated among the STI Assets, the Additional Property Operating Assets, the Texas Property Operating Assets and, if applicable, the interest of STI in the -18- 19 Additional Property and the interest of Southeast in the Texas Property, as set forth on Exhibit N attached hereto and made a part hereof. 6.2 Development Site Purchase Price. The total purchase price for the Development Sites shall be Three Million Three Hundred Nineteen Thousand Nine Hundred Thirty and No/100 Dollars ($3,319,930.00) (the "Development Site Purchase Price"), which amount shall be payable by Prime to the Development Site Subsidiaries in cash or other immediately available funds at Closing, One Million Six Hundred Ninety-Seven Thousand Five Hundred Five and No/100 Dollars ($1,697,505.00) for the Mt. Laurel, New Jersey site and One Million Six Hundred Twenty-Two Thousand Four Hundred Twenty-Five and No/100 Dollars ($1,622,425.00) for the Fairfax County, Virginia site. ARTICLE VII CONSTRUCTION CONTRACT 7.1 Construction Contract. At the Closing, Prime shall enter into, and ShoLodge shall cause Moore to enter into, an agreement (the "Construction Contract") in form and substance reasonably satisfactory to Prime and Moore whereby Moore will agree to construct for Prime, and Prime will engage Moore to construct, an AmeriSuites hotel on each Development Site. The Construction Contract shall provide for a fixed price of Seventy-Six Thousand Five Hundred and No/100 Dollars ($76,500.00) per room (including land, building and furniture, fixtures and equipment). The parties acknowledge that the fixed price set forth in the preceding sentence includes the cost of acquisition of the Development Sites, and, thus, the Development Site Purchase Price shall be deducted from the fixed price otherwise payable to Moore during the course of construction (as it will already have been paid to the Development Site Subsidiaries at Closing). Disbursements to Moore of the fixed price less the Development Site Purchase Price will be paid by Prime monthly during construction based upon the percentage of completion, subject to retainage of ten percent (10%). The Construction Contract shall further provide that Moore shall construct on each Development Site a hotel building in accordance with the plans and specifications which have been filed by ShoLodge, Moore or the applicable Development Site Subsidiary with the local building code officials, but with finishes and signage in accordance with the plans and specifications described on Exhibit K attached hereto and incorporated herein by this reference, all in accordance with all applicable laws, regulations, statutes and orders. The parties acknowledge that the Construction Contract shall contain a scheduled completion date, together with delay damages, among other terms, which terms shall be negotiated during the Due Diligence Period. The provisions of this Section 7.1 shall survive the Closing, but any conflict between the terms of this Section 7.1 and the terms of the Construction Contract shall be governed by the Construction Contract. -19- 20 ARTICLE VIII RESERVATION AGREEMENT 8.1 Reservation Agreement. At the Closing, Prime and ShoLodge shall enter into an agreement (the "Reservation Agreement") in form and substance reasonably satisfactory to Prime and ShoLodge whereby ShoLodge will agree to provide to Prime, and Prime will engage ShoLodge to provide, exclusive reservation services for all proprietary brand hotels owned, operated or franchised by Prime or any Affiliate of Prime (including the Sumner Suites hotels acquired by a Prime Subsidiary as contemplated herein, but such Sumner Suites hotels may be removed from the ShoLodge reservation system upon conversion to the AmeriSuites brand in Prime's sole discretion if the Reservation Agreement has not then become effective as described in subparagraph (d) below). The Reservation Agreement, among other provisions, will contain the following terms: (a) The term of the Reservation Agreement will be for five (5) years from the date the Reservation Agreement becomes effective as described in subparagraph (d) below and ShoLodge begins providing reservation services thereunder for all or all but an insignificant number of such proprietary brand hotels owned, operated or franchised by Prime or any Affiliate of Prime, but Prime will have a right to terminate the Reservation Agreement without penalty at any time upon one hundred twenty (120) days prior written notice to ShoLodge, such notice not to be given earlier than the date two (2) years after the Reservation Agreement becomes effective as described in subparagraph (d) below and ShoLodge begins providing reservation services thereunder for all or all but an insignificant number of such proprietary brand hotels owned, operated or franchised by Prime or any Affiliate of Prime; provided, however, in the event any of the Hotels are removed from the ShoLodge reservation system, such two (2) year period during which notice of termination may not be given shall be extended for a period equal to the shorter of (i) the time one (1) or more of the Sumner Suites hotels acquired by a Prime Subsidiary as contemplated herein is not on the ShoLodge reservation system, or (ii) three (3) months. (b) The Reservation Agreement will provide that Prime will pay a monthly fee to ShoLodge in the amount of one percent (1%) of gross room revenues and will pay customary pass through costs such as commissions and global distribution system fees. (c) The Reservation Agreement will provide that Prime will have the right of first offer and the right of first refusal with respect to any proposed sale by ShoLodge of the reservation system during the term of the Reservation Agreement. (d) The Reservation Agreement shall not become effective until the day after (i) ShoLodge has notified Prime that its reservation system complies with -20- 21 the software and hardware requirements set forth on Exhibit Q hereto and incorporated herein by this reference and (ii) Prime has confirmed in writing that the ShoLodge reservation system does so comply, provided that Prime shall have no more than a ninety (90) day period following ShoLodge's notice to test the system and confirm such compliance with whatever tests Prime desires, in Prime's reasonable discretion. (e) The effective date of the Reservation Agreement must occur within four hundred forty-five (445) days after the date of execution of the Reservation Agreement by ShoLodge and Prime or Prime shall have the option to terminate the Reservation Agreement effective upon written notice thereof to ShoLodge. (f) The Reservation Agreement shall contain performance standards together with termination rights related thereto. (g) The Reservation Agreement will provide that Prime shall have the exclusive right to use the Sumner Suites 1-800 number (1-800-74-SUITE) for the one (1) year period commencing on the initial Closing Date under this Agreement, after which time the right of Prime to use such 1-800 number shall terminate; provided, however, during such one (1) year period, Prime shall cause all calls received on such 1-800 number which relate to a Hotel then operated by ShoLodge or an Affiliate of ShoLodge to be forwarded to the ShoLodge reservation system. ShoLodge shall reimburse to Prime the actual out of pocket cost to Prime to transfer such calls to the ShoLodge reservation system, not to exceed One Dollar ($1.00) per transferred call. 8.2 Termination Fee. Prime shall pay any required termination fees to cancel its current agreement for reservation services. 8.3 Survival. The provisions of Article VIII shall survive the Closing, but any conflict between the terms of Article VIII and the terms of the Reservation Agreement shall be governed by the Reservation Agreement. ARTICLE IX PRICE ADJUSTMENTS; INITIAL CONSIDERATION 9.1 Closing Adjustments. (a) The cash portion of the Purchase Price described in Section 6.1(a) and the Development Site Purchase Price, as applicable, shall be increased, by: -21- 22 (i) any cash on hand at the Hotels when a Prime Subsidiary takes possession (any such cash shall be counted by representatives of ShoLodge and Prime on the Closing Date); (ii) any revenue generated by the operation of the Hotels through and including the night before the Closing Date arising from accounts receivable with respect to guests of the Hotels then in occupancy which in the normal course of business would be received after the Closing (the amount of such revenue to be determined by representatives of ShoLodge and Prime on the Closing Date); (iii) amounts paid prior to Closing for any ad valorem real estate taxes and assessments relating to the Real Property on account of any period from and after 12:01 a.m. of the Closing Date; (iv) personal property taxes, gross receipts taxes, sales taxes, excise taxes, hotel occupancy taxes or other similar taxes (but excluding income and franchise taxes), if any, relating to the Assets paid prior to Closing on account of any period from and after 12:01 a.m. of the Closing Date; (v) amounts paid prior to Closing under any Operating Agreement, the HPT Lease (including, if applicable, as amended, or pursuant to the separate lease contemplated in Section 3.8) or any instrument creating a Permitted Exception on account of any period from and after 12:01 a.m. of the Closing Date; (vi) accrued but unpaid interest earnings on the HPT Lease Guaranty Deposit for any period prior to 12:01 a.m. of the Closing Date (if such HPT Lease Guaranty Deposit is not returned from HPT and/or Landlord to ShoLodge or STI); (vii) any utility deposits relating to the Assets which are transferred and remain on deposit after Closing for the benefit of a Prime Subsidiary or Prime, as applicable; and (viii) any other charges or fees customarily prorated by a credit to the seller in the jurisdiction in which the Real Property is situated, on customary terms. (b) The cash portion of the Purchase Price described in Section 6.1(a) and the Development Site Purchase Price, as applicable, shall be decreased, by: (i) any Advance Payments retained by STI, an Additional Hotel Subsidiary, or Southeast, as applicable; (ii) unpaid ad valorem real estate taxes and assessments relating to the Real Property on account of any period prior to 12:01 a.m. of the Closing Date; (iii) unpaid personal property taxes, gross receipts taxes, sales taxes, excise taxes, hotel occupancy taxes or other similar taxes (but excluding income and franchise -22- 23 taxes), if any, relating to the Assets payable on account of any period prior to 12:01 a.m. of the Closing Date; (iv) unpaid amounts payable under any Operating Agreement (ShoLodge shall use its best efforts to cause all amounts due under the Operating Agreements to be paid to the Closing Date), the HPT Lease (including, if applicable, as amended, or pursuant to the separate lease contemplated in Section 3.8) or any instrument creating a Permitted Exception on account of any period prior to 12:01 a.m. of the Closing Date (for this purpose "Additional Rent" (as defined in the HPT Lease) shall be calculated based on the "Total Hotel Sales" (as defined in the HPT Lease) for the current year to the Closing Date compared to "Base Total Hotel Sales" (as defined in the HPT Lease) for the similar period of the applicable "Base Year" (as defined in the HPT Lease)); and (v) unpaid rates, rents and charges for sewer, water, gas, electricity, telephone and other utility services provided to the Hotels for any period prior to 12:01 a.m. of the Closing Date (ShoLodge shall use commercially reasonable efforts to cause meters to be read as of the Closing Date); (vi) accrued but unpaid benefits due to employees of the Hotels who are hired by Prime or a Prime Subsidiary, as applicable, which are not paid by STI, ShoLodge or an Affiliate of ShoLodge directly to such employees upon termination of employment; and (vii) any other charges or fees customarily prorated by a charge to the seller in the jurisdiction in which the Real Property is situated, on customary terms. (c) The intent of the foregoing is to credit or charge, as the case may be, STI, the Additional Hotel Subsidiaries, Southeast or the Development Subsidiaries, as applicable, with all revenues and expenses respecting the Assets which are attributable to operations before the Closing Date and to credit or charge, as the case may be, Prime or a Prime Subsidiary, as applicable, with all such revenues and expenses attributable to operations on and after the Closing Date. At Closing, STI, the Additional Hotel Subsidiaries and Southeast, as applicable, shall provide the Prime HPT Subsidiary and the Prime Texas Subsidiary, as applicable, with a list setting forth advance guest bookings, conventions, meetings and any other booking commitments for the period from and after the Closing Date. 9.2 Post-Closing Adjustments. If at any time following the Closing Date, the calculation of an item listed in Section 9.1 above shall prove to be incorrect or an item is discovered which should have been included in the adjustments but which was omitted therefrom, the Person in whose favor the error or omission was made shall pay the sum necessary to correct such error or omission to the Person entitled to such payment promptly following receipt of proof of such error or omission from such Person entitled to such payment, provided that such proof is delivered to the Person from whom payment is requested within thirty (30) days of the Closing Date. The adjustment of "Additional Rent" pursuant to Section 9.1(b)(iv), however, shall be final and shall not be further adjusted regardless of the actual amount of "Additional Rent" for the year in which the Closing Date occurs. -23- 24 If the amount of real estate taxes or assessments for the current year is not known on the Closing Date, then the taxes or assessments shall be apportioned on the basis of the taxes assessed for the preceding year or some reasonable assessment agreed by the parties if a Hotel is in its first year of operation. Notwithstanding the foregoing thirty (30) day limitation, the amounts as computed shall be adjusted when the final tax assessment and tax rates are determined. Subject to the limitations set forth herein, the provisions of this Section 9.2 shall survive the Closing. 9.3 Initial Consideration. On the date of execution of this Agreement by Prime, Prime will deliver to ShoLodge a check in the amount of One Hundred and No/100 Dollars ($100.00) as initial consideration for any option granted in this Agreement (the "Initial Consideration"). The Initial Consideration is non-refundable and shall be retained by ShoLodge regardless of whether or not this Agreement is terminated pursuant to a right to do so hereunder. ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SHOLODGE Each and every obligation of ShoLodge and the ShoLodge Subsidiaries to be performed hereunder shall be subject to the satisfaction, prior to or on the date on which performance is due, of the following express conditions precedent: 10.1 Compliance with Agreement. Prime and the Prime Subsidiaries shall have performed and complied in all respects with all of their obligations under this Agreement which are to have been performed or complied with by Prime or the Prime Subsidiaries, as applicable, as of such date. 10.2 Representations and Warranties. The representations and warranties made by Prime in this Agreement shall have been true and correct in all material respects and such representations and warranties shall be true and correct in all material respects as of the Closing Date with the same force and effect as though such representations and warranties had been made on the Closing Date. 10.3 Proceedings and Instruments Satisfactory. All proceedings, corporate or other, to be taken by Prime or a Prime Subsidiary, as applicable, in connection with the performance of this Agreement and all Closing Documents to be executed by Prime and/or a Prime Subsidiary shall be complete to the reasonable satisfaction of ShoLodge and ShoLodge's attorneys, and Prime and the Prime Subsidiaries, as applicable, shall have made available to ShoLodge for examination the originals or true and correct copies of all documents relating to such proceedings which ShoLodge may reasonably request in connection with the transactions contemplated by this Agreement. 10.4 Deliveries at Closing. Prime and the Prime Subsidiaries, as applicable, shall have delivered or caused to be delivered to ShoLodge the Closing Documents to be executed by -24- 25 Prime and/or a Prime Subsidiary, each properly executed, acknowledged or notarized, if appropriate, and dated as of the Closing Date or such other date as the parties shall agree, including, without limitation, the Construction Contract (in form and substance reasonably satisfactory to Moore and including, without limitation, those provisions set forth in Section 7.1) and the Reservation Agreement (in form and substance reasonably satisfactory to ShoLodge and including, without limitation, those provisions set forth in Section 8.1). 10.5 Other Documents. Prime and the Prime Subsidiaries, as applicable, shall have delivered to ShoLodge or caused to be delivered to ShoLodge such certificates and documents of officers of Prime and the Prime Subsidiaries, as applicable, and public officials as shall be reasonably requested by ShoLodge's counsel to establish the existence and good standing of Prime and the Prime Subsidiaries, as applicable, and the due authorization and enforceability of this Agreement and the Closing Documents to be executed by Prime and/or a Prime Subsidiary, and the authorization of the transactions and performance contemplated hereby and thereby by Prime and the Prime Subsidiaries. 10.6 HPT Closing. All transactions with HPT and Landlord as contemplated in this Agreement, including, without limitation, the agreement or consent of Landlord and HPT to the assignment by STI to the Prime HPT Subsidiary of all of STI's right, title and interest in and to the HPT Lease, the amendment of the HPT Lease and related documents to reflect the transfer of the STI Leased Property and, if applicable, the Additional Property (as contemplated in Section 3.8) from STI to the Prime HPT Subsidiary and the change of the brand from "Sumner Suites" to "AmeriSuites", the release by Landlord of STI of and from any liability under the HPT Lease and related documents (including, without limitation, any separate lease as contemplated in Section 3.8), the substitution of a pledge of the stock of the Prime HPT Subsidiary for the existing pledge of the stock of STI to Landlord, the release by HPT and Landlord of ShoLodge of and from any liabilities under the HPT Lease Guaranty and, if applicable, any separate guaranty (as contemplated in Section 3.8), if applicable, the agreement or consent of HPT and Landlord to the absolute assignment by ShoLodge to Prime of all of ShoLodge's right, title and interest in and to the HPT Lease Guaranty Deposit, the transfer and conveyance of the Additional Property from the Additional Hotel Subsidiaries to Landlord and, if applicable, the removal of any Hotel from the HPT Lease or a separate lease (as contemplated in Section 3.8) to accomplish a partial termination of this Agreement pursuant to Section 13.3 or Section 13.4 (with minimum annual rent reduced by the applicable amount set forth in Exhibit C to the HPT Lease or set forth in Exhibit P attached hereto and incorporated herein by this reference, as applicable), shall have closed pursuant to documents in form and substance reasonably satisfactory to ShoLodge. Further, the HPT Estoppel Certificate shall acknowledge that (i) there are no existing defaults nor events which with the giving of notice or the passage of time may become defaults by STI under the HPT Lease nor any cause for HPT or Landlord to offset any obligation of STI under the HPT Lease against the HPT Lease Guaranty Deposit, and (ii) as of the date of the HPT Estoppel Certificate the HPT Lease Security Deposit is Twenty-One Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00) and the HPT Lease Guaranty Deposit is Fourteen Million and No/100 Dollars ($14,000,000.00). -25- 26 10.7 Opinions of Counsel. ShoLodge shall have received a written opinion from counsel to Prime regarding the organization and authority of Prime and the Prime Subsidiaries, the due execution and delivery of this Agreement and the Closing Documents by Prime and the Prime Subsidiaries, as applicable, and such other matters with respect to the transactions contemplated by this Agreement as ShoLodge may reasonably require, which opinion may have customary and reasonable assumptions and qualifications. In the event that the conditions to the performance by ShoLodge and the ShoLodge Subsidiaries have not occurred by the Closing Date, ShoLodge may terminate this Agreement by delivering written notice to Prime. Thereafter, Prime and ShoLodge shall be released and relieved of all further obligations, liabilities and claims hereunder, other than the performance by each party of its Post Termination Obligations, and, as to a failure or refusal by Prime to perform Prime's obligations hereunder, other than the right of ShoLodge to pursue a suit for damages as described in Section 19.5(b)(i). ARTICLE XI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRIME Each and every obligation of Prime and the Prime Subsidiaries to be performed hereunder shall be subject to the satisfaction prior to or on the Closing Date of the following express conditions precedent: 11.1 Compliance with Agreement. ShoLodge and the ShoLodge Subsidiaries shall have performed and complied in all respects with all of their obligations under this Agreement which are to have been performed or complied with by ShoLodge or the ShoLodge Subsidiaries, as applicable, prior to or on such Closing Date. 11.2 Representations and Warranties. The representations and warranties made by ShoLodge in this Agreement shall have been true and correct in all material respects and such representations and warranties shall be true and correct in all material respects as of the Closing Date with the same force and effect as though such representations and warranties had been made on the Closing Date. 11.3 Proceedings and Instruments Satisfactory. All proceedings, corporate or other, to be taken by ShoLodge or a ShoLodge Subsidiary, as applicable, in connection with the performance of this Agreement and all Closing Documents to be executed by ShoLodge and/or a ShoLodge Subsidiary shall be complete to the reasonable satisfaction of Prime and Prime's attorneys, and ShoLodge and the ShoLodge Subsidiaries, as applicable, shall have made available to Prime for examination the originals or true and correct copies of all documents relating to such proceedings which Prime may reasonably request in connection with the transactions contemplated by this Agreement. 11.4 Deliveries at Closing. ShoLodge and the ShoLodge Subsidiaries, as applicable, shall have delivered or caused to be delivered to Prime the Closing Documents to be -26- 27 executed by ShoLodge and/or a ShoLodge Subsidiary, each properly executed, acknowledged or notarized, if appropriate, and dated as of the Closing Date or such other date as the parties shall agree, including, without limitation, the Construction Contract (in form and substance reasonably satisfactory to Prime and including, without limitation, those provisions set forth in Section 7.1) and the Reservation Agreement (in form and substance reasonably satisfactory to Prime and including, without limitation, those provisions set forth in Section 8.1. 11.5 Other Documents. ShoLodge and the ShoLodge Subsidiaries, as applicable, shall have delivered to Prime or caused to be delivered to Prime such certificates and documents of officers of ShoLodge and the ShoLodge Subsidiaries, as applicable, and public officials as shall be reasonably requested by counsel to Prime to establish the existence and good standing of ShoLodge and the ShoLodge Subsidiaries, as applicable, and the due authorization and enforceability of this Agreement and the Closing Documents to be executed by ShoLodge and/or a ShoLodge Subsidiary, and the authorization of the transactions and performance contemplated hereby and thereby by ShoLodge and the ShoLodge Subsidiaries, as applicable. 11.6 HPT Closing. All transactions with HPT and Landlord as contemplated in this Agreement, including, without limitation, the agreement or consent of Landlord and HPT to the assignment by STI to the Prime HPT Subsidiary of all of STI's right, title and interest in and to the HPT Lease, the amendment of the HPT Lease and related documents (i) to acknowledge the assignment of STI's interest in the HPT Lease and the STI Leased Property and, if applicable, the Additional Property (as contemplated in Section 3.8) from STI to the Prime HPT Subsidiary, (ii) to add the Additional Properties to the properties leased from Landlord to STI (and the Prime HPT Subsidiary) by the HPT Lease, if applicable, (iii) to remove any Hotel from the HPT Lease to accomplish a partial termination of this Agreement pursuant to Section 13.3 or Section 13.4 (with minimum annual rent reduced by the applicable amount set forth in Exhibit C to the HPT Lease or set forth in Exhibit P attached hereto and incorporated herein by this reference, as applicable), (iv) to reflect the change of the brand from "Sumner Suites" to "AmeriSuites", and (v) to make such other modifications as Prime or the Prime HPT Subsidiary reasonably may request consistent with the provisions of this Agreement prior to the expiration of the Due Diligence Period (such amendment being referred to herein as the "HPT Lease Amendment"), the substitution of a pledge of the stock of the Prime HPT Subsidiary for the existing pledge of the stock of STI to Landlord, the transfer and conveyance of the Additional Property from the Additional Hotel Subsidiaries to Landlord, if applicable, and, if applicable, the lease by separate document of the Additional Property from Landlord to the Prime HPT Subsidiary, shall have closed pursuant to documents in form and substance reasonably satisfactory to Prime. Further, Prime shall have received the executed HPT Estoppel Certificate which acknowledges that (i) there are no existing defaults nor events which with the giving of notice or the passage of time may become defaults by STI under the HPT Lease nor any cause for HPT or Landlord to offset any obligation of STI under the HPT Lease against the HPT Lease Guaranty Deposit, and (ii) as of the date of the HPT Estoppel Certificate the HPT Lease Security Deposit is Twenty-One Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00) and the HPT Lease Guaranty Deposit is Fourteen Million and No/100 Dollars ($14,000,000.00). -27- 28 11.7 Condition of Assets. (a) All of the Assets shall be in substantially the same physical condition (including, without limitation, with respect to the environmental condition of the Assets) as on the last day of the Due Diligence Period, ordinary wear and tear excepted; (b) No material default or event which with the giving of notice and/or the lapse of time could constitute a material default shall have occurred and be continuing under any Operating Agreement; and (c) All material licenses, permits and other authorizations necessary for the current use, occupancy and operation of the Assets shall be in full force and effect in all material respects, including, without limitation, any licenses and permits for the sale and on-premises consumption of liquor and other alcoholic beverages. 11.8 Opinions of Counsel. Prime shall have received a written opinion from counsel to ShoLodge regarding the organization and authority of ShoLodge and the ShoLodge Subsidiaries, the due execution and delivery of this Agreement and the Closing Documents by ShoLodge and the ShoLodge Subsidiaries, as applicable, and such other matters with respect to the transactions contemplated by this Agreement as Prime may reasonably require, which opinion may have customary and reasonable assumptions and qualifications. 11.9 Security Deposit. Any addition to the HPT Lease Security Deposit or any "Retained Funds" required to be deposited pursuant to a separate lease, as applicable, with respect to the lease of the Additional Property from Landlord to STI or the Prime HPT Subsidiary, as applicable, shall be deposited by ShoLodge or a ShoLodge Affiliate with Landlord on or prior to the Closing Date. 11.10 Resolution of Prime Objections. ShoLodge shall have completed, to the reasonable satisfaction of Prime, the resolution of "unacceptable items" identified pursuant to Sections 12.1 and 12.2 of this Agreement which ShoLodge undertakes to resolve pursuant to such sections. 11.11 Title Policies for Development Sites. A title company reasonably satisfactory to Prime shall be prepared, subject only to payment of the applicable premium, endorsement and related fees and delivery of related conveyance documents in recordable form, to issue title insurance policies insuring Prime concerning the Development Sites, subject only to the Permitted Exceptions. In the event that the conditions to the performance by Prime and the Prime Subsidiaries have not occurred by the Closing Date, Prime may terminate this Agreement by delivering written notice to ShoLodge. Thereafter, Prime and ShoLodge shall be released and relieved of all further obligations, liabilities and claims hereunder, other than the performance by each party of its Post Termination Obligations and, as to a failure or refusal by ShoLodge to -28- 29 perform ShoLodge's obligations hereunder, other than the right of Prime to pursue a suit for damages as described in Section 19.5(a)(i). Further, the obligation of Prime to acquire each Development Site pursuant to Article V shall be subject to the receipt by Prime prior to or on the Closing Date for such Development Site of evidence reasonably satisfactory to Prime that all building permits necessary for the construction of an AmeriSuites hotel thereon as contemplated in Article VII have been obtained. In the event that such condition has not been satisfied as to a Development Site on or before the scheduled (or last possible) Closing Date for such Development Site, Prime shall have the right to terminate this Agreement as to such Development Site only by giving written notice to ShoLodge at any time thereafter, so long as ShoLodge has not satisfied such condition prior to receipt of Prime's termination notice. In the event Prime timely elects to terminate this Agreement pursuant to the preceding sentence with respect to a Development Site, the Development Site Purchase Price shall be reduced by the portion of the Development Site Purchase Price applicable to such Development Site as set forth in Section 6.2 and thereafter ShoLodge and Prime shall be released and relieved of all further obligations, liabilities and claims hereunder with respect to such Development Site other than the performance by each party of its Post Termination Obligations with respect to such Development Site. Such termination shall not affect the rights and obligations of the parties hereto with respect to the other Assets. ARTICLE XII DUE DILIGENCE 12.1 Title Policies; Surveys and Environmental Studies; HPT Documents; Operating Agreements; Operating Permits and Licenses. Prior to the execution of this Agreement, ShoLodge has delivered to Prime a copy of a title policy (and all exceptions described therein), survey and environmental study for each parcel constituting a part of the Real Property, a copy of the HPT Documents, a copy of all Operating Agreements described on Exhibit L attached hereto and incorporated herein by this reference and a copy of all certificates of occupancy and operating permits and licenses relating to the Hotels. In the event that any matter shown on such title policies, surveys or environmental studies or any provision of the HPT Documents or any of the Operating Agreements described on Exhibit L or any matter concerning the Hotels as revealed by an examination of the certificates of occupancy and the operating permits and licenses (or lack thereof) is not acceptable to Prime, in Prime's sole judgment, Prime shall deliver written notice to ShoLodge on or prior to the last day of the Due Diligence Period specifying in detail all such unacceptable items; provided, however, that with respect to any of the foregoing items which have not been delivered to Prime prior to the execution of this Agreement, the deadline for Prime to deliver such written notice to ShoLodge shall end on the later of (i) the last day of the Due Diligence Period or (ii) the date ten (10) days after delivery of such item to Prime. Unless ShoLodge undertakes to resolve such unacceptable items in a manner acceptable to Prime within five (5) days of receipt of such notice, Prime may, by delivering written notice to ShoLodge within five (5) days after the deadline for ShoLodge to undertake to resolve such unacceptable items, terminate this Agreement, whereupon Prime and ShoLodge shall be released and relieved of all further obligations, liabilities and claims hereunder, other than the performance by each party of its Post Termination Obligations. In the event that the Agreement is not terminated pursuant to this Section 12.1, Prime shall be deemed to have approved all exceptions to title as reflected on -29- 30 the title policies, the condition of the Real Property as reflected by the surveys and environmental studies, all provisions of the HPT Documents and the Operating Agreements described on Exhibit L and all matters which would be revealed by an examination of the operating permits and licenses (but subject to ShoLodge completing the resolution of the unacceptable items which ShoLodge has undertaken to resolve). 12.2 Property Inspections. Beginning on the Effective Date, Prime shall have the right to undertake a complete physical examination and inspection of the Assets and to perform or have performed such engineering and environmental tests as deemed necessary or appropriate by Prime. ShoLodge will provide to Prime and its officers and other representatives, during normal business hours, and with prior notice to ShoLodge, free and full access to the Hotels and the other Assets to conduct such examinations and inspections and will cooperate fully with any examination or inspection made by Prime, its officers or representatives. All examinations and inspections shall be conducted at such times and in such a manner as to minimize the disruption to the business being conducted on the Real Property. ShoLodge shall also request that HPT forward to Prime a copy of all examinations and inspections which HPT obtained with respect to the Existing HPT Hotels or hereafter obtains with respect to the Additional HPT Hotels. Should Prime discover any physical condition of the Assets (including, without limitation, any environmental condition) which is not acceptable to Prime and which is not eligible to be repaired with funds in the "FF&E Reserve" established under the HPT Lease or the Texas Lease or a similar fund created under a separate lease contemplated in Section 3.3 and in Section 3.8, as applicable, Prime shall deliver written notice to ShoLodge on or prior to the last day of the Due Diligence Period specifying in detail all such unacceptable items; provided, however, that with respect to any of the foregoing examinations and inspections obtained by HPT with respect to the Existing HPT Hotels or the Additional HPT Hotels, the deadline for Prime to deliver such written notice to ShoLodge shall end on the later of (i) the last day of the Due Diligence Period or (ii) the date ten (10) days after delivery of such item to Prime or (iii) thirty (30) days after receipt by Prime of written notice from HPT or ShoLodge that any such examinations and inspections obtained by HPT will not be provided to Prime. Unless ShoLodge undertakes to repair such unacceptable items in a manner acceptable to Prime within five (5) days of receipt of such notice, Prime may, by delivering written notice to ShoLodge within five (5) days after the deadline for ShoLodge to undertake to repair such unacceptable items, terminate this Agreement, whereupon Prime and ShoLodge shall be released and relieved of all further obligations, liabilities and claims hereunder, other than the performance by each party of its Post Termination Obligations. In the event that the Agreement is not terminated pursuant to this Section 12.2, Prime shall be deemed to have approved the physical condition of the Assets as in existence on the last day of the Due Diligence Period (but subject to ShoLodge completing the repair of the unacceptable items which ShoLodge has undertaken to repair). 12.3 Confidentiality. All materials delivered to Prime and all results, information and reports generated from Prime's examinations and inspections of the Assets shall be held in strict confidence and no copies of such materials, results, information or reports shall be given to anyone (other than employees, agents, attorneys and accountants of Prime who shall also agree to keep such results, information and reports confidential) without the prior written approval of ShoLodge. The provisions of this Section 12.3 shall survive any termination of this Agreement. -30- 31 ARTICLE XIII CERTAIN MATTERS PENDING THE CLOSING 13.1 Notice of Adverse Changes. Pending the Closing Date, ShoLodge shall give to Prime prompt notice of the occurrence of any of the following: (a) the commencement or threat of commencement of any proceeding at law or in equity or before any agency or administrative or regulatory body or authority which could have a material adverse effect on any of the Hotels or the operation of any of the Hotels; (b) any notice of breach, default, claimed default or termination of the HPT Lease or any Operating Agreement; (c) any violation by STI, an Additional Hotel Subsidiary or Southeast, as applicable, or notice of any alleged violation by STI, an Additional Hotel Subsidiary or Southeast, as applicable, of any federal, state or local law, statute, ordinance, rule or regulation, but only as relates to the operation of the Hotels; or (d) any material change in any condition with respect to any of the Assets or any event or circumstance which makes any representation or warranty of ShoLodge to Prime under this Agreement untrue or misleading in any material respect (Prime agreeing, on learning of any such fact or condition, promptly to notify ShoLodge thereof). 13.2 Operations Pending Closing. Pending the Closing Date, STI, the Additional Hotel Subsidiaries and Southeast, as applicable, shall, unless otherwise approved in writing by Prime: (a) operate the Hotels in the ordinary course of business of a first class hotel operation and in accordance with past practices consistently applied so as to keep the Hotels in first class condition, reasonable wear and tear excepted, and so as to maintain a first class hotel operation and the reasonable goodwill of all tenants of the Hotels and all employees, guests and other customers of the Hotels; (b) maintain the Equipment in good operating condition and repair and replace with equipment of similar value which is in good operating condition or repair any of the Equipment which shall be worn out, lost, stolen or destroyed (which maintenance, repair and replacement as to the STI Equipment and, if applicable, the Additional Equipment may be made from funds in the "FF&E Reserve" created pursuant to the HPT Lease or any separate lease as contemplated in Section 3.8); (c) not sell, lease, mortgage, pledge or otherwise dispose of any of the Assets or any portion thereof, except for dispositions contemplated in this Agreement and dispositions in the ordinary course of business; -31- 32 (d) with respect to the personnel employed at the Hotels, (i) not increase or otherwise change the rate or nature of the compensation (including wages, salaries and bonuses) which is paid or payable to any such employee other than in the ordinary course of business, and (ii) use reasonable efforts to keep available to the applicable Prime Subsidiary the services of the present employees at the Hotels (except those dismissed for cause or those who voluntarily discontinue their employment); (e) not (i) enter into or become obligated under any Operating Agreement except for normal contracts entered into in the ordinary course of business which can be terminated upon not more than thirty (30) days notice without penalty and, if the party thereto delivering goods or performing services is an Affiliate of ShoLodge, which contain fair market terms, or (ii) in any manner change, modify, extend or renew any existing Operating Agreement unless such Operating Agreement can be terminated upon not more than thirty (30) days notice without penalty and, if the party thereto delivering goods or performing services is an Affiliate of ShoLodge, unless such changes, modifications, extensions or renewals are at fair market terms; (f) maintain the Inventory in good condition and in amount in accordance with past practices consistently applied (but as to bath towels, hand towels, wash cloths, bath mats, sheets and pillow cases not less than two (2) "turns" (as such term is used in the hotel industry) and as to other linen items such as blankets, pillows and bed spreads, not less than one (1) "turn" plus appropriate spare inventory of such other linen items); (g) maintain in full force and effect policies of liability and casualty insurance of the same type, character and coverage as the policies currently carried with respect to the Assets and as required under the HPT Lease or any separate lease as contemplated in Section 3.8; (h) not in any manner change, modify, extend, renew or terminate the HPT Lease, except as required by the terms thereof or except as expressly permitted by this Agreement; (i) maintain its books of account and records relating to the Assets in accordance with sound accounting principles; (j) use and operate the Hotels in compliance in all material respects with applicable laws, statutes, rules and regulations and the requirements of any mortgage, lease, Operating Agreement, Permitted Exception and insurance policy affecting the Hotels or any Assets; (k) pay or cause to be paid prior to delinquency all ad valorem, occupancy and sales taxes due and payable with respect to any Asset or the operation of the Hotels or establish or cause to be established adequate reserves therefor; (l) except as otherwise permitted hereby, not take any action or fail to take action the result of which would have a material adverse effect on an Asset or on the ability -32- 33 of the applicable Prime Subsidiary to operate the Hotels as first class hotels after the Closing Date or which would cause any of the representations and warranties contained in Article XV hereof to be untrue in any material respect as of Closing; (m) maintain the Buildings (including, but not limited to, the mechanical systems, plumbing, electrical, wiring, appliances, fixtures, heating, air conditioning and ventilating equipment, elevators, boilers, equipment, roofs, structural members and furnaces) in substantially the same condition as they are as of the last day of the Due Diligence Period, reasonable wear and tear excepted (which maintenance as to the STI Buildings and, if applicable, the Additional Buildings, may be made from funds in the "FF&E Reserve" created pursuant to the HPT Lease or any separate lease as contemplated in Section 3.8); (n) not materially diminish the quality or quantity of maintenance and upkeep services heretofore provided to the Assets; (o) continue to use reasonable efforts to take guest room reservations and to book functions and meetings and otherwise to promote the business of the Hotels in accordance with current practices and at current rates; provided, however, no such bookings shall be for more than six (6) months in advance without the consent of Prime; (p) promptly deliver to Prime upon Prime's request such reports showing the revenue and expenses of the Hotels and all departments thereof, together with such periodic information with respect to room reservations and other bookings, as ShoLodge customarily keeps or receives internally for its own use; and (q) keep, observe and perform all its obligations in all material respects under the HPT Lease, the Operating Agreements and all material licenses, permits and other authorizations necessary for the current use, occupancy and operation of the Assets, including, without limitation, any licenses and permits for the sale and on-premises consumption of liquor and other alcoholic beverages, consistent with ShoLodge's past practice. 13.3 Destruction of Assets. If prior to the Closing Date, any Hotel suffers loss or damage on account of fire, flood, earthquake, accident, act of war, civil commotion or other similar cause or event occurring after the Effective Date such that STI has the right to terminate the HPT Lease as to such Hotel or would have such right if such Hotel were leased by STI pursuant to the HPT Lease and ShoLodge has not repaired such damage prior to the Closing Date, Prime shall have the right to terminate this Agreement as to such damaged Hotel (and the Assets related thereto) only by giving written notice to ShoLodge on or prior to the Closing Date, in which event (i) the Purchase Price shall be reduced by the applicable amount as reflected on Exhibit O attached hereto and incorporated herein by this reference, (such reduction to come first from the cash portion of the Purchase Price described in Section 6.1(a) and then from the ShoLodge debt securities described in Section 6.1(b)) and Exhibit N shall be appropriately modified, and (ii) if applicable, the "minimum annual rent" described in Section 3.3 and in Section 4.3 shall be reduced by the applicable amount as specified on Exhibit P attached hereto and incorporated herein by this reference (as adjusted, if applicable, pursuant to Section 3.3 and -33- 34 Section 4.3). If Prime fails to terminate this Agreement as to a damaged Hotel (and the Assets related thereto) by giving timely written notice of termination as provided herein or if a Hotel is damaged but the damage is such that Prime does not have an option to terminate this Agreement as to such damaged Hotel (and the Assets related thereto), Prime shall consummate the transactions contemplated hereunder (including, without limitation, as contemplated herein with respect to such damaged Hotel (and the Assets related thereto)), in which event the applicable Prime Subsidiary, except as otherwise provided in the HPT Lease (or a separate lease contemplated in Section 3.8, if applicable), shall be entitled to all insurance or other proceeds payable by reason of such loss or damage to such damaged Hotel in excess of the amount spent by ShoLodge or a ShoLodge Subsidiary to repair such damage (insurance or other proceeds in such amount being payable to ShoLodge or such ShoLodge Subsidiary), and, in addition, there shall be a reduction in the Purchase Price by the amount by which any deductibles under the policies of insurance covering such loss or damage exceed the amount spent by ShoLodge or a ShoLodge Subsidiary to repair such damage which is not reimbursed from insurance or other proceeds. ShoLodge shall not permit STI to terminate the HPT Lease or the separate lease contemplated in Section 3.8 due to any casualty without the prior written approval of Prime, such written approval not to be unreasonably withheld, delayed or conditioned. In the event of a casualty to an Existing HPT Hotel or to an Additional HPT Hotel such that Prime elects to terminate this Agreement as to such Hotel, ShoLodge agrees that, at Prime's request, ShoLodge shall cause STI to terminate the HPT Lease or the separate lease contemplated in Section 3.8 with respect to such Hotel pursuant to the provisions thereof. Further, prior to commencing the repair of any damage following a casualty event which would cost more than Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in the aggregate to repair, ShoLodge shall cause STI to obtain the prior written consent of Prime, not to be unreasonably withheld, conditioned or delayed, to such repair. In the event Prime timely elects to terminate this Agreement pursuant to the preceding paragraph with respect to a damaged Hotel (and the Assets related thereto), thereafter, ShoLodge and Prime shall be released and relieved of all further obligations, liabilities and claims hereunder with respect to such damaged Hotel (and the Assets related thereto), other than the performance by each party of its Post Termination Obligations with respect to such damaged Hotel (and the Assets related thereto). Such termination shall not affect the rights and obligations of the parties hereto with respect to the other Assets. 13.4 Condemnation. In the event of any actual or threatened taking pursuant to the power of eminent domain of all or any portion of any HPT Real Property or the Texas Real Property such that STI has the right to terminate the HPT Lease as to such HPT Real Property or would have such right if such HPT Real Property or such Texas Real Property were leased by STI pursuant to the HPT Lease or any Development Site such that the taking would materially adversely affect the operation of the hotel to be constructed on such property, as applicable, or any proposed sale in lieu thereof, ShoLodge shall give written notice thereof to Prime promptly after ShoLodge learns or receives notice thereof, and Prime shall have the right to terminate this Agreement as to such HPT Real Property or such Texas Real Property (and the Assets related thereto) or as to such Development Site, as applicable, only by giving written notice to ShoLodge on or prior to the date ten (10) days after receipt of such written notice from ShoLodge, in which -34- 35 event (i) if applicable, the Purchase Price shall be reduced by the applicable amount as reflected on Exhibit O attached hereto and incorporated herein by this reference (such reduction to come first from the cash portion of the Purchase Price described in Section 6.1(a) and then from the ShoLodge debt securities described in Section 6.1(b)) and Exhibit N shall be appropriately modified, (ii) if applicable, the Development Site Purchase Price shall be reduced by the portion of the Development Site Purchase Price applicable to such Development Site as set forth in Section 6.2, and (iii) if applicable, the "minimum annual rent" in Section 3.3 and in Section 4.3 shall be reduced by the applicable amount as specified on Exhibit P attached hereto and incorporated herein by this reference (as adjusted, if applicable, pursuant to Section 3.3 and Section 4.3). If Prime fails to terminate this Agreement as to any such HPT Real Property or any such Texas Real Property (and the Assets related thereto) or as to any such Development Site, as applicable, by giving timely written notice of termination as provided herein or if the taking or threatened taking of such HPT Real Property, Texas Real Property or Development Site, as applicable, is such that Prime does not have an option to terminate this Agreement as to such HPT Real Property or such Texas Real Property (and the Assets related thereto) or as to such Development Site, as applicable, Prime shall consummate the transactions contemplated hereunder (including, without limitation, as contemplated herein with respect to such HPT Real Property or such Texas Real Property (and the Assets related thereto) or such Development Site, as applicable), in which event the applicable Prime Subsidiary or Prime, as applicable, except as otherwise provided in the HPT Lease (or a separate lease contemplated in Section 3.8 if applicable), shall be entitled to all proceeds, awards and other payments arising out of such condemnation or sale (actual or threatened), but there shall be no reduction in the Purchase Price. ShoLodge shall not permit STI to terminate the HPT Lease or the separate lease contemplated in Section 3.8 due to any taking pursuant to the power of eminent domain without the prior written approval of Prime, such written approval of Prime not to be unreasonably withheld, delayed or conditioned. In the event of a taking with respect to any HPT Real Property, ShoLodge agrees that, at Prime's request, ShoLodge shall cause STI to terminate the HPT Lease or the separate lease contemplated in Section 3.8 with respect to such HPT Real Property pursuant to the provisions thereof. In the event Prime timely elects to terminate this Agreement pursuant to the preceding paragraph with respect to any HPT Real Property or any Texas Real Property (and the Assets related thereto) or a Development Site, as applicable, thereafter, ShoLodge and Prime shall be released and relieved of all further obligations, liabilities and claims hereunder with respect to such HPT Real Property or such Texas Real Property (and the Assets related thereto), or such Development Site, as applicable, other than the performance by each party of its Post Termination Obligations with respect to such HPT Real Property or such Texas Real Property (and the Assets related thereto) or such Development Site, as applicable. Such termination shall not affect the rights and obligations of the parties hereto with respect to the other Assets. -35- 36 ARTICLE XIV POST TERMINATION OBLIGATIONS 14.1 Post Termination Obligations. All costs and expenses related to Prime's examination and inspection of the Assets shall be paid for by Prime, and Prime agrees to indemnify and hold ShoLodge and the ShoLodge Subsidiaries harmless from and against all such costs and expenses. Prime shall not permit any liens to attach to the Assets by reason of the exercise of Prime's inspection rights hereunder. Prime agrees that if this Agreement is terminated for any reason, Prime will: (i) restore the Assets to the condition which existed prior to any inspections, tests or other activities of Prime (casualty, condemnation, ordinary wear and tear and acts or omissions of ShoLodge or its Affiliates excepted); (ii) indemnify and hold ShoLodge and the ShoLodge Subsidiaries harmless from and against any and all liens by contractors, subcontractors, materialmen or laborers performing work or tests for Prime and from and against any and all claims for damages by third parties for damage to property or personal injuries to the extent arising out of or attributable to the conduct of such work and tests and/or any other activities of Prime or Prime's employees or agents; (iii) pay or reimburse ShoLodge and the ShoLodge Subsidiaries for the payment of any expenses (including reasonable attorney fees and court costs) incurred in connection with any of the foregoing; and (iv) deliver to ShoLodge copies of all studies, reports, surveys, tests and other materials of any kind or nature generated for or by Prime in connection with Prime's inspection of the Assets. The foregoing obligations of Prime, together with Prime's obligation to maintain the confidentiality of certain matters as specified in Section 12.3, the obligation of each party to maintain the confidentiality of certain matters as specified in Section 20.1 and the obligation of each party with respect to costs and expenses set forth in Section 17.5, are referred to herein collectively as the "Post Termination Obligations." Notwithstanding any provision herein to the contrary, it is agreed and understood that a termination of this Agreement under any right granted hereunder shall terminate all obligations of ShoLodge and Prime under this Agreement except that such termination shall not terminate the provisions in this Agreement relating to the Post Termination Obligations and except that any termination due to the failure or refusal of a party to perform its obligations hereunder shall not terminate the right of the other party hereto to pursue a suit to recover damages in accordance with the provisions of Section 19.5(a)(i) or Section 19.5(b)(i), as applicable. The Post Termination Obligations shall survive any termination of this Agreement, and the right to pursue a suit to recover damages in accordance with the provisions of Section 19.5(a)(i) and Section 19.5(b)(i) shall survive any termination due to the failure or refusal of a party to perform its obligations hereunder. Further, the obligations of Prime set forth in (ii) and (iii) of the third sentence of this Section 14.1 shall survive the Closing. ARTICLE XV REPRESENTATIONS AND WARRANTIES OF SHOLODGE ShoLodge hereby represents and warrants to Prime and to the Prime Subsidiaries, as follows: -36- 37 15.1 Organization. ShoLodge is a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee and has the corporate power and authority to enter into and to perform this Agreement and the Closing Documents to which ShoLodge is a party. Each ShoLodge Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee and has the corporate power and authority to perform its obligations as contemplated in this Agreement and to enter into and to perform the Closing Documents to which each such ShoLodge Subsidiary is a party. ShoLodge and each ShoLodge Subsidiary have duly qualified to transact business in each jurisdiction in which the nature of the business conducted by it requires such qualification, except where failure to do so could not reasonably be expected to have a material adverse effect. 15.2 Authorization. The execution and delivery of this Agreement by ShoLodge, the execution and delivery of all Closing Documents to be executed by ShoLodge, and the consummation by ShoLodge of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of ShoLodge. The execution and delivery of all Closing Documents to be executed by a ShoLodge Subsidiary, as applicable, and the consummation by each ShoLodge Subsidiary, as applicable, of the transactions contemplated hereby and thereby have been duly authorized by each such corporation's Board of Directors. Neither the entering into this Agreement and the Closing Documents to be executed by ShoLodge or a ShoLodge Subsidiary, as applicable, nor the consummation of the transactions contemplated herein or therein will cause a violation, default or breach by ShoLodge or a ShoLodge Subsidiary, as applicable, of, or conflict with, any contracts, agreements or instruments to which ShoLodge or a ShoLodge Subsidiary, as applicable, is a party or by which ShoLodge or a ShoLodge Subsidiary, as applicable, is bound. 15.3 Valid and Binding Agreement. This Agreement constitutes, and each of the Closing Documents to be executed by ShoLodge or a ShoLodge Subsidiary, as applicable, will constitute upon execution by all parties thereto, a valid and binding agreement of ShoLodge and the ShoLodge Subsidiaries who are parties thereto, as applicable, enforceable in accordance with its terms, subject as to enforceability to bankruptcy, insolvency and similar laws affecting creditors' rights generally and to the availability of equitable remedies. 15.4 No Violation. Neither the execution and delivery of this Agreement, the execution and delivery of the Closing Documents to be executed by ShoLodge or a ShoLodge Subsidiary, as applicable, nor the consummation by ShoLodge and the ShoLodge Subsidiaries, as applicable, of the transactions contemplated hereby or thereby violates or conflicts with any such corporation's Charter or Bylaws or any agreement or other restriction of any kind to which any such corporation is as a party or by which any such corporation is bound. 15.5 Employment Issues. The employees at the Hotels are not represented by any union and, to the knowledge of ShoLodge, have not been solicited with respect to organization or representation by any labor organization or similar body. There are no employment agreements or other labor agreements with respect to any employees at the Hotels. Except as set forth on Exhibit M attached hereto and incorporated herein by this reference, there is not any "employee benefit plan" as defined in Section 3(3) of the Employment Retirement Income Security Act of 1974, -37- 38 as amended ("ERISA"), nor any stock purchase plan, practice or arrangement, nor any other material benefits, practice or arrangement relating to employees at the Hotels (each such plan, practice or arrangement being referred to as a "Benefit Plan"). ShoLodge is not currently required to contribute to any multi-employer plans (as defined within the meaning of Section 3(37) of ERISA) for the benefit of the employees of any Hotel, nor has ShoLodge been required to contribute to any multi-employer plans (as defined within the meaning of Section 3(37) of ERISA) for the benefit of the employees at the Hotels, nor has ShoLodge been required to contribute to any multi-employer plan for the benefit of the employees at the Hotels within the last five (5) years. With respect to each Benefit Plan set forth on Exhibit M, if any, ShoLodge has furnished Prime, to the extent applicable to each Benefit Plan (i) complete and accurate copies of the Benefit Plan, including all amendments, (ii) the most recent determination letter from the Internal Revenue Service, (iii) the most recent actuarial reports, and (iv) all reports of the Benefit Plan required by ERISA and the regulations thereunder. The execution and delivery of this Agreement by ShoLodge and the consummation of the transactions contemplated hereunder (x) do not constitute a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code, and (y) will not result in any obligation or liability of Prime or ShoLodge to the Pension Benefit Guaranty Corporation in respect of any Benefit Plan. 15.6 Site Disclosure. (a) To the knowledge of ShoLodge, there is no pending or threatened condemnation or similar proceeding affecting the Real Property or any portion thereof, and to the knowledge of ShoLodge, no such action is presently contemplated. (b) To the knowledge of ShoLodge (i) all necessary permits and licenses required for the operation of the Hotels have been obtained, and (ii) no zoning, building or other federal, state or municipal law, ordinance, regulation or restriction is violated by the continued operation of the Hotels in the manner now being operated. No notice of zoning or building code violations resulting from the improvements on the HPT Real Property or the Texas Real Property or the continued operation of the Hotels thereon has been received by ShoLodge. (c) To the knowledge of ShoLodge and except as disclosed in any environmental studies obtained by Prime or provided by ShoLodge to Prime, (i) the Hotels have been operated in compliance with all environmental regulations, and (ii) no pollutants or other toxic or hazardous substances, including any solid, liquid, gaseous or thermal irritant or contaminant, such as smoke, vapor, soot, fumes, alkalis, acids, chemicals or wastes, have been stored, discharged, released, generated or allowed to escape at or from the Real Property in violation of any environmental regulations, (iii) no underground storage tanks are located on the Real Property or have been removed or filled, and (iv) no investigation, administrative order, consent order or agreement, litigation or settlement with respect to any of the foregoing is proposed, threatened, anticipated or in existence with respect to the Real Property. ShoLodge has not received any notice of any such investigation, administrative order, consent order or agreement, litigation or settlement. -38- 39 (d) To the knowledge of ShoLodge, there are no structural, electrical, mechanical, plumbing or other defects in any of the Hotels which could have a material adverse effect on the operation of such Hotel. 15.7 Operating Agreements. Attached hereto as Exhibit L is a schedule of all Operating Agreements in effect as of the Effective Date. There are no material management, service, supply or maintenance contracts or equipment leases or similar contracts or agreements in effect as of the Effective Date with respect to the Assets other than the Operating Agreements listed on Schedule L attached hereto and incorporated herein by this reference. The copies of the Operating Agreements previously provided or made available to Prime are true and complete copies of said Operating Agreements and, to ShoLodge's knowledge, are valid and in full force and effect and no party has breached any material condition or provision thereof. To ShoLodge's knowledge, ShoLodge or the applicable ShoLodge Subsidiary has performed all of its material obligations under each of the Operating Agreements. To ShoLodge's knowledge no fact or circumstance has occurred which, by itself or with the passage of time or the giving of notice or both, would constitute a default in any material respect under any of the Operating Agreements. To ShoLodge's knowledge, all other parties to the Operating Agreements have performed all of their obligations thereunder in all material respects and are not in default thereunder in any material respect. Except as set forth on Exhibit L or disclosed to Prime, ShoLodge has received no notice of any intention of any of the parties to any of the Operating Agreements to cancel the same, nor has ShoLodge or the applicable ShoLodge Subsidiary canceled any of same. 15.8 Equipment. To the knowledge of ShoLodge, each item of Equipment is in good operating condition and repair. 15.9 Brokers Fees. No brokers, finders or similar agents acting on behalf of ShoLodge are entitled to any brokerage commission, finder's fee or any similar compensation in connection with this Agreement or the transactions contemplated hereby. 15.10 Litigation. ShoLodge has not received any written notice of and, to ShoLodge's knowledge, no action or proceeding is pending or threatened and no investigation looking toward such an action or proceeding has begun, which (a) questions the validity of this Agreement or the HPT Lease or any action taken or to be taken pursuant hereto, (b) will result in any material adverse change in the business, operation, affairs or condition of any of the Hotels, (c) will result in or subject any Asset to a material liability, or (d) involves condemnation or eminent domain proceedings against any part of the Assets. 15.11 Booking Agreements. All bookings of guest rooms and meeting rooms which will be binding on a Prime Subsidiary subsequent to the Closing Date were entered into in the ordinary course of business consistent with past practice. 15.12 HPT Documents. The copy of the HPT Documents previously provided or made available to Prime is a full and complete copy of the HPT Documents and, to ShoLodge's knowledge, the HPT Documents are valid and in full force and effect and no party has breached any material condition or provision thereof, including, without limitation, as to STI, the provisions -39- 40 of Section 9.1 of the HPT Lease concerning required insurance. To ShoLodge's knowledge, STI has performed all of its material obligations under the HPT Lease. To ShoLodge's knowledge no fact or circumstance has occurred which, by itself or with the passage of time or the giving of notice or both, would constitute a default in any material respect under the HPT Lease. To ShoLodge's knowledge, Landlord has performed all of its obligations under the HPT Lease in all material respects and is not in default thereunder in any material respect. STI has not prepaid rent or additional rent or any other items under the HPT Lease for more than one (1) month in advance. 15.13 Not A Foreign Person. Neither ShoLodge nor any ShoLodge Subsidiary is a "foreign person" within the meaning of Section 1445 of the Code. 15.14 Insurance. ShoLodge has not received any written notice from any insurance carrier of defects or inadequacies in any Asset which, if uncorrected, would result in a termination of insurance coverage or a material increase in the premiums charged therefor. 15.15 Adjacent Land. No land or facilities adjacent to any of the Hotels is used in the operation of the Hotels except for access, parking and utility easements as reflected in the title documents previously provided by ShoLodge to Prime. 15.16 Trademarks. ShoLodge has received no written notice that the use of the "Sumner Suites" trademark or tradename is in violation of any trademark or tradename owned by any other Person, except for claims resolved in favor of ShoLodge by final order. 15.17 Compliance with Laws. To ShoLodge's knowledge, each Asset is in compliance in all material respects with all laws of governmental authorities which are applicable to the Asset or the use or operation of such Asset. 15.18 Taxes. In connection with the ownership and operation of each Asset, to ShoLodge's knowledge, ShoLodge or a ShoLodge Subsidiary, as applicable, has filed or will timely file all required federal, state and local income, withholding, unemployment, FICA, excise, franchise, gross receipts, property, sales, resort, use, occupancy and other tax returns either when due or not later than the end of applicable extension periods. All taxes which have become due and payable or may become due and payable prior to or after the Closing on account of the Assets or the operation of the Hotels prior to the Closing Date have been paid or will be paid when due, except liens for real estate taxes which are not delinquent or which are being contested in good faith or as to which adequate reserves are provided therefor (and none of such taxes shall be assumed by Prime except to the extent the Purchase Price or the Development Site Purchase Price is decreased for such taxes pursuant to Section 9.1(b)). After the Closing and except as contemplated to the contrary in the preceding sentence, there shall be no liens on any of the Assets by reason of any taxes payable on or before the Closing Date or pertaining to periods ending on or before the Closing Date. To ShoLodge's knowledge, other than the amounts disclosed by tax bills, no taxes or special assessments of any kind (special, bond or otherwise) are or have been levied with respect to any of the Assets, or any portion thereof, which are outstanding or unpaid, -40- 41 other than amounts not yet due and payable or, if due and payable, not yet delinquent or as to which adequate reserves are provided therefor. 15.19 Financial Information. All of ShoLodge's financial information, including, without limitation, all books and records and financial statements previously furnished to Prime ("Financial Information") is to ShoLodge's knowledge true and correct in all material respects and presents accurately the results of the operations of the Hotels for the periods indicated and has been prepared in accordance with generally accepted accounting principles. Since the date of the last financial statement included in ShoLodge's Financial Information, there has been no material adverse change in the financial condition or in the operations of the Hotels. 15.20 Leases. There are no leases, subleases, licenses or other lettings of space within a Hotel that will remain in existence after the Closing Date other than (i) the rights of guests in occupancy and the holders of reservations for future occupancy of guest rooms or meeting rooms, (ii) the rights set forth in the Operating Agreements, and (iii) the rights of the owner of record of any license or permit for the sale and on-premises consumption of liquor and other alcoholic beverages (which license shall remain in effect to the extent contemplated in Section 18.1). 15.21 HTP Lease Security Deposit/HPT Lease Guaranty Deposit. The amount of the HPT Lease Security Deposit is Twenty-One Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00). The amount of the HPT Lease Guaranty Deposit is Fourteen Million and No/100 Dollars ($14,000,000.00). When used herein the words "to the knowledge of ShoLodge" or words of similar effect mean the actual knowledge of the current officers of ShoLodge, without independent inquiry. Prime acknowledges that Prime has not entered into this Agreement based upon any representation, warranty, agreement, statement or expression of opinion by ShoLodge or by any Person acting or allegedly acting for or on behalf of ShoLodge as to the Assets or the condition of the Assets (other than any warranty of title set out in the Closing Documents and other than the representations and warranties specifically set forth in Article XV hereof). Prime agrees that the Assets to be sold or leased to Prime or a Prime Subsidiary hereunder are to be sold or leased to and accepted by Prime or a Prime Subsidiary at Closing, AS IS, WHERE IS, WITH ALL FAULTS, IF ANY, AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED (other than (i) any warranty of title set out in the Closing Documents, (ii) the representations and warranties specifically set forth in Article XV hereof, and (iii) the obligation of ShoLodge to complete the "unacceptable items" identified pursuant to Sections 12.1 and 12.2 of this Agreement which ShoLodge undertakes to resolve pursuant to such sections). -41- 42 ARTICLE XVI REPRESENTATIONS AND WARRANTIES OF PRIME Prime hereby represents and warrants to ShoLodge and to the ShoLodge Subsidiaries, as follows: 16.1 Organization. Prime is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into and to perform this Agreement and the Closing Documents to which Prime is a party. Each Prime Subsidiary is, or prior to Closing will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has, or will have prior to Closing, the corporate power and authority to perform its obligations as contemplated in this Agreement and to enter into and to perform the Closing Documents to which each such Prime Subsidiary is a party. Prime and each Prime Subsidiary have, or prior to Closing will have, duly qualified to transact business in each jurisdiction in which the nature of the business conducted by it requires such qualification, except where failure to do so could not reasonably be expected to have a material adverse effect. 16.2 Authorization. The execution and delivery of this Agreement by Prime, the execution of all Closing Documents to be executed by Prime and the consummation by Prime of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Prime. The execution and delivery of all Closing Documents to be executed by a Prime Subsidiary, as applicable, and the consummation by each Prime Subsidiary, as applicable, of the transactions contemplated hereby and thereby have been, or prior to Closing will be, duly authorized by such corporation's Board of Directors. Neither the entering into this Agreement and the other Closing Documents to be executed by Prime or a Prime Subsidiary, as applicable, nor the consummation of the transactions contemplated herein or therein will cause a violation, default or breach by Prime or a Prime Subsidiary, as applicable, of, or conflict with, any contracts, agreements or instruments to which Prime or a Prime Subsidiary, as applicable, is a party or by which Prime or a Prime Subsidiary, as applicable, is bound. 16.3 Valid and Binding Agreement. This Agreement constitutes, and each of the Closing Documents to be executed by Prime or a Prime Subsidiary, as applicable, will constitute upon execution by all parties thereto, a valid and binding agreement of Prime and the Prime Subsidiaries who are parties thereto, as applicable, enforceable in accordance with its terms, subject as to enforceability to bankruptcy, insolvency and similar laws affecting creditors' rights generally and to the availability of equitable remedies. 16.4 No Violation. Neither the execution and delivery of this Agreement, the execution and delivery of the Closing Documents to be executed by Prime or a Prime Subsidiary, as applicable, nor the consummation by Prime and the Prime Subsidiaries, as applicable, of the transactions contemplated hereby or thereby violates or conflicts with either such corporation's Charter or Bylaws or any agreement or other restriction of any kind to which either such corporation is as a party or by which either such corporation is bound. -42- 43 16.5 Brokers Fees. No brokers, finders or similar agents acting on behalf of Prime are entitled to any brokerage commission, finder's fee or any similar compensation in connection with this Agreement or the transactions contemplated hereby. ARTICLE XVII CLOSING 17.1 Closing. The Closing shall occur on such date as the parties hereto may agree upon in writing for the closing of the transactions contemplated hereby; provided, however, that such date shall not be later than the date thirty (30) days after the last day of the Due Diligence Period; provided, further, that if on such date the conditions precedent to Closing set forth in Sections 10.6 and 11.6 have not been satisfied, ShoLodge, by written notice to Prime, may postpone the Closing while ShoLodge diligently and continuously attempts to satisfy such conditions precedent, such postponed Closing to occur no later than the earlier of (i) the date one hundred five (105) days after the last day of the Due Diligence Period, and (ii) the date fifteen (15) days after such conditions precedent are satisfied; and provided, further, that if on such date the condition precedent to Closing with respect to one (1) or both of the Development Sites set forth in the last paragraph of Article XI has not been satisfied, ShoLodge, by written notice to Prime, may postpone the Closing as to such Development Site or Development Sites, as applicable, while ShoLodge diligently and continuously attempts to satisfy such condition precedent, such postponed Closing to occur no later than the earlier of (i) the date one hundred eighty (180) days after the last day of the Due Diligence Period, and (ii) the date fifteen (15) days after such condition precedent is satisfied. Notwithstanding the foregoing or any other provision to the contrary set forth in this Agreement, upon the receipt by ShoLodge from Prime of (i) ten (10) days advance written notice, and (ii) the written waiver by Prime of any right to terminate this Agreement pursuant to Section 12.1 or Section 12.2, Prime, at Prime's option, may proceed to close all (but not less than all) of the transactions contemplated herein other than the transaction with respect to the Additional HPT Hotels as contemplated in Article III and other than the transfer of one (1) or both of the Development Sites the Closing of which has been postponed as described herein. In the event the transactions contemplated by this Agreement are closed on more than one (1) date as contemplated in this Section 17.1, the provisions of this Agreement shall be interpreted to accommodate such separate Closings, and the provisions of this Agreement relating to the transactions which have not closed shall remain in effect following any Closing. 17.2 Closing Date Deliveries. At the Closing on the Closing Date: (a) ShoLodge shall deliver, or cause to be delivered, to Prime, a Prime Subsidiary or Landlord, as applicable: (1) the Closing Documents to be signed by ShoLodge and/or a ShoLodge Subsidiary, as applicable, properly executed by ShoLodge and/or the ShoLodge Subsidiaries, as applicable, (2) a certificate of existence or similar document from the Secretary of State of the State of Tennessee or from such other appropriate official in Tennessee evidencing the due organization, valid existence and good standing of ShoLodge and the ShoLodge Subsidiaries under the laws of the State of Tennessee, (3) resolutions of ShoLodge and the ShoLodge Subsidiaries authorizing the transactions contemplated hereby, certified by the Secretary -43- 44 of ShoLodge and the ShoLodge Subsidiaries, (4) the HPT Estoppel Certificate, (5) the HPT Lease Amendment, (6) title records for any vehicles transferred pursuant to this Agreement, and (7) such other documents as Prime shall reasonably request. (b) Prime shall deliver, or cause to be delivered, to ShoLodge, a ShoLodge Subsidiary or Landlord, as applicable: (1) the Closing Documents to be signed by Prime and/or a Prime Subsidiary, as applicable, properly executed by Prime and/or the Prime Subsidiaries, as applicable, (2) a certificate of existence or similar document from the Secretary of State of the State of Delaware or from such other appropriate official in Delaware evidencing the due organization, valid existence and good standing of Prime and the Prime Subsidiaries under the laws of the State of Delaware, (3) resolutions of Prime and the Prime Subsidiaries authorizing the transactions contemplated hereby, certified by the Secretary of Prime and the Prime Subsidiaries, and (4) such other documents as ShoLodge shall reasonably request. 17.3 Possession. Possession of all tangible Assets will be delivered by ShoLodge and the ShoLodge Subsidiaries, as applicable, to Prime or a Prime Subsidiary, as applicable, on the Closing Date, and ShoLodge and the ShoLodge Subsidiaries, as applicable, shall relinquish their use of or claims to any and all intangible Assets on the Closing Date. 17.4 Employment Matters. At Closing, all employees working at the Hotels shall be terminated by ShoLodge or a ShoLodge Subsidiary, as applicable, and ShoLodge or such ShoLodge Subsidiary, as applicable, shall pay all salaries and wages and, to the extent possible, all accrued but unsatisfied benefits of such employees with regard to all periods of time prior to the Closing Date. ShoLodge shall defend, indemnify and hold Prime and the Prime Subsidiaries, as applicable, harmless from and against any and all loss, expense (including, without limitation, reasonable attorneys' fees and court costs arising from the enforcement of this indemnity), damage and liability arising from the termination of any employees on the Closing Date, including, without limitation, any claim, damage, penalty or fees, including reasonable attorneys' fees, arising out of the failure of ShoLodge or a ShoLodge Subsidiary, as applicable, to comply with all provisions of the Worker Adjustment and Retraining Act, as amended, except to the extent any of the foregoing is caused by the failure of Prime or a Prime Subsidiary, as applicable, to rehire such employees pursuant to the next succeeding sentence and except to the extent the Purchase Price is decreased for accrued but unpaid benefits due to such terminated employees pursuant to Section 9.1(b)(vi). Immediately following the termination of all employees working at the Hotels as contemplated herein, Prime shall hire, or shall cause a Prime Subsidiary to hire, all such employees other than the general manager, the assistant general manager and the director of sales at each Hotel. Prior to the execution of this Agreement, ShoLodge has provided to Prime a schedule of all employees working at the Hotels by classification, seniority, rate of pay and accrued benefits. Prime may, during normal business hours and with prior notice to ShoLodge during the Due Diligence Period, interview the general managers, assistant general managers and directors of sales to determine if Prime wants to employ such employees. The provisions of this Section 17.4 shall survive the Closing. 17.5 Closing Costs and Expenses. Prime shall pay or cause to be paid the premium for any title policy insuring Prime or a Prime Subsidiary, as applicable, as to the Real -44- 45 Property. All costs of recording the transfer and assignment documents to Prime or a Prime Subsidiary, as applicable, contemplated herein, including, without limitation, any and all real estate transfer taxes, shall be paid in accordance with local custom. Except as set forth in the preceding sentence, each party shall be responsible for the payment of its own attorney's fees, copying expenses and other costs and expenses incurred in connection with the negotiation of this Agreement and the consummation of the transactions contemplated hereunder. The provisions of this Section 17.5 shall survive the Closing and any termination of this Agreement. 17.6 Hendersonville Restriction. At or prior to Closing, ShoLodge shall cause to be recorded against the Hendersonville, Tennessee Hotel restrictions and covenants (i) requiring the lessee under the HPT Lease during the term thereof (including extensions and renewals) and thereafter the owner of such property (A) to secure the approval (not to be unreasonably withheld, delayed or conditioned) of the owner of the adjacent property on which ShoLodge's corporate offices are located of any change, alteration, repair, repainting or similar activity which affects the exterior of such Hotel or the premises on which such Hotel is located except in an insignificant manner and (B) to maintain such Hotel and such premises in a neat and attractive manner consistent with the standard for AmeriSuites hotels, and (ii) providing for common lawncare and maintenance of landscaping of such properties and the adjacent bank property with the cost to be shared based on the square footage of each property compared to the total square footage of all such property (the "Hendersonville Restriction"). At least ten (10) days prior to recordation, ShoLodge shall deliver to Prime a copy of the proposed Hendersonville Restriction for Prime's written approval, such approval not to be unreasonably withheld, delayed or conditioned. In no event shall the Hendersonville Restriction be recorded without Prime's prior written approval. The portion of the Hendersonville Restriction described in part (ii) of the first sentence of this Section 17.6 shall be mutually restrictive as to all real property covered thereby. The provisions of this Section 17.6 shall survive the Closing, but any conflict between the terms of this Section 17.6 and the terms of the Hendersonville Restriction shall be governed by the Hendersonville Restriction. ARTICLE XVIII POST CLOSING ITEMS 18.1 Operating Permits. Prime or a Prime Subsidiary, as applicable, shall apply for new or modified operating permits and licenses, including, without limitation, liquor licenses, if applicable, to reflect Prime or a Prime Subsidiary, as applicable, as the new operator of the Hotels as soon as possible after Closing. ShoLodge and the ShoLodge Subsidiaries, as applicable, shall cooperate with Prime or a Prime Subsidiary, as applicable, in its efforts to obtain new operating permits and licenses for the Hotels or modifications to existing operating permits and licenses or, to the extent permitted by applicable law, to maintain the existing operating permits and licenses in effect until such time as the new or modified operating permits and licenses may be obtained. Until such time as such new or modified operating permits and licenses are obtained, ShoLodge and the ShoLodge Subsidiaries, as applicable, to the extent permitted by applicable law, shall take all steps reasonably necessary to enable the current operating permits and licenses, if any, to be used in the operation of the Hotels and to permit the continued operation of the Hotels, -45- 46 including, without limitation, the uninterrupted sale and serving of alcoholic beverages at the Hotels, if applicable. All costs and expenses incurred by ShoLodge or a ShoLodge Subsidiary in connection with the foregoing shall be paid by Prime or a Prime Subsidiary, as applicable, and Prime and the Prime Subsidiaries shall defend, indemnify and hold ShoLodge and the ShoLodge Subsidiaries harmless from and against any and all loss, expense (including, without limitation, reasonable attorney's fees and court costs arising from the enforcement of this indemnity), damage and liability arising from the foregoing, and Prime and the Prime Subsidiaries shall cause ShoLodge and the ShoLodge Subsidiaries, as applicable, to be named as additional insureds under their liability insurance policies for the Hotels including, without limitation, under their liquor liability or "dram shop" coverage with respect to the sale, distribution or consumption of alcoholic beverages. Evidence of such insurance shall be provided to ShoLodge at Closing, and such insurance must contain a provision to the effect that it may not be canceled or modified without thirty (30) days advance written notice from the insurer to ShoLodge (until such time as the new or modified operating permits and licenses are received). The provisions of this Section 18.1 shall survive the Closing. 18.2 Radius Restriction. For a twenty (20) year period commencing on the Closing Date, neither ShoLodge nor any ShoLodge Affiliate shall own, operate or franchise any all-suites hotel substantially similar in nature and kind to the AmeriSuites hotels to be operated by Prime or a Prime Subsidiary, as applicable, as contemplated in this Agreement anywhere within a certain designated area of each Hotel, such area being as to the Existing HPT Hotels and the Additional HPT Hotels the applicable "Restricted Trade Area" as set forth in Exhibit B to the HPT Lease or the comparable provision of any separate lease contemplated in Section 3.3 and in Section 3.8, as applicable, and being as to the Texas Hotels a three (3) mile radius of each such Texas Hotel. The foregoing, however, shall not limit ShoLodge or any ShoLodge Affiliate from (i) developing or constructing any all-suites hotel substantially similar in nature and kind to the AmeriSuites hotels contemplated herein within such restricted area as long as such hotel is both (A) operated by someone other than ShoLodge or a ShoLodge Affiliate, and (B) owned by someone other than ShoLodge or a ShoLodge Affiliate, or (ii) owning, operating or franchising (A) any "Shoney's" brand all-suites hotel within such restricted area, or (B) any other hotel within such restricted area as long as such other hotel is not an all-suites hotel substantially similar in nature and kind to the AmeriSuites hotels contemplated herein. The provisions of this Section 18.2 shall survive the Closing. Prime shall have the right to any remedies available to it at law or in equity, including without limitation, injunction, in the event ShoLodge or any ShoLodge Affiliate violates the covenant set forth in this Section 18.2. ARTICLE XIX SURVIVAL OF REPRESENTATIONS; INDEMNIFICATIONS; REMEDIES 19.1 Survival of Representations. All representations and warranties made by any party in this Agreement shall be true and correct in all material respects as of Closing and, subject to the limitations described in Section 19.6 below, shall survive the Closing hereunder. -46- 47 19.2 Indemnification by Prime. Prime hereby indemnifies and holds ShoLodge and the ShoLodge Subsidiaries harmless from and against, and agrees to promptly defend ShoLodge and the ShoLodge Subsidiaries from and reimburse ShoLodge and the ShoLodge Subsidiaries for, any and all losses, damages, costs, expenses, liabilities, obligations, suits, actions, proceedings (formal or informal), investigations, settlements and claims of any kind (including, without limitation, reasonable attorney fees and other legal costs and expenses) which ShoLodge or the ShoLodge Subsidiaries may at any time suffer or incur, or become subject to, as a result of or in connection with: (a) the representations and warranties made by Prime in this Agreement having been untrue or incorrect in any material respect; (b) any failure by Prime to carry out, perform, satisfy and discharge any of the covenants, agreements, undertakings, liabilities or obligations of Prime under this Agreement; and (c) except to the extent the Purchase Price or the Development Site Purchase Price has been increased pursuant to Section 9.1(a) for the obligation in question, the operation of the Hotels on and after the Closing Date, including, without limitation, the following: (i) any obligation arising out of an accident, injury, death or damage whatsoever caused to any Person or loss of property occurring on or after the Closing Date in or about the Assets or any part thereof; and (ii) any obligation arising out of any actions or omissions of Prime or a Prime Subsidiary or its or their agents, representatives, employees or contractors relating to the Assets on or after the Closing Date. 19.3 ShoLodge's Indemnity. ShoLodge hereby indemnifies and holds Prime and the Prime Subsidiaries harmless from and against, and agrees promptly to defend Prime and the Prime Subsidiaries from and reimburse Prime and the Prime Subsidiaries for, any and all losses, damages, costs, expenses, liabilities, obligations, suits, actions, proceedings (formal or informal), investigations, settlements and claims of any kind (including, without limitation, reasonable attorney fees and other legal costs and expenses) which Prime or the Prime Subsidiaries may at any time suffer or incur, or become subject to, as a result of or in connection with: (a) the representations and warranties made by ShoLodge in this Agreement having been untrue or incorrect in any material respect; (b) any failure by ShoLodge to carry out, perform, satisfy and discharge any of the covenants, agreements, undertakings, liabilities or obligations of ShoLodge under this Agreement; (c) except to the extent the Purchase Price or the Development Site Purchase Price has been decreased pursuant to Section 9.1(b) for the obligation in question, the operation of the Hotels prior to the Closing Date, including, without limitation, the following: -47- 48 (i) any obligation arising out of an accident, injury, death or damage whatsoever caused to any Person or loss of property occurring prior to the Closing Date in or about the Assets or any part thereof; (ii) any obligation arising out of any actions or omissions of ShoLodge or a ShoLodge Subsidiary or its or their agents, representatives, employees or contractors relating to the Assets prior to the Closing Date; and (iii) accounts payable with respect to goods or services provided to or for the Hotels prior to the Closing Date; and (d) any failure of ShoLodge or any ShoLodge Subsidiary to comply with any bulk sales law or like statute in connection with the transactions contemplated herein. Notwithstanding the foregoing, ShoLodge shall have no obligation to indemnify Prime or the Prime Subsidiaries with respect to any representation or warranty concerning the condition of the STI Assets, the Additional Property or the Texas Property or any portion thereof to the extent such condition can be corrected (by maintenance, repair or replacement) pursuant to the terms of the HPT Lease or the Texas Lease with funds in the "FF&E Reserve" created pursuant to the HPT Lease (or a similar fund created under a separate lease contemplated in Section 3.3 and in Section 3.8) or the Texas Lease, as applicable. 19.4 Notification of Claims. (a) A party or parties entitled to be indemnified pursuant to Section 19.2 or 19.3 hereof or otherwise pursuant to this Agreement (the "Indemnified Party") shall notify the party or parties liable for such indemnification (the "Indemnifying Party") in writing of any claim or demand which the Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement. Subject to the Indemnifying Party's right to defend in good faith third party claims as hereinafter provided, the Indemnifying Party shall satisfy its obligations under this Article XIX or otherwise pursuant to this Agreement within thirty (30) days after the receipt of written notice thereof from the Indemnified Party. (b) If the Indemnified Party shall notify the Indemnifying Party of any claim or demand pursuant to Section 19.4(a), and if such claim or demand relates to a claim or demand asserted by a third party against the Indemnified Party which the Indemnified Party asserts is a claim or demand for which the Indemnifying Party must indemnify or hold harmless the Indemnified Party under Section 19.2 or 19.3 hereof or otherwise pursuant to this Agreement, the Indemnifying Party shall have the right to employ counsel to defend any such claim or demand asserted against the Indemnified Party. The Indemnified Party shall have the right to cooperate at its expense in the defense of any such claim or demand. The Indemnifying Party shall notify the Indemnified Party in writing, within thirty (30) days after the date of the notice of claim given by the Indemnified Party to the Indemnifying Party under Section 19.4(a) of its election to defend in good faith any such third party claim or demand. So long as the Indemnifying Party is defending in good faith any such claim or demand asserted by a third party against the Indemnified -48- 49 Party, the Indemnified Party shall not settle or compromise such claim or demand. The Indemnified Party shall make available to the Indemnifying Party or its agents all records and other materials in the Indemnified Party's possession reasonably required by the Indemnifying Party for its use in contesting any third party claim or demand. Whether or not the Indemnifying Party elects to defend any such claim or demand, the Indemnified Party shall have no obligation to do so. 19.5 Remedies. (a) If ShoLodge fails or refuses to timely perform ShoLodge's obligations hereunder, Prime shall have only the following options: (i) to terminate this Agreement as provided in Article XI and thereupon this Agreement shall terminate, and Prime and ShoLodge shall be relieved and released of any further obligations, claims and liabilities hereunder, except for the performance by each party of its Post Termination Obligations which shall remain enforceable, and except that Prime may pursue a suit against ShoLodge for damages resulting from any failure or refusal of ShoLodge to perform ShoLodge's obligations hereunder prior to such termination, or (ii) to pursue any and all remedies available to Prime at law or in equity, including, without limitation, a suit for specific performance. (b) If Prime fails or refuses to timely perform Prime's obligations hereunder, ShoLodge shall have only the following options: (i) to terminate this Agreement as provided in Article X and thereupon this Agreement shall terminate, and Prime and ShoLodge shall be relieved and released of any further obligations, claims and liabilities hereunder, except for the performance by each party of its Post Termination Obligations which shall remain enforceable and except that ShoLodge may pursue a suit against Prime for damages resulting from any failure or refusal of Prime to perform Prime's obligations hereunder prior to such termination, or (ii) to pursue any and all remedies available to ShoLodge at law or in equity, including, without limitation, a suit for specific performance. (c) Notwithstanding anything to the contrary expressed or implied in this Agreement, the sole and exclusive remedy of Prime and the Prime Subsidiaries for any breach of any representation or warranty of ShoLodge contained in this Agreement shall be as follows: (i) prior to Closing, to terminate this Agreement pursuant to Article XI; and (ii) on and after Closing, to obtain indemnification from ShoLodge pursuant to this Article XIX. Prime and the Prime Subsidiaries shall have no other right or remedy with respect to the breach of any representation or warranty of ShoLodge contained in this Agreement at law or in equity. 19.6 Limitations. Notwithstanding the foregoing, unless notice of any claim for any indemnification obligation of ShoLodge for any breach of any representation or warranty of ShoLodge contained in this Agreement has been given to ShoLodge within twelve (12) months after the Closing, no claim may be asserted against, and no action, suit or proceeding may be brought against, ShoLodge. Further, notwithstanding anything contained herein to the contrary, neither Prime nor the Prime Subsidiaries shall have the right to recover damages against ShoLodge for the breach of any representation or warranty of ShoLodge contained herein as to which Prime or a Prime Subsidiary had knowledge prior to or at Closing, and neither ShoLodge nor any -49- 50 ShoLodge Subsidiary shall have the right to recover damages against Prime for the breach of any representations or warranty of Prime contained herein as to which ShoLodge or any ShoLodge Subsidiary had knowledge prior to or at Closing. 19.7 Survival. The provisions of this Article XIX shall survive the Closing of the transactions contemplated by this Agreement, and the provisions of Section 19.4 shall survive the termination of this Agreement and apply with respect to indemnification obligations constituting a part of the Post Termination Obligations. Further, the provisions of Section 19.5(a)(i) and Section 19.5(b)(i) concerning a suit for damages shall survive the termination of this Agreement pursuant to Section 19.5. ARTICLE XX MISCELLANEOUS 20.1 Confidentiality. Each of the parties hereto agrees and undertakes to retain in confidence and to require its respective employees, consultants and agents to retain in confidence, all information obtained in connection with this Agreement and the transactions and disclosures contemplated hereby which information is not generally ascertainable from public sources. Except as required by law, each of the parties further agrees not to make any disclosure to non-parties, or any public announcements, regarding this Agreement or the transactions contemplated hereby without the prior consent of the other party hereto. It is understood and agreed, however, that this section will not be construed as an obligation to refrain from business activities in the future that are similar to the business in which the parties hereto are now engaged. The provisions of this Section 20.1 shall survive the Closing and any termination of this Agreement. 20.2 Parties in Interest. Except as otherwise expressly provided herein, all the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of, and shall be enforceable by the respective heirs, beneficiaries, personal and legal representatives, successors, and assigns of the parties hereto. Notwithstanding the foregoing, Prime shall not assign its rights under this Agreement without the prior written approval of ShoLodge, and any attempted assignment without such approval shall be null and void. 20.3 Entire Agreement; Amendments. This Agreement, including the exhibits and other documents and writings referred to herein or delivered pursuant hereto, which form a part hereof, contains the entire understanding of the parties with respect to this subject matter. There are no restrictions, agreements, promises, warranties, covenants, or undertakings other than those expressly set forth herein or therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. This Agreement may be amended only by a written instrument duly executed by the parties or their respective successors or permitted assigns. Any condition to a party's obligations hereunder may be waived by such party in writing. -50- 51 20.4 Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 20.5 Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be deemed effective three (3) business days after deposit in the United States Registered or Certified Mail, postage prepaid, return receipt requested, or one (1) business day after delivery to an overnight courier service for next business day delivery or upon delivery in person, or upon sending via telecopy with a copy deposited in the United States first class mail, addressed to such party as follows: 20.6 If to ShoLodge, then to: ShoLodge, Inc. 130 Maple Drive North Hendersonville, TN 37075 Attn: Leon Moore Telecopy: (615)264-1758 and with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 Nashville, TN 37219 Attn: Patrick L. Alexander, Esq. Telecopy: (615)252-6362 20.7 If to Prime, then to: Prime Hospitality Corp. 700 Route 46 East Fairfield, NJ 07004 Attn: Douglas W. Vicari Telecopy: (973) 882-7635 and with a copy to: Prime Law Department 700 Route 46 East Fairfield, NJ 07004 Attn: Joseph Bernadino, Esq. Telecopy: (973)882-1787 or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall only be effective upon receipt. -51- 52 20.8 Counterparts. This Agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 20.9 Severability. If any provision, clause or part of this Agreement or the application thereof under certain circumstances is held invalid, the remainder of this Agreement or the application of such provision, clause or part under other circumstances shall not be affected thereby. 20.10 Time of Essence. Time is of the essence in this Agreement, and all dates and time periods specified herein shall be strictly observed. 20.11 Enforcement Expenses. The prevailing party in any action commenced due to the breach hereof shall be entitled to recover its costs, expenses and reasonable attorney's fees incurred in the enforcement of this Agreement. 20.12 Survival. The provisions of this Agreement which by their terms survive or must survive in order to accomplish the purpose of such provisions shall survive the termination of this Agreement. 20.13 Governing Laws. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware. 20.14 Representation by Counsel. The parties acknowledge that each party to this Agreement has been represented by counsel and such counsel have participated in the negotiation and preparation of this Agreement. This Agreement shall be construed without regard to any presumption or rule requiring that it be construed or constructed against the party who has drafted or caused the Agreement to be drafted. 20.15 Notice by Counsel. Anything contained in this Agreement to the contrary notwithstanding, all notices pursuant to this Agreement, whether from ShoLodge to Prime or from Prime to ShoLodge, will be effective if executed by and sent by the attorney of the party sending such notice. Prime and ShoLodge hereby agree that if a notice is given hereunder by counsel, such counsel may communicate directly in writing with all principals, as may be required to comply with the notice provisions of this Agreement. 20.16 No Recording. ShoLodge and Prime hereby acknowledge that neither this Agreement nor any memorandum, affidavit or other instrument evidencing this Agreement or relating hereto (other than the closing documents contemplated hereunder) shall ever be recorded in the real property records where any of the Real Property is located. 20.17 Exclusive Contract. Beginning on the Effective Date and continuing until the termination of this Agreement, unless ShoLodge obtains the prior approval of Prime, ShoLodge shall not enter into an agreement to sell, lease or otherwise transfer and convey the Assets or any portion thereof to anyone other than Prime or a Prime Subsidiary; provided, -52- 53 however, that the foregoing shall not apply to the sale of such portion of the Assets as would be sold in the ordinary course of business notwithstanding the transactions contemplated herein or to the sale of such portion of the Assets to Landlord as is contemplated herein. (signatures on following page) -53- 54 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly signed, all as of the date first above written. SHOLODGE, INC. By: [SIG] --------------------- Date: 3-15-00 Title: President --------------------- --------------------- PRIME HOSPITALITY CORP. By: [SIG] --------------------- Douglas Vieari Date: 3/16/00 Title: Sr. V.P. --------------------- --------------------- -54- EX-4.J 5 3RD AMENDMENT TO SECURED REVOLVING CREDIT AGREEMNT 1 EXHIBIT 4(K) THIRD AMENDMENT TO CREDIT AGREEMENT This THIRD AMENDMENT TO CREDIT AGREEMENT (this "THIRD AMENDMENT") is dated as of October 27, 1999 and entered into by and among PRIME HOSPITALITY CORP., a Delaware corporation ("COMPANY"), the financial institutions listed on the signature pages hereof ("LENDERS"), SOCIETE GENERALE, SOUTHWEST AGENCY, as Documentation Agent, CREDIT LYONNAIS NEW YORK BRANCH, as Syndication Agent and BANKERS TRUST COMPANY, as agent for Lenders ("AGENT"), and, for purposes of Section 4 hereof, the Credit Support Parties listed on the signature pages hereof, and is made with reference to that certain Amended and Restated Senior Secured Credit Agreement dated as of December 17, 1997, by and among Company, Lenders, Documentation Agent, Syndication Agent and Agent, as amended or otherwise modified by that certain First Amendment to Credit Agreement dated as of February 23, 1998, that certain Limited Waiver to Credit Agreement dated as of August 5, 1998, and that certain Second Amendment to Credit Agreement dated as of September 24, 1998 (collectively, the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Company and Lenders desire to amend the Credit Agreement in the manner set forth below, NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT 1.1 AMENDMENTS TO SECTION 1: PROVISIONS RELATING TO DEFINED TERMS A. The definition of the term "New Sources" set forth in subsection 1.1 of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: "NEW SOURCES" means, as of any date of determination, the sum, without duplication, of (a) Net Equity Proceeds and (b) Net Cash Proceeds derived from any Asset Sale, less (i) any and all Supplemental Amounts expended from New Sources pursuant to Subsection 5.19, (ii) any and all amounts expended from New Sources pursuant to subsection 6.5 in connection with any Stock Repurchase (exclusive of amounts expended pursuant to clause (i)(B) of subsection 6.5), and (iii) two hundred percent (200%) of any and all amounts expended from New Sources in connection with any Stock Repurchase pursuant to clause (i)(B) of subsection 6.5." B. Subsection 1.1 of the Credit Agreement is hereby amended by adding thereto the following definition, which shall be inserted in proper alphabetical order: 2 "THIRD AMENDMENT EFFECTIVE DATE" shall have the meaning assigned to such term in the Third Amendment to Credit Agreement dated as of October 27, 1999." 1.2 AMENDMENTS TO SECTION 6: FINANCIAL COVENANTS Subsection 6.5 of the Credit Agreement is hereby amended by deleting it in its entirety and substituting the following therefor: "6.5 RESTRICTED PAYMENTS. The Loan Parties shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly, declare, order, pay, make, give, or publish notice or fix a date in respect of or set apart any sum for any Restricted Payment, enter into an agreement or make any commitment to effect any of the foregoing or take any other similar action in furtherance of or otherwise in connection with the foregoing; provided that, (i) if no Event of Default or Potential Event of Default exists and Company would then be able to incur $1 of additional Indebtedness pursuant to the Mortgage Note indenture (as in effect on the Closing Date), Company may elect to make one or more Stock Repurchases and pay dividends or make other distributions on shares or purchase shares of Capital Stock of Company in an aggregate amount not to exceed $25,000,000, except that Company may (A) at any time during the 1999 calendar year make one or more Stock Repurchases in an aggregate amount not to exceed $50,000,000 over and above the $25,000,000 amount otherwise permitted herein and (B) at any time make one or more Stock Repurchases in an aggregate amount not to exceed $100,000,000 over and above the $25,000,000 amount or the $50,000,000 amount, as applicable, otherwise permitted herein, provided that (1) each such Stock Repurchase pursuant to clause (A) or (B) above shall be effected only through the use of New Sources and (2) the aggregate amount applied in respect of any Stock Repurchase pursuant to clause (B) above, if any, shall not exceed fifty percent (50%) of New Sources then available therefor; (ii) Company and its Subsidiaries may make Restricted Payments (but not any voluntary prepayments) in respect of Indebtedness permitted pursuant to subsection 6.1 in accordance with, and to the extent required by, the terms and provisions of the applicable Indebtedness; (iii) Company may prepay Indebtedness permitted pursuant to subsection 6.1 with the proceeds of refinancing indebtedness permitted pursuant to subsection 6.1(c); (iv) Company may prepay Indebtedness permitted pursuant to subsection 6.1(d), provided that the aggregate amount of principal payments prior to the Maturity Date in respect of such Indebtedness shall not exceed $20,000,000; and (v) Company may prepay Indebtedness referred to in clause (i) of the definition of the term "Net Cash Proceeds" contained in Section 1.1." SECTION 2. CONDITIONS TO EFFECTIVENESS Section 1 of this Third Amendment shall become effective only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the "THIRD AMENDMENT EFFECTIVE DATE"): A. On or before the Third Amendment Effective Date, Company shall deliver to Agent executed copies of this Third Amendment (with sufficient originally executed copies for each Lender and its counsel) dated the Third Amendment Effective Date. 2 3 B. On or before the Third Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Agent and such counsel, and Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Agent may reasonably request. SECTION 3. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Third Amendment and to amend the Credit Agreement in the manner provided herein, Company represents and warrants to each Lender that the following statements are true, correct and complete: A. CORPORATE POWER AND AUTHORITY. Each of Company and the Subsidiary Guarantors that are a party hereto have all requisite corporate power and authority to enter into this Third Amendment and to carry out the transactions contemplated by, and perform its respective obligations under, the Credit Agreement as amended by this Third Amendment (the "AMENDED AGREEMENT"). B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Third Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of Company and the Subsidiary Guarantors, as the case may be. C. NO CONFLICT. The execution and delivery by each of Company and the Subsidiary Guarantors that are a party hereto of this Third Amendment and the performance by Company of the Amended Agreement do not, and will not, (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than Liens created under any of the Loan Documents in favor of Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries, except for such approvals or consents which have been obtained on or before the Third Amendment Effective Date and disclosed in writing to Agent and Lenders. D. GOVERNMENTAL CONSENTS. The execution and delivery by each of Company and the Subsidiary Guarantors that are a party hereto of this Third Amendment and any other operative document delivered pursuant to this Third Amendment and the performance by Company of the Amended Agreement do not, and will not, require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. 3 4 E. BINDING OBLIGATION. This Third Amendment and the Amended Agreement have been duly executed and delivered by each of Company and the Subsidiary Guarantors that are a party hereto, and will be legally valid and binding obligations of Company and such Subsidiary Guarantors, enforceable against Company and such Subsidiary Guarantors in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. GOVERNMENTAL REGULATION; SECURITIES ACTIVITIES. Neither the making of the Loans pursuant to the Amended Agreement nor the granting of a Security Interest in any Collateral (as defined in the Security Agreement) pursuant to the Security Documents violates Regulations T, U or X of the Board of Governors of the Federal Reserve System. It is not necessary in connection with the execution and delivery of this Third Amendment or the Amended Agreement to register the Loans under the Securities Act or to qualify any indenture under the Trust Indenture Act of 1939, as amended. G. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 4 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Third Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. H. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Third Amendment that would constitute an Event of Default or a Potential Event of Default. SECTION 4. ACKNOWLEDGEMENT AND CONSENT Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Third Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Third Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of Company now or hereafter existing under or in respect of the Amended Agreement and the Notes defined therein. Each Credit Support Party acknowledges and agrees that any of the Loan Documents and the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder (which obligations on the date hereof remain absolute and unconditional and are not subject to any defenses, set-offs or counterclaims) shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Third Amendment. Each Credit Support Party represents and 4 5 warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the Third Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party (other than Company) acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Third Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Third Amendment and (ii) nothing in the Credit Agreement, this Third Amendment or any other Loan Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. SECTION 5. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (i) On and after the Third Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "Thereunder", "Thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Third Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Third Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of Agent or any Lender under, the Credit Agreement or any of the other Loan Documents. B. FEES AND EXPENSES. Company acknowledges that all costs, fees and expenses as described in subsection 8.2 of the Credit Agreement incurred by Agent and its counsel with respect to this Third Amendment and the documents and transactions contemplated hereby shall be for the account of Company. Without limiting the generality of the foregoing, and in addition to any other costs, fees and expenses required to be paid by Company hereunder or under the Credit Agreement or the other Loan Documents, Company agrees that it shall pay to each Lender that consents to this Third Amendment an amount equal to the product of (i) four hundredths of one percent (0.04%) and (ii) such Lender's Pro Rata Share of the aggregate amount of the Commitments. 5 6 C. EXHIBITS. The Credit Agreement is hereby further amended as follows: (i) Exhibit XVI and Exhibit XVII to the Credit Agreement shall mean the exhibits attached to the First Amendment as Annex D and Annex B thereto, respectively; and (ii) the phrase "Exhibit XVI" in the definition of the term "Development Plan" set forth in subsection 1.1 of the Credit Agreement is hereby deleted and the phrase "Exhibit XVIII" substituted therefor. D. HEADINGS. Section and subsection headings in this Third Amendment are included herein for convenience of reference only and shall not constitute a part of this Third Amendment for any other purpose or be given any substantive effect. E. APPLICABLE LAW. THIS THIRD AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. F. COUNTERPARTS; EFFECTIVENESS. This Third Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Third Amendment shall become effective upon the execution of a counterpart hereof by Company, Lenders and each of the Credit Support Parties and receipt by Company and Agent of written or telephonic notification of such execution and authorization of delivery thereof. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. PRIME HOSPITALITY CORP. By: /s/ DOUGLAS VICARI -------------------------------------- Name: Douglas Vicari Title: SVP & CFO HOMEGATE AUSTIN, INC., (for purposes of Section 4 only) as a Credit Support Party By: /s/ DOUGLAS VICARI -------------------------------------- Name: Douglas Vicari Title: President HOMEGATE HOSPITALITY, INC., (for purposes of Section 4 only) as a Credit Support Party By: /s/ DOUGLAS VICARI -------------------------------------- Name: Douglas Vicari Title: President S-1 8 BANKERS TRUST COMPANY, as Agent and as a Lender By: /s/ LAURA BURWICK -------------------------------------- Name: Laura Burwick Title: Principal S-2 9 CREDIT LYONNAIS NEW YORK BRANCH, as Syndication Agent and as a Lender By: /s/ BRUNO DeFLOOR -------------------------------------- Name: BRUNO DeFLOOR Title: VICE PRESIDENT S-3 10 SOCIETE GENERALE, SOUTHWEST AGENCY, as Documentation Agent and as a Lender By: /s/ HUVISHKA ALI ------------------------------------ Name: HUVISHKA ALI Title: VICE PRESIDENT S-4 11 BANK LEUMI USA, as a Lender By: /s/ CYNTHIA C. WILBAR ---------------------------------- Name: CYNTHIA C. WILBAR Title: AVP S-5 12 BANKBOSTON, N.A., as a Lender By: /s/ ROBERT C. AVIL ------------------------------------ Name: Robert C. Avil Title: Director 13 BANK ONE, TEXAS NATIONAL ASSOCIATION, as a Lender By: /s/ CHARLES L. CRANE ------------------------------------ Name: Title: S-7 14 CIBC, INC., as a Lender By: /s/ DEAN J. DECKER ------------------------------------ Name: Dean J. Decker Title: Executive Director CIBC World Markets Corp., AS AGENT S-8 15 IMPERIAL BANK, as a Lender By: /s/ STEVEN K. JOHNSON ------------------------- Name: STEVEN K. JOHNSON Title: SENIOR VICE PRESIDENT S-10 16 BANK OF AMERICA, N.A., f/k/a NATIONSBANK, N.A., as a Lender By: /s/ MATT JUALL ----------------- Name: Matt Juall Title: Vice President S-11 17 ORIX USA CORPORATION, as a Lender By: /s/ KAZUSOSTIA KAWABATA ------------------------- Name: Kazusostia Kawabata Title: Vice President S-12 18 PNC BANK, N.A., as a Lender By: /s/ GREGORY J. McMANUS ------------------------- Name: GREGORY J. McMANUS Title: VICE PRESIDENT S-13 19 SOUTHERN PACIFIC BANK, as a Lender By: /s/ MUNYOUNG KIM ------------------------- Name: MunYoung Kim Title: Vice President S-14 EX-10.N 6 NONQUALIFIED STOCK OPTION AGREEMENT 1 EXHIBIT 10(n) NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT, is made and entered into as of October 14, 1998, by and between PRIME HOSPITALITY CORP., a corporation organized and existing under the laws of the State of Delaware with its principal place of business in Fairfield, New Jersey (the "Corporation"), and A.F. PETROCELLI ("Optionee"), a resident of the State of New Jersey (the "Agreement") WITNESSETH: WHEREAS, Optionee has agreed to serve as an officer of the Corporation; and WHEREAS, as a material inducement to Optionee to enter into the Employment Agreement, dated as of September 14, 1998, by and between Optionee and the Corporation (the "Employment Agreement") and serve the Corporation as an officer, Corporation desires to grant to Optionee an option to purchase shares of common stock of the Corporation, par value $.01 per share (the "Common Stock"), on the terms and subject to the conditions set forth in this Agreement and Optionee desires to accept such stock option award on such terms and conditions; and WHEREAS, capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Employment Agreement. NOW THEREFORE, in consideration of the premises set forth in the Employment Agreement, the parties hereto agree as follows: 1. GRANT OF STOCK OPTION. The Corporation hereby grants Optionee the right, privilege and option to purchase 1,750,000 shares of Common Stock (the "Option Shares") at a price of $5.91 per share ("Exercise Price"), in the manner and subject to the terms and conditions contained herein. The grant of this option shall be effective as of October 14, 1998 ("Grant Date") in accordance with the terms of the Employment Agreement. This option is hereby designated as a "Nonqualified Stock Option." 2. OPTION TERM. This option shall terminate ten (10) years from the Grant Date ("Option Term"); however, this option is subject to earlier expiration upon termination of Optionee's status as an employee of the Corporation, as more fully described in Section 5 hereof. 3. VESTING OF OPTION SHARES. The Option Shares shall vest and become exercisable in accordance with the following schedule: (a) Tranche A, covering 1,000,000 Option Shares, shall vest and become exercisable with respect to 20% of such Option Shares on each of the first through fourth anniversaries of September 14, 1998, and with respect to the remaining 20% of such Option Shares on September 13, 2003, provided, in each case, that Optionee remains an employee of the Corporation on the applicable vesting date; and (b) Tranche B, covering the remaining 750,000 Option Shares, shall vest and become exercisable on the eighth anniversary of the Grant Date, provided Optionee remains an employee of the Corporation on such date, subject to earlier vesting, however, 2 based upon the Corporation's attainment of the following share price values: (i) 250,000 Option Shares shall vest and become exercisable at such time as the Common Stock's closing price on the New York Stock Exchange is first at or above 20.00 per share; (ii) an additional 250,000 Option Shares shall vest and become exercisable at such time as the Common Stock's closing price on the New York Stock Exchange is first at or above $25.O0 per share; and (iii) an additional 250,000 Option Shares shall vest and become exercisable at such time as the Common Stock's closing price on the New York Stock Exchange is first at or above $30.00 per share; provided further, that in each case, Optionee remains an employee of the Corporation on the applicable vesting date. In addition, (x) all Option Shares shall become immediately vested and fully exercisable upon a "Change in Control", as defined in the Change in Control Agreement between the Corporation and Optionee, provided Optionee remains an employee of the Corporation on the date of such Change in Control; and (y) all unvested Option Shares covered by Tranche A of the Option grant shall become immediately and fully exercisable upon expiration of the Employment Agreement prior to September 13, 2003 as a result of notice of non-renewal given by the Company pursuant to Section 2 of the Employment Agreement. Optionee shall have the right hereunder to purchase only those Option Shares which have become vested and exercisable as provided under this Agreement. 4. MANNER OF EXERCISE OF OPTIONS. To exercise the options granted herein, Optionee shall give written notice to the Corporation at its principal executive office, to the attention of the Secretary of the Corporation, accompanied by a proper notice of exercise setting forth the number of Option Shares with respect to which the option is to be exercised, and by payment of the Exercise Price in one of the methods permitted by Section 9. Optionee further agrees that in connection with any exercise of all or part of this option; Optionee shall deliver to the Corporation such sum, if any, as the Corporation deems necessary to satisfy any withholding and other tax obligations resulting from such exercise. Optionee may elect to surrender to the Corporation shares of Common Stock already owned by Optionee or shares that would otherwise have been acquired upon exercise to fulfill any tax withholding obligation. The date on which the Corporation receives written notice of any exercise hereunder accompanied by payment of the Exercise Price will be considered the date this option was exercised. Promptly, and in no event more than five (5) business days after receipt of written notice of exercise of all or part of this option, the Corporation shall deliver to Optionee or such other person a certificate or certificates for the requisite number Of Option Shares. Optionee or a transferee of an option hereunder shall not have any privileges as a stockholder of the Corporation with respect to any stock covered by this option until the date of issuance of a stock certificate for such Option Shares. 5. TERMINATION OF OPTION RIGHTS. (a) If Optionee's employment with the Corporation shall terminate voluntarily by Optionee, or by the Company for Cause, and immediately after such termination Optionee shall not then be employed by the Corporation, the option granted hereunder, to the extent not exercised prior to the date of termination of employment, shall expire forthwith. In the event of Optionee's voluntary termination of employment, the Corporation, in its sole discretion, may consent to Optionee's exercise within three (3) months after termination of the option granted hereunder, if the Corporation determines that it is in the interest of the Corporation to permit such exercise, subject, however, to the limitations of subparagraph (d), below. -2- 3 (b) If the employment of Optionee with the Corporation shall terminate other than (i) by reason of death, (ii) voluntarily by Optionee, or (iii) by the Corporation for Cause, and immediately after such termination Optionee shall not then be employed by the Corporation, the option granted hereunder may be exercised at any time within three (3) months after such termination, subject to the provisions of subparagraph (d) below. For purposes of this Agreement, the retirement of Optionee either pursuant to a pension or retirement plan adopted by the Corporation, on the normal retirement date presented from time to time by the Corporation, and the termination of employment as a result of Optionee's Disability, shall be deemed to be a termination of Optionee's employment other than voluntarily by Optionee or for Cause. (c) If an Optionee dies (i) while employed by the Corporation or (ii) within three (3) months after the termination of his employment other than as a result of (A) a voluntary termination by Optionee, or (B) a termination by the Corporation for Cause, the option granted hereunder may be exercised at any time within six (6) months after Optionee's death, subject to the provisions of subparagraph (d) below. (d) This option may not be exercised pursuant to this Section 5 except to the extent that Optionee was entitled to exercise the option at the time of termination of employment or death, and in any event may not be exercised after the expiration of ten (10) years from the Grant Date. 6. CHANGES IN CAPITAL STRUCTURE. If the capital stock of the Corporation is changed by reason of a reorganization, merger, consolidation, recapitalization, reclassification, stock split, reverse stock split, stock dividend or exchange of shares and the like, appropriate equitable adjustments shall be made in (a) the number and class of shares of Common Stock subject to this option, and (b) the Exercise Price of this option; provided, however, that if fractions of a share would result from any such adjustment, the adjustment shall be revised to the next lower whole number of shares and any adjustment in the number of shares of Common Stock subject to this option shall apply proportionately to only the unexercised portion of such option. Each such adjustment shall be determined by the Board of Directors of the Corporation (the "Board") in good faith, which determination shall be final and binding on all persons. If the Corporation shall be reorganized, consolidated, or merged with another corporation, or if all or substantially all of the assets of the Corporation shall be sold or exchanged, Optionee shall at the time of issuance of the stock under such corporate event be entitled to receive upon the exercise of this option the same number and kind of shares of stock or the same amount of property, cash or securities as he would have been entitled to receive upon the occurrence of any such corporate event as if he had been, immediately prior to such event, the bolder of the number of shares covered by this option. 7. AUTHORIZED SHARES. The Corporation agrees to take all necessary and appropriate steps to ensure that there are at all times sufficient authorized shares of capital stock available for issuance upon exercise of this option. 8. TRANSFERABILITY OF OPTIONS. To the extent not prohibited by any statute, rule or regulation applicable to the option or the registration of the Option Shares with the Securities and Exchange Commission, all or a portion of the option is transferable by Optionee, without consideration, to or for the benefit of Immediate Family Members, including but not limited to a -3- 4 partnership or trust with respect to which Immediate Family Members are the sole partners or beneficiaries, respectively. The right to transfer the option is personal to Optionee and any transferee of the option shall not have the right to transfer the option to any person other than by the laws of descent and distribution. As used herein the phrase "Immediate Family Members" shall mean Optionee's spouse, children, grandchildren, parents and grandparents. Except with respect to transfers to Immediate Family Members as discussed above, this option shall not be transferable, except by will or the laws of descent or distribution, and the option may be exercised during the lifetime of Optionee only by him. This option shall not be subject to execution, attachment or other process. 9. PAYMENT OF EXERCISE PRICE. Except as provided below, payment of the Exercise Price for the Option Shares shall be made (a) in cash, (b) by certified check or bank cashier's check payable to the order of the Corporation in the amount of such Exercise Price, (c) by delivery to the Corporation of shares of Common Stock having a fair market value on the date of exercise equal to such Exercise Price, (d) by irrevocable instructions to a broker to deliver promptly to the Corporation the amount of sale or loan proceeds necessary to pay such Exercise Price and to sell the shares of Common Stock to be issued upon exercise of the option and deliver the net cash proceeds (less the Exercise Price delivered to the Corporation and the commissions and brokerage fees) to the Optionee or to deliver the remaining shares of Common Stock to the Optionee, or (e) by any combination of the methods of payment described in (a) through (d) above. Proceeds of any payment shall constitute general funds of the Corporation. Before the option is exercised, the Board, in the exercise of its absolute discretion, may authorize payment by acceptance of Optionee's full recourse promissory note for some or all of the Exercise Price of the Option Shares being acquired (except for the aggregate par value of the shares being acquired, which must be paid in cash or other lawful consideration under applicable law), payable on such terms and bearing such interest rate as determined by the Board, and secured in such manner as the Board shall approve, including, without limitation, by a security interest in shares of Common Stock or other securities of the Corporation. 10. GOVERNING LAW. This Agreement shall be interpreted and construed according to and governed by the laws of the State of New Jersey. Any disputes or claims shall be resolved as provided in Section 11.5 of the Employment Agreement. 11. ENTIRE AGREEMENT. This instrument, the Employment Agreement and the Change in Control Agreement contain the entire agreement of the parties relating to the option grant. To the extent that the terms and provisions of this Agreement are in conflict with or inconsistent with the terms and provisions of the Employment Agreement or Change in Control Agreement, then the Employment Agreement or Change in Control Agreement, as applicable, shall be controlling and shall govern the relationship between the parties. This Agreement may not be changed orally, but may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 12. SEVERABILITY. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision of this Agreement. -4- 5 13. AUTHORITY. The provisions of this Agreement required to be approved by the Board have been so approved and authorized. 14. BENEFIT. This Agreement shall bind all parties, their respective heirs, executors, administrators and assigns. Except as provided in Section 8 hereof, nothing contained herein shall be construed as an authorization or right of any party to assign their respective rights or obligations hereunder and Optionee shall have no right to assign the option herein granted to him and any such attempted assignment shall be ineffective. The option, right and privilege herein granted to Optionee to purchase Option Shares shall be binding upon the Corporation and its successors or assigns. 15. TERMINATION OF AGREEMENT. This Agreement shall terminate: (a) upon the written agreement of all parties or (b) upon the terms and conditions set forth in the Employment Agreement. IN WITNESS WHEREOF, the parties hereto have executed this instrument effective as of the day and year first above written. Attest: PRIME HOSPITALITY CORP. By: /s/ RICHARD FRANZBLAU By: /s/ JOSEPH BERNADINO ----------------------------- ----------------------------- Name: Richard Franzblau JOSEPH BERNADINO --------------------------- SENIOR VICE PRESIDENT Title: Assistant Secretary -------------------------- OPTIONEE /S/ A.F. PETROCELLI -------------------------------- A.F. PETROCELLI -5- EX-10.O 7 CHANGE IN CONTROL AGREEMENT 1 EXHIBIT 10(o) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 25th day of October, 1999, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Terry P. O'Leary ("Employee"). R E C I T A L S: A Employee is a key officer and employee of the Company. B. The Board of Directors of the Company (the "Board") recognizes that Employee is one of several key officer/employees whose high quality of job performance is essential to promoting and protecting the best interests of the Company and its shareholders. C. The Board further recognizes (i) that it is possible that a Change in Control of the Company could occur at some time in the future, (ii) that the uncertainty associated with such a possibility could result in the distraction of Employee from Employee's assigned duties and responsibilities, (iii) that it is in the best interests of the Company and its shareholders to assure the continued attention by Employee to such duties and responsibilities without such distraction and (iv) that Employee must be able to participate in the assessment and evaluation of any proposal which could effect a Change in Control of the Company without Employee's judgment being influenced by uncertainties regarding Employee's future financial security. D. The Company wishes to provide Employee with certain benefits in the event of a Change in Control of the Company as set forth herein. TERMS AND CONDITIONS For valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. (a) For purposes of this Agreement, the Company shall have "Cause" to terminate Employee's employment hereunder upon (A) the willful engaging by Employee in misconduct 2 which results in demonstrable and material economic injury to the Company, or (B) the conviction of Employee of a felony involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in or not opposed to the best interests of the Company. Employee shall not be deemed to have been terminated for Cause unless the Company shall have given or delivered to Employee (i) reasonable notice setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for Employee to cure any such breach within thirty (30) days after receipt of such notice, (iii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iv) a written notice of termination stating that, in the good faith opinion of not less than a majority of the entire membership of the Board, Employee was guilty of conduct set forth above in clauses (A) or (B) of the second preceding sentence, and specifying the particulars thereof in detail. Notwithstanding the foregoing, in the case of any Employee who has in effect an employment agreement with the Company ("Employment Agreement"), no termination following a Change in Control shall be treated as for Cause (x) for purposes of this Agreement unless it would also be treated as for Cause under such Employment Agreement, or (y) for purposes of such Employment Agreement unless it would also be treated as for Cause under this Agreement. (b) A "Change in Control" of the Company shall be considered to occur if and when: (i) more than 30% of the Company's outstanding securities entitled to vote in elections of directors (the "Voting Securities") are acquired by any person, entity or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than the Company, any corporation, partnership, trust or other entity controlled by the Company (a "Subsidiary") or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its Subsidiaries) (such person, entity or group, a "Person"); provided, 2 3 however that, notwithstanding the prior clause of this Section 1(b)(i), unless the Board, within thirty (30) days of such event, determines otherwise, a Change in Control shall be considered to occur if and when more than 20% of the Voting Securities are acquired by any Person; or (ii) during any period of two consecutive years, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided, however, that a director who is not otherwise a member of the Incumbent Board shall be deemed to be a member of the Incumbent Board if such director was elected by, on the recommendation of, or with the approval of, at least two-thirds of the Incumbent Board (taking into account the proviso in this Section 1(b)(ii); (iii) the sale, lease, exchange or other disposition in one transaction or in a series of related transactions of all or substantially all of the assets of the Company, other than a sale, lease, exchange or other disposition to an entity, following which (A) more than 50%, respectively, of the then outstanding shares of common stock or other securities, (measured by value) of such entity and the combined voting power of the then outstanding voting securities of such entity entitled to vote generally in the election of directors (collectively, "Equity Securities") is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners of the outstanding Voting Securities immediately prior to such sale, lease, exchange or other disposition, in substantially the same proportions among such beneficial owners, (B) no Person (excluding any Person beneficially owning, immediately prior to such sale, lease, exchange or other disposition, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more, respectively, of the then 3 4 outstanding Equity Securities, and (C) at least a majority of the members of the board of directors of the entity were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale, lease, exchange or other disposition of assets of the Company; (iv) approval by the Company's shareholders of a reorganization, merger or consolidation of the Company, unless, following such reorganization, merger or consolidation, (A) more than 50%, respectively, of the then outstanding Equity Securities of the entity resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners, respectively, of the outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions among such beneficial owners, (B) no Person (excluding any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more, respectively, of the then outstanding Equity Securities of the entity resulting from such reorganization, merger or consolidation, and (C) at least a majority of the members of the board of directors of the entity resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; (v) approval by the Company's shareholders of a complete liquidation or dissolution of the Company; or (vi) such other events as the Board may designate. 4 5 (c) "Good Reason" shall mean the occurrence of any of the following, without Employee's consent, after a Change in Control: (i) a material reduction or adverse alteration in the titles, duties, authorities or responsibilities of Employee's position; (ii) a reduction in Employee's annual base salary, bonus or other compensation arrangements provided by the Company; (iii) the relocation of Employee's place of employment by more than twenty miles; or (iv) a material reduction in or the discontinuance of the perquisites or benefits provided by the Company to Employee. In addition, and without limiting the foregoing, in the case of an Employee with an Employment Agreement "Good Reason" shall include any act or failure to act which would constitute "good reason" as such term is defined in the Employee's Employment Agreement. (d) The term "Cash Compensation" shall mean, during any fiscal year of the Company, Employee's aggregate cash compensation earned as an Employee of the Company during the immediately preceding fiscal year (including any bonus earned but not paid by fiscal year-end and without regard to any election deferring the receipt of compensation so earned). If Employee was employed by the Company for only a portion of the preceding fiscal year, "Cash Compensation" for such year shall be determined based on the aggregate cash compensation earned during the portion of such year that Employee was employed. 2. Change in Control. (a) Options. In the event of a Change in Control of the Company, all stock options granted to Employee by the Company under any compensatory plan or arrangement shall become immediately vested and exercisable, notwithstanding any vesting schedule previously applicable to such stock options. 5 6 (b) Cash Payment. If, within twenty-four (24) months following a Change in Control of the Company, the Company terminates Employee's employment without Cause, or Employee terminates his or her employment with the Company for Good Reason, then the Company shall, within ten (10) days of such termination of employment, pay to Employee, in one lump sum, in immediately available funds by wire transfer in accordance with Employee's instructions, an amount equal to two and one-half (2-1/2) times Employee's "Cash Compensation" as defined above. 3. Excise Tax Gross-Up. (a) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or distribution by the Company to or for Employee's benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or pursuant to an Employment Agreement or any other compensatory Company plan or arrangement, without taking into account the Gross-Up Payment, as hereinafter defined) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all Federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes, withholding taxes and payroll taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. All determinations required to be made under this Section 11, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up 6 7 Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm as may be designated by Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Employee within fifteen (15) business days of the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne by the Company. Any Gross-Up Payment, as determined pursuant to this Section 11, shall be paid by the Company to Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 3(b) and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for Employee's benefit. (b) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen business days after Employee is informed in 7 8 writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (i) give the Company any information reasonably requested by the Company to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceeding relating to such claim, provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expense. Without limitation on the foregoing provisions of this Section 3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest 8 9 the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee, on an interest-free basis, and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for Employee's taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (c) If, after Employee's receipt of an amount advanced by the Company pursuant to Section 3(b), Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of this Section 3(b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after Employee's receipt of an amount advanced by the Company pursuant to Section 3(b), a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9 10 4. Waiver of Invalidity. Inasmuch as the injury caused to Employee in the event Employee's employment is terminated within twenty-four (24) months of a Change in Control is difficult or incapable of accurate estimation at the date of this Agreement, the amounts to be paid pursuant to Sections 2 and 3 are intended to be liquidated damages and not a penalty, and therefore constitute a good faith forecast of the harm which might be expected to be caused to Employee. Accordingly, the Company waives any right to assert against Employee the invalidity of any payment provided in Sections 2 and 3 by reason of Employee's failure to seek other employment or otherwise, nor shall the amount of any payment provided in Sections 2 and 3 be reduced by reason of any compensation earned or not earned by Employee as a result of employment by another employer after the date of termination or otherwise. 5. Arbitration of Disputes. All disputes governing the interpretation or enforcement of this Agreement shall be resolved exclusively by arbitration in the manner set forth in this Section 5. Employee or the Company may submit to arbitration any claim under this Agreement as follows: At any time following the termination of Employee's employment with the Company, the claim may be filed in writing with an arbitrator of Employee's choice or, if the claim is filed by the Company, reasonably acceptable to Employee, and thereafter the Company, or Employee, as applicable, shall be notified in writing of the claim and furnished with a true copy as so filed. The arbitrator must be a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the American Arbitration Association. To the extent not inconsistent with the rules set forth in this Section 5, the arbitration proceeding shall insofar as practicable be conducted in accordance with the National Rules of the American Arbitration Association for the Resolution of Employment Disputes effective June 1, 1996. The arbitration hearing shall be held within ten (10) business days after the receipt of notice of the claim by the Company. No continuance of the hearing shall be allowed without the mutual consent of Employee and the Company. Absence from or non-participation at the hearing by either party shall not 10 11 prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion. The arbitrator's award shall be rendered as expeditiously as possible. In the event the arbitrator finds that the Company has breached this Agreement, the arbitrator shall order the Company to pay to Employee, within twenty-four hours after the decision is rendered, the amount due hereunder. The award of the arbitrator shall be final and binding upon the parties. Judgment may be entered on the arbitrator's award in any appropriate court as soon as possible after its rendition without further notice to the Company. The Company shall promptly reimburse Employee for the reasonable legal fees and expenses incurred by Employee in connection with enforcement of Employee's rights hereunder or the determination of Employee's rights in any arbitration proceeding. 6. Miscellaneous. (a) Waiver. The failure of any party to exercise any rights hereunder or to enforce any of the terms or conditions of this Agreement on any occasion shall not constitute or be deemed a waiver of that party's rights thereafter to exercise any rights hereunder or to enforce each and every term and condition of this Agreement. (b) Binding Effect; Successors. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement, in form and substance satisfactory to Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession will entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to under Section 2(b) hereunder had the Company terminated Employee without Cause on the succession date (assuming a Change in Control of the Company had occurred prior to such succession date). As used in this 11 12 Agreement, "the Company" means Employer as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers the agreement provided for in this Section 6(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (ii) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by Employee and Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other beneficiary or, if there be no such beneficiary, to Employee's estate. (c) Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware. (d) Authorization and Modification. This Agreement is executed for and on behalf of the Company by an officer thereof duly authorized to do so by resolution of the Board of Directors approving this Agreement and authorizing such execution. This Agreement shall not be varied, altered, modified, changed or in any way amended except by an instruction in writing executed by the parties hereto. (e) Assignment by Employee. Except as otherwise expressly provided for in this Agreement, no right, benefit or interest of Employee arising hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. (f) Notice. For the purposes of this Agreement, notices, demands and all 12 13 other communications provided for in the Agreement shall be in writing and shall be deemed to have been given when hand delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: Terry P. O'Leary ------------------ 163 East Main Street Little Falls, New Jersey 07424 If to the Company: Prime Hospitality Corp. ----------------- 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel
or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (g) Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (h) Taxes. The Company shall deduct from all amounts payable under this Agreement all federal, state, local and other taxes required by law to be withheld with respect to such payments. 7. Other Arrangements. The rights of Employee under this Agreement are in addition to Employee's rights under any Employment Agreement or any successor agreement to an Employment Agreement covering Employee. Nothing contained in this Agreement shall adversely affect any of Employee's rights under an Employment Agreement or as a participant or beneficiary under the Company's pension and welfare benefit plans, incentive compensation arrangements and perquisite programs, or Employee's obligations arising under any confidentiality, non-competition or no solicitation agreement with the Company. This Agreement supersedes any and all prior Change in Control Agreements entered into 13 14 between Employee and the Company. PRIME HOSPITALITY CORP. By: /s/ A. F. PETROCELL ---------------------------------- A. F. Petrocelli, President EMPLOYEE: /s/ TERRY P. O'LEARY ------------------------------------- Terry P. O'Leary 14 EX-10.P 8 CHANGE IN CONTROL AGREEMENT 1 EXHIBIT 10(p) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 25th day of October, 1999, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Stephen Kronick ("Employee"). R E C I T A L S: A Employee is a key officer and employee of the Company. B. The Board of Directors of the Company (the "Board") recognizes that Employee is one of several key officer/employees whose high quality of job performance is essential to promoting and protecting the best interests of the Company and its shareholders. C. The Board further recognizes (i) that it is possible that a Change in Control of the Company could occur at some time in the future, (ii) that the uncertainty associated with such a possibility could result in the distraction of Employee from Employee's assigned duties and responsibilities, (iii) that it is in the best interests of the Company and its shareholders to assure the continued attention by Employee to such duties and responsibilities without such distraction and (iv) that Employee must be able to participate in the assessment and evaluation of any proposal which could effect a Change in Control of the Company without Employee's judgment being influenced by uncertainties regarding Employee's future financial security. D. The Company wishes to provide Employee with certain benefits in the event of a Change in Control of the Company as set forth herein. TERMS AND CONDITIONS For valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. (a) For purposes of this Agreement, the Company shall have "Cause" to terminate Employee's employment hereunder upon (A) the willful engaging by Employee in misconduct 2 which results in demonstrable and material economic injury to the Company, or (B) the conviction of Employee of a felony involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in or not opposed to the best interests of the Company. Employee shall not be deemed to have been terminated for Cause unless the Company shall have given or delivered to Employee (i) reasonable notice setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for Employee to cure any such breach within thirty (30) days after receipt of such notice, (iii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iv) a written notice of termination stating that, in the good faith opinion of not less than a majority of the entire membership of the Board, Employee was guilty of conduct set forth above in clauses (A) or (B) of the second preceding sentence, and specifying the particulars thereof in detail. Notwithstanding the foregoing, in the case of any Employee who has in effect an employment agreement with the Company ("Employment Agreement"), no termination following a Change in Control shall be treated as for Cause (x) for purposes of this Agreement unless it would also be treated as for Cause under such Employment Agreement, or (y) for purposes of such Employment Agreement unless it would also be treated as for Cause under this Agreement. (b) A "Change in Control" of the Company shall be considered to occur if and when: (i) more than 30% of the Company's outstanding securities entitled to vote in elections of directors (the "Voting Securities") are acquired by any person, entity or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than the Company, any corporation, partnership, trust or other entity controlled by the Company (a "Subsidiary") or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its Subsidiaries) (such person, entity or group, a "Person"); provided, 2 3 however that, notwithstanding the prior clause of this Section 1(b)(i), unless the Board, within thirty (30) days of such event, determines otherwise, a Change in Control shall be considered to occur if and when more than 20% of the Voting Securities are acquired by any Person; or (ii) during any period of two consecutive years, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided, however, that a director who is not otherwise a member of the Incumbent Board shall be deemed to be a member of the Incumbent Board if such director was elected by, on the recommendation of, or with the approval of, at least two-thirds of the Incumbent Board (taking into account the proviso in this Section 1(b)(ii); (iii) the sale, lease, exchange or other disposition in one transaction or in a series of related transactions of all or substantially all of the assets of the Company, other than a sale, lease, exchange or other disposition to an entity, following which (A) more than 50%, respectively, of the then outstanding shares of common stock or other securities, (measured by value) of such entity and the combined voting power of the then outstanding voting securities of such entity entitled to vote generally in the election of directors (collectively, "Equity Securities") is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners of the outstanding Voting Securities immediately prior to such sale, lease, exchange or other disposition, in substantially the same proportions among such beneficial owners, (B) no Person (excluding any Person beneficially owning, immediately prior to such sale, lease, exchange or other disposition, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more, respectively, of the then 3 4 outstanding Equity Securities, and (C) at least a majority of the members of the board of directors of the entity were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale, lease, exchange or other disposition of assets of the Company; (iv) approval by the Company's shareholders of a reorganization, merger or consolidation of the Company, unless, following such reorganization, merger or consolidation, (A) more than 50%, respectively, of the then outstanding Equity Securities of the entity resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners, respectively, of the outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions among such beneficial owners, (B) no Person (excluding any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more, respectively, of the then outstanding Equity Securities of the entity resulting from such reorganization, merger or consolidation, and (C) at least a majority of the members of the board of directors of the entity resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; (v) approval by the Company's shareholders of a complete liquidation or dissolution of the Company; or (vi) such other events as the Board may designate. 4 5 (c) "Good Reason" shall mean the occurrence of any of the following, without Employee's consent, after a Change in Control: (i) a material reduction or adverse alteration in the titles, duties, authorities or responsibilities of Employee's position; (ii) a reduction in Employee's annual base salary, bonus or other compensation arrangements provided by the Company; (iii) the relocation of Employee's place of employment by more than twenty miles; or (iv) a material reduction in or the discontinuance of the perquisites or benefits provided by the Company to Employee. In addition, and without limiting the foregoing, in the case of an Employee with an Employment Agreement "Good Reason" shall include any act or failure to act which would constitute "good reason" as such term is defined in the Employee's Employment Agreement. (d) The term "Cash Compensation" shall mean, during any fiscal year of the Company, Employee's aggregate cash compensation earned as an Employee of the Company during the immediately preceding fiscal year (including any bonus earned but not paid by fiscal year-end and without regard to any election deferring the receipt of compensation so earned). If Employee was employed by the Company for only a portion of the preceding fiscal year, "Cash Compensation" for such year shall be determined based on the aggregate cash compensation earned during the portion of such year that Employee was employed. 2. Change in Control. (a) Options. In the event of a Change in Control of the Company, all stock options granted to Employee by the Company under any compensatory plan or arrangement shall become immediately vested and exercisable, notwithstanding any vesting schedule previously applicable to such stock options. 5 6 (b) Cash Payment. If, within twenty-four (24) months following a Change in Control of the Company, the Company terminates Employee's employment without Cause, or Employee terminates his or her employment with the Company for Good Reason, then the Company shall, within ten (10) days of such termination of employment, pay to Employee, in one lump sum, in immediately available funds by wire transfer in accordance with Employee's instructions, an amount equal to two and one-half (2-1/2) times Employee's "Cash Compensation" as defined above. 3. Excise Tax Gross-Up. (a) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or distribution by the Company to or for Employee's benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or pursuant to an Employment Agreement or any other compensatory Company plan or arrangement, without taking into account the Gross-Up Payment, as hereinafter defined) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all Federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes, withholding taxes and payroll taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. All determinations required to be made under this Section 11, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up 6 7 Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm as may be designated by Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Employee within fifteen (15) business days of the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne by the Company. Any Gross-Up Payment, as determined pursuant to this Section 11, shall be paid by the Company to Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 3(b) and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for Employee's benefit. (b) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen business days after Employee is informed in 7 8 writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (i) give the Company any information reasonably requested by the Company to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceeding relating to such claim, provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expense. Without limitation on the foregoing provisions of this Section 3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest 8 9 the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee, on an interest-free basis, and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for Employee's taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (c) If, after Employee's receipt of an amount advanced by the Company pursuant to Section 3(b), Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of this Section 3(b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after Employee's receipt of an amount advanced by the Company pursuant to Section 3(b), a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9 10 4. Waiver of Invalidity. Inasmuch as the injury caused to Employee in the event Employee's employment is terminated within twenty-four (24) months of a Change in Control is difficult or incapable of accurate estimation at the date of this Agreement, the amounts to be paid pursuant to Sections 2 and 3 are intended to be liquidated damages and not a penalty, and therefore constitute a good faith forecast of the harm which might be expected to be caused to Employee. Accordingly, the Company waives any right to assert against Employee the invalidity of any payment provided in Sections 2 and 3 by reason of Employee's failure to seek other employment or otherwise, nor shall the amount of any payment provided in Sections 2 and 3 be reduced by reason of any compensation earned or not earned by Employee as a result of employment by another employer after the date of termination or otherwise. 5. Arbitration of Disputes. All disputes governing the interpretation or enforcement of this Agreement shall be resolved exclusively by arbitration in the manner set forth in this Section 5. Employee or the Company may submit to arbitration any claim under this Agreement as follows: At any time following the termination of Employee's employment with the Company, the claim may be filed in writing with an arbitrator of Employee's choice or, if the claim is filed by the Company, reasonably acceptable to Employee, and thereafter the Company, or Employee, as applicable, shall be notified in writing of the claim and furnished with a true copy as so filed. The arbitrator must be a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the American Arbitration Association. To the extent not inconsistent with the rules set forth in this Section 5, the arbitration proceeding shall insofar as practicable be conducted in accordance with the National Rules of the American Arbitration Association for the Resolution of Employment Disputes effective June 1, 1996. The arbitration hearing shall be held within ten (10) business days after the receipt of notice of the claim by the Company. No continuance of the hearing shall be allowed without the mutual consent of Employee and the Company. Absence from or non-participation at the hearing by either party shall not 10 11 prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion. The arbitrator's award shall be rendered as expeditiously as possible. In the event the arbitrator finds that the Company has breached this Agreement, the arbitrator shall order the Company to pay to Employee, within twenty-four hours after the decision is rendered, the amount due hereunder. The award of the arbitrator shall be final and binding upon the parties. Judgment may be entered on the arbitrator's award in any appropriate court as soon as possible after its rendition without further notice to the Company. The Company shall promptly reimburse Employee for the reasonable legal fees and expenses incurred by Employee in connection with enforcement of Employee's rights hereunder or the determination of Employee's rights in any arbitration proceeding. 6. Miscellaneous. (a) Waiver. The failure of any party to exercise any rights hereunder or to enforce any of the terms or conditions of this Agreement on any occasion shall not constitute or be deemed a waiver of that party's rights thereafter to exercise any rights hereunder or to enforce each and every term and condition of this Agreement. (b) Binding Effect; Successors. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement, in form and substance satisfactory to Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession will entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to under Section 2(b) hereunder had the Company terminated Employee without Cause on the succession date (assuming a Change in Control of the Company had occurred prior to such succession date). As used in this 11 12 Agreement, "the Company" means Employer as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers the agreement provided for in this Section 6(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (ii) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by Employee and Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other beneficiary or, if there be no such beneficiary, to Employee's estate. (c) Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware. (d) Authorization and Modification. This Agreement is executed for and on behalf of the Company by an officer thereof duly authorized to do so by resolution of the Board of Directors approving this Agreement and authorizing such execution. This Agreement shall not be varied, altered, modified, changed or in any way amended except by an instruction in writing executed by the parties hereto. (e) Assignment by Employee. Except as otherwise expressly provided for in this Agreement, no right, benefit or interest of Employee arising hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. (f) Notice. For the purposes of this Agreement, notices, demands and all 12 13 other communications provided for in the Agreement shall be in writing and shall be deemed to have been given when hand delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: Stephen Kronick ------------------ 31 Avondale Road West Hartford, Connecticut 06117 If to the Company: Prime Hospitality Corp. ----------------- 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel
or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (g) Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (h) Taxes. The Company shall deduct from all amounts payable under this Agreement all federal, state, local and other taxes required by law to be withheld with respect to such payments. 7. Other Arrangements. The rights of Employee under this Agreement are in addition to Employee's rights under any Employment Agreement or any successor agreement to an Employment Agreement covering Employee. Nothing contained in this Agreement shall adversely affect any of Employee's rights under an Employment Agreement or as a participant or beneficiary under the Company's pension and welfare benefit plans, incentive compensation arrangements and perquisite programs, or Employee's obligations arising under any confidentiality, non-competition or no solicitation agreement with the Company. This Agreement supersedes any and all prior Change in Control Agreements entered into 13 14 between Employee and the Company. PRIME HOSPITALITY CORP. By: /s/ A. F. PETROCELLI ---------------------------------- A. F. Petrocelli, President EMPLOYEE: /s/ STEPHEN KRONICK ------------------------------------- Stephen Kronick 14 EX-10.Q 9 CHANGE IN CONTROL AGREEMENT 1 EXHIBIT 10(q) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 25th day of October, 1999, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and J. David Johnson ("Employee"). R E C I T A L S: A Employee is a key officer and employee of the Company. B. The Board of Directors of the Company (the "Board") recognizes that Employee is one of several key officer/employees whose high quality of job performance is essential to promoting and protecting the best interests of the Company and its shareholders. C. The Board further recognizes (i) that it is possible that a Change in Control of the Company could occur at some time in the future, (ii) that the uncertainty associated with such a possibility could result in the distraction of Employee from Employee's assigned duties and responsibilities, (iii) that it is in the best interests of the Company and its shareholders to assure the continued attention by Employee to such duties and responsibilities without such distraction and (iv) that Employee must be able to participate in the assessment and evaluation of any proposal which could effect a Change in Control of the Company without Employee's judgment being influenced by uncertainties regarding Employee's future financial security. D. The Company wishes to provide Employee with certain benefits in the event of a Change in Control of the Company as set forth herein. TERMS AND CONDITIONS For valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. (a) For purposes of this Agreement, the Company shall have "Cause" to terminate Employee's employment hereunder upon (A) the willful engaging by Employee in misconduct 2 which results in demonstrable and material economic injury to the Company, or (B) the conviction of Employee of a felony involving moral turpitude. For purposes of this paragraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in or not opposed to the best interests of the Company. Employee shall not be deemed to have been terminated for Cause unless the Company shall have given or delivered to Employee (i) reasonable notice setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for Employee to cure any such breach within thirty (30) days after receipt of such notice, (iii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iv) a written notice of termination stating that, in the good faith opinion of not less than a majority of the entire membership of the Board, Employee was guilty of conduct set forth above in clauses (A) or (B) of the second preceding sentence, and specifying the particulars thereof in detail. Notwithstanding the foregoing, in the case of any Employee who has in effect an employment agreement with the Company ("Employment Agreement"), no termination following a Change in Control shall be treated as for Cause (x) for purposes of this Agreement unless it would also be treated as for Cause under such Employment Agreement, or (y) for purposes of such Employment Agreement unless it would also be treated as for Cause under this Agreement. (b) A "Change in Control" of the Company shall be considered to occur if and when: (i) more than 30% of the Company's outstanding securities entitled to vote in elections of directors (the "Voting Securities") are acquired by any person, entity or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than the Company, any corporation, partnership, trust or other entity controlled by the Company (a "Subsidiary") or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its Subsidiaries) (such person, entity or group, a "Person"); provided, 2 3 however that, notwithstanding the prior clause of this Section 1(b)(i), unless the Board, within thirty (30) days of such event, determines otherwise, a Change in Control shall be considered to occur if and when more than 20% of the Voting Securities are acquired by any Person; or (ii) during any period of two consecutive years, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided, however, that a director who is not otherwise a member of the Incumbent Board shall be deemed to be a member of the Incumbent Board if such director was elected by, on the recommendation of, or with the approval of, at least two-thirds of the Incumbent Board (taking into account the proviso in this Section 1(b)(ii); (iii) the sale, lease, exchange or other disposition in one transaction or in a series of related transactions of all or substantially all of the assets of the Company, other than a sale, lease, exchange or other disposition to an entity, following which (A) more than 50%, respectively, of the then outstanding shares of common stock or other securities, (measured by value) of such entity and the combined voting power of the then outstanding voting securities of such entity entitled to vote generally in the election of directors (collectively, "Equity Securities") is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners of the outstanding Voting Securities immediately prior to such sale, lease, exchange or other disposition, in substantially the same proportions among such beneficial owners, (B) no Person (excluding any Person beneficially owning, immediately prior to such sale, lease, exchange or other disposition, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more, respectively, of the then 3 4 outstanding Equity Securities, and (C) at least a majority of the members of the board of directors of the entity were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale, lease, exchange or other disposition of assets of the Company; (iv) approval by the Company's shareholders of a reorganization, merger or consolidation of the Company, unless, following such reorganization, merger or consolidation, (A) more than 50%, respectively, of the then outstanding Equity Securities of the entity resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by individuals and entities who were the beneficial owners, respectively, of the outstanding Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions among such beneficial owners, (B) no Person (excluding any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more of the outstanding Voting Securities), beneficially owns, directly or indirectly, 30% or more, respectively, of the then outstanding Equity Securities of the entity resulting from such reorganization, merger or consolidation, and (C) at least a majority of the members of the board of directors of the entity resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; (v) approval by the Company's shareholders of a complete liquidation or dissolution of the Company; or (vi) such other events as the Board may designate. 4 5 (c) "Good Reason" shall mean the occurrence of any of the following, without Employee's consent, after a Change in Control: (i) a material reduction or adverse alteration in the titles, duties, authorities or responsibilities of Employee's position; (ii) a reduction in Employee's annual base salary, bonus or other compensation arrangements provided by the Company; (iii) the relocation of Employee's place of employment by more than twenty miles; or (iv) a material reduction in or the discontinuance of the perquisites or benefits provided by the Company to Employee. In addition, and without limiting the foregoing, in the case of an Employee with an Employment Agreement "Good Reason" shall include any act or failure to act which would constitute "good reason" as such term is defined in the Employee's Employment Agreement. (d) The term "Cash Compensation" shall mean, during any fiscal year of the Company, Employee's aggregate cash compensation earned as an Employee of the Company during the immediately preceding fiscal year (including any bonus earned but not paid by fiscal year-end and without regard to any election deferring the receipt of compensation so earned). If Employee was employed by the Company for only a portion of the preceding fiscal year, "Cash Compensation" for such year shall be determined based on the aggregate cash compensation earned during the portion of such year that Employee was employed. 2. Change in Control. (a) Options. In the event of a Change in Control of the Company, all stock options granted to Employee by the Company under any compensatory plan or arrangement shall become immediately vested and exercisable, notwithstanding any vesting schedule previously applicable to such stock options. 5 6 (b) Cash Payment. If, within twenty-four (24) months following a Change in Control of the Company, the Company terminates Employee's employment without Cause, or Employee terminates his or her employment with the Company for Good Reason, then the Company shall, within ten (10) days of such termination of employment, pay to Employee, in one lump sum, in immediately available funds by wire transfer in accordance with Employee's instructions, an amount equal to two and one-half (2-1/2) times Employee's "Cash Compensation" as defined above. 3. Excise Tax Gross-Up. (a) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or distribution by the Company to or for Employee's benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or pursuant to an Employment Agreement or any other compensatory Company plan or arrangement, without taking into account the Gross-Up Payment, as hereinafter defined) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all Federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes, withholding taxes and payroll taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. All determinations required to be made under this Section 11, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up 6 7 Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm as may be designated by Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Employee within fifteen (15) business days of the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne by the Company. Any Gross-Up Payment, as determined pursuant to this Section 11, shall be paid by the Company to Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 3(b) and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for Employee's benefit. (b) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen business days after Employee is informed in 7 8 writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (i) give the Company any information reasonably requested by the Company to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceeding relating to such claim, provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expense. Without limitation on the foregoing provisions of this Section 3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest 8 9 the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee, on an interest-free basis, and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for Employee's taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (c) If, after Employee's receipt of an amount advanced by the Company pursuant to Section 3(b), Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of this Section 3(b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after Employee's receipt of an amount advanced by the Company pursuant to Section 3(b), a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9 10 4. Waiver of Invalidity. Inasmuch as the injury caused to Employee in the event Employee's employment is terminated within twenty-four (24) months of a Change in Control is difficult or incapable of accurate estimation at the date of this Agreement, the amounts to be paid pursuant to Sections 2 and 3 are intended to be liquidated damages and not a penalty, and therefore constitute a good faith forecast of the harm which might be expected to be caused to Employee. Accordingly, the Company waives any right to assert against Employee the invalidity of any payment provided in Sections 2 and 3 by reason of Employee's failure to seek other employment or otherwise, nor shall the amount of any payment provided in Sections 2 and 3 be reduced by reason of any compensation earned or not earned by Employee as a result of employment by another employer after the date of termination or otherwise. 5. Arbitration of Disputes. All disputes governing the interpretation or enforcement of this Agreement shall be resolved exclusively by arbitration in the manner set forth in this Section 5. Employee or the Company may submit to arbitration any claim under this Agreement as follows: At any time following the termination of Employee's employment with the Company, the claim may be filed in writing with an arbitrator of Employee's choice or, if the claim is filed by the Company, reasonably acceptable to Employee, and thereafter the Company, or Employee, as applicable, shall be notified in writing of the claim and furnished with a true copy as so filed. The arbitrator must be a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the American Arbitration Association. To the extent not inconsistent with the rules set forth in this Section 5, the arbitration proceeding shall insofar as practicable be conducted in accordance with the National Rules of the American Arbitration Association for the Resolution of Employment Disputes effective June 1, 1996. The arbitration hearing shall be held within ten (10) business days after the receipt of notice of the claim by the Company. No continuance of the hearing shall be allowed without the mutual consent of Employee and the Company. Absence from or non-participation at the hearing by either party shall not 10 11 prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion. The arbitrator's award shall be rendered as expeditiously as possible. In the event the arbitrator finds that the Company has breached this Agreement, the arbitrator shall order the Company to pay to Employee, within twenty-four hours after the decision is rendered, the amount due hereunder. The award of the arbitrator shall be final and binding upon the parties. Judgment may be entered on the arbitrator's award in any appropriate court as soon as possible after its rendition without further notice to the Company. The Company shall promptly reimburse Employee for the reasonable legal fees and expenses incurred by Employee in connection with enforcement of Employee's rights hereunder or the determination of Employee's rights in any arbitration proceeding. 6. Miscellaneous. (a) Waiver. The failure of any party to exercise any rights hereunder or to enforce any of the terms or conditions of this Agreement on any occasion shall not constitute or be deemed a waiver of that party's rights thereafter to exercise any rights hereunder or to enforce each and every term and condition of this Agreement. (b) Binding Effect; Successors. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement, in form and substance satisfactory to Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession will entitle Employee to compensation from the Company in the same amount and on the same terms as Employee would be entitled to under Section 2(b) hereunder had the Company terminated Employee without Cause on the succession date (assuming a Change in Control of the Company had occurred prior to such succession date). As used in this 11 12 Agreement, "the Company" means Employer as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers the agreement provided for in this Section 6(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. (ii) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by Employee and Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other beneficiary or, if there be no such beneficiary, to Employee's estate. (c) Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware. (d) Authorization and Modification. This Agreement is executed for and on behalf of the Company by an officer thereof duly authorized to do so by resolution of the Board of Directors approving this Agreement and authorizing such execution. This Agreement shall not be varied, altered, modified, changed or in any way amended except by an instruction in writing executed by the parties hereto. (e) Assignment by Employee. Except as otherwise expressly provided for in this Agreement, no right, benefit or interest of Employee arising hereunder shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. (f) Notice. For the purposes of this Agreement, notices, demands and all 12 13 other communications provided for in the Agreement shall be in writing and shall be deemed to have been given when hand delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: J. David Johnson ------------------ 82 Fern Circle Trumbull, Connecticut 06611 If to the Company: Prime Hospitality Corp. ----------------- 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel
or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (g) Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (h) Taxes. The Company shall deduct from all amounts payable under this Agreement all federal, state, local and other taxes required by law to be withheld with respect to such payments. 7. Other Arrangements. The rights of Employee under this Agreement are in addition to Employee's rights under any Employment Agreement or any successor agreement to an Employment Agreement covering Employee. Nothing contained in this Agreement shall adversely affect any of Employee's rights under an Employment Agreement or as a participant or beneficiary under the Company's pension and welfare benefit plans, incentive compensation arrangements and perquisite programs, or Employee's obligations arising under any confidentiality, non-competition or no solicitation agreement with the Company. This Agreement supersedes any and all prior Change in Control Agreements entered into 13 14 between Employee and the Company. PRIME HOSPITALITY CORP. By: /s/ A. F. PETROCELLI --------------------------------------------- A. F. Petrocelli, President EMPLOYEE: /s/ J. DAVID JOHNSON ------------------------------------------------ J. David Johnson 14 EX-10.R 10 AMENDMENT TO CHANGE IN CONTROL AGREEMENT 1 EXHIBIT 10 (r) AMENDMENT TO CHANGE IN CONTROL AGREEMENT Amendment dated this 8th day of March, 1999 to Change in Control Agreement ("Agreement"), dated the 14th day of September, 1998, between Prime Hospitality Corp., a Delaware corporation (the "Company") and A. F. Petrocelli ("Employee"). WHEREAS, the parties wish to amend the Agreement; The parties agree as follows: 1. The Agreement is hereby amended in the following respects: a. Section 1(a), the definition "Cause" is deleted. b. Section 1(c), the definition "Good Reason" is deleted. c. Section 2(b) is to read as follows: "(b) Cash Payment. If a Change in Control of the Company shall occur, then the Company shall, within ten (10) days of such event, pay to Employee, in one lump sum, in immediately available funds by wire transfer in accordance with Employee's instructions, an amount equal to two and one-half (2-1/2) times Employee's "Cash Compensation" as defined above." d. Section 5 (Arbitration of Disputes) is amended by deleting from the second sentence thereof the words "At any time following the termination of Employee's employment with the Company." 2. In all other respects, the Agreement as amended hereby shall remain in full force and effect. PRIME HOSPITALITY CORP. By: /s/ JOSEPH BERNADINO --------------------------- Joseph Bernadino Senior Vice President /s/ A. F. PETROCELLI --------------------------- A. F. Petrocelli EX-23 11 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 dated October 7, 1993 pertaining to the 1992 Prime Hospitality Corp. Employee Stock Option Plan; Form S-8, file number 033-54995 pertaining to the Prime Hospitality Corp. 1992 Performance Incentive Plan; Form S-8, file number 333-03361 of Prime Hospitality Corp. pertaining to the 1995 Employee Stock Option Plan and the 1995 Non-employee Director Stock Option Plan; Form S-8, file number 333-44287 pertaining to the Prime Hospitality Corp. 1995 Employee Stock Option Plan and the 1995 Non-employee Director Stock Option Plan; and Form S-8, file number 333-60911, pertaining to the Prime Hospitality Corp. 1995 Employee Stock Option Plan) of our report dated February 9, 2000, except for Note 1 (Business Activities) and Note 20, as to which the date is March 20, 2000, with respect to the consolidated financial statements of Prime Hospitality Corp. included in the Annual Report (Form 10-K) for each of the three years in the period ended December 31, 1999. Ernst & Young LLP New York, New York March 24, 2000 EX-27 12 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 7,240 8,262 21,379 954 0 55,680 1,093,123 118,311 1,328,779 61,225 549,032 0 0 557 632,000 1,328,779 532,746 552,732 0 451,996 0 0 43,634 65,897 25,700 40,197 0 0 (5,315) 34,882 .68 .67
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