-----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, C+2raDSBocuVlnZEfGmXWcXK70Z+nDkJpGBGow1zX0BWk/m0REtuEGnyNNm0hWz1 TyVW/IVoDBH9uO9wTJoG5A== 0000804219-96-000002.txt : 19960402 0000804219-96-000002.hdr.sgml : 19960402 ACCESSION NUMBER: 0000804219-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME MOTOR INNS LTD PARTNERSHIP CENTRAL INDEX KEY: 0000804219 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 222754689 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09311 FILM NUMBER: 96542765 BUSINESS ADDRESS: STREET 1: C/O WHI STREET 2: 4243 HUNT ROAD CITY: CINCINNATI STATE: OH ZIP: 45242 BUSINESS PHONE: 5138911066 MAIL ADDRESS: STREET 1: C/O WHI STREET 2: 4243 HUNT ROAD CITY: CINCINNATI STATE: OH ZIP: 45242 10-K 1 1995 FORM 10-K UNITED STATES 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 (FEE REQUIRED) For the fiscal year ended December 31, 1995. 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. 1-9311 PRIME MOTOR INNS LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 22-2754689 (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) C/O WHI, 4243 Hunt Road Cincinnati, Ohio 45242 (Registrant's Mailing Address) Registrant's telephone number, including area code: (513) 891-2920 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on which registered Units of Limited Partnership Interest New York Stock Exchange Evidenced by Depository Receipts Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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) On March 12, 1996 there were 4,000,000 of registrant's units of limited partnership interest outstanding. The aggregate market value of such units held by non-affiliates on that date based on the reported closing price on The New York Stock Exchange, Inc. on that date, was approximately $ 2,250,000. The Exhibit Index is located on page 19. PART I Item 1. Business Prime Motor Inns Limited Partnership (the "Partnership") and its 99% owned subsidiary, AMI Operating Partners, L.P. ("Operating Partners"), were formed in October 1986 under the Delaware Revised Uniform Limited Partnership Act. The Partnership and Operating Partners are referred to collectively as the "Partnerships". Prime-American Realty Corp. (the "General Partner"), a subsidiary of Prime Hospitality Corporation ("Prime"), formerly Prime Motor Inns, Inc., is the general partner of and holds as its principal asset a 1% partnership interest in each of the Partnerships. The business of the Partnerships is to operate and maintain 16 full-service hotels (the "Inns"), which are presently franchised as part of the "Holiday Inn" system. The Inns were purchased from subsidiaries of Prime in December, 1986, with the proceeds of the public offering of 4,000,000 units of limited partnership interest (the "Units") in the Partnership and of the issuance and sale of $61,470,000 of mortgage notes (the "Mortgage Notes") of Operating Partners. Until November 30, 1990, the Inns were leased to AMI Management Corp. ("AMI Management"), a subsidiary of Prime, pursuant to a net lease between AMI Management and Operating Partners (the "Lease"). On September 18, 1990, Prime and certain of its subsidiaries, including AMI Management, had filed for reorganization (the "Prime Bankruptcy") under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida (the "Florida Bankruptcy Court") and, effective November 30, 1991, AMI Management rejected the Lease. At that time, Operating Partners, through Winegardner & Hammons, Inc. ("W&H"), a prominent hotel management company with operational experience with "Holiday Inn" franchises, took control of the Inns and commenced operation of the Inns for the account of the Partnerships. In the opinion of the Board of the General Partner, occupancies and cash flows at the Inns during 1991 and 1990 were adversely affected by, among other things, international tensions in the Middle East and the economic recession that began in 1990, and the resulting slowdown in travel, and AMI Management's operation of the Inns, primarily in the period immediately prior to and during its bankruptcy. To conserve cash to provide funds to maintain and improve the Inns and pay suppliers, Operating Partners suspended the monthly payments of the principal and interest on the Mortgage Notes beginning with the payments due on February 28, 1991, which constituted an event of default under, and resulted in acceleration and demand for payment of the entire outstanding balance of the Mortgage Notes. After detailed and extended negotiations among Operating Partners and its advisors and representatives of the holders of the Mortgage Notes (the "Mortgage Lenders") and their advisors, the parties agreed upon the terms of a priming loan and the restructuring of the Mortgage Notes. Three of the Mortgage Lenders (the "Priming Lenders") agreed to provide post-petition financing (the "Priming Loan") of up to an aggregate of $14 million to finance the refurbishment and upgrading of the Inns and to fund operating deficiencies, and the Mortgage Lenders agreed to restructure the Mortgage Notes, as part of a "prepackaged" reorganization of Operating Partners. On February 28, 1992, Operating Partners filed with the United States Bankruptcy Court for the Southern District of New York (the "New York Bankruptcy Court") a Voluntary Petition for Relief under Chapter 11 of the United States Bankruptcy Code, and sought confirmation by the New York Bankruptcy Court of the prepackaged plan of reorganization consented to by the Mortgage Lenders (the "Plan"). From February 28, 1992 through May 28, 1992, Operating Partners managed its properties and its operations as a Chapter 11 debtor-in-possession pursuant to the Bankruptcy Code. To continue to operate the Inns as part of the "Holiday Inn" system, beginning in July, 1991, Operating partners paid fees to acquire franchise agreements to replace those that had been held by AMI Management. Holiday Inns, Inc. and its affiliates engaged in administering the "Holiday Inn" system (collectively, "HII") issued a new ten-year franchise agreement for Baltimore Inner Harbor Inn to 2005, and extended to June 30, 1997 the term of the franchise agreements that previously expired prior to June 30, 1997. Continuation of the franchise agreements requires continued compliance with Holiday Inn quality standards. Operating Partners and W&H entered into a replacement management agreement (the "W&H Management Agreement") pursuant to which W&H manages the Inns from January 4, 1992 through 1996, renewable for two two-year renewal terms. Under the W&H Management Agreement, W&H is paid an annual base management fee of 2.25% of the gross revenues of the Inns, an incentive management fee based on defined income in excess of defined amounts, and is reimbursed for miscellaneous out-of-pocket expenses allocated to the Inns, including salaries, accounting, legal, computer services, royalties, marketing, advertising, public relations, and reservation services, subject to certain limitations. The Plan provided for the Priming Loan of $14,000,000 to Operating Partners, due December 31, 1999, bearing interest at the rate of 11% per annum, and secured by a security interest, lien and mortgage senior to all other liens on the property of Operating Partners. A portion of the Priming Loan (the "Tranche A Loan") was to be used to fund a capital improvement program, could cover the entire $14,000,000 of the Priming Loan, and is subject to a prepayment penalty of 2%. The balance of the Priming Loan (the "Tranche B Loan") was a revolving credit facility to be used to fund operating cash requirements, and was limited to the lesser of $2,500,000 and the amount of the Priming Loan that was not drawn as part of the Tranche A Loan. Although there were borrowings under the Tranche B Loan during 1993, 1994 and 1995, there were no outstanding borrowings under the Tranche B Loan at December 31, 1993, 1994 and 1995. At December 31, 1995, the outstanding balance of the Tranche A Loan was $11,500,000 and the maximum availability under the Tranche B Loan was $2,500,000. Operating Partners must apply all revenues in excess of operating and administrative expenses, debt service, a reserve for capital replacements (the "FF&E Reserve", which amounted to 1 1/2% of gross revenues in 1993 and 4% of gross revenues in 1994 and 5% of gross revenues in 1995 and thereafter), income taxes (if the Partnerships are taxable as corporations) and amounts necessary to enable Operating Partners to maintain a working capital reserve of $2 million, to the repayment of the Tranche B Loan, then deposited into an escrow account held on behalf of the Lenders for payment of taxes and insurance, and then to pay the Tranche A Loan. In the event of a default under the Priming Loan, the agent for the Priming Lenders may, in addition to any other remedies; cure any defaults of Operating Partners; and/or declare the entire outstanding balance of the Priming Loan to be due and payable. Default provisions under the Priming Loan include, among others, (a) default for five days in the payment of principal or interest, (b) default for five days after notice of any other amounts due under the Priming Loan documents, and (c) acquisition by any person, without the the consent of 75% in interest of the Priming Lenders, of the Partnership's interest in Operating Partners or of 50% or more of the stock of the General Partner. The Plan also provided for the restatement of the loan agreement for the Mortgage Notes (the "Restated Loan Agreement"), under which $3,467,000 of accrued and unpaid interest at December 31, 1991 (the "Deferred Amount") was added to the principal amount of the Mortgage Notes, but bore interest only from and after January 1, 1995; the Mortgage Notes (not including the Deferred Amount) bore interest at the rate of 7% per annum in 1992 and 1993 and 8% in 1994; the principal amount of the Mortgage Notes (including the Deferred Amount) bore interest at a rate of 10% per annum after 1994; and the maturity of the Mortgage Notes (including the Deferred Amount) was extended to, December 31, 1999. In addition, the Restated Loan Agreement includes a shared appreciation feature, upon which any sale of any of the Inns and/or upon the maturity (by acceleration, at the stated maturity date or otherwise), a portion of any appreciation in the Inns held by the Partnerships is payable as additional interest on the restructured Mortgage Notes. During the term of the restructured Mortgage Notes, operating revenues in excess of the $2 million of working capital that Operating Partners is permitted to retain and the required payments (as described in the Priming Loan) must be applied to repayment of the Mortgage Notes after the Priming Loan has been paid. The Mortgage Notes can be repaid at any time without penalty. In addition, in consideration of the agreement of the Mortgage Lenders to the restructuring of the Mortgage Notes, Operating Partners and the Partnership deposited the deeds to the Inns and assignments of other assets of Operating Partners in escrow. Under the terms of the escrow agreement those deeds and assignments will be released from escrow to a designee of the Mortgage Lenders if certain defaults occur and continue not to be cured for 90 days. Such defaults would include, among others, (a) non-payment when due, of any principal, interest or other charges under the Priming Loan or the Mortgage Notes, (b) failure to pay rent on any ground leases, (c) failure to pay real and personal property taxes on the Inns, (d) failure to pay or provide for premiums for insurance required under the Priming Loan or the Mortgage Notes or the mortgages securing them, and (e) failure to pay operating expenses for the Inns (subject to certain rights to contest amounts claimed to be due). In the escrow agreement, Operating Partners has agreed not to interpose any defense or objection to, or bring any lawsuit opposing, the Mortgage Lenders' exercise of their rights under the escrow agreement, or, if Operating Partners files another bankruptcy case, contest the lifting of any stay to permit the Mortgage Lenders to exercise such rights. During 1992 and 1993, Operating Partners violated certain covenants in the Priming Loan and Restated Loan Agreements. The Mortgage Lenders and Priming Lenders (collectively, the "Lenders") consented to amendments to the Priming Loan and Restated Loan Agreements, providing for, among other things, (1) revised capital, operating and administrative expense budgets, (2) elimination of operating cash flow requirements and (3) revision of the capital improvement program for the Inns (the "Revised Capital Improvement Program"). The capital improvement program originally provided for in the Priming Loan, encompassed improvements and refurbishments with an aggregate cost of approximately $16,000,000, which were expected to be completed by December 31, 1993. The Revised Capital Improvement Program, provided for capital improvements and refurbishments totaling $13,000,872, all of which was completed by July 1, 1994. The Revised Capital Improvement Program was funded by $11,500,000 of the Tranche A Loan and $1,500,872 from the FF&E Reserve. During the first quarter of 1995, the Lenders agreed to the 1995 operating, capital and administrative expense budgets for the Partnership, confirmed satisfactory and timely completion of the Revised Capital Improvement Program and acknowledged that the requirements of the Priming Loan with respect to the capital improvement program had been completed. Operating Partners are currently in compliance with all covenants and requirements of the Priming Loan and Amended and Restated Loan Agreements. The Partnerships' investment in the Inns continues to be subject to the risks generally incident to the ownership of real estate, including those relating to the uncertainty of cash flow to meet fixed obligations, adverse changes in national economic conditions, adverse changes in local market conditions, construction of new hotels and/or the franchising by Holiday Inn of competitor hotels, changes in interest rates, the availability of financing for operating or capital needs, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, acts of God (which may result in uninsured losses), condemnation and other factors that are beyond the control of the General Partner, the Partnership, Operating Partners or W&H. The "Holiday Inns" franchise of ten of the Inns will expire on June 30, 1997 and the franchises of two additional Inns will expire on December 31, 1997. Before the expiration of the franchise for any "Holiday Inn" property, the property is inspected by HII and that inspection forms the basis for a Property Improvement Plan ("PIP"), the completion of which is a condition to the renewal of the franchise for the property. HII has inspected and prepared PIP's for ten of the Inns, the franchises of which expire in 1997. HII has indicated that they may not renew the franchises of two of the Inns and accordingly has not prepared a PIP for them. Based on those PIP's, Operating Partners' current estimate of the cost of the capital expenditures could be in the range of $13,000,000, although Operating Partners believes that the scope of work and related costs are subject to negotiation. Accordingly, Operating Partners has begun the process of evaluating, for each Inn, the relative benefits and costs of renewing the "Holiday Inn" franchise for the Inn, Operating the Inn under other franchises that may be available, and operating the Inn without a franchise affiliation. In addition, Operating Partners will evaluate improvements and expenditures included in each PIP in order to identify those items that Operating Partners believes will enhance the Inn's ability to compete in its market and will add value to the Inn, and those improvements or expenditures that Operating Partners believes to be less necessary or to add little value. Operating Partners will then negotiate with HII the scope of work included in each PIP and the length of time that will be required to complete such improvements. Generally, in connection with the renewal of the franchise for an Inn, Operating Partners will have one year, which may be negotiable, from the franchise expiration date to complete the capital improvements included in the PIP. It is anticipated that those capital improvements will be financed partially from the FF&E Reserve and from additional financing, if available. However, under the Priming Loan and Restated Loand Agreements, approval by the Lenders will be required for any franchise changes, capital expenditures or additional financing. The Partnerships believe that their ability to pay operating expenses, debt service (both the Mortgage Loan and Priming Loan), and to create required reserves depends on the ability of the Partnerships to increase future cash flows from operations. The Partnership has not declared nor paid any distributions to Unitholders of the Partnership since the third quarter of 1990 and no distributions are expected to be declared until cash flows are sufficient to pay operating and capital requirements, including debt service. In addition, the Partnership cannot make any distributions to the Unitholders until the Priming Loan is repaid, Mortgage Note payments are maintained and proper reserves are funded as required. The Transfer Agent for the Partnership is First Chicago Trust Company of New York. Their address is P.O. Box 2500, Jersey City, New Jersey 07303-2500. Certain administrative functions are performed for the Partnership by W&H. Therefore, the mailing address of the Partnership is c/o WHI, 4243 Hunt Road, Cincinnati, Ohio 45242 (Telephone: (513) 891-2920). The operation of the Inns is supervised from W&H's regional office at 301 West Lombard Street, Baltimore, MD 21201. Competition The hotel industry is highly competitive and each of the Inns experiences significant competition from other hotels, some of which are affiliated with national or regional chains (including the "Holiday Inn" system). The number of available hotel rooms in certain markets of the Inns has increased in recent years, and in many areas has reached levels in excess of peak demand. The Inns' success is in large part dependent upon their ability to compete on the basis of factors such as physical condition of the Inns, access, location, service, employees, marketing quality, reservation services, the quality and scope of food and beverage facilities, and other amenities. The demand for lodging accommodations varies seasonally and from one part of the week to another, and is dependent upon general and local economic conditions. In addition, the demand for accommodations at a particular Inn may be adversely affected by government cutbacks, changes in travel patterns caused by the relocation of highways or airports, the construction of additional highways, strikes, weather conditions, and the availability and price of gasoline and energy or other factors. Employees There are approximately 890 persons employed in the operation of the Inns (not including W&H employees engaged in management and supervision). Operating Partners believes its relationships with its employees are satisfactory, and that the Inns have a number of core employees and key supervisory personnel who provide experienced labor and management to the operations of the Inns. ITEM 2. PROPERTIES The Inns, each of which is franchised as a "Holiday Inn", are located in Maryland, Pennsylvania and Connecticut. The franchises with HII expire on various dates as summarized in the following table. Each of the Inns is located near an interstate highway or major traffic artery, or in a city's business district, providing both visibility and accessibility to travelers. All of the Inns contain meeting rooms with sound equipment and banquet facilities. Each of the Inns has on-site parking and a swimming pool. Also, each of the Inns contains a full service restaurant and lounge which offer food and beverages throughout the day. The following table presents certain information concerning the Inns:
Franchise Status of Ownership Location Year Number Expiration Ownership by Opened of Rooms Date Operating Partners Maryland Baltimore Inner Harbor 1964 375 Dec. 31, 2005 Land and building lease Baltimore Washington International Airport 1973(1) 259 June 30, 1997 Land and building lease Frederick 1963(2) 157 June 30, 1997 Fee Baltimore-Cromwell Bridge 1972 139 Dec. 31, 1997 Fee Baltimore-Moravia Road 1974 139 Dec. 31, 1997 Fee Baltimore-Belmont Blvd. 1973 135 Dec. 31, 2001 Fee Baltimore-Glen Burnie No. 1973 128 Dec. 31, 1999 Land Lease Baltimore-Pikesville 1963 108 June 30, 1997 Fee Baltimore-Glen Burnie So. 1965 100 June 30, 1997 Fee Pennsylvania Lancaster-Route 30 1971 189 June 30, 1997 Land Lease Lancaster-Route 501 1964 160 June 30, 1997 Land Lease York-Market Street 1964 120 June 30, 1997 Land Lease York-Arsenal Road 1970 100 Dec. 31, 1998 Fee Hazleton 1969 107 June 30, 1997 Fee Connecticut New Haven 1965 160 June 30, 1997 Fee East Hartford 1974 130 June 30, 1997 Land and building lease Total 2,506
(1) 96 room addition completed in 1985 (2) 63 room addition completed in 1985 The terms of the leases (including options exercised) expire at various dates ranging from 2000 through 2024. Some of the leases contain purchase options to acquire title, with options to extend the leases for terms varying from ten to forty years. Five of the leases are subject to rental adjustments based upon inflationary indexes. The leases generally require Operating Partners to pay the cost of repairs, insurance, and real estate taxes. Each of the properties is subject to mortgage liens securing the Priming Loan and the Mortgage Notes. Each Mortgage Note is cross-collateralized and secured by all of the Inns. In addition, the land and building under lease in the Baltimore Washington International Airport Inn is subject to an additional mortgage held by the Ground Lessor. The Priming Loan funded the needed capital improvements and capital expenditures in order to render the condition of the Inns suitable and adequate for Operating Partners' business, correct deficiencies at the Inns, satisfy HII quality standards, perform required maintenance and repairs, restore and retain the competitive position of the Inns and substantially upgrade the Baltimore Inner Harbor Inn, which was primarily funded from the Tranche A portion of the Priming Loan. Under the Revised Capital Improvement Program, improvements and refurbishments totaling $13,000,872 were completed in 1994, $11,500,000 of which was funded by the Tranche A Loan and $1,500,872 of which was funded by the FF&E Reserve. In addition to the completion of the Revised Capital Improvement Program, the Inns made other capital improvements during 1994 of approximately $2,773,000; and capital expenditures of approximately $2,423,000 in 1995, which were funded from the FF&E Reserve. Item 3. Legal Proceedings The Partnership and Operating Partners asserted claims against Prime and AMI Management in the Prime Bankruptcy with respect to defaults under the Lease and Prime's guaranty (the "Guaranty") of certain obligations under the Lease, the operation and maintenance of the Inns prior to and following the commencement of the Prime Bankruptcy, and the rejection of the Lease and the Guaranty. Operating Partners entered into an agreement (the "Omnibus Agreement") under which, among other things, Operating Partners assigned to the holders of the Mortgage Notes its claims (including claims in connection with such disputes) against Prime and AMI Management and agreed that amounts recovered on such claims would be allocated among financial claims (the proceeds of which would be applied to the repayment of the Mortgage Notes) and operating claims (the proceeds of which would be available to finance capital improvements to the Inns). In July, 1992 the Florida Bankruptcy Court approved the Prime Settlement, under which various claims of the holders of the Mortgage Notes against Prime and AMI Management were allowed; Operating Partners did not make any payments to or for the benefit of any other party; and Prime, AMI Management and Operating Partners exchanged mutual releases. Since 1992, Operating Partners and the Mortgage Lenders received total proceeds as a result of the Prime settlement of approximately $8,874,000, of which $8,827,000 was utilized to reduce the principal amount of the Mortgage Notes and $47,000 was used to fund capital improvements. No further recovery from the Prime Settlement is expected by the Mortgage Lenders or the Partnerships. Should any further recovery be received by the Mortgage Lenders, the proceeds would be utilized to reduce the principal balance of the Mortgage Notes, upon evaluation in accordance with the Omnibus Agreement. At the time the principal reduction of the Mortgage Notes occur, the Partnerships will recognize lease settlement proceeds. In the ordinary course of business, the Partnership and Operating Partners are named as defendants in lawsuits relating to the operation of the Inns, principally involving claims for injury alleged to have been sustained in or near the Inns or for damages alleged to have been incurred in business dealings with Operating Partners or others in connection with the Inns. Such claims are generally covered by insurance. Claims not covered by insurance have not, individually or in the aggregate been material. Item 4. Submission of Matters to a Vote of Unitholders No matter was submitted during 1995 to a vote of the Unitholders of the Partnership. PART II Item 5. Market for Registrant's Units and Related Unitholder Matters (a) The Units have been traded on the New York Stock Exchange since December 17, 1986. The following table sets forth the high and low sale price for the Partnership's Units for the calendar quarters indicated, as reported by the New York Stock Exchange:
Year Fiscal Period High Low 1995 First Quarter 3/4 1/2 Second Quarter 3/4 1/2 Third Quarter 5/8 3/8 Fourth Quarter 1/2 1/4 1994 First Quarter 1 3/4 1/2 Second Quarter 1 1/2 5/8 Third Quarter 1 3/8 3/4 Fourth Quarter 3/4 3/8 1993 First Quarter 5/8 1/4 Second Quarter 1 -- 5/8 Third Quarter 5/8 3/4 Fourth Quarter 5/8 3/8
(b) On February 29, 1996, there were 643 holders of record of the Partnership's Units. (c) No dividends have been declared or distributed since 1990. The Partnership's cash flow, which is dependent on revenues from operations of the Inns, has been insufficient to maintain quarterly distributions. In addition the Partnership cannot make any distributions to Unitholders until the Priming Loan is repaid, Mortgage Note payments are maintained and proper reserves are funded as required. Item 6. Selected Financial Data
1995 (a) 1994 (a) 1993 (a) 1992 (a) 1991 (a) (in thousands, except per Unit amounts) Operating Data: Total revenues (b) $ 46,720 $ 43,471 $ 45,590 $ 43,422 $ 41,417 Net loss (2,280) (4,673) (1,215) (2,911) (61,806)(c) Net loss allocable to limited partners (2,257) (4,626) (1,203) (2,882) (61,188)(c) Per Unit loss allocable to limited partners $ (0.56) $ (1.16) $ (0.30) $ (0.72) $ (15.30) Balance Sheet Data: Total assets $ 57,001 $ 60,673 $ 64,009 $ 66,645 $ 61,723 Long-term debt, net of current maturities 65,645 66,627 65,912 67,108 59,354(d) Partners' deficit $(15,733) $(13,453) $ (8,780) $ (7,565) $ (4,654)
(a) As a result of the fact that W&H's system of accounting for all properties under its management, operates on the basis of a calendar year deemed closed by bookkeeping purposes on that Friday which is most proximate to December 31 of any given year, the financial year of Operating Partners for 1995 ended December 29, 1995; for 1994, December 30, 1994; for 1993, December 31, 1993; for 1992, January 1, 1993; and for 1991 January 3, 1992. (b) Includes $374,000, $341,000, $304,000, $360,000 and $300,000 for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively, of other income (principally interest income). In addition, it includes $1,025,000, $4,389,000 and $3,375,000 for the years ended December 31, 1995, 1993 and 1992, respectively, of non-recurring revenue from the Prime Settlement. (c) The carrying value of the Inns and related intangible assets were written down through a charge to expense in 1991 in the amount of $51,292,000. (d) As a result of the payment default on the Mortgage Notes, the outstanding indebtedness of Operating Partners thereunder, $59,354,000 at December 31, 1991, was classified as a current liability. The Inns' room statistics are as follows:
1995 1994 1993 Average Average Average Daily Room Occupancy Daily Room Occupancy Daily Room Occupancy Rate Percentage Rate Percentage Rate Percentage 1st Quarter $59.84 47.8% $56.33 48.0% $51.77 50.5% 2nd Quarter $64.74 69.4% $61.79 69.4% $57.69 66.3% 3rd Quarter $67.06 72.2% $61.10 72.7% $59.93 71.7% 4th Quarter $62.51 56.8% $58.72 57.5% $56.76 55.6% Full Year $63.95 61.6% $59.82 61.9% $56.91 61.0%
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Partnership's actual results and could cause the Partnership's actual results in future years to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Partnership. Financial Condition The Partnership derives its income from its 99% interest in Operating Partners, whose income is generated from the operations of the Inns. Operating Partners receives all lodging and other revenues derived from, and is responsible for the payment of all expenses directly attributable to, the operation of the Inns. Set forth below is information as to lodging and food and beverage revenues and expenses generated from the operations of the Inns (in thousands):
1995 1994 1993 Operating revenues: Lodging $ 37,083 $ 34,866 $ 32,563 Food & beverage 8,238 8,264 8,334 Totals 45,321 43,130 40,897 Direct operating expenses: Lodging 8,249 7,972 7,294 Food & beverage 7,809 7,509 7,514 Marketing 3,334 3,244 3,228 Utilities 2,956 2,875 2,978 Repairs & maintenance 3,490 3,379 3,016 Rent 1,317 1,301 1,315 Insurance 630 670 595 Property taxes 1,380 1,300 1,385 Other 7,718 7,593 7,013 Totals 36,883 35,843 34,338 Operating revenues in excess of direct operating expenses $ 8,438 $ 7,287 $ 6,559
In 1992, as part of its Plan, Operating Partners restructured its Mortgage Notes under the Restated Loan Agreement and arranged a Priming Loan to fund necessary capital improvements and finance operating deficiencies. The improved condition of the Inns coupled with proper management and assisted by the stable economy, have enabled the Partnerships to significantly increase average daily room rates (ADR). Operating revenues have, therefore, increased to improve the cash flows to cover operating expenses, pay debt service (includingthe Tranche A Loan), make necessary and required repairs and maintenance and repay the Tranche B Loan. The ability of the Partnerships to pay operating expenses, service debt and create required reserves depends upon the ability of the Partnerships to increase future cash flows from operations. Unless cash flows from operations are sufficient, the Partnerships may not be able to continue as going concerns, although it is the intention of the Partnerships to continue to operate as going concerns. It is, however, the present intention of Operating Partners to sell the Moravia Inn. Operating Partners believe that the Moravia Inn will not contribute to the long term cash flow requirements of the Partnerships, and therefore the sale proceeds can better be utilized to reduce the Priming Loan debt. Operating Partners have no present intention to list any of the other Inns for sale. As required under the Priming Loan and Restated Loan Agreement, approval by the Lenders will be required for the sale of the Moravia Inn. The Partnerships' investment in the Inns continues to be subject to the risks generally incident to the ownership of real estate, including those relating to the uncertainty of cash flow to meet fixed obligations, adverse changes in national economic conditions, adverse changes in local market conditions, changes in interest rates, the availability of financing for operating or capital needs, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, acts of God (which may result in uninsured losses), condemnation and other factors that are beyond the control of the General Partner, the Partnership, Operating Partners or W&H. Results of Operations Total revenues (excluding non-recurring income from the Prime Settlement) increased to $45,695,000 in 1995 from $43,471,000 in 1994 and $41,201,000 in 1993. Total non-recurring income from the Prime Settlement was $1,025,000 in 1995 and $4,389,000 in 1993. The Partnerships' net loss was $2,280,000 for the year ended December 31, 1995 as compared to a loss of $4,673,000 in 1994, and a loss of $1,215,000 in 1993, including the Prime Settlement proceeds. Excluding the Prime Settlement proceeds received in 1995 and 1993, the loss in 1995 of $3,305,000 decreased from the loss in 1994 of $4,673,000 and $5,604,000 in 1993. The following table compares the room revenues, occupancy percentage levels and ADR for the years indicated:
1995 1994 1993 Lodging revenues (in thousands) $ 37,083 $ 34,866 $ 32,563 Occupancy percentage 61.6% 61.9% 61.0% ADR $ 63.95 $ 59.82 $ 56.91
The Inns have been able to increase their respective ADR's by changing the mix of market segments (hotel guests categorized as individual business, leisure and government guests, etc. and groups such as corporate, association, tours, crews, etc.), from lower ADR to higher ADR segments. Attracting and maintaining the higher ADR segments has been accomplished by increased marketing and sales promotions and the attractiveness of the Inns as a result of the capital improvement program completed in 1994 and the continuation of capital improvements through 1995. In addition, the Inns have been able to capture new accounts from businesses that have moved into the market. In attracting the market segments with higher ADR, the Inns have had to remove most of their lower ADR market segments (such as airline crews and tour groups). This repositioning of market segment business contributed to the decline in occupancies in 1995. Due to the intense competition, including recent conversions of competitor hotels to HII franchises, and saturation of available rooms where the Inns are located, the Partnerships and W&H believe it will continue to be difficult to substantially increase the respective occupancy levels at the Inns. Another contributing factor to the projected stagnant occupancy is that approximately one-third of the Inns are "highway oriented" location properties, which in general have lagged behind in demand, as compared to midscale and urban, suburban and airport location properties. Also, these "highway oriented" Inns have an external dated appearance due to their age, which contributes to their median occupancies. It is anticipated that the Inns can continue to improve their mix of market segments and thereby increase their ADR's and improve profit margins. This is expected to be accomplished by seeking the higher rated segments through continued participation in HII national advertising and marketing, Priority Club promotions and W&H Marketing and Sales. Also, the Inns plan to attract and target segments of business previously unattainable due to the conditions of the Inns prior to the capital improvements. The Inns have been removing the lower rated market segments, in order to have the capacity to accept more higher rated segments that may have been previously denied a guest room. Food and beverage revenues for 1995 declined slightly to $8,238,000 from $8,264,000 in 1994 and $8,334,000 in 1993. The decline is attributed to the change in mix of market segments, since some of the market segments that pay a lower ADR and were displaced, used the restaurant and banquet facilities at the Inns more than some of the higher ADR segments. Also, the food and beverage revenues have historically fluctuated with occupancies at the Inns. Direct operating expenses in 1995 were $36,883,000, as compared to $35,843,000 in 1994 and $34,338,000 in 1993. The increase in lodging expenses is reflective of inflationary increases in labor costs, and increases in expenses that are incurred in servicing the higher rated market segments, such as room amenities, travel agent commissions, and guest supplies. Increases in food and beverage expenses are attributable to the inflationary increases in labor costs and food costs. Repair and maintenance costs have increased in 1995 over 1994, which is reflective of the age of the Inns. In an effort to attract the higher rated market segments, the Inns have increased spending in marketing, such as advertising costs and hotel promotions. The Inns' utility cost increases are attributable to the less than favorable weather conditions in 1995 as compared to 1994, and some utility rate increases incurred at a few of the Inns. The increase in property taxes is associated with increases in real estate and personal property tax rates at certain of the Inns, as assessment values have stayed relatively stable in 1995 to that of 1994. The increases in other expenses, included in direct operating expenses, reflect higher administrative and general expenses directly incurred in the operations of the Inns and in costs that vary with revenues, such as franchise fees paid to HII, management fees paid to W&H, and credit card commissions. Depreciation and amortization expense decreased in 1995, due to the original debt acquisition costs having been fully amortized in the first quarter of 1995. The reduction in interest expense is the result of the reduction in the outstanding principal balance of the Mortgage Notes from the $1,025,000 of Prime Settlement proceeds received in 1995. Liquidity and Capital Resources The changes in cash and cash equivalents are summarized as follows:
1995 1994 1993 Net cash provided by operating activities $ 2,092 $ 1,451 $ 578 Net cash used by investing activities (2,668) (2,482) (2,843) Net cash provided by financing activities - 675 2,331 Net increase (decrease) in cash and cash equivalents $ (576) $ (356) $ 66
In 1993, cash provided by operating revenues exceeded cash used for operating expenses of the Inns and of the Partnerships, resulting in net cash being provided by operating activities. Cash used by investment activities equaled $2,843,000 in 1993, of which $2,685,000 was utilized for capital improvements and refurbishments. In addition, there was a net increase in the restricted cash and cash equivalents of $158,000 in 1993, including the funding to the FF&E Reserve of 1-1/2% of gross revenues, which totaled $385,000, offset by the reduction of $52,000 in the funds required to be maintained in the property tax escrow account and the application of $175,000 that remained unexpended in 1992 from the mandatory advance balance under the Priming Loan to fund the capital improvements and refurbishments. In 1993, borrowings from the Priming Loan provided cash for financing activities. The Partnerships borrowed $3,157,000 under the Tranche A Loan and an additional $815,000 under the Tranche B Loan. The entire balance of the Tranche B Loan was repaid from excess working capital in 1993, in the amount of $1,641,000. In addition the remaining balance of the mandatory advance was drawn down for the capital improvements. Non cash activities in 1993 included the reduction of long term debt by $4,389,000 from the proceeds from the Prime Settlement. In 1994, cash flows from operating activities increased, as compared to 1993, as a result of increased revenues from operations and control of operating expenses. This resulted in net cash being provided by operating activities. In 1994, net cash used by investing activities was $2,482,000, and included additions to property and equipment of $2,773,000, partially offset by a $291,000 decrease in the restricted cash accounts. The restricted cash accounts included the net reduction in the FF&E Reserve of $305,000 (the capital expenditures of $2,056,000 which were funded from the FF&E Reserve exceeded the $1,751,000 funded to the FF&E Reserve at 4% of revenues, plus interest earned on the account) net of an increase of $14,000, in the interest reserve and tax escrow accounts. In 1994, borrowings from the Priming Loan provided cash for financing activities. The Partnerships borrowed the remaining $675,000 under the Tranche A Loan and $1,763,000 under the Tranche B Loan. The entire Tranche B Loan borrowed to supplement cash flow deficiencies in the first quarter of 1994 was repaid from excess working capital in the second quarter of 1994. In 1995, cash provided by operating revenues exceeded cash used for operating expenses of the Inns and of the Partnerships, resulting in net cash being provided by operating activities. Cash used in investing activities equaled $2,668,000 in 1995, of which $2,423,000 was utilized for capital improvements and refurbishments and $245,000 of increases in restricted cash. The restricted cash accounts included the net increase in the FF&E Reserve of $221,000 (funding plus interest earned of $2,337,000 less capital expenditures of $2,117,000) and increases of $24,000 in the interest reserve and tax escrow accounts. The Partnerships borrowed $1,200,000 from the Tranche B Loan to supplement operating cash flow deficiencies during the first quarter of 1995. The entire Tranche B Loan was repaid from excess working capital during the second quarter of 1995. Until the Priming Loan is paid in full, no principal is required to be paid on the Mortgage Notes from operating cash. In 1992 and 1993, interest on the Mortgage Notes was payable at 7% per annum and at 8% per annum in 1994, with the interest rate increasing to 10% per annum after 1994 (including on the Deferred Amount). The outstanding principal amount of the Mortgage Notes has been reduced by $8,827,000 from the proceeds of the Prime Settlement ($3,419,000 during 1992, $4,383,000 during 1993, and $1,025,000 during 1995). The Partnerships' ongoing cash requirements are for working capital, debt service and the funding of required reserves. The Partnerships' source of liquidity is the operations of the Inns, which during the winter months have been insufficient to fund working capital, debt service and required reserves. The Partnerships may however, borrow up to $2,500,000 of the Tranche B portion of the Priming Loan for operating cash deficiencies, but must repay any amount borrowed, if for any month cash on hand exceeds working capital requirements, as defined in the Priming Loan. There were no Tranche B borrowings outstanding as of December 31, 1995. Approximately $792,000 of working capital cash was on hand as of December 31, 1995. Presently the Partnerships have a capital replacement reserve of approximately $831,000, which is available only for capital improvements and refurbishments. Beginning in 1993, the FF&E Reserve was required under the Priming Loan, to be funded on a monthly basis at 1.5% of revenues. The required funding of the FF&E Reserve increased to 4% of revenues in 1994, and 5% thereafter. The interest reserve account contains approximately $443,000. The interest reserve account was established through the initial Priming Loan, and, at the option of the Lenders, may be used to cure any default under the Priming Loan. No additional funding to the interest reserve is required under the Priming Loan. No distributions will be made to Unitholders until the Priming Loan is paid in full, proper required reserves are maintained, and proper payments are made on the Mortgage Notes which would include principal reduction. There is no guarantee that there will ever be excess cash for such distributions to Unitholders. The Partnerships anticipate moderate growth in the economy, in the travel and hospitality industries, in the real estate market and in the comparative attractiveness of the Inns resulting from the capital improvements (although neither the Partnership nor any of its advisors can give any assurances as to the strength or duration of any such economic growth). The Partnerships anticipate that such economic growth coupled with the improvements constantly being made to the physical condition of the Inns, continued professional management and marketing of the Inns, will result in the improvement of occupancies, room rates and related revenues, and thus create better profit margins. The Partnerships anticipate that their future earnings, together with the advances under the Priming Loan, will enable the Partnerships to pay all operating expenses, pay debt service and satisfy the current requirements under the HII franchise agreements. However, while the Partnerships' budgets and capital plans reflect their present best estimates of future events, those events are beyond the control of the Partnerships, the General Partner and W&H and no assurances can be given that the Partnerships will have the liquidity to meet future operating and capital commitments. Further, the "Holiday Inns" franchise of ten of the Inns will expire on June 30, 1997 and the franchises of two additional Inns will expire on December 31, 1997. Before the expiration of the franchise for any "Holiday Inn" property, the property is inspected by HII and that inspection forms the basis for a Property Improvement Plan ("PIP"), the completion of which is a condition to the renewal of the franchise for the property. HII has inspected and prepared PIP's for ten of the Inns, the franchises of which expire in 1997. HII has indicated that they may not renew the franchises of two of the Inns and accordingly has not prepared a PIP for them. Based on those PIP's, Operating Partners' current estimate of the cost of the capital expenditures could be in the range of $13,000,000, although Operating Partners believes that the scope of work and related costs are subject to negotiation. Accordingly, Operating Partners has begun the process of evaluating, for each Inn, the relative benefits and costs of renewing the "Holiday Inn" franchise for the Inn, operating the Inn under other franchises that may be available, and operating the Inn without a franchise affiliation. In addition, Operating Partners will evaluate improvements and expenditures included in each PIP in order to identify those items that Operating Partners believes will enhance the Inn's ability to compete in its market and will add value to the Inn, and those improvements or expenditures that Operating Partners believes to be less necessary or to add little value. Operating Partners will then negotiate with HII the scope of work included in each PIP and the length of time that will be required to complete such improvements. Generally, in connection with the renewal of the franchise for an Inn, Operating Partners will have one year, which may be negotiable, from the franchise expiration date to complete the capital improvements included in the PIP. It is anticipated that those capital improvements will be financed partially from the FF&E Reserve and from additional financing, if available. However, under the Priming Loan and Restated Loan Agreements, approval by the Lenders will be required for any franchise changes, capital expenditures or additional financing. Operating Partners' operating expenses have been and are expected to be subject to inflationary pressures. Depending on levels of economic activity and competitive pressures, the room rates and food and beverage charges at the Inns may also increase with inflation, but not necessarily in proportion to the pressures affecting expenses. Under the Internal Revenue Code, a publicly traded partnership, such as the Partnership, is taxable as a corporation unless it satisfies certain conditions. However, subject to various limitations, publicly traded partnerships in existence on December 17, 1987 are generally exempt from taxation as a corporation until after 1997. If the Partnerships' operations continue as described herein, the Partnership should not be taxed as a corporation until after 1997. However, a publicly traded partnership which adds a substantial new line of business is not eligible for such exemption and it is possible that the Internal Revenue Service could contend that the Partnership should be taxed as a corporation after November 29, 1990, the date of the termination of the Lease. If the Partnership were taxable as a corporation, its operating losses should eliminate any tax liability for some time. Item 8. Financial Statements and Supplementary Data See Index to Financial Statements and Financial Schedules included in Item 14(a). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Certain information is set forth below concerning the directors and officers of the General Partner, each of whom has been elected or appointed to serve until his successor is duly elected and qualified. The Unitholders of the Partnership do not have voting rights with respect to the election of directors of the General Partner. Present Position with the General Partner Name Age and Business Experience for Past Five Years S. Leonard Okin 62 Vice President and Director of the General Partner since inception; Managing Director of the General Partner since January 1, 1994; Vice President and Director of First American Realty Associates, Inc., (mortgage brokers) from prior to 1989 to December 31, 1993 (1). Robert A. Familant 44 Director of the General Partner since August 19, 1994; Treasurer/CEO of Progressive Credit Union (credit union) since prior to 1989 (2). Seymour G. Siegel 53 Director of the General Partner since November 21, 1994; President of Siegel Rich Resources, Inc. (consulting firm) since January 1, 1994; Senior Partner of M.R. Weiser & Co. (accounting firm) from prior to 1989 (3). (1) In 1994, with the approval of the Lenders, Mr. Okin entered into a Consulting Services Agreement (the "Consulting Services Agreement") with the Partnerships and the General Partner, giving him authority to make day to day operating decisions for the Inns, and for the purposes hereof will be referred to as Managing Director of the corporate General Partner. First American Realty Associates, Inc. had performed mortgage brokerage services for Prime Hospitality Corp., formerly Prime Motor Inns, Inc. (2) Mr. Familant was elected and approved as an outside Director of the General Partner effective August 19, 1994. (3) Mr. Siegel was elected and approved as an outside Director of the General Partner effective November 21, 1994. Under the Consulting Services Agreement, Mr. Okin, as an independent contractor, performs on behalf of the Partnership, Operating Partners and the General Partner, the services normally performed by and exercises the authority normally assumed or undertaken by, the chief executive officer of a corporation. The Consulting Services Agreement was effective December 1, 1994 through December 31, 1995, and has been extended to December 31, 1996. Unless the parties or the Lenders exercise their rights to terminate the Consulting Services Agreement, it will be extended automatically for successive twelve-month periods. The Consulting Services Agreement is terminable, among other things, by 30 days prior written notice from the Partnership, Operating Partners, or the General Partner to Mr. Okin of their election not to renew the agreement at the expiration of the initial or any renewal term; for cause; by 60 days prior written notice from Mr. Okin to the General Partner of Mr. Okin's election at any time to terminate the agreement; at any time by Mr. Okin if the Partnership, Operating Partners and the General Partner for any reason are not able to maintain in place specified liability insurance coverage for Mr. Okin; and upon foreclosure by the Lenders on substantially all of the assets of the Partnerships, by notice from the Lenders to Mr. Okin given within ten days of such foreclosure. Item 11. Executive Compensation As the only person performing services to the Partnerships comparable to the services of an officer, Mr. Okin is required to devote substantial time and effort to manage the Partnerships. The following table sets forth the Mr. Okin's compensation paid in respect of the fiscal year ended December 31, 1995 and 1994. Summary Compensation Table:
Name and Other Annual Long Term All Other Principle Position Year Salary ($) Bonus ($) Compensation Compensation Compensation S. Leonard Okin(1) 1995 $ 120,000 $ - $ - $ - $ - 1994 $ 120,000 $ - $ - $ - $ -
(1) Mr. Okin receives compensation as Managing Director of the corporate General Partner. In addition, Mr. Okin received reimbursement for out-of-pocket expenses in 1995 and 1994 totaling approximately $27,500 and $27,400, respectively (for office rent, secretarial services, utilities, airfare, postage, office supplies, etc.) and $6,250 and $3,250, respectively, for attendance at board meetings. Mr. Okin did not receive compensation in excess of $100,000 in 1993. Directors are currently paid a fee of $1,000 for each Board meeting attended in New York and $1,500 for each meeting out of town, plus out of pocket expenses incurred for attending meetings. Item 12. Securities Ownership of Certain Beneficial Owners and Management The following table sets forth, as of December 31, 1995, the number of Units owned by the officers and directors of the General Partner and by all persons owning of record or, to the knowledge of the Partnership, beneficially more than 5% of the outstanding Units. The General Partner does not own any Units.
Ownership of Units Number Total No. Percentage of Units of Units of Units Name & Address of Owner Held Held Outstanding S. Leonard Okin c/o Prime American Realty Corp. P.O. Box 230 Hawthorne, NJ 07507-0230 1,000 1,000 0.025% Jerome & Marcella Yunger 5039 Mesa View Drive Las Vegas, NV 89120 174,800 Roxanne Rose Yunger 5039 Mesa View Drive Las Vegas, NV 89120 129,400 304,200(1) 7.605%(1)
(1) Includes 174,800 Units held of record by Mr. & Mrs. Yunger as Trustees of the Jerome J. and Marcella M. Yunger Family Trust and 129,400 Units held of record by Roxanne Rose Yunger. The Partnership has no knowledge as to the beneficial ownership of such Units. Item 13. Certain Relationships and Related Transactions During 1995 and 1994, Mr. Okin as Managing Director and Officer of the General Partner, received $153,750 and $150,650 as cash compensation for his services and reimbursement of expenses. See Item 10 and 11 above. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1.Financial Statements 2. Financial Statement Schedules The Financial Statements and Schedules listed in the accompanying index on page 24 to financial statements are filed as part of this Form 10-K. 3. Exhibits (2) (a) Joint motion and stipulation before the Florida Bankruptcy Court for order authorizing Prime and AMI Management to enter into an agreement with Operating Partners and the Partnership and approving the terms thereof included as Exhibit (2) (a) to the Partnership's 1990 Annual Report on Form 10-K is incorporated herein by reference. (2) (b) Agreed order of the Florida Bankruptcy Court approving rejection of the Lease, the Guarantee and a related agreement included as Exhibit (2) (b) to the Partnership's 1990 Annual Report on Form 10-K is incorporated herein by reference. (3) (a) Amended and Restated Agreement of Limited Partnership of the Partnership included as Exhibit 3.1 to the Partnership's Registration Statement on Form S-1 (No. 33-9595) (The "Registration Statement") is incorporated herein by reference. (3) (b) Certificate of Limited Partnership of the Partnership included as Exhibit 3.2 to the Registration Statement is incorporated herein by reference. (3) (c) Amended and Restated Agreement of Limited Partnership of Operating Partners, included as Exhibit 3.3 to the Registration Statement is incorporated herein by reference. (3) (d) Certificate of Limited Partnership of Operating Partners included as Exhibit 3.6 to the Registration Statement is incorporated herein by reference. (4) (a) Form of Deposit Agreement included as Exhibit 10.8 to the Registration Statement is incorporated herein by reference. (10) (a) Form of Lease included as Exhibit 10.1 to the Registration Statement is incorporated herein by reference. (10) (b) Form of Management Agreement included as Exhibit 10.2 to the Registration Statement is incorporated herein by reference. (10) (c) Form of Purchase and Sale Agreement included as Exhibit 10.3 to the Registration Statement is incorporated herein by reference. (10) (d) Form of Note Purchase and Loan Agreement included as Exhibit 10.4 to the Registration Statement is incorporated herein by reference. (10) (e) Form of Service Contract included as Exhibit 10.5 to the Registration Statement is incorporated herein by reference. (10) (f) Form of Undertaking included as Exhibit 10.6 to the Registration Statement is incorporated herein by reference. (10) (g) Form of Guaranty included as Exhibit 10.7 to the Registration Statement is incorporated herein by reference. (10) (h) Management Agreement among AMI Operating Partners, L.P. ("Operating Partners"), Sixteen Hotels, Inc. ("Sixteen Hotels"), and Winegardner & Hammons, Inc. ("W&H"), as Manager, dated January 4, 1992. (10) (i) Loan Agreement among Massachusetts Mutual Life Insurance Company, Century Life of America and Jackson National Life Insurance Company (collectively, the "Priming Lenders"), as lenders, Operating Partners, as borrower and Norwest Bank Minnesota, N.A., Agent (the "Agent") dated as of February 28, 1992 included as Exhibit (10) (i) to the Partnership's 1992 Annual Report on Form 10-K is incorporated herein by reference. (10) (j) Amended and Restated Loan Agreement among Massachusetts Mutual Life Insurance Company, Century Life of America and Jackson National Life Insurance Company, (collectively, the "Priming Lenders"), as lenders, AMI Operating Partners, as borrower and Norwest Bank Minnesota, N.A., Agent (the "Agent"), dated as of June 12, 1992, as amended by letters of consent agreements dated February 1993, and March 17, 1993, included as Exhibit (10) (j) to the Partnership's 1992 Annual Report on Form 10-K (are incorporated herein by reference), and January 31, 1994, a copy of which is attached hereto. (10) (k) Amended and Restated Loan Agreement among Operating Partners, the Holders named in Exhibit A thereto (collectively, the "Existing Lenders") and IBJ Schroeder Bank and Trust Company, Servicer, dated June 12, 1992, as amended by letters of consent agreements dated February 1993, included as Exhibit (10) (k) to the Partnership's 1992 Annual Report on Form 10-K, and March 17, 1993 (are incorporated herein by reference) and attached hereto. (10) (l) Escrow Agreement among Operating Partners, the Existing Lenders and Chicago Title Insurance Company, as escrow agent and as title insurer dated June 12, 1992, included as Exhibit (10) (l) to the Partnership's 1992 Annual Report on Form 10-K. (10) (m) Consulting Services Agreement among the Partnerships, the General Partner and Mr. S. Leonard Okin dated December 1, 1994, included as Exhibit (10) (m) to the Partnership's 1994 Annual Report on Form 10-K. (10) (n) Fourth Consent Agreement among Operating Partners, the Priming Loan Lenders named in Exhibit A thereto, and the Lenders named in Exhibit B thereto, dated March 17, 1995, included as Exhibit (10) (n) to the Partnership's 1994 Annual Report on Form 10-K. (21) Subsidiaries of Prime Motor Inns Limited Partnership are as follows: Name Jurisdiction of Incorporation AMI Operating Partners, L.P. Delaware (27) Financial Data Schedules (b) Reports on Form 8-K None 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, there-unto duly authorized. PRIME MOTOR INNS LIMITED PARTNERSHIP (Registrant) By: Prime-American Realty Corp. General Partner Date: March 22, 1996 By: /s/ S. Leonard Okin S. Leonard Okin Vice President & Director Date: March 22, 1996 By: /s/ Robert A. Familant Robert A. Familant Director Date: March 22, 1996 By: /s/ Seymour G. Siegel Seymour G. Siegel Director SIGNATURES 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 and on the dates indicated. BOARD OF DIRECTORS OF THE GENERAL PARTNER Signature Title Date By: /s/ S. Leonard Okin Director and Vice President March 22, 1996 S. Leonard Okin of the General Partner; Consultant under the Consulting Services Agreement By: /s/ Robert A. Familant Director of the March 22, 1996 Robert A. Familant General Partner By: /s/ Seymour G. Siegel Director of the March 22, 1996 Seymour General Partner EX-10 2 AUDIT REPORT CONTENTS Pages Report of Independent Accountants 25 Financial Statements: Consolidated Balance Sheets - December 31, 1995 and 1994 26 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 28 Consolidated Statements of Partners' Deficit for the years ende December 31, 1995, 1994 and 1993 29 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 30 Notes to Consolidated Financial Statements 31 Report of Independent Accountants To the Partners of the Prime Motor Inns Limited Partnership and AMI Operating Partners, L.P. We have audited the accompanying consolidated balance sheets of Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership as of December 31, 1995 and 1994, and the related consolidated statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Partnerships will continue as a going concern. As discussed in Note 1, the Partnerships have incurred significant operating losses and have a capital deficit at December 31, 1995. These matters raise substantial doubt about the Partnerships' ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Cincinnati, Ohio February 23, 1996 Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Balance Sheets December 31, 1995 and 1994 (dollars in thousands)
ASSETS 1995 1994 Current Assets Cash and cash equivalents $ 792 $ 1,368 Accounts receivable, net of allowance for doubtful accounts in 1995 and 1994 of $20 and $19, respectively 661 881 Prepaid expenses 941 986 Other current assets 375 391 Total current assets 2,769 3,626 Property and equipment: Land 7,653 7,653 Buildings and leasehold improvements 55,389 54,359 Furniture and equipment 38,244 36,851 101,286 98,863 Less allowance for accumulated depreciation and amortization (49,140) (43,982) 52,146 54,881 Cash and cash equivalents restricted for: Acquisition of property and equipment 831 610 Interest and taxes 491 467 Other assets, net 764 1,089 Total assets $ 57,001 $ 60,673
Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Balance Sheets, Continued December 31, 1995 and 1994 (dollars in thousands)
LIABILITIES AND PARTNERS' DEFICIT 1995 1994 Current liabilities: Trade accounts payable $ 568 $ 402 Accrued payroll 688 714 Accrued payroll taxes 286 258 Accrued vacation 473 436 Accrued utilities 326 249 Sales tax payable 242 221 Other current liabilities 671 643 Total current liabilities 3,254 2,923 Long-term debt 65,645 66,627 Deferred interest 3,685 4,426 Other liabilities 150 150 Total liabilities 72,734 74,126 Commitments Partners' deficit: General partner (729) (706) Limited partners (15,004) (12,747) Total partners' deficit (15,733) (13,453) Total liabilities and partners deficit $ 57,001 $ 60,673
The accompanying notes are an integral part of the consolidated financial statements. Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 (dollars in thousands, except per unit amounts)
1995 1994 1993 Revenues: Direct operating revenues: Lodging $ 37,083 $ 34,866 $ 32,563 Food and beverage 8,238 8,264 8,334 Other income 374 341 304 Lease settlement proceeds 1,025 - 4,389 Total revenues 46,720 43,471 45,590 Expenses: Direct operating expenses Lodging 8,249 7,972 7,294 Food and beverage 7,809 7,509 7,514 Marketing 3,334 3,244 3,228 Utilities 2,956 2,875 2,978 Repairs and maintenance 3,490 3,379 3,016 Rent 1,317 1,301 1,315 Insurance 630 670 595 Property taxes 1,380 1,300 1,385 Other 7,718 7,593 7,013 Other general and administrative 587 606 802 Depreciation and amortization 5,473 5,626 5,451 Interest expense 6,057 6,069 6,214 Total expenses 49,000 48,144 46,805 Net loss (2,280) (4,673) (1,215) Net loss allocable to general partner (23) (47) (12) Net loss allocable to limited partners $ (2,257) $ (4,626) $ (1,203) Number of limited partner units outstandi 4,000 4,000 4,000 Net loss allocable to limited partners per unit $ (.56) $ (1.16) $ (.30)
The accompanying notes are an integral part of the consolidated financial statements. Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Statements of Partners' Deficit for the years ended December 31, 1995, 1994 and 1993 (dollars in thousands)
General Limited Partners Partner Total Balance at December 31, 1992 $ (647) $ (6,918) $ (7,565) Net loss (12) (1,203) (1,215) Balance at December 31, 1993 (659) (8,121) (8,780) Net loss (47) (4,626) (4,673) Balance at December 31, 1994 (706) (12,747) (13,453) Net loss (23) (2,257) (2,280) Balance at December 31, 1995 $ (729) $ (15,004) $ (15,733)
The accompanying notes are an integral part of the consolidated financial statements. Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 (dollars in thousands)
1995 1994 1993 Cash flows from operating activities: Net loss $ (2,280) $ (4,673) $ (1,215) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization of property 5,158 5,126 4,951 Lease settlement proceeds (1,025) - (4,389) Amortization of other assets 315 500 500 Amortization of debt discount 43 40 36 Changes in operating assets and liabilities: Accounts receivable 220 (12) 125 Prepaid expenses 45 (37) (147) Other current assets 16 (117) 122 Other assets 10 2 (6) Trade accounts payable 166 (206) (351) Accrued payroll (26) 124 107 Accrued payroll taxes 28 39 (64) Accrued vacation 37 59 11 Accrued utilities 77 (65) 6 Sales tax payable 21 9 15 Other current liabilities 28 82 (404) Deferred interest (741) 580 (1,131) Other liabilities - - 150 Net cash provided by operating activities 2,092 1,451 578 Cash flows from investing activities: Additions to property and equipment (2,423) (2,773) (2,685) Decrease (increase) in restricted cash (245) 291 (158) Net cash used for investing activities (2,668) (2,482) (2,843) Cash flows from financing activities: Long-term borrowings - 675 3,157 Borrowings under revolving credit facility 1,200 1,763 815 Repayment of revolving credit facility (1,200) (1,763) (1,641) Net cash provided by financing activities - 675 2,331 Net increase (decrease) in cash and cash equivalents (576) (356) 66 Cash and cash equivalents, beginning of ye 1,368 1,724 1,658 Cash and cash equivalents, end of year $ 792 $ 1,368 $ 1,724 Supplementary cash flow data: Interest paid $ 6,755 $ 5,449 $ 5,046 Noncash activities: Lease settlement proceeds received from former affiliate in the form of stock used to reduce long-term debt $ 1,025 $ - $ 4,389
The accompanying notes are an integral part of the consolidated financial statements. Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Notes to Consolidated Financial Statements Organization, Operations and Bankruptcy: Prime Motor Inns Limited Partnership (the "Partnership") and its 99%-owned subsidiary, AMI Operating Partners, L.P. ("Operating Partners"), were formed in October 1986 under the Delaware Revised Uniform Limited Partnership Act. The Partnership and Operating Partners are referred to collectively as the "Partnerships". Prime-American Realty Corp. (the "General Partner"), a subsidiary of Prime Hospitality Corporation ("Prime"), formerly Prime Motor Inns, Inc., is the general partner of and holds as its principal asset a 1% partnership interest in the Partnership and in Operating Partners. In December 1986, the Partnership consummated an initial public offering (the "Offering") of 4,000,000 units of limited partnership interest (the "Units") in the Partnership, and used the funds received to acquire the 99% limited partnership interest in Operating Partners. Units are evidenced by depositary receipts which are listed on the New York Stock Exchange. Operating Partners commenced operations in December 1986 when it used the Offering proceeds and issued mortgage notes (the "Mortgage Notes") in the principal amount of $61,470,000 to purchase 16 full service hotels (the "Inns") from subsidiaries of Prime. The Partnerships operate and maintain 9 Inns in Maryland, 5 in Pennsylvania and 2 in Connecticut, all of which are presently franchised as part of the "Holiday Inn" system. Profits and losses from operations and cash distributions of the Partnerships combined are generally allocated 1.99% to the General Partner and 98.01% to the limited partners. Any profits and losses from operations in excess of certain specified annual and cumulative returns on investments in limited partner shares, as defined (generally 12.5%), are allocated approximately 30% to the General Partner and 70% to the limited partners. Until November 30, 1990, the Inns were operated by AMI Management Corp. ("AMI Management"), another subsidiary of Prime, under the terms of a lease between AMI Management and Operating Partners (the "Lease"), guaranteed by Prime (the "Guaranty"). The Lease was a net lease that granted AMI Management the right to use the Inns until December 31, 1991. On September 18, 1990, Prime announced that it and certain of its subsidiaries, including AMI Management but not the General Partner, had filed for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida. AMI Management defaulted on the payment of base rent due November 1, 1990 under the Lease. On November 7, 1990, the Partnership gave notice of default to, and demanded payment from AMI Management and Prime. AMI Management and Prime also filed a motion to reject the Lease and Guaranty and, by order of the bankruptcy court dated December 7, 1990, the bankruptcy court approved such rejection and the Lease and Guaranty were terminated effective as of November 30, 1990 (see Note 3). Organization, Operations and Bankruptcy, Continued: Operating Partners was in default under its mortgage loan agreement as of and prior to December 31, 1991 as a result of, among other things, the bankruptcy filing by Prime and AMI Management. On March 28, 1991, the Partnerships received a notice of acceleration and demand for payment of the entire outstanding balance of the Mortgage Notes along with certain conditions under which the lenders would pursue discussions with respect to restructuring the Mortgage Notes. On February 28, 1992, Operating Partners filed with the United States Bankruptcy Court a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code, seeking confirmation by the bankruptcy court of a prepackaged plan of reorganization (the "Plan"). The New York Bankruptcy Court confirmed the Plan, on May 28, 1992, which became effective as of June 12, 1992 (the "Effective Date"). Upon confirmation of the Plan, the New York Bankruptcy Court approved the Restated Loan Agreement (the "Restated Loan Agreement") which, among other things, extended the maturity date of the Mortgage Notes to December 31, 1999 (refer to Note 5 for a further discussion of this matter). Although the Plan was approved, the Partnerships may not be able to continue as going concerns unless cash flow from operations are sufficient. The Partnerships have incurred significant operating losses and have a capital deficit at December 31, 1995. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of recorded asset amounts or the amounts of liabilities that might be necessary should the Partnerships be unable to continue as going concerns. 2. Summary of Significant Accounting Policies: 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 dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The following is a summary of certain significant accounting policies used in the preparation of the consolidated financial statements. a. Principles of Consolidation: The consolidated financial statements include the accounts of the Partnership and its 99%-owned subsidiary limited partnership, Operating Partners. Operating partners operates on the basis of a calendar year ending on the Friday which is most proximate to December 31 of any given year. All material intercompany accounts and transactions have been eliminated. b. Cash Equivalents: Cash equivalents are highly liquid investments with a maturity of three months or less when acquired. c. Property and Equipment: Property and equipment are stated at the lower of cost or fair market value. The net carrying value of property and equipment as of December 31, 1991 was reduced to estimated fair market value, through a charge to expenses in the amount of $46,354,000. Expenditures for improvements and major renewals are capitalized. Expenditures for maintenance and repairs, which do not extend the useful life of the asset, are expensed as incurred. For financial statement purposes, provision is made for depreciation and amortization using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the related leases. For federal income tax purposes, accelerated methods are used in calculating depreciation. d. Impairment of Long Lived Assets: In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long Lived Assets" which is effective for years beginning after December 15, 1995, with earlier adoption encouraged. The Partnerships elected early adoption of SFAS No. 121 in 1995. In accordance with this new pronouncement, the Partnerships review for impairment and recoverability of, primarily, property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the assets carrying amount to determine if a write-down is required. e. Other Assets: Franchise fees, deferred lease costs, and deferred debt acquisition costs are amortized on a straight-line basis over the estimated lives of the assets or the specific term of the related agreement, lease or mortgage loan. f. Net Loss per Unit: Net loss per Unit is calculated based on net loss allocable to limited partners divided by the 4,000,000 Units outstanding. 3 Operations of the Inns: a. Lease and Guaranty: Prior to the rejection and termination of the Lease and Guaranty effective as of November 30, 1990, the Lease granted AMI Management the right to use the Inns for the operation of hotels and related purposes. AMI Management defaulted on the payment of $1,311,000 of base rent due on November 1, 1990. Pursuant to the joint motion approved by order of the bankruptcy court on January 8, 1991, the Partnerships, AMI Management and Prime entered into an agreement providing for the assumption by Operating Partners of the operations of the Inns (the "Agreement"). The Partnerships also effectively assumed control over certain accounts receivable, supplies, equipment and other assets and responsibility for certain accounts payable and other liabilities arising from the operations of the Inns by AMI Management during the term of the lease. Disputes between the parties existed at December 31, 1991 as to, among other things, the value of certain assets and liabilities under the Agreement. Operating Partners entered into an agreement in 1993 (the "Omnibus Agreement") under which, among other things, Operating Partners assigned to the holders of the Mortgage Notes its claims against Prime and AMI Management and agreed that amounts recovered on such claims would be allocated among financial claims (the proceeds of which would be applied to the repayment of the Mortgage Notes) and operating claims (the proceeds of which would be available to finance capital improvements to the Inns). In July, 1992 the servicing agent for the holders of the Mortgage Notes, Prime and AMI Management reached a settlement (the "Settlement") of claims which was approved by the Florida Bankruptcy Court. Under the Settlement, various claims of the holders of the Mortgage Notes against Prime and AMI Management were allowed; Operating Partners will not make any payments to or for the benefit of any other party; and Prime, AMI Management and Operating Partners have exchanged mutual releases. In February 1995, the Partnership received proceeds totaling approximately $1,025,000 from the sale of 127,924 shares of Prime common stock received in the Settlement. The proceeds were used to reduce the principal balance on the Mortgage Notes in 1995. During 1993, the Partnership received proceeds totaling $4,389,000 primarily from the sale of 841,130 shares of common stock in Prime and the sale of junior and senior notes, which were received in the Settlement. The proceeds were used primarily to reduce the principal balance of the Mortgage Notes. Total settlement proceeds received in 1995 and 1993 of $1,025,000 and $4,389,000, respectively, have been recognized as lease settlement proceeds in the consolidated statements of operations. There were no proceeds received from the Settlement in 1994. b. Franchise Agreements: Holiday Inns, Inc. and its affiliates engaged in administering the "Holiday Inn" system (collectively, "HII") extended the franchise agreement for Baltimore Inner Harbor Inn to 2005. The franchise agreements for twelve of the remaining Inns expire in 1997, one each in 1998 and 1999, and another in 2001. HII has notified the Partnerships that certain capital expenditure projects at the Inns will be required to maintain the Inns' franchise status. For ten of the Inns whose franchises expire in 1997, the capital expenditures have been estimated by Operating Partners to approximate $13,000,000, however, such capital expenditures are subject to negotiation with HII. Operating Partners will have one year, which may be negotiable, from the franchise expiration date to complete the capital improvements. The loss of the Holiday Inn franchise status of any of the Inns may have a near term adverse impact in the Partnerships' results of operations. c. W&H Management Agreement: Winegardner & Hammons, Inc. ("W&H") continues to manage the operations of the Inns pursuant to its management agreement with Operating Partners which provides for an annual management fee of 2.25% of the gross revenues of the Inns and certain incentive management fees. The management agreement, entered into in 1993, extends through 1996, renewable for two two-year terms. W&H is also reimbursed for miscellaneous out-of-pocket expenses allocated to the Inns, including expenses incurred in providing certain administrative services for the Partnerships, royalties and marketing, advertising, public relations, and reservation services, subject to certain limitations. At December 31, 1995 and 1994, the Partnerships had approximately $61,000 and $97,000, respectively, in receivables from an entity controlled by W&H which manages certain of the Inns' lounges. 4. Other Assets: The components of other assets are as follows (in thousands):
1995 1994 Deferred lease costs $ 21 $ 21 Debt acquisition costs 2,839 2,839 Franchise fees 820 820 Other 4 14 3,684 3,694 Less accumulated amortization 2,920 2,605 $ 764 $1,089
Amortization of debt acquisition costs charged to expense was $174,000, $359,000 and $359,000 in 1995, 1994 and 1993 respectively. Amortization of franchise fees charged to expense was $141,000 in 1995, 1994, and 1993. 5. Debt:
Long-term debt consists of: 1995 1994 Mortgage notes, net of unamortized discount of $204,000 in 1995 and $247,000 in 1994 $ 54,145,000 $ 55,127,000 Priming loan, interest at 11% 11,500,000 11,500,000 $ 65,645,000 $ 66,627,000
In confirming the bankruptcy Plan of Reorganization on May 28, 1992, the New York Bankruptcy Court approved the Restated Loan Agreement which called for the following provisions: $3,467,127 of accrued and unpaid interest at December 31, 1991 (the "Deferred Amount") to be added to the principal amount of the Mortgage Notes, but to bear interest only from and after January 1, 1995; the Mortgage Notes (not including the Deferred Amount) to bear interest payable at a rate of 8% per annum in 1994; the principal amount of the Mortgage Notes (including the Deferred Amount) to bear interest at the rate of 10% per annum from January 1, 1995 until maturity; and maturity of the Mortgage Notes (including the Deferred Amount) to be extended to December 31, 1999. In addition, the Restated Loan Agreement provides for the deeds to the Inns and assignments of other assets of Operating Partners to be held in escrow until maturity of the Mortgage Notes. Under the terms of the Restated Loan Agreement, the Mortgage Notes are repayable at any time without penalty. The Restated Loan Agreement also provides for a shared appreciation feature that calls for Operating Partners to pay additional interest to the mortgage lenders, based on sale or appraisal values of the Inns compared to the principal amount of the Mortgage Notes, upon payment, prepayment, maturity or acceleration of the Mortgage Notes, or upon sale of one or more of the Inns. The Partnerships periodically estimate the fair value of the Inns to determine if a reserve is needed for future payments to lenders under the shared appreciation feature. While the estimates of fair value are based on an analysis of the facilities and determined under industry standards, the amounts the Partnerships will ultimately realize upon the sale of the properties or appraised values could differ materially in the near term from the estimated fair values used in the calculation of the reserve. There was no additional interest accrued or paid to the lenders under this feature in 1995, 1994 or 1993. The Restated Loan Agreement was accounted for as a modification of terms in accordance with Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings". Accordingly, the carrying value of the Mortgage Notes and Deferred Amount was not adjusted to reflect the terms of the Restated Loan Agreement. The effect of the changes in the terms of the Mortgage Notes will be recognized prospectively over the life of the Mortgage Notes, through an adjustment of the effective interest rate on the Mortgage Notes and Deferred Amount to approximately 8.5% per annum (the "Effective Rate"). The amount by which interest payable at the Effective Rate exceeded the amount of interest paid at the stated rate, has been accrued and is included in deferred interest payable at December 31, 1995 and 1994. The amount by which interest paid at the stated rate exceeds the amount of interest payable at the Effective Rate will reduce the deferred interest balance in future periods. As part of the Plan, certain members of the lending group also agreed to provide Operating Partners post-petition financing (the "Priming Loan") which holds a security interest, lien and mortgage senior to all outstanding liens. Borrowings under the Priming Loan, may be used to finance capital improvements or to fund operating cash requirements. The portion used for capital improvements (defined as the Tranche A Loan), which may be up to the full amount of the $14,000,000 available, is due on December 31, 1999 and provides for a prepayment premium of 2%. The portion used for operating cash requirements (defined as the Tranche B Loan), which cannot exceed $2,500,000, is also limited to the amount remaining after borrowings for capital improvements. Borrowings under the Tranche B loan are pursuant to a revolving facility, such that amounts repaid can be reborrowed up to the limits of availability. These revolving credit borrowings are subject to the mandatory repayment provisions described below. There were no outstanding borrowings under the revolving facility at December 31, 1995 or December 31, 1994. As of December 31, 1995 and 1994, the outstanding balance under the Priming loan was $11,500,000. The entire amount in 1995 and 1994 represents borrowings under the Tranche A loan. The outstanding Tranche A Loan balance includes $385,000 representing funds borrowed in 1993 to fund an interest reserve required by the Priming Loan. The balance in the interest reserve, which represents the original funds borrowed and interest earned thereon, is $442,000 and $419,000 at December 31, 1995 and 1994, respectively. These amounts are included in cash restricted for interest and taxes on the consolidated balance sheets. The Priming Loan agreement places certain restrictions on the use of Operating Partners' cash flow and sales proceeds. Operating cash flow can be used only in accordance with the Priming Loan agreement, which calls for, among other things, monthly deposits beginning in 1994 into an escrow account held by or on behalf of the lenders for the payment of a furniture, fixtures and equipment reserve of 4% of gross revenues during 1994 and 5% of gross revenues thereafter. The cash on hand from the operation of the Inns less the current month projected cash deficiency, if any, less a working capital reserve not to exceed $2,000,000, shall be utilized to first repay any outstanding borrowings under the Tranche B Loan and then paid into an escrow account held on behalf of the lenders for the payment of taxes and insurance. 6. Commitments: a. Operating Leases: Four of the Inns are held pursuant to land leases and three of the Inns are held pursuant to land and building leases, which are accounted for as operating leases. The leases have terms expiring at various dates from 2000 through 2024 and options to renew the leases for terms varying from ten to forty years. Five of the leases are subject to an escalating rent provision based upon inflationary indexes, which adjusts the lease payment every five to ten years depending on the respective lease. One of the leases is a land lease with a subsidiary of Prime that expires in 2000 (with an option to extend 40 years) and requires annual rentals of $24,000. Future minimum lease payments will be as follows:
Year Amount 1996 1,254,000 1997 1,254,000 1998 1,348,000 1999 1,372,000 2000 1,381,000 2001 and thereafter 22,209,000
Rent expense under these leases totaled $1,260,000, $1,253,000 and $1,251,000 in 1995, 1994, and 1993, respectively. 7. Income Taxes: No federal or state income taxes are reflected in the accompanying financial statements of the Partnerships. Based upon an opinion of counsel of the Partnership obtained in 1986, which is not binding upon the Internal Revenue Service, the Partnerships were not taxable entities at their inception. The partners must report their allocable shares of the profits and losses of the Partnerships in their respective income tax returns. The Revenue Act of 1987 (the "1987 Act") added several provisions to the Internal Revenue Code which affect publicly traded partnerships such as the Partnership. Under these new rules, a publicly traded partnership is taxed as a corporation unless 90% or more of its income constitutes "qualifying income" such as real property rents, dividends and interest. The 1987 Act also provided certain transitional rules, however, which generally exempt publicly traded partnerships in existence on December 17, 1987 from application of the new rules until after 1997, subject to various limitations. If the Partnership's operations continue as described herein, the Partnership should not be taxed as a corporation until after 1997. However, publicly traded partnerships which add a substantial new line of business are not eligible for relief under these transitional rules and it is possible that the Internal Revenue Service could contend that the Partnership should be taxed as a corporation after November 30, 1990, the date of termination of the Lease. Also, it should be noted that with respect to the partners, the 1987 Act also contained rules under which the income of the Partnership will be treated, effectively, as "portfolio income" for tax purposes and will not be eligible to offset losses from other passive activities. Similarly, any losses of the Partnership will not be eligible to offset any income from other sources. The Partnerships have determined that they do not have to provide for deferred tax liabilities based on temporary differences between financial and tax reporting purposes. The tax basis of the net assets of the Partnerships exceeded the financial reporting basis at December 31, 1995 and is expected to do so at December 31, 1997. EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 U.S. DOLLARS YEAR DEC-31-1995 DEC-31-1995 1000 792 0 681 (20) 0 1316 101286 (49140) 57001 3254 0 0 0 0 0 57001 45321 46720 16058 49000 0 0 6057 (2280) 0 (2280) 0 0 0 (2280) (.56) (.56)
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