-----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, ErvMjjjhvW5W3wTjjznQ5ipBIbU9Dx6qD1XM40TMvFDWvbyyymF9ORhQf3s6cnf0 FNg5qGzMZoOSgwJDQ3X+uA== 0000950123-99-002639.txt : 19990330 0000950123-99-002639.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950123-99-002639 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99575360 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 CORP. 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, 1998 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, FAIRFIELD, NEW JERSEY 07004 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 882-1010 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 15, 1999 based on the last sale price as reported by the National Quotation Bureau, Inc. on that date was approximately $537,813,759. The Registrant had 51,220,358 shares of Common Stock outstanding as of March 15, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement prepared for the 1999 annual meeting of shareholders are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 References in this report to the "Company" or "Prime" are to Prime Hospitality Corp. and its subsidiaries. EBITDA represents earnings before extraordinary items, interest expense, provision for income taxes and depreciation and amortization and excludes interest income on cash investments and other income. EBITDA is used by the Company for the purpose of analyzing its operating performance, leverage and liquidity. Hotel EBITDA represents EBITDA generated from the operations of owned hotels. Hotel EBITDA excludes management fee income, interest income from mortgages and notes receivable, general and administrative expenses and other revenues and expenses which do not directly relate to operations of owned hotels. EBITDA and Hotel EBITDA are not measures of financial performance under generally accepted accounting principles and should not be considered as alternatives to net income as an indicator of the Company's operating performance or as alternatives to cash flows as a measure of liquidity. Unless otherwise indicated, industry data is based on reports of Smith Travel Research. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES THE COMPANY Prime is an owner, manager and franchisor of hotels, with 193 hotels in operation containing 26,015 rooms located in 32 states and the U.S. Virgin Islands (the "Portfolio") as of February 28, 1999. Prime controls three high-quality hotel brands -- AmeriSuites(R), HomeGate Studios & Suites(R) and Wellesley Inns(R) -- as well as a portfolio of upscale, full-service hotels operated under franchise agreements with national hotel chains. As of February 28, 1999, the Company owned and operated 153 hotels (the "Owned Hotels"), operated 28 hotels under lease agreements with real estate investment trusts (the "Leased Hotels"), managed 10 hotels for third parties (the "Managed Hotels") and franchised two hotels which it does not operate (the "Franchised Hotels"). Prime's portfolio consists primarily of new, well-maintained hotels, with an average age of approximately 6.5 years. The Company's strategy is to develop proprietary brands in growing market segments. Reflecting this strategy, the majority of the Company's capital spending over the past three years was dedicated to the growth of its proprietary brands. In particular, the Company has aggressively expanded its AmeriSuites brand which has grown from 21 hotels at February 28, 1996, to 94 hotels at February 28, 1999. The Company seeks to further expand its brands through franchising which commenced in 1998. Through the development of its proprietary brands, the Company has positioned itself to generate additional revenues with minimal capital investment. The Company's growth is also focused on its hotel management abilities which the Company believes enables it to maximize the value of its brands and assets. Over the past three years, Prime has achieved rapid growth in the Portfolio, from 13,733 rooms at February 29, 1996 to 26,015 rooms at February 28, 1999. Prime's focus on brand development has resulted in the growth of the number of hotels operated under Prime's proprietary brands from 49 hotels at February 29, 1996 to 160 hotels at February 28, 1999. At the same time, the Company's EBITDA has grown at a compound annual rate of 18.6%, from $88.8 million in 1996 to $148.3 million in 1998, while recurring net income has grown at a compound annual rate of 23.6%, from $28.3 million to $53.4 million over the same period. Prime's hotels serve four major lodging industry segments: the all-suites segment, under Prime's AmeriSuites brand; the extended-stay segment, under Prime's HomeGate brand; the limited-service segment, primarily under Prime's Wellesley Inns brand and the full-service segment, under major national franchises. All-Suites: There are 94 all-suite hotels in operation under the AmeriSuites brand name. Prime operates 92 of these hotels and franchises the operation of the remaining two hotels. Prime currently has three AmeriSuites under construction, six land sites targeted for AmeriSuites development and 10 AmeriSuites to be developed pursuant to franchise agreements. AmeriSuites are upscale, all-suite hotels containing approximately 128 suites and located primarily near suburban commercial centers, corporate office parks and other 1 3 travel destinations, with close proximity to dining, shopping and entertainment amenities. In 1998, AmeriSuites contributed approximately $71.7 million, or 50.5%, of the Company's Hotel EBITDA. Extended-Stay: Through its December 1997 merger with Homegate Hospitality, Inc., Prime owns and operates extended-stay hotels under its proprietary HomeGate Studios & Suites brand name. There are 38 HomeGate hotels in operation and another six hotels under construction. HomeGates are mid-price, extended-stay hotels typically containing between 120-140 suites with fully equipped kitchens, upscale furnishings and separation between cooking, living and sleeping areas. In 1998, the HomeGate hotels contributed $10.4 million, or 7.3%, of the Company's Hotel EBITDA reflecting the start-up nature of the brand. The Company expects this percentage to increase in 1999 as the new hotels achieve stabilization. Limited-Service: Prime operates 33 limited-service hotels, 28 of which are Wellesley Inns. The Company owns all of the Wellesley Inns, which compete primarily in the mid-price segment with hotels such as Hampton Inns and La Quinta Inns. The remaining five limited-service hotels consist of four Managed Hotels and one Owned Hotel and are operated under franchise agreements with national chains. In 1998, the Company's limited-service hotels contributed approximately $20.9 million, or 14.7%, of the Company's Hotel EBITDA. Full-Service: Prime operates 28 full-service hotels primarily in the upscale segment with food service and banquet facilities under franchise agreements with national hotel brands such as Hilton, Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. In 1998, the Company's full-service hotels contributed approximately $39.1 million, or 27.5%, of the Company's Hotel EBITDA. OPERATING PERFORMANCE AND INTERNAL GROWTH Prime seeks to achieve internal growth through the use of sophisticated operating, marketing and financial systems at its hotels. Prime has demonstrated its ability to operate its hotels effectively by achieving revenue per available room ("REVPAR") increases in 1998 at its comparable hotels of 5.2%, versus 1997 results. The Company's emphasis on efficient operations has increased operating margins, thus translating its top-line REVPAR growth into increased earnings. In 1998, gross operating profit increased for comparable hotels by 7.0%, versus 1997 results. Management believes that its asset base is well positioned with a national brand in AmeriSuites, an upscale portfolio of full-service hotels in the Northeast, a consistent performer in Wellesley Inns and a new brand in a growing segment in HomeGate. BRAND GROWTH Prime's external growth strategy is to develop its proprietary brands. In particular, the Company's growth plans are concentrated on the AmeriSuites brand. The Company is focused on 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. In 1998, the Company received the necessary statutory approvals to begin franchising its brands. The Company intends to commit capital to develop its brands on a more limited scale and rely on franchisees to provide the bulk of the growth. RECENT DEVELOPMENTS In September 1998, A.F. Petrocelli was appointed to the position of Chairman and CEO replacing David A. Simon. Mr. Petrocelli had previously served on Prime's Board of Directors since 1992, and is also Chairman and CEO of United Capital Corp. (ASE:AFP), a diversified real estate and manufacturing company. In October 1998, Mr. Petrocelli was also appointed President of Prime, replacing John M. Elwood who resigned from the Company. In September 1998, the Company announced plans to reduce new hotel development. The Company's previous development plans were to be financed primarily through the sale and leaseback of hotels to real estate investment trusts ("REITs"). Recent changes in the capital markets have affected the ability of hotel REITs to raise both debt and equity capital to finance acquisitions. Due to this uncertainty regarding hotel divestitures, Prime is developing hotels only to the extent of funding being available from internal cash 2 4 sources. Under its revised plans, Prime has completed the majority of its development and has three AmeriSuites and six HomeGates under construction. The Company also intends to develop AmeriSuites hotels on six land sites which it owns. In February 1999, MeriStar Hospitality Corp. ("MeriStar") notified the Company that it would be unable to fulfill its contractual obligation to purchase nine full-service hotels from Prime. Under the terms of the contract, Prime received a $4 million contract termination fee. Prime had previously modified its business and development plans in September 1998 under the assumption that MeriStar would be unable to consummate this transaction due to changes in the capital markets. Prime will continue to operate the nine full-service hotels which generated $80.3 million in revenue and $25.7 million in EBITDA in 1998. Since December 1998, the Company has sold two AmeriSuites hotels and certain other assets for total proceeds of $25.4 million. The Company has utilized the proceeds to purchase 2.5 million shares of its common stock in 1999. Under the terms of the covenants of its $200 million revolving credit facility (the "Revolving Credit Facility"), stock repurchases are limited to $50 million in 1999. The Company intends to continue to reduce its real estate holdings with the proceeds to be utilized for stock repurchases, debt reduction and/or new development. INDUSTRY OVERVIEW In 1998, industry-wide percentage growth in supply exceeded industry-wide percentage growth in room demand (4.0% versus 3.1%), continuing a trend that began in 1997. This resulted in a slight decline in overall occupancy levels from 64.5% in 1997 to 64.0% in 1998. 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 4.4% from $75.31 in 1997 to $78.62 in 1998, resulting in a REVPAR increase of 3.6%. 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 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 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 --------------------------- --------------------------- --------------------------- 1996 V. 1997 V. 1998 V. 1996 V. 1997 V. 1998 V. 1996 V. 1997 V. 1998 V. 1995 1996 1997 1995 1996 1997 1995 1996 1997 ------- ------- ------- ------- ------- ------- ------- ------- ------- United States........................... 2.3% 3.4% 4.0% 3.1% 2.5% 3.1% 7.8% 5.3% 3.6% BY REGION: Middle Atlantic......................... 1.0 1.7 2.3 3.3 2.5 3.1 10.1 9.6 7.3 South Atlantic.......................... 2.0 3.4 4.3 3.3 2.4 2.8 7.9 4.7 2.7 West South Central...................... -- 4.9 5.1 -- 4.0 5.2 -- 4.3 4.5 BY SERVICE (PRICE LEVEL): Upscale................................. 3.4 4.0 5.0 3.4 3.7 4.2 5.4 4.7 2.9 Mid-Price............................... 3.3 4.6 6.2 3.3 3.5 4.7 6.7 4.9 3.4
3 5 PRIME'S LODGING OPERATIONS The following table sets forth information with respect to the Portfolio as of February 28, 1999:
OWNED(1) LEASED(2) MANAGED(3) FRANCHISED(4) TOTAL(5) --------------- -------------- -------------- -------------- --------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ----- ------ ------ ALL-SUITES: AmeriSuites...................... 73 9,399 19 2,403 2 258 94 12,060 EXTENDED-STAY: HomeGate Studios & Suites........ 38 4,774 38 4,774 FULL-SERVICE: 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 Marriott......................... 1 504 1 504 Radisson......................... 3 627 3 627 Ramada........................... 5 823 3 433 4 796 12 2,052 Sheraton......................... 1 240 2 349 3 589 --- ------ -- ----- -- ----- --- ------ Total Full-Service........ 13 2,939 9 1,453 6 1,320 28 5,712 LIMITED-SERVICE: Howard Johnson................... 1 108 4 549 5 657 Wellesley Inns................... 28 2,812 28 2,812 --- ------ -- ----- --- ------ Total Limited-Service..... 29 2,920 4 549 33 3,469 Total..................... 153 20,032 28 3,856 10 1,869 2 258 193 26,015 === ====== == ===== == ===== == === === ======
- --------------- (1) The Owned Hotels represent those hotels in which the Company retains the economic interest. The Company owns the fee interest in all but nine of the hotels, which hotels 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 have agreements which 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 a 4.0% royalty fee. (3) Of the 10 Managed Hotels, the Company has significant financial interests in the form of a mortgage or profit participations on five hotels. (4) Franchised Hotels are hotels operated by third parties under AmeriSuites franchise agreements. (5) In addition to the above, as of February 28, 1999, Prime has three AmeriSuites comprising 407 rooms and six HomeGates comprising 702 rooms under construction. 4 6 The following table sets forth the location of the Portfolio as of February 28, 1999:
OWNED LEASED MANAGED FRANCHISED TOTAL --------------- -------------- -------------- -------------- --------------- HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS ------ ------ ------ ----- ------ ----- ------ ----- ------ ------ Alabama................. 1 128 1 128 2 256 Arizona................. 7 916 1 117 8 1,033 Arkansas................ 1 130 1 130 California.............. 1 128 1 96 1 128 3 352 Colorado................ 5 663 5 663 Connecticut............. 4 492 2 305 6 797 Florida................. 26 3,000 4 431 1 115 31 3,546 Georgia................. 9 1,157 1 189 10 1,346 Idaho................... 1 128 1 128 Illinois................ 6 753 6 753 Indiana................. 2 263 1 126 3 389 Kansas.................. 3 379 1 126 4 505 Kentucky................ 2 251 2 251 Louisiana............... 1 128 1 128 Maine................... 1 130 1 130 Maryland................ 1 128 1 128 Massachusetts........... 1 158 1 158 Michigan................ 2 256 2 256 Minnesota............... 1 128 1 128 2 256 Nevada.................. 1 125 3 552 4 677 New Jersey.............. 15 2,455 4 637 7 1,469 26 4,561 New Mexico.............. 2 237 1 128 3 365 New York................ 8 933 8 933 North Carolina.......... 5 649 5 649 Ohio.................... 4 462 3 379 7 841 Oklahoma................ 3 384 3 384 Oregon.................. 1 137 1 161 2 298 Pennsylvania............ 4 632 4 632 South Carolina.......... 2 239 2 239 Tennessee............... 3 379 2 256 5 635 Texas................... 28 3,522 28 3,522 U.S. Virgin Islands..... 1 504 1 504 Virginia................ 4 444 1 126 5 570 --- ------ -- ----- -- ----- -- --- --- ------ Total......... 153 20,032 28 3,856 10 1,869 2 258 193 26,015 === ====== == ===== == ===== == === === ======
5 7 The following table sets forth for the five years ended December 31, 1998 operating data for the hotels in the Portfolio as of December 31, 1998. 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"), which were impacted by hurricane damage, 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 --------- ------ --------- ------ 1994................... 45 5,828 70 9,995 1995................... 50 6,415 78 10,969 1996................... 60 7,695 92 12,698 1997................... 100 12,915 137 18,558 1998................... 140 18,042 178 23,884
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1994................... 72.1% $58.11 $41.89 70.8% $64.29 $45.51 1995................... 69.0 62.16 42.88 69.9 68.15 47.63 1996................... 68.6 68.18 46.76 70.8 73.95 52.38 1997................... 66.5 71.55 47.58 68.5 77.13 52.81 1998................... 64.6 75.13 48.52 66.4 80.22 53.24
AMERISUITES The Company currently has 94 AmeriSuites in operation and has three AmeriSuites hotels under construction. In addition, Prime has signed 10 AmeriSuites franchise agreements and has 22 applications pending. The AmeriSuites brand is being developed primarily through new construction to assure product consistency and quality. All of the current AmeriSuites hotels have been 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 mid-price and upscale brands such as Courtyard by Marriott and Holiday Inn. The average age of the AmeriSuites hotels as of February 28, 1999 was approximately 1.75 years. In 1998, AmeriSuites which were in operation for at least one year generated an average EBITDA of $1.2 million, representing an average unleveraged 16.8% return on total invested capital. 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 with a complimentary continental breakfast in a spacious lobby cafe, remote-control cable television, fully-equipped business centers, fitness centers and pool facilities. The hotels provide group meeting space, but do not include restaurant or lounge facilities. AmeriSuites attract customers principally because of the quality of the guest suites, which offer distinct living, sleeping and kitchen areas and the consistency of product quality. AmeriSuites hotels also offer business suites marketed under the name "TCB (Taking Care of Business) Suites". TCB Suites were developed specifically for the business traveler and feature a well-equipped, in-suite office, including an oversized desk with executive chair, dual phone lines, easy chair and ottoman, in addition to voice mail, data ports and other amenities. Each AmeriSuites contains approximately 128 suites, including 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 6 8 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 1998, the REVPAR contribution from the central reservation system for comparable AmeriSuites hotels increased by 21% over the prior year level to 33% of revenues. Management believes that the growing AmeriSuites 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 chain's number of hotels in the past year will permit AmeriSuites to achieve critical mass and outperform its older, more established competitors. The following table sets forth for the five years ended December 31, 1998 certain data with respect to the Owned AmeriSuites hotels. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations. For purposes of showing operating trends, comparable data has also been presented for the AmeriSuites hotels which have been in operation for all of 1997 and 1998.
OWNED TOTAL ------------------- ------------------- HOTELS ROOMS HOTELS ROOMS --------- ------ --------- ------ 1994................... 5 618 12 1,494 1995................... 10 1,205 19 2,319 1996................... 20 2,485 33 4,048 1997................... 20 2,485 63 7,969 1998................... 20 2,485 83 10,684
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1994................... 73.9% $60.94 $45.03 65.9% $59.90 $39.50 1995................... 67.7 67.27 45.52 67.2 65.45 43.98 1996................... 62.2 73.85 45.93 65.6 72.12 47.28 1997................... 67.5 74.77 50.44 65.1 75.65 49.23 1998................... 68.4 78.03 53.39 65.9 81.16 53.45
HOMEGATE STUDIOS & SUITES Prime currently owns 38 HomeGate hotels and has six HomeGates under construction. All of the HomeGate hotels are owned and operated by the Company. The HomeGate hotels were developed primarily through new construction within the past two years. The Company currently has seven non-prototype hotels, six of which were purchased and subsequently converted. The Company is currently reviewing its options regarding these seven hotels, including potential sales or reflaggings. HomeGate hotels are designed to compete primarily in the mid-price range of the extended-stay industry segment. Prime believes that HomeGate is an attractive product, based on the quality of its design elements and furnishings and the separation between cooking, sleeping and living areas. HomeGate Studios & Suites offer a superior price/value relationship and appeal to extended-stay guests of both upscale and economy hotels. Each HomeGate hotel features three types of room configurations: studios (300 square feet); suites (450 square feet); and executive suites (570 square feet). The hotels offer amenities that appeal to extended-stay hotel guests, including a fully equipped kitchen consisting of a full-size refrigerator, a cooktop, a microwave oven, a dishwasher, a coffee maker and utensils; separate cooking, living and sleeping areas; an oversized work desk; two telephone jacks with dataports; a direct-dial telephone with voice-mail messaging; cable television and a sleeper sofa. Homegates also provide 24 hour desk service, and other services such as daily maid service for one to six night stays, weekly maid service for stays longer than six nights, twice-weekly linen service, a coin-operated laundry facility and an exercise room. 7 9 In 1998, the Company introduced the HomeGate Suites concept, an upscale version of HomeGate Studios and Suites. The HomeGate Suites will solely feature suite rooms, in contrast to the HomeGate Studios and Suites product which features a combination of studios and suites. The Company currently has one HomeGate Suites hotel under construction. Extended-stay hotels typically experience longer average guest stays than traditional hotels, resulting in higher average occupancies and a more stable revenue stream. While HomeGate hotels generally emphasize a minimum stay of one week, daily rates are also offered. In addition, the staffing levels of extended-stay hotels are much lower than those of traditional hotels, because many labor intensive services offered by full-service hotels are de-emphasized or excluded entirely, resulting in lower labor costs. At the HomeGate hotels, there is no food and beverage service and limited common area amenities. The low labor costs combined with fewer amenities result in higher operating margins than traditional hotels. The HomeGate hotels are marketed primarily at the local levels. In July 1998, the hotels also began utilizing the central reservation system operated by REZsolutions, Inc. The Company has expanded its HomeGate brand to take advantage of what management perceives as an underserved and growing market. Based on industry data compiled by D.K. Shifflet and Smith Travel Research, the demand for business extended-stay rooms is between 400,000-500,000 rooms per night, however only 140,000 rooms are dedicated to the extended-stay market. This imbalance is most severe in the mid-price range where supply is estimated at 22,000 rooms and there is no dominant competitor. The Company also believes that favorable demographic and social trends will also benefit the extended-stay market. In particular, increases in business mobility, corporate training, temporary assignments and business relocations have created more demand for extended-stay facilities. The Company does not intend to develop new HomeGate hotels in the short term. Due to its rapid growth, the Company plans to focus on the chain's operations and on maximizing the profits on existing hotels. The following table sets forth for the two years ended December 31, 1998, certain data with respect to HomeGate hotels. Operating data for the hotels built during the period are presented from the dates such hotels commenced operations.
TOTAL ------------------------------------------------ HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- ------ ------ 1997................................. 14 1,789 51.9% $38.13 $19.79 1998................................. 35 4,406 54.0% 46.59 25.15
WELLESLEY INNS AND OTHER LIMITED SERVICE HOTELS The Company's limited-service hotels consist primarily of 28 Wellesley Inns, all of which are owned and operated by the Company. Of the Company's 28 Wellesley Inns, 15 are located in Florida and the remainder in the Middle Atlantic and Northeast United States. The prototypical Wellesley Inn has 105 rooms and is distinguished by its classic stucco exterior, spacious lobby and amenities such as pool facilities, complimentary continental breakfast, remote control cable television 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 addition, the Wellesley Inns are marketed under the reservation system operated by REZsolutions, Inc. In 1998, the REVPAR contribution from the central reservation system for the Wellesley Inns hotels increased by 16% to 17% of revenues. In Florida, where the population has grown rapidly, the Company has built a geographically concentrated group of Wellesley Inns, thereby developing regional brand name recognition. The majority of the Florida Wellesley Inns were constructed within the past ten years. In 1997, Prime completed a $9 million reimaging program at 14 Wellesley Inns which were acquired in March 1996. The reimaging included upgrades to the hotels' curb appeal with a redesigned arrival court, new landscaping and a bright, new exterior. Interior upgrades included an expanded lobby and continental 8 10 breakfast area and totally renovated rooms. Prime believes that the reimaging improved the consistency and quality of the chain. The Company intends to grow the chain through franchisees. Prime will consider both new construction and conversion of existing hotels for its new franchises. The Company signed its first Wellesley franchise agreement in 1998. The following table sets forth for the five years ended December 31, 1998 operating data for Wellesley Inns as of December 31, 1998. 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 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.
TOTAL ------------------------------------------------ HOTELS ROOMS OCCUPANCY ADR REVPAR ------ ----- --------- ------ ------ 1994................................. 28 2,812 77.8% $48.12 $37.44 1995................................. 28 2,812 75.3 52.11 39.25 1996................................. 28 2,812 73.8 53.80 39.72 1997................................. 28 2,812 73.6 58.29 42.87 1998................................. 28 2,812 70.8 61.13 43.26
The Company's other limited-service hotels consist of five hotels operated under franchise agreements, four of which are managed for third parties. 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 28 full-service hotels primarily in the upscale segment with food service and banquet facilities under franchise agreements with Hilton, Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and Ramada. The full-service hotels are concentrated in the Northeast. The Company owns 13 of these hotels, operates nine hotels under lease agreements with REITs and manages six 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 owns and operates one resort hotel, the Marriott's Frenchman's Reef Hotel in St. Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 504-room resort hotel which includes a 408-room eight-story building and 96 rooms in the adjacent Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive convention facilities, complete sports and beach facilities and a self-contained, total energy system. The Frenchman's Reef is marketed directly through its own sales force at the hotel, through regional offices located in Connecticut and Virginia and through the Marriott reservation system. The Frenchman's Reef market includes tour groups, corporate meetings, conventions and individual vacationers. In December 1997, the Frenchman's Reef and Morningstar Beach Resorts reopened after completing a $45 million property renovation. The resorts were closed in April 1997 in order to implement a major 9 11 renovation of the facilities which were damaged by hurricanes in 1995 and 1996. All rooms at the Frenchman's Reef have been completely renovated along with the lobby, public areas, pools and restaurants. In addition to the upgrades, certain enhancements have been made to the resorts in order to fortify them against severe windstorms. Those enhancements include hurricane resistance shutters to all public areas, new pitched metal roofs, improved exterior walls, and the addition of hurricane resistant glass storm doors to every guestroom. As part of the Company's strategy to reduce its real estate holdings, in 1998 the Company sold and leased back eight full-service hotels to MeriStar. In the future, the Company intends to divest certain of its remaining 13 owned full-service hotels which are not consistent with the majority of its portfolio including certain mid-price hotels and the Frenchman's Reef. Prime intends to capitalize on its ability to effectively manage full-service hotels. While Prime does not intend to acquire full-service hotels, it does plan to invest capital to pursue management opportunities in the full-service segment either as a manager and/or lessee. The following table sets forth for the five years ended December 31, 1998, operating data for the full-service hotels in the Company's portfolio as of December 31, 1998. For purposes of showing operating trends, the results of the Frenchman's Reef, which were impacted by hurricane damage, have been excluded from the table. Operating data for the hotels built or acquired during the period are presented from the dates such hotels commenced operations or became Owned Hotels. For purposes of showing operating trends, the results of 6 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 --------- ------ --------- ------ 1994................. 11 2,285 25 5,027 1995................. 11 2,285 26 5,176 1996................. 11 2,285 26 5,176 1997................. 12 2,435 27 5,325 1998................. 12 2,435 27 5,325
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR --------- ------ ------ --------- ------ ------ 1994.................... 64.3% $74.27 $47.78 68.9% $78.13 $53.83 1995.................... 61.8 75.83 46.89 68.1 81.26 55.37 1996.................... 67.4 83.94 56.54 72.5 88.15 63.87 1997.................... 71.6 92.28 66.02 73.9 95.84 70.80 1998.................... 70.7 101.95 72.03 73.1 104.64 76.51
FRANCHISING Prime has implemented several franchise initiatives in order to further accelerate the growth of its brands. In 1998, the Company completed its statutory filings and received all the necessary approvals to begin franchising. The Company has also developed internal franchise marketing, training and quality assurance programs to provide support to franchisees and control product quality. The Company established a franchise sales team consisting of a senior vice president and eight regional sales vice presidents. Prime currently has 21 hotels operated under AmeriSuites franchise agreements, 19 of which are with Equity Inns, Inc. ("Equity Inns"). In 1997, Prime entered into a strategic alliance with Equity Inns whereby Equity Inns has rights to acquire certain AmeriSuites through 2000. Pursuant to this agreement, Prime will generate franchise income for its services and for use of the AmeriSuites name. Thus far, Equity Inns has purchased 19 hotels from Prime. Due to the recent changes in the capital markets affecting REITs, the Company is not projecting sales of hotels to Equity Inns in the near future. 10 12 As of February 28, 1999, the Company has signed 10 new AmeriSuites franchise agreements and one Wellesley Inn franchise agreement for new hotels to be developed and has 22 additional AmeriSuites franchise applications pending. The standard franchise agreement has a term of ten years and requires the franchisee to maintain certain operating and product standards. The franchise fees are generally comprised of an initial application fee and monthly fees based on a percentage of hotel revenues. The monthly fees cover royalties and the cost of marketing and reservation services. Prime will also offer additional services including purchasing and design services. The standard monthly fees as a percentage of room sales are as follows:
ROYALTY MARKETING FEE FEE RESERVATION ------- --------- ----------- AmeriSuites.................................. 5.0% 2.0% 1.5% HomeGate..................................... 4.5% 2.0% 1.5% Wellesley Inns............................... 4.5% 2.0% 1.5%
DEVELOPMENT The Company has developed its AmeriSuites brands utilizing its internal development resources in order to maintain control of the development process. The HomeGate hotels were developed under a master development agreement with Trammel Crow Residential and Greystar Capital Partners entered into by Homegate Hospitality, Inc. prior to its merger with the Company. The agreement terminated on December 31, 1998. The following are key factors in the development process. Detailed Site Selection. The Company undertakes an extensive review process in selecting sites for new hotels. Key factors in the selection of sites include close proximity to demand generators, superior visibility, ease of access and nearby guest amenities. Sites are initially identified with the assistance of a nationwide network of brokers. Once identified, the Company qualifies the sites before entering into a letter of intent. After a letter of intent is signed, the Company assesses the feasibility of the sites, which includes extensive review by the Company's operations and sales and marketing staffs as well as independent consultants. Upon satisfactory completion of economic feasibility, the Company enters into a contract for the site and commences legal, engineering and environmental due diligence. The entire process, from site selection to completion of construction and opening, takes approximately 18 months. Suburban Market Focus. The Company believes that suburban markets offer a number of features which permit the rapid expansion of its brands. As opposed to central business districts, suburban markets offer ample land to construct new hotels. More importantly, the Company believes that suburban locations appeal to multiple demand generators. In addition to the business traveler, who is the target customer, the weekend/leisure traveler is attracted by the close proximity to nearby dining, shopping and entertainment amenities. Strategy. The Company has expanded into new regions by first developing hotels in certain key cities which it has targeted. The Company has added additional hotels in that region in cities which are logical destinations from the key cities. This strategy has permitted the Company to quickly build brand recognition in a particular region. Key cities where AmeriSuites are open or under development include Dallas/Fort Worth (8), Atlanta (7), Chicago (7), Miami/Ft. Lauderdale (4), Denver (3) and Phoenix (3). Key cities where HomeGate hotels are open or under construction include Dallas/Ft. Worth (5), Austin (4), Houston (4), Phoenix (4) and Orlando (3). The Company has also focused on areas where there are high barriers to entry and where the development process is more time consuming. The Company currently has hotels open or under development in the Northeast in New Jersey (3), Connecticut (2) and suburban Boston and the West Coast in Sacramento and San Francisco. OPERATIONS As a leading domestic hotel operating company, the Company enjoys a number of operating advantages over other lodging companies. With 191 hotels under management covering a number of price points and broad geographic regions, the Company possesses the critical mass to support sophisticated operating, 11 13 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 hotels generated average operating profit margins that exceeded comparable industry averages for 1997, the most current data available from industry sources, by approximately 8% for all-suites hotels, 19% for full-service hotels and 4% for limited-service hotels. The Company's operating strategy combines operating service and guidance from its central management team with decentralized decision-making authority delegated to each hotel's on-site management. The on-site hotel management teams consist of a general manager and, depending on the hotel's size and market positioning, managers of sales and marketing, food and beverage, front desk services, housekeeping and engineering. The Company's operating objective is to exceed guest expectations by providing quality services and comfortable accommodations at a fair value. On-site hotel management is responsible for efficient expense controls and uses operating standards provided by the Company. Within parameters established in the operating and capital planning process, on-site management possesses broad decision-making authority on operating issues such as guest services, marketing strategies, hiring practices and incentive programs. Each hotel's management team is empowered to take all necessary steps to ensure guest satisfaction within established guidelines. Key on-site personnel participate in an incentive program based on hotel revenues and profits. The central management team is located in Fairfield, New Jersey, with AmeriSuites and HomeGate operations offices in Atlanta, Georgia. Central management provides four major categories of services: (i) operations management, (ii) sales and marketing management, (iii) financial reporting and control and (iv) hotel support services. Operations Management. Operations management consists of the development, implementation and monitoring of hotel operating standards and is provided by a network of regional operating officers who are each responsible for the operations of 10 to 30 hotels. They are supported by training, food and beverage and human resources departments, each staffed full-time by specialized professionals. The 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. 12 14 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. 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 significance of the Company's interest as a franchisor or mortgagee. In addition to making normal capital improvements, the Company reviews, on an on-going basis, each hotel's competitive position in the local market in order to decide the types of product that will best meet the market's demand characteristics. During the past three years, the Company has 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 February 28, 1999, the Company operates 28 hotels under lease agreements with REITs. The leases have terms of 10 years expiring from 2007 to 2008 with certain renewal options. The agreements 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 Company also operates 19 of the 28 Leased Hotels, pursuant to AmeriSuites franchise agreements which also provide the Company with a 4.0% royalty fee. The remaining Leased Hotels are operated under franchise agreements with national chains. MANAGEMENT AGREEMENTS As of February 28, 1999, the Company provided hotel management services to third party hotel owners of 10 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 2011. Although management agreements may be terminated in connection with a change in ownership of the underlying hotels, such risks may be limited due to the Company's other financial interests in these hotels. The Company holds financial interests in the form of mortgages or significant profit participations in 5 of the 10 Managed Hotels. 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 with 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 13 15 implement certain capital programs. The payment 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 currently enjoys good relationships with its franchisors. WORKING CAPITAL The Company has financed its operations and capital needs principally through a combination of cash flow from operations, borrowings under its Revolving Credit Facility, proceeds from the sale/leaseback of certain hotels and proceeds from debt or equity offerings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SEASONALITY The impact of seasonality on the Company as a whole is insignificant due to the seasonal balance achieved from the geographical location of the Company's hotel properties. COMPETITION The Company operates and manages hotel properties in areas that contain numerous other hotels, some of which are affiliated with national or regional brands. The Company competes with other hotels primarily on the basis of price, physical facilities and customer service. EMPLOYEES As of December 31, 1998, the Company employed approximately 6,800 employees. Certain of the Company's employees are covered by collective bargaining agreements. The Company believes that relations with its employees are good. ENVIRONMENTAL MATTERS The Hotels are subject to environmental regulations under Federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. The Company does not believe that it is subject to any material environmental liability. ITEM 3. LEGAL PROCEEDINGS The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation that will, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fiscal quarter ended December 31, 1998 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 15, 1999 there were 51,220,358 shares of common stock outstanding. 14 16 The following table sets forth the reported high and low closing sales prices of the common stock on the NYSE.
HIGH LOW DIVIDEND/SHARE ---- --- -------------- Year Ended December 31, 1997 First Quarter.......................................... $18 1/8 $14 1/8 0 Second Quarter......................................... 20 7/8 14 3/4 0 Third Quarter.......................................... 22 9/16 17 1/2 0 Fourth Quarter......................................... 23 3/16 16 5/16 0 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
As of March 15, 1999, the closing sales price of the common stock on the NYSE was $10 1/2 per share, and there were approximately 2,022 holders of record of common stock. The Company has not declared any cash dividends on its common stock during the two prior fiscal years and does not currently anticipate paying any dividends on the common stock in the foreseeable future. The Company currently anticipates that it will retain any future earnings for use in its business. The Company is prohibited by the terms of certain debt agreements from paying cash dividends. 15 17 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, 1998. 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, ------------------------------------------------------------ 1994 1995 1996 1997 1998 -------- -------- -------- ---------- ---------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Total revenues................. $134,303 $205,628 $271,100 $ 340,961 $ 469,405 Income from continuing operations before extraordinary items......... 18,258 17,465 30,048 25,856 53,847 Extraordinary items-gains on discharge of indebtedness (net of income taxes)....... 172 104 202 75 -- Net income..................... 18,430 17,569 30,250 25,931 53,847 BALANCE SHEET DATA: Total assets................... $434,932 $573,241 $877,100 $1,196,666 $1,408,398 Long-term debt, net of current portion..................... 178,545 276,920 319,836 554,500 582,031 Stockholders' equity........... 204,065 232,916 484,584 524,413 641,045
Quarterly financial data for the years ending December 31, 1997 and 1998 is presented as follows (in thousands, except per share amounts).
THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 --------- -------- ------------- ------------ Net revenue.......................... $78,053 $85,562 $87,804 $ 89,542 Operating income..................... 18,085 25,544 24,846 22,363 Merger expenses...................... -- -- -- (18,555) Net income before extraordinary items.............................. 8,202 12,513 10,564 (5,423) Extraordinary items (net of tax)..... 22 53 -- -- Net income........................... 8,224 12,566 10,564 (5,423) Earnings per common share: Basic: Income before extraordinary items.... $ 0.18 $ 0.27 $ 0.23 $ (0.12) Extraordinary items.................. -- -- -- -- ------- ------- ------- -------- Earnings per share................... $ 0.18 $ 0.27 $ 0.23 $ (0.12) ======= ======= ======= ======== Diluted: Income before extraordinary items.... $ 0.17 $ 0.26 $ 0.22 $ (0.11) Extraordinary items.................. -- -- -- -- ------- ------- ------- -------- Earnings per share................... $ 0.17 $ 0.26 $ 0.22 $ (0.11) ======= ======= ======= ========
16 18
THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 --------- -------- ------------- ------------ Net revenue............................ $103,288 $122,947 $121,045 $122,125 Operating income....................... 21,125 24,641 18,908 24,287 Extraordinary items (net of tax)....... -- -- -- -- Net income............................. 10,291 23,571 8,943 11,042 Earnings per common share: Basic: Income before extraordinary items...... $ 0.22 $ 0.45 $ 0.17 $ 0.20 Extraordinary items.................... -- -- -- -- -------- -------- -------- -------- Earnings per share..................... $ 0.22 $ 0.45 $ 0.17 $ 0.20 ======== ======== ======== ======== Diluted: Income before extraordinary items...... $ 0.20 $ 0.43 $ 0.17 $ 0.20 Extraordinary items.................... -- -- -- -- -------- -------- -------- -------- Earnings per share..................... $ 0.20 $ 0.43 $ 0.17 $ 0.20 ======== ======== ======== ========
17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is an owner, manager and franchisor of hotels throughout the United States and the U.S. Virgin Islands. The Company operates three proprietary brands, AmeriSuites (all-suites), HomeGate Studios & Suites (extended-stay) and Wellesley Inns (limited-service). Also within its portfolio are full-service hotels operated under franchise agreements with national hotel chains. As of February 28, 1999, the Company owned 153 hotels (the "Owned Hotels"), operated 28 hotels under lease agreements with REITs (the "Leased Hotels"), managed 10 hotels for third parties (the "Managed Hotels") and franchised two hotels which it does not operate (the "Franchised Hotels"). The Company has significant equity interests in the Owned Hotels and has economic interests limited to a percentage of hotel revenues (generally between 2.5% to 5.0%) generated by the Leased Hotels, Managed Hotels and Franchised Hotels. The Company consolidates the results of operations of its Owned Hotels and Leased Hotels and only records management fees (including incentive management fees) on the Managed Hotels and franchise revenue on the Franchised Hotels. Effective September 30, 1998, A.F. Petrocelli was appointed to the position of Chairman and CEO replacing David Simon. Mr. Petrocelli had previously served on Prime's Board of Directors since 1992, and is also Chairman and CEO of United Capital Corp. (ASE:AFP), a diversified real estate and manufacturing company. On October 23, 1998, Mr. Petrocelli was also appointed President of Prime, replacing John Elwood, who resigned from the Company. The Company's strategy is to develop proprietary brands in growing market segments. The Company seeks to further expand its brands through franchising which commenced in 1998. Through the development of its proprietary brands, the Company has positioned itself to generate additional revenues with minimal capital investment. The Company's growth focuses on the new construction of AmeriSuites hotels both directly by the Company and by franchisees. Due to the uncertainty in the capital markets, during the third quarter Prime reduced its hotel development to levels which can be funded by internal cash sources. In 1998, earnings from recurring operations increased by 33.3% over 1997 levels. The earnings gains were the result of strong growth in revenue per available room ("REVPAR") and profit margins at comparable Owned Hotels and significant new AmeriSuites unit growth. For the comparable Owned Hotels, REVPAR increased by 5.2% in 1998 over 1997 levels. The combination of strong REVPAR increases and effective expense controls resulted in increases in gross operating profits at comparable Owned Hotels of 7.0%. The earnings growth was also favorably affected by the addition of 45 new AmeriSuites hotels and 35 new HomeGate hotels since January 1, 1997. The Company's EBITDA increased by $23.3 million, or 18.6%, from $125.0 million in 1997 to $148.3 million in 1998, and Hotel EBITDA increased by $11.6 million, or 8.9%, from $130.4 million in 1997 to $142.0 million in 1998. 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 four segments of the industry: the upscale all-suites segment, under the Company's proprietary AmeriSuites brand; the mid-price extended-stay segment under the Company's proprietary HomeGate Studios & Suites brand; the upscale full-service segment, under major national franchises; and the mid-price limited-service segment, primarily under the Company's proprietary 18 20 Wellesley Inns brand. The following table illustrates the Hotel EBITDA contribution from each segment (in thousands):
1997 1998 ---------------------- ---------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL -------- ---------- -------- ---------- All-suites...................... $ 52,377 39.3% $ 71,658 50.5% Full-service.................... 53,861 40.5 39,111 27.5 Limited-service................. 24,120 18.1 20,875 14.7 Extended-Stay................... 2,771 2.1 10,350 7.3 -------- ----- -------- ----- Total................. $133,129 100.0% $141,994 100.0% ======== ===== ======== =====
Hotel EBITDA for 1998 reflects the shifting mix in the Company's hotel portfolio toward its proprietary brand AmeriSuites and the sale/leaseback of eight full-service hotels. Based on the Company's development plans, Prime expects the relative contribution from its all-suite AmeriSuites hotels and extended-stay HomeGate hotels to continue to increase in 1999. EBITDA and Hotel EBITDA are not measures of financial performance under generally accepted accounting principles and should not be considered as alternatives to net income as an indicator of the Company's operating performance or as alternatives to cash flows as a measure of liquidity. 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. 19 21 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 The following table presents the components of operating income, operating expense, margins and other data for the Company and the Company's comparable Owned Hotels for the years ended December 31, 1998 and 1997. The results of hotels divested during 1997 and 1998 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) ------------------- ------------------- 1997 1998 1997 1998 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) Income Statement Data: Revenues: Lodging............................................. $272,267 $393,988 $153,379 $160,715 Food and beverage................................... 41,968 53,391 22,332 24,746 Management, franchise and other fees................ 9,708 13,362 Interest on mortgages and notes receivable.......... 6,097 4,664 Business interruption insurance..................... 10,921 4,000 -------- -------- Total revenues.............................. 340,961 469,405 Direct hotel operating expenses: Lodging............................................. 68,072 98,400 38,574 40,309 Food and beverage................................... 31,036 39,771 17,289 18,900 Selling and general................................. 70,225 99,361 38,860 39,573 Occupancy and other operating......................... 23,669 57,067 General and administrative............................ 22,923 26,509 Depreciation and amortization......................... 34,198 41,975 Other charges......................................... -- 17,361 Operating income...................................... 90,838 88,961 Operating expense margins: Direct hotel operating expenses: Lodging, as a percentage of lodging revenue......... 25.0% 25.0% 25.1% 25.1% Food and beverage, as a percentage of food and beverage revenue................................. 74.0% 74.5% 77.4% 76.4% Selling and general, as a percentage of lodging and food and beverage revenue........................ 22.3% 22.2% 22.1% 21.3% Occupancy and other operating, as a percentage of lodging and food and beverage revenue............... 7.5% 12.8% General and administrative, as a percentage of total revenue............................................. 6.7% 5.6% Other Data: Occupancy............................................. 67.6% 69.7% 70.9% 69.8% ADR................................................... $ 74.72 $ 70.22 $ 73.68 $ 78.70 REVPAR................................................ $ 50.53 $ 48.95 $ 52.20 $ 54.91 Gross operating profit................................ $140,831 $209,847 $ 80,988 $ 86,679
- --------------- (1) For purposes of this discussion of results of operations, comparable Owned Hotels refers to the 60 Owned Hotels that were owned by the Company during all of 1997 and 1998. 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 20 22 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 in 1998 from the Company's comparable Owned Hotels, by industry segment.
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 % ------ ------- --- AMERISUITES Occupancy........................................ 67.5% 68.4% ADR.............................................. $74.77 $ 78.03 REVPAR........................................... $50.44 $ 53.39 5.9% 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........................................ 70.9% 69.8% ADR.............................................. $73.68 $ 78.70 REVPAR........................................... $52.20 $ 54.91 5.2%
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 6.8%, offset by occupancy declines of 1.1 percentage points in 1998. 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. Food and beverage revenues for comparable Owned Hotels increased by $2.4 million, or 10.8%, primarily due to increased banquet business. 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. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues also remained constant at 25.1% in 1997 and 1998. 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 which reopened in 21 23 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. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue decreased from 77.4% in 1997 to 76.4% in 1998. The decrease was primarily due to a shift in the mix of revenues to higher margin banquet revenues. 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. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues also decreased from 22.1% in 1997 to 21.3% 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, Inc. ("Equity Inns") and 8 hotels to MeriStar Hospitality Corporation ("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 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 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. 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. The pretax extraordinary gain of $123,000 in 1997 relates to the retirement of debt. 22 24 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 The following table presents the components of operating income, operating expense margins and other data for the Company and the Company's comparable Owned Hotels for the years ended December 31, 1997 and 1996. The results of hotels divested during 1996 and 1997 are not material to an understanding of the results of the Company's operations in such periods and, therefore, are not separately discussed.
COMPARABLE OWNED TOTAL HOTELS(1) -------------------- -------------------- 1996 1997 1996 1997 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT ADR AND REVPAR) Income Statement Data: Revenues: Lodging....................................... $201,179 $272,267 $142,870 $155,426 Food and beverage............................. 41,437 41,968 31,461 31,628 Management and other fees..................... 6,729 6,424 Interest on mortgages and notes receivable.... 6,090 6,097 Business interruption insurance............... 13,562 10,921 Rental and other.............................. 2,103 3,284 -------- -------- Total revenues........................ 271,100 340,961 Direct hotel operating expenses: Lodging....................................... 52,224 68,072 36,255 38,947 Food and beverage............................. 32,053 31,036 23,335 23,412 Selling and general........................... 62,580 70,225 41,424 42,301 Occupancy and other operating................... 17,071 23,669 General and administrative...................... 18,764 22,923 Depreciation and amortization................... 23,976 34,198 Operating income................................ 64,432 90,838 Operating expense margins: Direct hotel operating expenses: Lodging, as a percentage of lodging revenue... 26.0% 25.0% 25.4% 25.1% Food and beverage, as a percentage of food and beverage revenue........................... 77.4% 74.0% 74.2% 74.0% Selling and general, as a percentage of lodging and food and beverage revenue...... 25.8% 22.3% 23.8% 22.6% Occupancy and other operating, as a percentage of lodging and food and beverage revenue...... 7.0% 7.5% General and administrative, as a percentage of total revenue................................. 6.9% 6.7% Other Data: Occupancy....................................... 69.6% 67.6% 71.1% 72.5% ADR............................................. $ 71.66 $ 74.72 $ 73.43 $ 78.50 REVPAR.......................................... $ 49.90 $ 50.53 $ 52.21 $ 56.92 Gross operating profit.......................... $ 89,409 $140,831 $ 73,317 $ 82,394
- --------------- (1) For purposes of this discussion of results of operations, comparable Owned Hotels refers to the 51 Owned Hotels that were owned by the Company during all of 1996 and 1997. \ Lodging revenues, which include room revenues and other related revenues such as telephone and vending, increased by $71.1 million, or 35.3%, from $201.2 million in 1996 to $272.3 million in 1997. The increase was primarily due to incremental revenues of $56.6 million from the 44 AmeriSuites hotels, added during 1996 and 23 25 1997, growth in revenues at comparable Owned Hotels of $12.6 million and incremental revenues of $6.1 million from new HomeGate hotels. These increases were partially offset by a decrease in revenue at the Frenchman's Reef of $7.5 million attributable to hurricane related damage. The following table illustrates the REVPAR growth in 1997 from the Company's owned Hotels, by industry segment.
YEAR ENDED DECEMBER 31, ------------------------ 1996 1997 % ------ ------ ---- AMERISUITES Occupancy........................................ 70.2% 71.6% ADR.............................................. $71.06 $73.91 REVPAR........................................... $49.89 $52.93 6.1% FULL-SERVICE Occupancy........................................ 69.3% 72.0% ADR.............................................. $85.40 $92.20 REVPAR........................................... $59.17 $66.41 12.2% WELLESLEY INNS Occupancy........................................ 77.3% 75.7% ADR.............................................. $54.30 $58.01 REVPAR........................................... $41.98 $43.93 4.7% TOTAL Occupancy........................................ 71.1% 72.5% ADR.............................................. $73.43 $78.50 REVPAR........................................... $52.21 $56.92 9.0%
The Company achieved solid revenue growth in all of its industry segments. The REVPAR increases reflect the results of several repositionings and continued favorable industry trends in the full-service segment, growing recognition of AmeriSuites as a leading brand in the fast-growing all-suites segment and the reimaging program at the Wellesley Inns. The AmeriSuites results were achieved despite a difficult comparison to the prior year which included significant revenues attributable to the Olympics. Excluding Olympic-related markets, AmeriSuites REVPAR grew by 9.1%. The improvements in REVPAR at comparable Owned Hotels were generated by increases in ADR, which rose by 6.9%, and occupancy gains of 1.4 percentage points, in 1997. Food and beverage revenues increased by $531,000, or 1.3%, from $41.4 million in 1996 to $42.0 million in 1997 due to the net addition of two new full-service hotels and growth at comparable outlets. Food and beverage revenues for comparable Owned Hotels increased by $167,000, or 0.5%, due to increased banquet business offset by the impact of renovations at several outlets. The increases were partially offset by a decrease of $3.0 million at the Frenchman's Reef attributable to the hurricane damage. Management and other fees consist of base and incentive fees earned under management agreements, fees for additional services rendered to Managed Hotels and sales commissions earned by the Company's national sales group. Management and other fees decreased by $305,000, or 4.5%, from $6.7 million in 1996 to $6.4 million in 1997. The decrease was primarily due to the conversions of Managed Hotels into Owned Hotels partially offset by increased base and incentive management fees associated with the remaining Managed Hotels. Interest on mortgages and notes receivable primarily relate to mortgages secured by certain Managed Hotels. Interest on mortgages and notes receivable were even with 1996 levels at $6.1 million. Business interruption insurance revenue is based on the settlement of the Company's claim related to the hurricane damage at the Frenchmen's Reef caused by Hurricane Marilyn in September 1995 and Hurricane Bertha in July 1996. Business interruption insurance revenue decreased by $2.7 million, or 19.5%, from $13.6 million in 1996 to $10.9 million in 1997 due to higher operating losses in 1996. 24 26 Direct lodging expenses increased by $15.9 million, or 30.3%, from $52.2 million in 1996 to $68.1 million in 1997, due primarily to the addition of new hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased from 26.0% in 1996 to 25.0% in 1997. This decrease was primarily due to increases in ADR which had minimal corresponding increases in expenses. For comparable Owned Hotels, direct lodging expenses as a percentage of lodging revenues decreased from 25.4% in 1996 to 25.1% in 1997. Direct food and beverage expenses decreased by $1.0 million, or 3.2%, from $32.0 million in 1996 to $31.0 million in 1997, primarily due to the decrease in food and beverage revenue at the Frenchman's Reef attributable to hurricane damage. As a percentage of food and beverage revenues, direct food and beverage expenses decreased from 77.4% in 1996 to 74.0% in 1997. For comparable Owned Hotels, direct food and beverage expenses as a percentage of food and beverage revenue increased slightly from 74.2% in 1996 to 74.0% in 1997. The decreases were primarily due to a shift in the mix of revenues to higher margin banquet revenues. 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 $7.6 million, or 12.2%, from $62.6 million in 1996 to $70.2 million in 1997, 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 25.8% in 1996 to 22.3% in 1997. For comparable Owned Hotels, direct selling and general expenses as a percentage of revenues decreased from 23.8% in 1996 to 22.6% in 1997. The decreases were due to ADR improvements, effective cost controls and decreases in snow removal and other weather related costs. Occupancy and other operating expenses consist primarily of insurance, real estate and other taxes and rent expense. Occupancy and other operating expenses increased by $6.6 million, or 38.7%, from $17.1 million in 1996 to $23.8 million in 1997. As a percentage of hotel revenues, occupancy and other operating expenses increased from 7.0% in 1996 to 7.5% in 1997, primarily due to the rent associated with the new leased hotels. Occupancy and other operating expenses are expected to increase in 1998 due to the rent associated with the sale/leaseback of hotels to American General and Equity Inns. General and administrative expenses consist primarily of centralized management expenses such as operations management, sales and marketing, finance and hotel support services associated with operating both the Owned Hotels and Managed Hotels and general corporate expenses. General and administrative expenses increased by $4.1 million, or 22.2%, from $18.8 million in 1996 to $22.9 million in 1997, due to 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 6.9% in 1996 to 6.7% in 1997 due to operating leverage. Depreciation and amortization expense increased by $10.2 million, or 42.6%, from $24.0 million in 1996 to $34.2 million in 1997, due to the impact of new hotel properties and refurbishment efforts at several hotels. Interest expense increased by $3.8 million, or 16.2%, from $23.1 million in 1996 to $26.9 million in 1997, primarily due to the issuance of the $200 million Senior Subordinated Notes in March 1997 offset by capitalized interest related to new AmeriSuites and HomeGate construction. The Company capitalized $7.7 million and $18.2 million of interest in 1996 and 1997, respectively. Investment income decreased by $1.9 million, or 36.8%, from $5.1 million in 1996 to $3.2 million in 1997 primarily due to higher average cash balances generated by the new borrowing. Other income consists of items which are not part of the Company's recurring operations. For the year ended December 31, 1997, other income consisted of a net gains on property sales of $2.1 million. Other income for the year ended December 31, 1996 consisted primarily of gains on settlements of notes receivable of $1.8 million and gains on property sales of $2.5 million. Pretax extraordinary gains of $337,000 and $123,000 for 1996 and 1997 relate to the retirement of debt. 25 27 LIQUIDITY AND CAPITAL RESOURCES Prime's capital requirements have focused on the expansion of its proprietary AmeriSuites and HomeGates brands through new construction. As of February 28, 1999, Prime had 94 AmeriSuites and 38 HomeGates in operation with another three AmeriSuites and six HomeGates under construction. In September 1998, Prime announced plans to reduce its hotel development from prior levels. The Company's previous development plans were to be financed primarily through the sale and leaseback of hotels to REITs. Recent changes in the capital markets have affected the ability of hotel REITs such as MeriStar and Equity Inns to raise both debt and equity capital to finance acquisitions. Due to this uncertainty regarding hotel divestitures, Prime is developing hotels only to the extent of funding being available from internal cash sources. Under its revised plans, Prime has completed the majority of its current development program and has nine hotels remaining to be completed. Prime also anticipates commencing construction on six land sites it currently owns in mid-1999. Prime believes that borrowing availability under the Company's Revolving Credit Facility and internally generated cash flow will be sufficient to fund its revised development plan. At December 31, 1998, the Company had cash, cash equivalents and current marketable securities of $25.0 million. In addition, at December 31, 1998, the Company had $35.0 million available under the Revolving Credit Facility. The Company's major sources of cash for 1998 were gross borrowings primarily under the Revolving Credit Facility of $203.6 million, net proceeds from the sales of hotels of $223.8 million and cash flow from operations of $82.2 million. The Company's major uses of cash during the period were capital expenditures of $430.5 million relating primarily to the development of new hotels and debt repayments of $69.9 million. Cash flow from operations was positively impacted by the utilization of net operating loss carryforwards ("NOLs") and other tax basis differences of $4.2 million in 1997 and $5.0 million in 1998, respectively. At December 31, 1998, the Company had federal NOLs relating primarily to its predecessor, Prime Motor Inns, Inc. ("PMI"), of approximately $69.9 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 significant hotel real estate and to invest the proceeds in the growth of its proprietary brands. Primarily, through sale/leasebacks to REITs, the Company generated approximately $223.8 million in cash in 1998 which was used to finance hotel development. Due to the uncertainty in the real estate capital markets, the Company's business plan does not depend upon any proceeds from asset sales in 1999. In January 1998, the Company completed the sale/leaseback of eight full-service hotels to MeriStar, formally known as American General Hospitality, Inc., for $138.4 million. The purchase price consisted of $114.4 million in cash, $10.2 million in assumed debt and $13.8 million in MeriStar limited partnership operating units. The Company is operating the hotels under a lease agreement which has a term of 10 years. The transaction generated a net gain of approximately $65.0 million which will be recognized as a reduction of rent expense over the life of the lease. The Company also 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 million contract termination fee in February 1999. In June 1998, the Company sold nine AmeriSuites hotels to Equity Inns, Inc. for $97.0 million in cash. The Company is operating the hotels under a lease agreement between Equity Inns and a subsidiary of the Company for a ten-year term with certain renewal options. The transaction generated a net gain of $15.2 million, which will be recognized as a reduction of rent expense over the life of the lease. The Company is also generating franchise fees under a ten-year franchise agreement. The sale is part of an ongoing strategic relationship between the Company and Equity Inns whereby Equity Inns has the right of first refusal on the sale of the first 20 AmeriSuites hotels per year. In December 1998, the Company sold an AmeriSuites hotel for $10.8 million. In February 1999, the Company sold another AmeriSuites hotel for $9.7 million. Under both transactions, the Company will receive 26 28 franchise fees under ten year franchise agreements. The Company utilized the proceeds to repurchase its common stock. See Uses of Capital. The Company intends to continue to reduce its real estate holdings and will utilize the proceeds for the repurchase of stock, the reduction of debt and/or the development of its brands. 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. 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. As of December 31, 1998, the Company had outstanding borrowings of $165.0 million under the facility and further availability of $35.0 million. On September 30, 1998, the Company's Revolving Credit Facility was amended to provide for the elimination of a market capitalization test, a revision of the key man employee covenant and limitations on hotel development and stock repurchases. Pursuant to such amendment, development of new hotels is limited to the existing development plan plus $50 million through 1999. Stock repurchases are limited to an aggregate of $50 million in 1999 to the extent of new cash sources (i.e asset sales, equity offerings). On March 12, 1998, the Company settled its insurance claim for $16.4 million related to damage at the Frenchman's Reef caused by Hurricane Bertha in July 1996. The Company had previously received $2.5 million in 1997 and received the remaining amount, net of deductibles, in April 1998. Uses of Capital. The Company's capital spending is focused on completing the development of its AmeriSuites and HomeGate hotels currently under construction. For 1998, the Company spent $235.4 million on new construction of AmeriSuites and $166.7 million on new construction of HomeGates. The Company expects to spend approximately $65 million to complete its current construction pipeline in 1999 and an additional $30 million on new construction to begin in mid- 1999 on six land sites it owns (amounts include capitalized interest). These amounts will be funded by borrowings under the Revolving Credit Facility and internally generated cash flow. For 1998, the Company spent approximately $26.2 million on capital improvements at its Owned Hotels of which approximately $11.8 million related to the refurbishment of the Frenchman's Reef. Under its stock repurchase program, in 1998 the Company purchased 1.4 million shares of its common stock at an average price of $17.78 per share. Under the terms of the Revolving Credit Facility the Company may purchase additional shares in an aggregate amount not to exceed $50 million in 1999. As of March 15, 1999, the Company had purchased 2.5 million shares of stock in 1999 at an average price of $10.00 per share. On April 17, 1998, the Company's $86.3 million 7% Convertible Notes due 2002 were converted into 7.2 million shares of common stock of the Company at a conversion price of $12 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, 1998, the Company had advances of approximately $217.4 million to such third party which advances are classified as property, equipment and leasehold improvements. Year 2000 Readiness. The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This is necessary because certain computer programs have been written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a material system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process normal business transactions. In addition, many of the Company's vendors and service providers are also faced with similar issues related to the year 2000. In connection with the Company program related to year 2000 readiness, the Company's management has assessed the Company's information systems, including its hardware and software systems and embedded systems contained in the Company's hotels and corporate headquarters. Based on the findings of this 27 29 assessment, the Company has commenced a plan to upgrade or replace the Company's hardware or software for year 2000 readiness as well as to assess the year 2000 readiness of the Company's vendors and service providers. In addition, the Company's management is currently formulating contingency plans, which, in the event that the Company is unable to fully achieve year 2000 readiness in a timely manner, or any of the Company's vendors or service providers fails to achieve year 2000 readiness, may be implemented to minimize the risks of interruptions of the Company's business. Based on its assessment to date of the year 2000 readiness of the Company's vendors, service providers and other third parties on which the Company relies for business operations, the Company believes that its principal vendors, service providers and other third parties are taking action for year 2000 compliance. However, the Company has limited ability to test and control such third parties' year 2000 readiness, and the Company cannot provide assurance that failure of such third parties to address the year 2000 issue will not cause an interruption of the Company's business. As of December 31, 1998, the Company believes that approximately 50% of its information systems are year 2000 ready. The Company estimates that the total costs associated with implementing year 2000 readiness since the project's commencement will be in the range of $1 million. The Company anticipates that it will finance the cost of its year 2000 remediation using its existing sources of liquidity. The Company expects to complete its year 2000 remediation by October 1999. However, the Company's ability to execute its plan in a timely manner may be adversely affected by a variety of factors, some of which are beyond the Company's control including turnover of key employees, availability and continuity of consultants and the potential for unforeseen implementation problems. The Company's business could be interrupted if the year 2000 plan is not implemented in a timely manner, if the Company's vendors, service providers or other third parties are not year 2000 ready or if the Company's contingency plans are not successful. Based on currently available information, and although no assurance can be given, the Company does not believe that any such interruptions are likely to have a material adverse effect on the Company's results of operations, liquidity or financial condition. 28 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This table presents descriptions of the financial instruments and derivative instruments that are held by the Company at December 31, 1998 and which are sensitive to changes in interest rates. The Company has entered into a derivative financial instrument transaction in order to manage or reduce market risk. 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.
FAIR 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- LIABILITIES Fixed Rate............ $1,333.. $1,135 $ 1,173 $ 7,378 $1,166 $339,754 $351,939 $360,888 Average Interest Rate................ 9.51% 9.52% 9.53% 9.63% 9.56% 9.34% 9.35% Average Rate.......... $14,429 $4,500 $44,592 $145,304 $6,848 $ 30,181 $245,855 $245,855 Average Interest Rate................ 7.55% 7.42% 7.42% 7.81% 8.31% 7.67% 7.71% INTEREST-RATE DERIVATIVES Variable to fixed: Notional amount....... $40,000 $ -- $ -- $ -- $ -- $ -- $ -- $ (397) Average Pay Rate...... 6.18% -- -- -- -- -- -- Average Receive Rate................ 5.06% -- -- -- -- -- --
In October 1995, the Company entered into an interest rate protection agreement with a major financial institution which fixes interest rates on 40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.18% and receives a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement expires in October 1999 and has been reflected in the table above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements included in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 29 31 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....................... 55 President, Chief Executive Officer and Chairman of the Board of Directors Lawrence N. Friedland(1).............. 76 Director Howard M. Lorber(1)................... 50 Director Herbert Lust, II(1)................... 72 Director Jack H. Nusbaum....................... 58 Director Paul H. Hower......................... 64 Executive Vice President Joseph Bernadino...................... 52 Senior Vice President, Secretary and General Counsel Ethan Kramer.......................... 41 Senior Vice President/Development John H. Leavitt....................... 46 Senior Vice President/Sales and Marketing Terry P. O'Leary...................... 43 Senior Vice President/Franchising Douglas W. Vicari..................... 39 Senior Vice President and Chief Financial Officer Richard T. Szymanski.................. 41 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. 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. 30 32 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 Pioneer Companies, Inc., W.R. Berkley Corporation, Strategic Distribution, Inc., The Topps Company, Inc. and Fine Host Corporation. Paul H. Hower has been an Executive Vice President of the Company since June 1993. Mr. Hower was President of Integrity Hospitality Services prior to June 1993. Joseph Bernadino has been Senior Vice President, Secretary and General Counsel of the Company since 1992. Ethan Kramer has been a Senior Vice President-Development of the Company since 1998, a Vice President of Development from 1996 to 1997, and a director of Development from 1995 to 1996. Mr. Kramer was a Senior Vice President of Atterbury & Associates, Inc. from 1994 to 1995. 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 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. Douglas W. Vicari 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. Richard T. Szymanski became Vice President/Finance of the Company in 1998. Prior to that he had been a Vice President and Corporate Controller of the Company for more than five years. ITEM 11. EXECUTIVE COMPENSATION There are incorporated in this Item 11 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Executive Compensation," "Compensation Pursuant to Plans," "Other Compensation," "Compensation of Directors," and "Termination of Employment and Change of Control Agreements". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There are incorporated in this Item 12 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Principal Shareholders" and "Security Ownership of Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are incorporated in this Item 13 by reference those portions of the Company's definitive Proxy Statement, which the Company intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the caption "Certain Relationships and Related Transactions." 31 33 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 reference. (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. 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. 32 34 (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. 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. (g) Change of Control Agreement, dated May 14, 1998, between Paul H. Hower and the Company. 33 35 (h) Change of Control Agreement, dated May 14, 1998, between John H. Leavitt and the Company. (i) Change of Control Agreement, dated May 14, 1998, between Joseph Bernadino and the Company. (j) Change of Control Agreement, dated May 14, 1998, between Richard T. Szymanski and the Company. (k) Change of Control Agreement, dated May 14, 1998, between Douglas W. Vicari and the Company. (l) Change of Control Agreement, dated May 14, 1998, between Terry P. O'Leary and the Company. (m) Change of Control Agreement, dated May 14, 1998 between Ethan Kramer and the Company. (n) Employment Agreement, dated September 14, 1998, between Attilio F. Petrocelli and the Company. (o) Change of Control Agreement, dated September 14, 1998, between Atillio F. Petrocelli and the Company. (21) Subsidiaries of the Company are as follows:
JURISDICTION OF NAME INCORPORATION - ---- --------------- AmeriSuites Franchising, Inc.......................... Delaware Caldwell Holding Corp................................. Delaware Clifton Holding Corp.................................. Delaware Dynamic Marketing Group, Inc.......................... Delaware Fairfield Holding Corp................................ Delaware Fairfield-Meridian Claims Service, Inc................ Delaware HomeGate Franchising, Inc............................. Delaware HomeGate Hospitality, Inc............................. Delaware KSA Management, Inc................................... Kansas Mahwah Holding Corp................................... Delaware Market Segments, Incorporated......................... Delaware Prime-American Realty Corp............................ Delaware Prime Hospitality Franchising, Inc.................... Delaware Prime-O-Lene, Inc..................................... New Jersey Republic Motor Inns, Inc.............................. Virginia Secaucus Holding Corp................................. Delaware VPS, Inc.............................................. Delaware Wellesley Inns Franchising, Inc....................... Delaware
(23) Consent of Arthur Andersen LLP (27) Financial data schedule. Certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries have not been filed in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to finish a copy of such instruments to the Commission upon request. 34 36 PRIME HOSPITALITY CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (ITEM 14(a))
PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Financial Statements: Balance Sheets at December 31, 1997 and 1998.............. F-3 Statements of Income for the Years Ended December 31, 1996, 1997 and 1998.................................... F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998....................... F-5 Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998.................................... 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 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Prime Hospitality Corp.: We have audited the accompanying consolidated balance sheets of Prime Hospitality Corp. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 1997 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prime Hospitality Corp. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey February 4, 1999 F-2 38 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
1997 1998 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 5,013 $ 12,534 Marketable securities available for sale.................... 8,697 12,460 Accounts receivable, net of reserves of $415 and $732 in 1997 and 1998, respectively............................... 16,318 20,816 Current portion of mortgages and notes receivable........... 2,271 797 Other current assets........................................ 28,780 28,791 ---------- ---------- Total current assets.............................. 61,079 75,398 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization................. 1,079,591 1,281,378 Mortgages and notes receivable, net of current portion...... 19,698 14,688 Other assets................................................ 36,298 36,934 ---------- ---------- Total Assets...................................... $1,196,666 $1,408,398 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of debt..................................... $ 3,871 $ 15,762 Other current liabilities................................... 76,921 82,767 ---------- ---------- Total current liabilities......................... 80,792 98,529 Long-term debt, net of current portion...................... 554,500 582,031 Other liabilities........................................... 18,253 6,240 Deferred income, net of current portion..................... 18,708 80,553 ---------- ---------- Total liabilities................................. 672,253 767,353 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; 47,233,011 and 55,202,253 shares issued and outstanding in 1997 and 1998, respectively................ 472 552 Capital in excess of par value.............................. 419,242 511,981 Retained earnings........................................... 105,737 159,584 Accumulated other comprehensive loss, net of taxes.......... -- (4,993) Treasury stock, at cost (50,039 and 1,470,439 shares in 1997 and 1998, respectively)................................... (1,038) (26,079) Total stockholders' equity........................ 524,413 641,045 ---------- ---------- Total Liabilities and Stockholders' Equity........ $1,196,666 $1,408,398 ========== ==========
See Accompanying Notes to Consolidated Financial Statements. F-3 39 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Revenues: Lodging.................................................. $201,179 $272,267 $393,988 Food and beverage........................................ 41,437 41,968 53,391 Management, franchise and other fees..................... 8,832 9,708 13,362 Interest on mortgages and notes receivable............... 6,090 6,097 4,664 Business interruption insurance.......................... 13,562 10,921 4,000 -------- -------- -------- Total revenues................................... 271,100 340,961 469,405 -------- -------- -------- Costs and expenses: Direct hotel operating expenses: Lodging............................................... 52,224 68,072 98,400 Food and beverage..................................... 32,053 31,036 39,771 Selling and general................................... 62,580 70,225 99,361 Occupancy and other operating.............................. 17,071 23,669 57,067 General and administrative................................. 18,764 22,923 26,509 Depreciation and amortization.............................. 23,976 34,198 41,975 Other charges.............................................. -- -- 17,361 -------- -------- -------- Total costs and expenses......................... 206,668 250,123 380,444 -------- -------- -------- Operating income........................................... 64,432 90,838 88,961 Investment income.......................................... 5,061 3,197 3,486 Interest expense........................................... (23,149) (26,893) (23,914) Other income............................................... 4,313 2,077 18,132 Merger costs............................................... -- (18,555) -- -------- -------- -------- Income before income taxes and extraordinary items......... 50,657 50,664 86,665 Provision for income taxes................................. 20,609 24,808 32,818 -------- -------- -------- Income before extraordinary items.......................... 30,048 25,856 53,847 Extraordinary items -- gains on discharges of indebtedness (net of income taxes of $135 and $48 in 1996 and 1997, respectively)............................................ 202 75 -- -------- -------- -------- Net income................................................. $ 30,250 $ 25,931 $ 53,847 ======== ======== ======== Basic earnings per Common Share: Income before extraordinary items.......................... $ .74 $ .56 $ 1.04 Extraordinary items........................................ -- -- -- -------- -------- -------- Net income per common share................................ $ .74 $ .56 $ 1.04 ======== ======== ======== Diluted earnings per Common Share: Income before extraordinary items.......................... $ .68 $ .54 $ 1.00 Extraordinary items........................................ -- -- -- -------- -------- -------- Net income per common share................................ $ .68 $ .54 $ 1.00 ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-4 40 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN ACCUMULATED COMMON STOCK EXCESS OF OTHER ------------------- PAR RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE SHARES AMOUNT VALUE EARNINGS LOSS STOCK TOTAL INCOME ---------- ------ ---------- --------- ------------- -------- -------- ------------- Balance December 31, 1995.... 31,004,499 $310 $183,050 $ 49,556 $ -- $ -- $232,916 $ -- Net income................... -- -- -- 30,250 -- -- 30,250 30,250 Utilization of net operating loss carryforwards......... -- -- 10,590 -- -- -- 10,590 -- Amortization of pre-fresh start tax basis differences................ -- -- 1,243 -- -- -- 1,243 -- Proceeds from issuance of common stock............... 14,763,000 148 206,827 -- -- -- 206,975 -- Proceeds and tax benefits from exercise of stock options.................... 148,492 1 1,521 -- -- -- 1,522 -- Proceeds from exercise of stock warrants............. 401,926 4 1,084 -- -- -- 1,088 -- Comprehensive income......... -- -- -- -- -- -- -- $30,250 ---------- ---- -------- -------- ------- -------- -------- ======= Balance December 31, 1996.... 46,317,917 463 404,315 79,806 -- -- 484,584 $ -- Net income................... -- -- -- 25,931 -- -- 25,931 25,931 Utilization of net operating loss carryforwards......... -- -- 4,141 -- -- -- 4,141 -- Amortization of pre-fresh start tax basis differences................ -- -- 102 -- -- -- 102 -- Proceeds and tax benefits from exercise of stock options.................... 576,908 6 5,771 -- -- -- 5,777 -- Proceeds from exercise of stock warrants............. 338,186 3 913 -- -- -- 916 -- Treasury stock purchases..... (50,039) -- -- -- -- (1,038) (1,038) -- Contribution from shareholder................ -- -- 4,000 -- -- -- 4,000 -- Comprehensive income......... -- -- -- -- -- -- -- $25,931 ---------- ---- -------- -------- ------- -------- -------- ======= Balance December 31, 1997.... 47,182,972 472 419,242 105,737 -- (1,038) 524,413 $ -- Net income................... -- -- -- 53,847 -- -- 53,847 53,847 Utilization of net operating loss carryforwards......... -- -- 3,956 -- -- -- 3,956 -- Amortization of pre-fresh start tax basis differences................ -- -- 1,005 -- -- -- 1,005 -- Proceeds and tax benefits from exercise of stock options.................... 146,167 2 1,906 -- -- -- 1,908 -- Proceeds from exercise of stock warrants............. 637,524 6 1,712 -- -- -- 1,718 -- Unrealized loss on marketable securities available for sale....................... -- -- -- -- (4,993) -- (4,993) (4,993) Treasury stock purchases..... (1,420,400) -- -- -- -- (25,041) (25,041) -- Conversion of long-term debt....................... 7,185,551 72 84,160 -- -- -- 84,232 -- Comprehensive income......... -- -- -- -- -- -- -- $48,854 ---------- ---- -------- -------- ------- -------- -------- ======= Balance December 31, 1998.... 53,731,814 $552 $511,981 $159,584 $(4,993) $(26,079) $641,045 ========== ==== ======== ======== ======= ======== ========
See Accompanying Notes to Consolidated Financial Statements. F-5 41 PRIME HOSPITALITY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 1996 1997 1998 --------- --------- --------- Cash flows from operating activities: Net income................................................ $ 30,250 $ 25,931 $ 53,847 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 23,976 34,198 41,975 Valuation adjustment on properties held for sale........ -- -- 10,000 Amortization of deferred financing costs................ 2,268 2,874 3,109 Utilization of net operating loss carryforwards......... 10,590 4,141 3,956 Gain on sale of assets.................................. (6,123) (2,077) (18,132) Gain on discharge of indebtedness....................... (337) (123) -- Amortization of deferred gain........................... -- (150) (9,421) Amortization of pre-fresh start tax basis differences... 1,243 102 1,005 Deferred income taxes................................... 1,386 2,479 (4,259) 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....................................... (221) (3,423) (4,498) Other current assets...................................... (5,695) (21,079) (1,554) Other liabilities......................................... 8,841 27,508 5,183 --------- --------- --------- Net cash provided by operating activities............... 66,178 74,381 82,211 Cash flows from investing activities: Net proceeds from mortgages and notes receivable.......... 8,933 3,543 26,320 Disbursements for mortgages and notes receivable.......... (2,700) (1,194) (1,541) Proceeds from sales of property, equipment and leasehold............................................... 12,962 100,820 223,773 Purchases of property, equipment and leasehold improvements............................................ (134,266) (107,868) (28,473) Construction of new hotels................................ (184,566) (343,203) (402,066) (Increase) decrease in restricted cash.................... 5,377 3,596 (7,012) Proceeds from insurance settlement........................ 1,500 2,500 3,782 Proceeds from sales of marketable securities.............. 15,023 238 1,906 Purchase of marketable securities......................... -- -- (350) Other..................................................... 13 (1,597) (3,298) --------- --------- --------- Net cash used in investing activities................... (277,724) (343,165) (186,959) Cash flows from financing activities: Net proceeds from issuance of debt........................ 184,705 390,769 203,552 Payments of debt.......................................... (184,803) (170,100) (69,870) Proceeds from the exercise of stock options and warrants................................................ 2,609 6,693 3,628 Proceeds from issuance of common stock.................... 206,975 -- -- Purchase of treasury stock................................ -- (1,038) (25,041) --------- --------- --------- Net cash provided by financing activities............... 209,486 226,324 112,269 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ (2,060) (42,460) 7,521 Cash and cash equivalents at beginning of period............ 49,533 47,473 5,013 --------- --------- --------- Cash and cash equivalents at end of period.................. $ 47,473 $ 5,013 $ 12,534 ========= ========= =========
See Accompanying Notes to Consolidated Financial Statements. F-6 42 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITIES The Company is an owner, manager and franchisor of hotels throughout the United States and the U.S. Virgin Islands. The Company operates three proprietary brands, AmeriSuites (all-suites), HomeGate Studios & Suites (extended-stay) and Wellesley Inns (limited-service). Also within its portfolio are full-service hotels operated under franchise agreements with national hotel chains. As of February 28, 1999, the Company owned 153 hotels (the "Owned Hotels"), operated 28 hotels under lease agreements with REITs (the "Leased Hotels"), managed 10 hotels for third parties (the "Managed Hotels") and franchised two hotels which it does not operate (the "Franchised Hotels"). The Company has significant equity interests in the Owned Hotels and has economic interests limited to a percentage of hotel revenues (generally between 2.5% to 5.0%) generated by the Leased Hotels, Managed Hotels and Franchised Hotels. The Company consolidates the results of operations of its Owned Hotels and Leased Hotels and only records management fees (including incentive management fees) on the Managed Hotels and franchise revenue on the Franchised Hotels. BASIS OF PRESENTATION The Company emerged from the Chapter 11 reorganization proceeding of its predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"), which consummated its Plan of Reorganization ("the Plan") on July 31, 1992. Pursuant to the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting as of July 31, 1992. Under fresh start reporting, the reorganization value of the entity was allocated to the reorganized Company's assets on the basis of the purchase method of accounting. The reorganization value (the approximate fair value) of the assets of the emerging entity was determined by consideration of many factors and various valuation methods, including discounted cash flows and price/earnings and other applicable ratios believed by management to be representative of the Company's business and industry. Liabilities were recorded at face values, which approximated the present values of amounts to be paid, determined at appropriate interest rates. Under fresh start reporting, the consolidated balance sheet as of July 31, 1992 became the opening consolidated balance sheet of the emerging Company. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents are highly liquid, unrestricted investments with a maturity of three months or less when acquired. F-7 43 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements that the Company intends to continue to operate are stated at their fair market value as of July 31, 1992 plus the cost of acquisitions subsequent to that date less accumulated depreciation and amortization from August 1, 1992. Provision is made for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Properties identified for disposal are stated at their estimated net realizable value. The Company evaluates whether impairment has occurred at each of its properties based upon the future cash flows (undiscounted and before interest charges) as compared to the carrying value of the property. During 1998, the Company established a $10 million valuation reserve (which is included as part of other charges) related to seven non-prototype HomeGate hotels. As of December 31, 1998, the Company believes that no further impairment exists regarding these or any of its other properties. MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are reflected at their fair value as of July 31, 1992, adjusted for payments and other advances since that date. The amount of interest income recognized on mortgages and notes receivable is generally based on the stated interest rate and the carrying value of the notes. The Company has a number of subordinated or junior mortgages which remit payment based on hotel cash flow. Because there was substantial doubt that the Company would recover any value, these mortgages were assigned no value in the Company's consolidated financial statements when the Company adopted fresh-start reporting on July 31, 1992. Interest 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, 1998. OTHER ASSETS Other assets consist primarily of deferred issuance costs related to the Company's debt obligations. Deferred issuance costs are amortized over the respective terms of the loans using the effective interest method. 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 F-8 44 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 Non-capital expenditures incurred prior to opening new or renovated hotels, such as payroll and operating supplies, are deferred and expensed within one year after opening. Pre-opening costs charged to expense were $1.3 million, $3.3 million and $6.7 million for the years ended December 31, 1996, 1997 and 1998, respectively. As of December 31, 1998, $8.7 million of pre-opening costs are included in other current assets. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") which is required to be adopted in the first quarter of 1999. At that time, the Company will be required to record a cumulative effect of a change in accounting principle to write off any unamortized pre-opening costs that remain on the balance sheet at the date of adoption. Additionally, on a prospective basis subsequent to the adoption of this new standard, all future pre-opening costs will be expensed as incurred. The Company believes that the adoption of SOP 98-5 will not have a material effect on its financial condition or the results of its operations. DEFERRED INCOME Deferred income consists primarily 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 accounting treatment for this agreement is to accrue net interest to be received or to be paid as an adjustment to interest expense as incurred. 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, 1999. 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. F-9 45 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1996 and 1997 consolidated financial statements to conform them to the December 31, 1998 presentation. NOTE 2 -- 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. NOTE 3 -- HOTEL ACQUISITIONS/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 $138.4 million. The purchase price consisted of $114.4 million in cash, $10.2 million in assumed debt and $13.8 million in MeriStar limited partnership operating units. The Company is operating the hotels under a lease agreement which has a term of 10 years. The transaction generated a net gain of approximately $65.0 million which will be recognized as a reduction of rent expense over the life of the lease. As of December 31, 1998, $6.5 million of this gain had been amortized. The Company also 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 the contract, the Company received a $4.0 million contract termination fee in February 1999. On September 22, 1997, the Company entered into a 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. F-10 46 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1997, the Company sold 10 hotels to Equity Inns for $87.0 million, consisting of $78.3 million in cash and $8.7 million in limited partnership operating units. The Company will continue to operate the hotels under a lease agreement for a term of 10 years with certain renewal options. The Company is also generating franchise fees under a ten year franchise agreement. The sale generated a gain of $20.2 million which will be recognized over the life of the lease. As of December 31, 1998, $2.2 million of this gain had been amortized. In June 1998, the Company sold nine AmeriSuites hotels to Equity Inns for $97.0 million in cash. 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 will be recognized as a reduction of rent expense over the life of the lease. As of December 31, 1998, $800,000 of this gain had been amortized. ACQUISITIONS In February 1997, the Company acquired the Monroe Township, NJ Holiday Inn for approximately $11.2 million in cash. The acquisition was accounted for as a purchase and, accordingly, the revenues and expenses of the hotel have been included in reported results from the date of acquisition. If these operations had been included in the consolidated financial statements since the beginning of the year in which they occurred, reported results would not have been materially different. NOTE 4 -- CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of the following (in thousands):
DECEMBER 31, ----------------- 1997 1998 ------ ------- Cash...................................................... $2,981 $ 500 Commercial paper and other cash equivalents............... 2,032 12,034 ------ ------- Totals.......................................... $5,013 $12,534 ====== =======
NOTE 5 -- OTHER CURRENT ASSETS/LIABILITIES Other current assets consist of the following (in thousands):
DECEMBER 31, ------------------ 1997 1998 ------- ------- Hotel inventories........................................ $ 7,046 $12,083 Pre-opening expense...................................... 2,572 8,713 Accrued interest receivable.............................. 3,075 1,854 Business interruption insurance receivable............... 6,485 -- Prepaid expenses......................................... 2,067 3,350 Other.................................................... 7,535 2,791 ------- ------- Totals......................................... $28,780 $28,791 ======= =======
F-11 47 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other current liabilities consist of the following (in thousands):
DECEMBER 31, ------------------ 1997 1998 ------- ------- Accounts payable......................................... $19,696 $16,293 Construction payables.................................... 9,431 9,209 Interest payable......................................... 11,319 11,248 Accrued payroll and related benefits..................... 4,598 6,576 Accrued expenses......................................... 10,895 16,783 Accrued merger costs..................................... 5,114 -- Income taxes payable..................................... 3,055 5,613 Insurance reserves....................................... 8,277 5,298 Deferred income -- current portion....................... 2,093 10,322 Other.................................................... 2,443 1,425 ------- ------- Totals......................................... $76,921 $82,767 ======= =======
NOTE 6 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following (in thousands):
DECEMBER 31, ------------------------ YEARS OF 1997 1998 USEFUL LIFE ---------- ---------- ----------- Land and land leased to others(a)............... $ 188,531 $ 202,444 Hotels.......................................... 587,809 821,737 20 to 40 Furniture, fixtures and autos................... 118,262 148,602 3 to 10 Leasehold improvements.......................... 136,564 64,856 3 to 40 Construction in progress........................ 120,897 130,726 ---------- ---------- Sub-total..................................... 1,152,063 1,368,365 Less accumulated depreciation and amortization.................................. (72,472) (86,987) ---------- ---------- Totals................................ $1,079,591 $1,281,378 ========== ==========
- --------------- (a) Included in land at December 31, 1997 and 1998 was $65.5 million and $47.9 million, respectively, of land associated with hotels under construction. At December 31, 1998, the Company was the lessor of land and certain restaurant facilities in Company-owned hotels with an approximate aggregate book value of $11.2 million pursuant to noncancelable operating leases expiring on various dates through 2013. Minimum future rentals under such leases are $6.2 million, of which $4.0 million is scheduled to be received during the five-year period ending December 31, 2003. Depreciation and amortization expense on property, equipment and leasehold improvements was $22.2 million, $31.1 million and $36.7 million for the years ended December 31, 1996, 1997 and 1998, respectively. During the years ended December 31, 1996, 1997 and 1998, the Company capitalized $7.7 million, $18.2 million and $26.7 million, respectively, of interest related to borrowings used to finance hotel construction. F-12 48 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- MORTGAGES AND NOTES RECEIVABLE Mortgages and notes receivable are comprised of the following (in thousands):
DECEMBER 31, ------------------ 1997 1998 ------- ------- Properties operated by the Company(a).................... $19,195 $13,325 Other(b)................................................. 2,774 2,160 ------- ------- Total.......................................... 21,969 15,485 Less current portion..................................... (2,271) (797) ------- ------- Long-term portion........................................ $19,698 $14,688 ======= =======
- --------------- (a) At December 31, 1998, the Company is the holder of mortgage notes receivable with a book value of $10.5 million secured primarily by the operations of three hotels operated under lease agreements and mortgage notes receivable with a book value of $2.8 million secured by four hotel properties operated by the Company under management agreements. These notes bear interest at rates ranging from 8.0% to 13.5% and mature on various dates from 1999 through 2015. The mortgages were derived from the sales of hotel properties. The loans secured by hotel properties operated under management agreements include loans which pay interest and principal based upon available cash and include a participation in the excess cash flow of such hotel properties. In accordance with the adoption of fresh start reporting under SOP 90-7, no value was assigned to the cash flow notes as there was substantial doubt at the time of valuation that the Company would recover any of their value. As a result, interest income on these junior or cash flow mortgages is recognized when cash is received. During 1996, 1997 and 1998, the Company recognized $2.9 million, $3.3 million and $3.3 million, respectively, of interest income related to these mortgages. Future recognition of interest income on these mortgages is dependent primarily upon the net cash flow of the underlying hotels after debt service, which is senior to the Company's junior positions. (b) Other notes receivable currently bear interest at effective rates ranging from 4.0% to 10.0%, mature through 2011 and are secured primarily by hotel properties not currently managed by the Company. NOTE 8 -- DEBT Debt consists of the following (in thousands):
DECEMBER 31, -------------------- 1997 1998 -------- -------- 9 3/4% Senior Subordinated Notes(a).................... $200,000 $200,000 Revolving Credit Facility(b)........................... 35,000 165,000 9 1/4% First Mortgage Notes(c)......................... 120,000 120,000 7% Convertible Subordinated Notes(d)................... 86,250 -- Mortgages and other notes payable(e)................... 117,121 112,793 -------- -------- Total debt............................................. 558,371 597,793 Less current maturities................................ (3,871) (15,762) -------- -------- Long-Term debt, net of current portion................. $554,500 $582,031 ======== ========
- --------------- (a) In March 1997, the Company issued $200.0 million 9 3/4% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes") in reliance upon Rule 144A under the Securities Act of 1933, as amended. F-13 49 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Revolving Credit Facility is secured by certain of the Company's hotels with recourse to the Company. The Revolving Credit Facility bears interest at LIBOR plus 2.0% 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. On September 30, 1998, the Company's Revolving Credit Facility was amended to provide for the elimination of a market capitalization test, a revision of the key man employee covenant and limitations on hotel development and stock repurchases. Pursuant to such amendment, development of new hotels is limited to the existing development plan plus $50 million through 1999. Stock repurchases are limited to an aggregate of $50 million in 1999 to the extent of new cash sources (i.e. asset sales, equity offerings). 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. During 1998, the Company had gross borrowings and repayments of $181.9 million and $51.9 million, respectively, under the Revolving Credit Facility. As of December 31, 1998, the Company had outstanding borrowings of $165.0 million under this facility and had additional borrowing capacity of $35.0 million. (c) During 1996, the Company issued $120 million of 9 1/4% First Mortgage Notes due 2006. Interest on the notes is payable semi-annually on January 15 and July 15. The notes are secured by 15 hotels and contain certain covenants including limitations on the incurrence of debt, dividend payments, certain 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) In 1995, the Company sold $86.3 million of 7% Convertible Subordinated Notes due 2002. On April 17, 1998, the notes were converted into 7.2 million shares of common stock of the Company at a conversion price of $12 per share and transferred to stockholders' equity. (e) The Company has mortgage and other notes payable of approximately $112.8 million that are secured by mortgage notes receivable and hotel properties with a book value of $225.3 million. Principal and interest on these mortgages and notes are generally paid monthly. At December 31, 1998 these notes bear interest at rates ranging from 6.0% to 9.7%, with a weighted average interest rate of 8.6%, and mature from 1999 through 2008. In August 1995, the Company entered into an interest rate protection agreement with a major financial institution which reduces the Company's exposure to fluctuations in interest rates by effectively fixing interest rates on $40.0 million of variable interest rate debt. Under the agreement, on a monthly basis the Company pays a fixed rate of interest of 6.18% and receives a floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million notional principal amount. The agreement commenced in October 1995 and expires in October 1999. F-14 50 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maturities of long-term debt subsequent to December 31, 1998 are as follows (in thousands): 1999...................................................... $ 15,762 2000...................................................... 5,635 2001...................................................... 45,765 2002...................................................... 152,682 2003...................................................... 8,014 Thereafter................................................ 369,935 -------- Total..................................................... $597,793 ========
In connection with certain covenants related the Company's Senior Subordinated Notes, Revolving Credit Facility and 9 1/4% First Mortgage Notes due 2006, Homegate, a wholly-owned subsidiary of the Company is listed as a guarantor. The following is the separate financial information of Homegate for the years ended December 31, 1997 and 1998 (in thousands):
1997 1998 -------- -------- Balance Sheet Data: Total current assets................................. $ 4,729 $ 9,554 Noncurrent assets.................................... 157,555 244,229 -------- -------- Total assets......................................... $162,284 $253,783 ======== ======== Total current liabilities............................ $ 61,514 $ 4,422 Noncurrent liabilities............................... 53,284 210,235 -------- -------- Total liabilities.................................... $114,798 $214,657 ======== ======== Stockholder's equity................................. $ 47,486 $ 39,126 Operating Results: Net sales............................................ $ 8,546 $ 29,419 Operating income..................................... (1,533) (3,785) Merger expenses...................................... (18,555) -- Loss before extraordinary items...................... (21,202) (7,834) Net income........................................... $(21,202) $ (7,834)
Total noncurrent liabilities includes $10.0 million and $165.4 million of intercompany liabilities at December 31, 1997 and 1998, respectively. Included in operating income in 1998 is a $10.0 million valuation reserve. (See Note 1). NOTE 9 -- 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 F-15 51 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1998 (in thousands): 1999...................................................... $ 35,704 2000...................................................... 35,560 2001...................................................... 35,226 2002...................................................... 35,226 2003...................................................... 35,203 Thereafter................................................ 157,842 -------- Total..................................................... $334,761 ========
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, 1996, 1997 and 1998 (in thousands):
DECEMBER 31, --------------------------- 1996 1997 1998 ------ ------ ------- Rentals................................................. $6,652 $8,131 $41,237 Contingent rentals...................................... 1,250 1,608 7,010 ------ ------ ------- Rental expense........................................ $7,902 $9,739 $48,247 ====== ====== =======
EMPLOYEE BENEFITS The Company does not provide any material post employment benefits to its current or former employees. NOTE 10 -- INCOME TAXES The provision for income taxes (including amounts applicable to extraordinary items) consisted of the following for the years ended December 31, 1996, 1997 and 1998 (in thousands):
DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Current: Federal............................................. $ 5,147 $13,133 $33,391 State............................................... 563 1,450 4,500 ------- ------- ------- 5,710 14,583 37,891 Deferred: Federal............................................. 13,005 9,174 (4,573) State............................................... 2,029 1,099 (500) ------- ------- ------- 15,034 10,273 (5,073) ------- ------- ------- Total....................................... $20,744 $24,856 $32,818 ======= ======= =======
F-16 52 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1996, 1997 and 1998 (in thousands):
DECEMBER 31, ------------------------------ 1996 1997 1998 ------- ------- -------- Utilization of net operating loss........................... $11,714 $ 4,141 $ 3,956 Amortization of pre-fresh start basis differences -- properties and notes....................... 1,243 102 1,005 Depreciation................................................ 830 650 1,066 Compensation expense........................................ 691 3,552 152 Property sales.............................................. (11) (1,273) (10,822) Note settlement............................................. -- -- 1,104 Other....................................................... 567 3,101 (1,534) ------- ------- -------- Total............................................. $15,034 $10,273 $ (5,073) ======= ======= ========
The following is a reconciliation of the statutory Federal tax rate to the Company's effective income tax rate:
DECEMBER 31, ----------------------- 1996 1997 1998 ----- ----- ----- Statutory Federal tax rate................................. 35.0% 35.0% 35.0% State income taxes, net of Federal tax benefit............. 3.3 3.3 5.1 Non deductible merger expenses- Homegate Hospitality,Inc................................. -- 6.5 -- Effect of Homegate Hospitality, Inc. Net Operating Loss....................................... -- 1.6 (1.0) Other, net................................................. 1.7 2.5 (1.2) ----- ----- ----- Effective income tax rate................................ 40.0% 48.9% 37.9% ===== ===== =====
At December 31, 1998, the Company had available federal net operating loss carryforwards related to PMI of approximately $69.9 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 SFAS 109, the Company has not recognized the future tax benefits associated with the net operating loss carryforwards or with other temporary differences. Accordingly, the Company has provided a valuation allowance of approximately $24.5 million against the deferred tax asset as of December 31, 1998. 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, 1996, 1997 and 1998, the Company recognized $10.6 million, $4.1 million and $4.0 million, respectively, of such benefits as a contribution to stockholders' equity. Additionally, the Company recognized $1.2 million, $102,000 and $1.0 million as a contribution to stockholders' equity for the years ended December 31, 1996 and 1997, and 1998 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, 1997 and 1998. F-17 53 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- BUSINESS INTERRUPTION INSURANCE In September 1995, the Frenchman's Reef suffered damage when Hurricane Marilyn struck the U.S. Virgin Islands. In July 1996, the Company received the final installment under its insurance settlement, bringing the proceeds to $22.8 million, net of deductibles. In addition, in July 1996, Hurricane Bertha struck the island and caused further damage to the hotel. 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 1996, 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 $13.6 million, $10.9 million and $4.0 million, respectively. As of December 31, 1998, the Company has fully utilized its business interruption proceeds. NOTE 12 -- OTHER INCOME/OTHER CHARGES 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, 1996, 1997 and 1998 (in thousands):
DECEMBER 31, --------------------------- 1996 1997 1998 ------ ------ ------- Gains on sales of properties............................ $2,539 $2,077 $ 1,060 Gains on settlements of notes receivable................ 1,774 -- 18,353 Loss on the sale of marketable securities............... -- -- (1,281) ------ ------ ------- Total......................................... $4,313 $2,077 $18,132 ====== ====== =======
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 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The fair values of non-current financial assets and liabilities and other financial instruments are shown below (in thousands). The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts.
DECEMBER 31, 1997 DECEMBER 31, 1998 -------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Mortgage and notes receivable................... $ 19,698 $ 48,347 $ 14,688 $ 28,864 Long-term debt.................................. 554,500 598,113 582,031 590,981 Interest rate swap agreement.................... -- (242) -- (397)
The fair value for mortgages and notes receivable is based on the valuation of the underlying collateral utilizing discounted cash flows and other methods applicable to the industry. Valuations for long-term debt are based on quoted market prices or at current rates available to the Company for debt of the same maturities. The fair values of the interest rate swap and hedge agreements are based on the estimated amounts the Company would pay to terminate the agreements. The Company's mortgages and other notes receivable (See Note 7) are derived primarily from and are secured by hotel properties, which constitutes a concentration of credit risk. These notes are subject to many F-18 54 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 14 -- 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, 1996, 1997 and 1998 (in thousands):
DECEMBER 31, -------------------- 1996 1997 1998 ---- ---- ---- Management and other fee income............................. $157 $144 $138
At December 31, 1998, the Company managed two hotels for the income amounts shown above. NOTE 15 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS COMMON STOCK Under its stock repurchase program in 1998, the Company purchased 1.4 million shares of its common stock at an average price of $17.78 per share. Under the terms of the Revolving Credit Facility the Company may purchase additional shares in an aggregate amount not to exceed $50 million in 1999. As of March 15, 1999, the Company had purchased 2.5 million shares of stock in 1999 at an average price of $10.00 per share. 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, 1998, a total of 3.6 million options were outstanding under various plans with another 1.9 million options available to be issued. In addition to the options granted pursuant to the Company's various stock options plans, 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, 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 1997 and 1998, respectively, options to purchase 998,000 and 2,653,000 shares of common stock were granted under this plan. Under the 1995 Non-Employee Director Stock Option Plan, options to purchase 10,000 shares of common stock are automatically granted to each non-employee director at the fair market value of the common stock at the date of grant. All options will be fully vested and exercisable one year after the date of grant and will expire ten years after the date of grant, or earlier if the non-employee director ceases to be a director. Options to purchase 50,000 and 190,000 shares of common stock were granted under this plan in both 1997 and 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 F-19 55 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 273,000 shares of common stock were outstanding at December 31, 1998. The options were granted at prices which approximate fair market value at the date of grant ranging from $2.71 to $9.88 and expire from 1999 to 2005. 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 1,087,000 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 $2.3 million, or $.05 per share in 1996, $3.2 million, or $.07 per share in 1997 and $6.5 million, or $.12 per share in 1998. This pro forma impact only takes into account options granted since January 1, 1996 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1996, 1997 and 1998 was $7.33, $7.03 and $3.49, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $16.51 in 1996, $18.57 in 1997 and $8.49 in 1998 and the following weighted average assumptions: risk-free interest rate of 6.43% for 1996, 6.21% in 1997 and 4.72% in 1998, volatility of 38.64% for 1996, 30.80% for 1997 and 40.38% in 1998, and dividend yield of 0.0% for 1996, 1997 and 1998. F-20 56 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the stock options outstanding:
NUMBER OPTION PRICE OF SHARES PER SHARE ---------- ------------- Outstanding at December 31, 1995................. 1,828,000 Granted.......................................... 956,000 $14.75-$18.94 Exercised...................................... (149,000) $ 3.63-$10.81 Canceled....................................... (59,000) $ 3.63-$16.63 ---------- 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 ========== Exercisable at December 31, 1998................. 1,759,000 $ 3.20-$18.44 ==========
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-21 57 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16 -- EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 -------------------------------------- PER-SHARE INCOME SHARES AMOUNT --------- -------- ----------- Basic Earnings per Share Net income........................................... $30,250 40,650 $ .74 ===== Diluted Earnings per Share Options and warrants issued.......................... -- 2,064 Conversion of debt................................... 3,901 7,188 ------- ------ Net income plus assumed conversions.................. $34,151 49,902 $ .68 ======= ====== ===== 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 ======= ====== =====
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. Diluted earnings per common share for 1996 was determined on the assumptions that the 7% convertible subordinated notes due 2002 were converted upon issuance. 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-22 58 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 17 -- SUPPLEMENTAL CASH FLOW INFORMATION The following summarizes non-cash investing and financing activities for the years ended December 31, 1996, 1997 and 1998 (in thousands):
DECEMBER 31, ---------------------------- 1996 1997 1998 ------- ------ ------- Assumption of mortgages and notes payable in connection with the acquisitions of hotels...................... $12,222 $ -- $ -- Hotels received in settlements of mortgage notes receivable........................................... 35,306 -- -- 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 $22.9 million, $36.7 million and $48.5 million for the years ended December 31, 1996, 1997 and 1998, respectively. Cash paid for income taxes was $8.0 million, $14.4 million and $17.7 million for the years ended December 31, 1996, 1997 and 1998, respectively. NOTE 18 -- GEOGRAPHIC AND BUSINESS INFORMATION The Company's hotels serve four major lodging industry segments: the all-suites segment, under its AmeriSuites brand; the extended-stay segment, under its HomeGates brand; the limited-service segment, primarily under its Wellesley Inns brand and the full-service segment under major national franchises. The Company's AmeriSuites are upscale, all-suite limited service hotels containing approximately 128 suites and located within close proximity to dining, shopping and entertainment amenities. HomeGates are mid-price, extended-stay hotels typically containing between 120 to 140 suites with fully equipped kitchens, upscale furnishings and separation between cooking, living and sleeping areas. Wellesley Inns compete in the mid-price segment, and are primarily located in the Northeast and Florida region of the United States. The prototypical Wellesley Inns has 105 rooms and includes amenities such as pool facilities, complimentary continental breakfast, remote control television and facsimile services. 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 hotels are primarily located near suburban commercial centers, corporate office parks, and other travel destinations throughout the United States, with one resort hotel located in the United States Virgin Islands. 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. 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. F-23 59 PRIME HOSPITALITY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents revenues and other financial information by business segment for the years ended December 31, 1996, 1997 and 1998 (in thousands):
1998 -------------------------------------------------------------- EXTENDED LIMITED FULL ALL-SUITES STAY SERVICE SERVICE CONSOLIDATED ---------- -------- -------- -------- ------------ Revenues........................... $191,690 $ 29,234 $ 47,482 $178,973 $ 447,379 Hotel EBITDA....................... 71,658 10,350 20,875 39,111 141,994 Depreciation and amortization...... 20,967 3,691 5,174 11,992 41,824 Capital expenditures............... 224,282 174,239 3,980 18,489 420,991 Total Assets....................... 554,253 253,764 114,207 228,385 1,150,609
1997 -------------------------------------------------------------- EXTENDED LIMITED FULL ALL-SUITES STAY SERVICE SERVICE CONSOLIDATED ---------- -------- -------- -------- ------------ Revenues........................... $113,412 $ 8,327 $ 50,530 $141,966 $ 314,235 Hotel EBITDA....................... 52,377 2,771 24,120 53,861 133,129 Depreciation and amortization...... 15,289 1,474 4,179 12,122 33,064 Capital expenditures............... 265,956 33,508 6,017 68,664 374,145 Total Assets....................... 431,673 162,220 112,853 286,487 993,233
1996 -------------------------------------------------------------- EXTENDED LIMITED FULL ALL-SUITES STAY SERVICE SERVICE CONSOLIDATED ---------- -------- -------- -------- ------------ Revenues........................... $ 54,198 $ 2,691 $ 49,787 $135,940 $ 242,616 Hotel EBITDA....................... 25,987 557 20,452 44,460 91,456 Depreciation and amortization...... 7,108 344 5,683 10,604 23,739 Capital expenditures............... 111,269 32,375 74,099 80,562 298,305 Total Assets....................... 234,631 88,533 123,457 240,771 687,392
NOTE 19 -- OTHER COMPREHENSIVE INCOME The tax effect of other comprehensive losses is as follows for the year ended December 31, 1998:
BEFORE- NET OF TAX TAX TAX AMOUNT EFFECT AMOUNT ------- ------- ------- Unrealized losses on securities: Unrealized holdings losses arising during period...... $(9,335) $(3,546) $(5,789) Less -- Reclassification adjustments for losses realized in net income.............................. (1,281) (485) (796) ------- ------- ------- Other comprehensive loss.............................. $(8,054) $(3,061) $(4,993) ======= ======= =======
F-24 60 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: ------------------------------------ A.F. Petrocelli, Chairman of the Board of Directors, President and Chief Executive Officer DATE: March 25, 1999 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 25, 1999.
SIGNATURE TITLE --------- ----- Chairman of Board of Directors, President - ----------------------------------------------------- and Chief Executive Officer A.F. Petrocelli Senior Vice President and Chief Financial - ----------------------------------------------------- Officer Douglas Vicari Director - ----------------------------------------------------- Lawrence Friedland Director - ----------------------------------------------------- Herbert Lust Director - ----------------------------------------------------- Jack H. Nusbaum Director - ----------------------------------------------------- Howard M. Lorber
61 EXHIBIT INDEX 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 reference. (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. 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. 62 (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. 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. (g) Change of Control Agreement, dated May 14, 1998, between Paul H. Hower and the Company. (h) Change of Control Agreement, dated May 14, 1998, between John H. Leavitt and the Company. 63 (i) Change of Control Agreement, dated May 14, 1998, between Joseph Bernadino and the Company. (j) Change of Control Agreement, dated May 14, 1998, between Richard T. Szymanski and the Company. (k) Change of Control Agreement, dated May 14, 1998, between Douglas W. Vicari and the Company. (l) Change of Control Agreement, dated May 14, 1998, between Terry P. O'Leary and the Company. (m) Change of Control Agreement, dated May 14, 1998 between Ethan Kramer and the Company. (n) Employment Agreement, dated September 14, 1998, between Attilio F. Petrocelli and the Company. (o) Change of Control Agreement, dated September 14, 1998, between Atillio F. Petrocelli and the Company. (21) Subsidiaries of the Company are as follows:
JURISDICTION OF NAME INCORPORATION - ---- --------------- AmeriSuites Franchising, Inc.......................... Delaware Caldwell Holding Corp................................. Delaware Clifton Holding Corp.................................. Delaware Dynamic Marketing Group, Inc.......................... Delaware Fairfield Holding Corp................................ Delaware Fairfield-Meridian Claims Service, Inc................ Delaware HomeGate Franchising, Inc............................. Delaware HomeGate Hospitality, Inc............................. Delaware KSA Management, Inc................................... Kansas Mahwah Holding Corp................................... Delaware Market Segments, Incorporated......................... Delaware Prime-American Realty Corp............................ Delaware Prime Hospitality Franchising, Inc.................... Delaware Prime-O-Lene, Inc..................................... New Jersey Republic Motor Inns, Inc.............................. Virginia Secaucus Holding Corp................................. Delaware VPS, Inc.............................................. Delaware Wellesley Inns Franchising, Inc....................... Delaware
(23) Consent of Arthur Andersen LLP (27) Financial data schedule. EX-10.G 2 CHANGE OF CONTROL AGREEMENT WITH PAUL H. HOWER 1 EXHIBIT 10(g) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Paul H. Hower ("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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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: Paul H. Hower 2320 Gates Court Morris Plains, New Jersey 07950 If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By: ----------------------------------- EMPLOYEE: ----------------------------------- Paul H. Hower 13 EX-10.H 3 CHANGE OF CONTROL AGREEMENT WITH JOHN J. LEAVITT 1 EXHIBIT 10(h) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and John H. Leavitt ("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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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: John H. Leavitt 17 Tannery Hill Drive Hamburg, New Jersey 07419 If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By:_______________________________ EMPLOYEE: __________________________________ John H. Leavitt 13 EX-10.I 4 CHANGE OF CONTROL AGREEMENT WITH JOSEPH BERNADINO 1 EXHIBIT 10(i) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Joseph Bernadino ("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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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: Joseph Bernadino 195 Elmwood Avenue Glen Rock, New Jersey 07452 If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By:____________________________________ EMPLOYEE: _______________________________________ Joseph Bernadino 13 EX-10.J 5 CHANGE OF CONTROL AGREEMENT WITH SYZMANSKI 1 EXHIBIT 10(j) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Richard T. Szymanski ("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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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: Richard T. Szymanski 133 Smoke Rise Drive Warren, New Jersey 07059 If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By: ----------------------------------- EMPLOYEE: ----------------------------------- Richard T. Szymanski 13 EX-10.K 6 CHANGE OF CONTROL AGREEMENT WITH DOUGLAS W. VICARI 1 EXHIBIT 10(k) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Douglas Vicari ("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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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: Douglas Vicari 464 Oradell Avenue Oradell, New Jersey 07649 If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By:________________________________ EMPLOYEE: ___________________________________ Douglas Vicari 13 EX-10.L 7 CHANGE OF CONTROL AGREEMENT WITH TERRY P. O'LEARY 1 EXHIBIT 10(l) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, 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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 one and one-half (1-1/2) 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By:____________________________________ EMPLOYEE: _______________________________________ Terry P. O'Leary 13 EX-10.M 8 CHANGE OF CONTROL AGREEMENT WITH ETHAN KRAMER 1 EXHIBIT 10(m) CHANGE IN CONTROL AGREEMENT This Agreement, dated this 14th day of May, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and Ethan Kramer ("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, however that, notwithstanding the prior clause of this Section 1(b)(i), unless 2 3 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 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 3 4 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. (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, 4 5 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 5 6 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 one and one-half (1-1/2) 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 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 6 7 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 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 7 8 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 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 8 9 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. 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 9 10 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 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 10 11 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 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 11 12 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 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: Ethan Kramer 527 N. Chestnut Street Westfield, New Jersey 07090 If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, New Jersey 07004 Attention: General Counsel 12 13 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 between Employee and the Company. PRIME HOSPITALITY CORP. By:____________________________________ EMPLOYEE: _______________________________________ Ethan Kramer 13 EX-10.N 9 EMPLOYMENT AGREEMENT WITH A.F. PETROCELLI 1 Exhibit 10(n) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of September 14, 1998, between A.F. Petrocelli ("Executive") and Prime Hospitality Corp., a Delaware corporation ("Employer"). In consideration of the premises and the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Employment of Executive Employer hereby agrees to employ Executive, and Executive hereby agrees to be and remain in the employ of Employer, upon the terms and conditions hereinafter set forth. 2. Employment Period Subject to earlier termination as provided in Section 5, the term of Executive's employment under this Agreement (the "Employment Period") shall commence as of the date hereof and shall continue for a period of three (3) years. The Employment Period shall be automatically extended for an additional period(s) of one year (and such additional one year period(s) shall be considered the applicable Employment Period) upon the terms and conditions set forth herein unless written notice of non-renewal is given by either party at least ninety (90) days prior to the expiration of this Agreement. 3. Duties and Responsibilities 3.1 General. During the Employment Period, Executive (i) shall have the titles of President and Chief Executive Officer of Employer and (ii) shall devote a substantial part of his business time and expend his best efforts, energies and skills to the business of Employer. Executive shall be responsible for the general management of Employer and shall perform such duties, consistent with his status as President and Chief Executive Officer of Employer, as he may be assigned from time to time by Employer's board of directors (the "Board"). Throughout the Employment Period, Executive shall faithfully and diligently perform his duties under this Agreement and shall use his best efforts to promote the interests of Employer. 4. Compensation and Related Matters 4.1 Base Salary. For each twelve-month period of the Employment Period, commencing with the twelve-month period beginning on the date of this Agreement (each such period, an "Employment Year"), Employer shall pay to Executive a base salary ("Base Salary") equal to $700,000. The Base Salary for each Employment Year shall be payable in equal weekly installments. 2 4.2 Annual Bonus. For each calendar year (the "Bonus Year"), at the discretion of the Compensation and Audit Committee of the Board (the "Committee"), Executive shall be eligible to receive a cash bonus of up to 100% of Base Salary ("Bonus") based upon Employer's and Executive's attainment of annual performance objectives to be reasonably established by the Committee for the Bonus Year in consultation with Executive, such performance objectives to be established as soon as possible following the beginning of the Bonus Year. Bonus earned for the Bonus Year shall be payable promptly following the determination thereof by the Committee, on the earlier of (i) fifteen (15) days after the members of the Committee received the audited financial statements for the Bonus Year, or (ii) the next meeting of the Board. To the extent specifically provided in Section 6 hereof, the Bonus payable for the Bonus Year in which the Employment Period terminates shall equal the Bonus that would have been paid had the Employment Period not so terminated, multiplied by a fraction, the numerator of which shall be the number of days of the Employment Period within the Bonus Year and the denominator of which shall be 365. 4.3 Life Insurance. To the extent it can be obtained at standard (i.e., non-rated) premium rates, Employer shall use its best efforts to procure and maintain in effect at all times during the Employment Period, at Employer's expense other than with respect to PS58 costs, a policy of whole life insurance on the life of Executive in the amount equal to $2,000,000, naming such person or trust as Executive shall designate from time to time as the owner and beneficiary thereof. The amount of such life insurance shall be provided under a conventional split dollar arrangement that gives Employer enforceable rights to death benefit proceeds equal to the aggregate premiums paid by Employer and that gives Executive, his legal representatives or beneficiaries, and trusts of which Executive was the settlor, as applicable, the right to assume the policy, upon payment to Employer of the cash surrender value in the event of his Termination of employment. Executive agrees that Employer shall have the right to obtain other life insurance on Executive's life, at Employer's sole expense and with Employer or an affiliate thereof as the sole beneficiary thereof. Executive shall (i) cooperate fully with Employer in obtaining all such insurance, (ii) sign any necessary consents, applications and other related forms or documents, and (iii) take any required medical examinations. 4.4 Automobile. Employer shall provide Executive with the use of a vehicle at Employer's expense. Executive will be entitled to continue to use that automobile for the term of this Agreement. Employer shall be responsible for all expenses of use, maintenance and operation of that vehicle, except if Executive's operation of the vehicle causes penalty insurance rates, in which case Executive will bear such costs. 4.5 Other Benefits. During the Employment Period, subject to, and to the extent Executive is eligible under their respective terms, Executive shall be entitled to receive such fringe benefits as are, or are from time to time hereafter, generally provided by Employer to Employer's senior management employees or other employees (other than those provided under or pursuant to separately negotiated individual employment agreements or arrangements) under any pension or retirement plan, disability plan or insurance, group life insurance, medical and dental insurance, travel accident insurance, phantom stock or other similar plan or program of Employer. Executive's Base Salary shall (where applicable) constitute the compensation on the basis of which the amount of Executive's benefits under any such plan or program shall be fixed and determined. -2- 3 4.6 Expense Reimbursement. Employer shall reimburse Executive for all business expenses reasonably incurred by him in the performance of his duties under this Agreement upon his presentation of signed, itemized accounts of such expenditures, all in accordance with Employer's procedures and policies as adopted and in effect from time to time and applicable to its senior management employees. 4.7 Vacations. Executive shall be entitled to twenty (20) days vacation for each calendar year during the Employment Period with reasonable one year carry-over allowances, which vacations shall be taken at such time or times as shall not unreasonably interfere with Executive's performance of his duties under this Agreement. 4.8 Stock Options. As soon as practicable after execution of this Agreement, the Committee shall meet and, as a material inducement to Executive's commencement of employment with Employer, grant to Executive a nonqualified stock option (the "Option") to purchase 1,750,000 shares of Common Stock of the Employer (the "Common Stock"), having a term of ten (10) years. The Option shall vest and become exercisable as follows: (i) Tranche A of the Option, covering 1,000,000 shares of Common Stock, shall vest and become exercisable as to 20% of the shares covered 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 Executive remains an employee of Employer on the applicable vesting date; and (ii) Tranche B of the Option, covering the remaining 750,000 shares of Common Stock, shall vest and become exercisable on the ninth anniversary of the date of grant, provide Executive remains an employee of Employer on such date, subject to earlier vesting, however, based upon Employer's attainment of the following share price values: (A) 250,000 Options 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; (B) an additional 250,000 Options 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 $25.00 per share; and (C) an additional 250,000 Options 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, Executive remains an employee of Employer. The exercise price shall be the fair market value of the Common Stock on the day preceding the date of grant (or, if no value was reported on that date, the last preceding date for which a value was reported). Except as otherwise set forth herein, the terms of the Option shall be as set forth in the Option Agreement to be entered into between Employer and Executive. 4.9 Tax Gross-Up. To the extent that payments made by Employer to or on behalf of Executive pursuant to the provisions of Sections 4.3 and 4.4 hereof are subject to federal, state or local income or payroll taxes, Employer shall pay to Executive, not later than forty-five (45) days after the end of the calendar year for which such payments are includable in Executive's gross income, the amount of such additional taxes, calculated by assuming application of the highest applicable tax rates, plus such additional amount as shall be necessary to hold harmless Executive, as nearly as practicable, from the obligation to pay such taxes in respect of amounts payable pursuant to this Section 4.9. -3- 4 5. Termination of Employment Period 5.1 Termination Without Cause; Voluntary Termination by Executive. Employer may, by notice to Executive at any time during the Employment Period, terminate the Employment Period without cause. The effective date of such termination of the Executive from the Employer shall be the date that is thirty (30) days following the date on which such notice is given. Executive may, by notice to Employer at any time during the Employment Period, voluntarily resign from the Employer and terminate the Employment Period. The effective date of such termination of the Executive from the Employer shall be the date that is thirty (30) days following the date on which such notice is given. 5.2 By Employer for Cause. Employer may, at any time during the Employment Period by notice to Executive (but only after compliance with the procedure hereinafter set forth in this Section 5.2 in the event of the cause specified in clause (ii) below), terminate the Employment Period "for cause" effective on the later of the giving of such notice or upon the determination by the Board following notice, if applicable. Such notice shall specify the conduct which is the basis for termination for cause in reasonable detail. For the purposes hereof, "for cause" means: (i) the conviction of Executive in a court of competent jurisdiction of a crime constituting a felony in such jurisdiction involving money or other property of the Employer or any of its affiliates or any other felony (whether or not involving money or other property of the Employer) involving moral turpitude; or (ii) the willful engaging in misconduct that is materially injurious to Employer, monetarily or otherwise. For the purposes hereof, (a) no act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that such action or omission was in or not opposed to the best interests of Employer and (b) no failure to achieve performance targets shall be considered a willful act of misconduct. Termination "for cause" pursuant to clause (ii) of the preceding sentence shall be effected only if (i) Employer has delivered to Executive a copy of a notice of termination that complies with the foregoing paragraph and that gives Executive, on at least fifteen (15) business days' prior notice, the opportunity, together with Executive's counsel, to be heard before Employer's Board, and (ii) the Board (after such notice and opportunity to be heard), adopts a resolution that, in the good faith opinion of the Board, Executive was guilty of conduct set forth in clause (ii) of the preceding sentence, and specifying the particulars thereof in reasonable detail. 5.3 By Executive for Good Reason. Executive may, at any time during the Employment Period by notice to Employer, terminate the Employment Period under this Agreement "for good reason" effective immediately. For the purposes hereof, "good reason" means any material breach by Employer of any provision of this Agreement. Without limiting the generality of the foregoing, each of the following shall be deemed to be "good reason": (i) a failure by the Employer to comply with any provision of this Agreement which has not been cured within ten (10) days after notice of such noncompliance has been given by Executive to the Employer, (ii) the assignment to Executive by Employer of duties inconsistent with Executive's position, responsibilities or status with -4- 5 Employer as in effect on the date of this Agreement including, but not limited to, any reduction whatsoever in such position, duties, responsibilities or status, any change in Executive's titles, offices or perquisites, as then in effect, or any removal of Executive from, or any failure to re-elect Executive to, any of such positions (except for Executive's election to the Board), except in connection with the termination of his employment on account of his death, disability, or for cause, (iii) any failure to pay (or any reduction in) compensation (including benefits) paid or payable to Executive pursuant to the provisions of Section 4 hereof, (iv) any purported termination of Executive's employment for cause which is not effected in accordance with the requirements of Section 5.2 hereof (and for purposes of this Agreement no such purported termination shall be effective) or (v) the failure of the Employer to obtain the assumption of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Employer as set forth in Section 9 herein. 5.4 Disability. During the Employment Period, if, as a result of physical or mental incapacity or infirmity, Executive shall be unable to perform his duties under this Agreement for (i) a continuous period of at least 180 days, or (ii) periods aggregating at least 270 days during any period of twelve (12) consecutive months (each a "Disability Period"), and at the end of the Disability Period there is no reasonable probability that Executive can promptly resume his duties hereunder, Executive shall be deemed disabled (the "Disability") and Employer, by notice to Executive, shall have the right to terminate the Employment Period for Disability at, as of or after the end of the Disability Period. The existence of the Disability shall be determined by a reputable, licensed physician mutually selected by Employer and Executive, whose determination shall be final and binding on the parties. Executive shall cooperate in all reasonable respects to enable an examination to be made by such physician. Notwithstanding the foregoing, Employer may conclusively determine Executive to be disabled at any time after the end of the Disability Period if Executive has then commenced receiving benefits under the long-term disability insurance policy obtained pursuant to Section 4.5 hereof. 5.5 Death. The Employment Period shall end on the date of Executive's death. 6. Termination Compensation 6.1 Termination Without Cause by Employer or for Good Reason by Executive. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.1 hereof or by Executive pursuant to the provisions of Section 5.3 hereof, Employer will pay to Executive (i) Executive's Base Salary through the date of termination, (ii) within five (5) days following the date of termination in one lump sum an amount equal to the greater of the (a) Base Salary multiplied by the number of full and partial years then remaining in the Employment Period (assuming no termination) and (b) one year's Base Salary (calculated in each case at the Base Salary rate then in effect); and (iii) on the date due pursuant to the provisions of Section 4.2 hereof, the bonus for the then current Bonus Year, without proration. All other benefits provided for in Sections 4.3, 4.4, 4.5 and Section 4.9 shall be continued at the expense of Employer for the longer of the balance of the unexpired portion of the Employment Period (assuming no termination) and twelve (12) months from date of termination. In addition, upon such termination, all of the unvested options granted as part of Tranch A shall immediately vest and become exercisable. -5- 6 6.2 Certain Other Terminations. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.2, or by death, pursuant to the provisions of Section 5.5, Employer shall pay to Executive, within thirty (30) days of the date of termination, Executive's Base Salary through the date of termination. Provided the date of termination is after the end of a calendar year for which a Bonus is payable, but prior to the date of payment, Employer shall also pay to Executive, when due pursuant to provisions of Section 4.2 hereof, the unpaid Bonus for such Bonus Year. Employer shall have no obligation to continue any other benefits provided for in Section 4 past the date of termination. 6.3 Termination for Disability. If the Employment Period is terminated by Employer pursuant to the provisions of Section 5.4, Employer shall make all payments and continue all benefits for the period specified in Section 6.1; provided, however, that such payment shall be reduced by any amounts actually paid to Executive pursuant to any disability insurance or other such similar program maintained by Employer, including amounts paid pursuant to any long-term disability policy purchased pursuant to Section 4.5 hereof. 6.4 Termination Prior to September 13, 2003 As a Result of Non-Renewal Notice Given by Employer. If the Employment Period is terminated by Employer prior to September 13, 2003 as a result of a non-renewal notice given by Employer in accordance with Section 2, all unvested options granted as part of Tranche A of the Option shall vest and become exercisable as provided in the Option Agreement. 6.5 No Other Termination Compensation. Executive shall not, except as set forth in this Section 6, be entitled to any compensation following termination of the Employment Period. 6.6 Mitigation; Offset. Executive shall not be required to mitigate the amount of any payments or benefits provided for hereunder upon termination of the Employment Period by seeking employment with any other person, or otherwise, nor shall the amount of any such payments or benefits be reduced by any compensation, benefit or other amount earned by, accrued for or paid to Executive as the result of Executive's employment by or consultancy or other association with any other person or entity provided, that any medical, dental or hospitalization insurance or benefits provided to Executive in connection with his employment by or consultancy with any person or entity unaffiliated with the Employer during such period shall be primary to the benefits to be provided to Executive pursuant to this Agreement for the purposes of coordination of benefits. Notwithstanding the foregoing, if Executive elects to be covered by the insurance or benefits provided by an entity or person unaffiliated with the Employer, Executive agrees that Employer may terminate any insurance or benefits provided to the Executive. The Employer's obligation to pay termination compensation pursuant to this Section 6 shall not be reduced by any amount owed by Executive to the Employer. 7. Indemnification 7.1 General. The Employer shall indemnify the Executive to the fullest extent permitted by law in effect as of the date hereof against all costs, expenses, liabilities and losses (including, without limitation, attorneys' fees, judgments, fines, penalties, ERISA excise taxes, penalties and amounts paid in settlement) reasonably incurred by the Executive in connection with a Proceeding. -6- 7 For the purposes of this Section, a "Proceeding" shall mean any action, suit or proceeding, whether civil, criminal, administrative or investigative, in which the Executive is made, or is threatened to be made, a party to, or a witness in, such action, suit or proceeding by reason of the fact that he is or was an officer, director or employee of the Employer or is or was serving as an officer, director, member, employee, trustee or agent of any other entity at the request of the Employer. 7.2 Costs and Expenses. The Employer shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within twenty (20) days after receipt by the Employer of a written request for such advance. Such request shall include an itemized list of the costs and expenses and an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. Notwithstanding anything herein to the contrary, to the extent that Executive has served on behalf of the Employer as a witness or other participant in any Proceeding, or has been successful, on the merits or otherwise, in defense of any Proceeding, including but not limited to, the dismissal of any Proceeding without prejudice, Executive shall be indemnified against all costs, charges and expenses (including attorney's fees) actually incurred by Executive in connection therewith. 7.3 Standard of Conduct. The Executive shall not be entitled to indemnification under this Section unless he meets the standard of conduct specified in the Delaware General Corporation Law. Notwithstanding the foregoing, to the extent permitted by law, neither Section 145(d) of the Delaware General Corporation Law nor any similar provision shall apply to indemnification under this Section, so that if the Executive in fact meets the applicable standard of conduct, he shall be entitled to such indemnification whether or not the Employer (whether by the Board of Directors, the shareholders, independent legal counsel or other party) determines that indemnification is proper because he has met such applicable standard of conduct. Neither the failure of the Employer to have made such a determination prior to the commencement by the Executive of any suit or arbitration proceeding seeking indemnification, nor a determination by the Employer that he has not met such applicable standard of conduct, shall create a presumption that he has not met the applicable standard of conduct. 7.4 Settlement. The Employer shall not settle any Proceeding or claim in any manner which would impose on the Executive any penalty or limitation without his prior written consent. Neither the Employer nor the Executive will unreasonably withhold its or his consent to any proposed settlement. The Employer shall not be liable to indemnify the Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. 7.5 Notification and Defense of Claim. Promptly after receipt by the Executive of notice of the commencement of any Proceeding, the Executive will, if a claim in respect thereof is to be made against the Employer under this Agreement, notify the Employer in writing of the commencement thereof; but the omission to so notify the Employer will not relieve the Employer from any liability that it may have to the Executive otherwise than under this Agreement. Notwithstanding any other provision of this Agreement, with respect to any such Proceeding as to which the Executive gives notice to the Employer of the commencement thereof: -7- 8 (i) The Employer will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided in this Section 7.5(ii) to the extent that it may wish, the Employer, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof, with counsel satisfactory to the Executive. After notice from the Employer to the Executive of its election to so assume the defense thereof, the Employer shall not be liable to the Executive under this Agreement for any legal or other expenses subsequently incurred by th Executive in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Executive shall have the right to employ the Executive's own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Employer of its assumption of the defense thereof shall be at the expense of the Executive unless (a) the employment of counsel by the Executive has been authorized by the Employer, (b) the Executive shall have reasonably concluded that there may be a conflict of interest between the Employer and the Executive in the conduct of the defense of such Proceeding (which conclusion shall be deemed reasonable if, without limitation, such action shall seek any remedy other than money damages and the Executive would be personally affected by such remedy or the carrying out thereof), or (c) the Employer shall not in fact have employed counsel to assume the defense of the Proceeding, in each of which cases the fees and expenses of counsel shall be at the expense of the Employer. The Employer shall not be entitled to assume the defense of any Proceeding brought against the Executive by or on behalf of the Employer or as to which the Executive shall have reached the conclusion provided for in clause (b) above. 8. Confidentiality Unless otherwise required by law or judicial process, Executive shall retain in confidence after termination of Executive's employment with Employer pursuant to this Agreement all confidential information known to the Executive concerning the Employer and its businesses for the shorter of one (1) year following such termination or until such information is publicly disclosed by the Employer or otherwise becomes publicly disclosed other than through Executive's actions. 9. Successors; Binding Agreement (a) The Employer 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 Employer, by agreement, in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform if no such succession had taken place. Failure of the Employer to obtain such assumption and agreement prior to the effectiveness of any such succession will be a breach of this Agreement and entitle the Executive to compensation from the Employer in the same amount and on the same terms as the Executive would be entitled to hereunder had the Employer terminated the Executive without Cause pursuant to the provisions of Section 5.1 hereof on the succession date (and assuming a Change in Control of the Employer had occurred prior to such succession date). As used in this Agreement, "the Employer" means the 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 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. -8- 9 (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by Executive and Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive 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 Executive's devisee, legatee, or other beneficiary or, if there be no such beneficiary, to Executive's estate. 10. Survivorship The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 11. Miscellaneous 11.1 Notices. Any notice, consent or authorization required or permitted to be given pursuant to this Agreement shall be in writing and sent to the party for or to whom intended, at the address of such party set forth below, by registered or certified mail, postage paid (deemed given five days after deposit in the U.S. mails) or personally or by facsimile transmission (deemed given upon receipt), or at such other address as either party shall designate by notice given to the other in the manner provided herein. If to Employer: Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, NJ 07007-2700 Attention: Secretary If to Employer: Mr. A.F. Petrocelli Prime Hospitality Corp. 700 Route 46 East P.O. Box 2700 Fairfield, NJ 07007-2700 11.2 Legal Fees. Employer shall promptly reimburse the Executive for the reasonable legal fees and expenses incurred by Executive in connection with enforcement of Executive's rights hereunder. 11.3 Taxes. Employer is authorized to withhold (from any compensation or benefits payable hereunder to Executive) such amounts for income tax, social security, unemployment compensation and other taxes as shall be necessary or appropriate in the reasonable judgment of Employer to comply with applicable laws and regulations. 11.4 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed therein. -9- 10 11.5 Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Fairfield, New Jersey in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitration award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until expiration of the Employment Period during the pendency of any arbitration. 11.6 Headings. All descriptive headings in this Agreement are inserted for convenience only and shall be disregarded in construing or applying any provision of this Agreement. 11.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 11.8 Severability. If any provision of this Agreement, or any part thereof, is held to be unenforceable, the remainder of such provision and this Agreement, as the case may be, shall nevertheless remain in full force and effect. 11.9 Entire Agreement and Representation. This Agreement contains the entire agreement and understanding between Employer and Executive with respect to the subject matter hereof. No representations or warranties of any kind or nature relating to Employer or its several businesses, or relating to Employer's assets, liabilities, operations, future plans or prospects have been made by or on behalf of Employer to Executive. This Agreement supersedes any prior agreement between the parties relating to the subject matter hereof. -10- 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PRIME HOSPITALITY CORP. By: _______________________________ ___________________________________ A.F. PETROCELLI -11- EX-10.O 10 CHANGE OF CONTROL AGREEMENT WITH A.F. PETROCELLI 1 Exhibit 10(o) CHANGE IN CONTROL AGREEMENT This Agreement, dated this ____ day of ________, 1998, is between Prime Hospitality Corp., a Delaware corporation (the "Company"), and A.F Petrocelli ("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 2 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 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, -2- 3 on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in goo 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) in the case of conduct described in clause (A) above, 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, no termination following a Change in Contro shall be treated as for Cause (x) for purposes of this Agreement unless it -3- 4 would also be treated as for Cause under Employee's employment agreement with the Company, dated September 14, 1998 (the "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 a person, entity or group, a "Person"); provided, however that, notwithstanding the prior clause of this Section -4- 5 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 (2) 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, -5- 6 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 equity 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 outstanding Equity Securities, and (C) at least a majority of the members of the board of directors -6- 7 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 -7- 8 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. (c) "Good Reason" shall mean the occurrence of any of the following, without Employee's consent, after a Change in Control: -8- 9 (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 (20) miles; or (iv) a material reduction in or the discontinuance of any perquisites or benefits provided by the Company to Employee. In addition, and without limiting the foregoing, "Good Reason" shall include any act or failure to act which would constitute "good reason" as such term is defined in the 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 -9- 10 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" shall mean his annualized aggregate cash compensation for such year, which 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. (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 employment with the Company for Good Reason, then the Company shall, within ten (10) days of such termination of employment, pay to -10- 11 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, or any acceleration of vesting and exercisability of Company stock options (whether paid or payable or distributed or distributable or otherwise occurring pursuant to the terms of this Agreement or pursuant to the 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 -11- 12 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 or the Company on Employee's behalf of all Federal, state and local taxes imposed upon the Gross-Up Payment, including, without limitation, any income taxes, withholding taxes, payroll taxes and the Excise Tax (and any interest and penalties imposed with respect thereto), 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 3, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up 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 -12- 13 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 3, shall be paid by the Company to Employee, or to the applicable tax authorities on Employee's behalf (with notice to Employee of the name of each such tax authority and the amount and date of payment), within five (5) 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 -13- 14 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 Accountin 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 (15) business days after Employee is informed in 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 suc claim prior to the expiration of the thirty (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 -14- 15 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 -15- 16 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 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) -16- 17 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 paid or advanced by the Company to or on Employee's behalf pursuant to Section 3(a) or 3(b), Employee becomes entitled to receive any refund with respect to any taxes, interest or penalties to which the payments or advances related, Employee shall (subject to the Company's complying with the requirements of this Section 3(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes -17- 18 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 thirty (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. 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 -18- 19 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 wit the National Rules of the American Arbitration Association for the Resolution of Employment Disputes effective -19- 20 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 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 (24) 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. -20- 21 (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 -21- 22 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 Agreement, "the Company" means the 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 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 -22- 23 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 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 -23- 24 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 th 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 other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when hand delivered or (unless otherwise specified) mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: -24- 25 If to Employee: At his then current permanent home address as shown on the Company's records If to the Company: Prime Hospitality Corp. 700 Route 46 East Fairfield, NJ 07007-2700 Attn: 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 the Employment Agreement or any successor agreement to the Employment -25- 26 Agreement covering Employee. Nothing contained in this Agreement shall adversely affect any of Employee's rights under the 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 nonsolicitation agreement with the Company. This Agreement supersedes any and all prior Change in Control agreements entered into between Employee and the Company. PRIME HOSPITALITY CORP. By____________________________ Name: Title: A.F. PETROCELLI ______________________________ -26- EX-23 11 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT (23) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Prime Hospitality Corp: As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our reports included in the Company's previously filed Registration Statement Nos. 333-07431 and 333-38749. ARTHUR ANDERSEN LLP Roseland, New Jersey March 22, 1999 EX-27 12 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 12,534 12,460 20,816 732 0 75,398 1,378,365 96,987 1,408,398 82,767 664,798 0 0 552 640,493 1,408,398 447,379 469,405 0 380,444 0 0 23,914 86,665 32,818 53,847 0 0 0 53,847 1.04 1.00
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