-----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, LTJA2QWd5jkp4VV6yEEpDK9gerRxR6aK9aZd7r6stdN4OnSrc5j4oFU4nwessov6 9P7MRosMV/DrcNejvy0huQ== 0000804219-97-000002.txt : 19970329 0000804219-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000804219-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME MOTOR INNS LTD PARTNERSHIP CENTRAL INDEX KEY: 0000804219 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] 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: 97567404 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 1996 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, 1996. 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 incorporation or organization) (I.R.S. Employer Identification No.) 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 19, 1997 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 $3,750,000. The Exhibit Index is located on page 20. 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 under Chapter 11 of the Bankruptcy Code and, effective November 30, 1990, 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 Mortgage Lenders agreed to restructure the Mortgage Notes, as part of a "prepackaged" reorganization of Operating Partners and 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. On February 28, 1992, Operating Partners filed for reorganization under Chapter 11 of the Bankruptcy Code, and sought confirmation of the prepackaged plan of reorganization consented to by the Mortgage Lenders (the "Plan"). On May 28, 1992 the Plan was confirmed. 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 December 2005, and extended to June 30, 1997 the term of the franchise agreements that previously expired prior to June 30, 1997. Operating Partners and W&H entered into a management agreement (the "W&H Management Agreement") pursuant to which W&H managed the Inns through 1996, renewable for two two-year renewal terms. Under the W&H Management Agreement, W&H was 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 was 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. Of the Priming Loan, $11,500,000 (the "Tranche A Loan") was used to fund a capital improvement program, and is subject to a prepayment penalty of 2%, and the $2,500,000 balance of the Priming Loan (the "Tranche B Loan") is a revolving credit facility to be used to fund operating cash requirements. 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 to substantially upgrade the Baltimore Inner Harbor Inn. Improvements and refurbishment's 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. Although there were borrowings under the Tranche B Loan during 1994, 1995 and 1996, there were no outstanding borrowings under the Tranche B Loan at December 31, 1994, 1995 and 1996. At December 31, 1996, 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. All revenues in excess of budgeted or otherwise approved 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, must be applied by Operating Partners 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 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 consent of 75% in interest of the Priming Lenders, of 50% or more of the Units, or the sale, without the consent of 75% in interest 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 the appreciation, if any, in the Inns held by the Partnerships would be 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. Operating Partners is currently in compliance with all covenants and requirements of the Priming Loan and Restated Loan Agreement. The "Holiday Inn" franchises of ten of the Inns expire on June 30, 1997 and the franchises of two additional Inns will expire on December 31, 1997. Before the renewal of an expiring 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. Prior to December 31, 1995, HII had inspected and prepared PIPs for ten of the Inns whose franchises expire in 1997. During the second quarter of 1996, HII inspected and prepared PIPs for the remaining two Inns whose franchises expire in 1997 (though HII had previously indicated that it might not renew those franchises and, accordingly, had not prepared PIPs for those Inns). Based on those PIPs, and on analyses of W&H, Operating Partners estimates the cost of the capital expenditures to be in the range of $13,000,000, although Operating Partners believes that the scope of work and related costs will be subject to negotiation. In addition, Operating Partners will be required to pay franchise renewal costs of approximately $884,000 ($500 per room) for these twelve Inns. Accordingly, Operating Partners engaged W&H to evaluate, 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. Based on W&H's evaluation, Operating Partners, determined that the Inns should remain frachised as "Holiday Inns". Therefore, Operating Partners has reached an agreement with HII as to the terms and conditions of the franchise renewals and have submitted those agreements to the Lenders for their review. Operating Partners cannot enter into those agreements without the consent of the Lenders. In addition, Operating Partners is continuing to evaluate the improvements and expenditures included in each of the PIPs, in order to identify those items that Operating Partners believes will enhance the Inn's ability to continue to compete in its market and that will add value to the Inn; and those improvements or expenditures that Operating Partners believes to be less necessary or which will add little value. Operating Partners is continuing negotiations with HII as to the scope of work included in each PIP and the length of time within which such improvements will be completed. Generally, in connection with the renewal of the franchise for an Inn, Operating Partners will have one year, which may be negotiable, from the expiration date of the old franchise to complete the capital improvements included in the PIP. It is anticipated that the capital improvements for the PIPs will be financed partially from the FF&E Reserve and from additional financing, if available. At the present time, the current Lenders have stated that they are not willing to provide any such financing, that will be required. Operating Partners is actively investigating financing possibilities. However, there can be no assurance that additional financing will be available. The Partnerships and/or the General Partner periodically receive proposals from management companies or hotel property operators to acquire a substantial interest in the Inns, and/or to enter into management or acquisition transactions with the Partnership, to provide financing for the PIPs. The General Partner believes that the proposals heretofore made to the Partnership and the General Partner have not reflected the value or potential of the Inns. If financing is not available and Operating Partners is unable to defer the timing and costs of the PIPs, the Inns may have to change franchise affiliations or become independent hotels. Changes in such franchise affiliations could adversely impact the Partnerships' results of operations. Further, under the Priming Loan and Restated Loan Agreements, approval by the Lenders will be required for any franchise changes, capital expenditures or additional financing. The Partnerships have retained the services of Siegel Rich, Inc., a consulting firm in which Seymour G. Siegel is a shareholder, to advise the Partnership in developing a business strategy, and to structure, negotiate and evaluate potential transactions. Effective January 4, 1997, the initial term of the W&H Management Agreement was extended for four years, through 2000. However, in order to facilitate financing of the PIPs, a provision was added to the W&H Management Agreement which grants to either the Partnership or W&H, the right to terminate the agreement, without penalty, at any time without cause, upon at least 90 days prior written notification to the other party. However, under the Priming Loan and Restated Loan Agreements, approval by the Mortgage Lenders and Priming Lenders (collectively the "Lenders") will be required for the Partnership to elect to terminate the W&H Management Agreement. 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 (including to finance renewal of the Holiday Inn franchise agreements), changes in the 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 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 Unitholders until the Priming Loan is repaid, Mortgage Note payments are maintained and proper reserves are funded as required. The Partnerships continue to operate the Inns as going concerns. However, it is the present intention of Operating Partners to sell both the Baltimore Moravia Road and Baltimore Glen Burnie South Inns. Operating Partners believes that both of these Inns 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 has received a contract for the purchase of the Glen Burnie South Inn, subject to a due diligence review by the buyer (which is to be completed on or before April 9, 1997) and, subject to that review, a closing is to occur by May 9, 1997. Operating Partners has 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 either of these two Inns. Operating Partners has received some unsolicited proposals, to purchase certain of the Inns. Operating Partners is carefully evaluating these proposals. 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. 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. 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 have continued to increase 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, franchise affiliation, 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 960 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:
Year Number Franchise Status of Ownership Location Opened of Rooms Expiration Date by 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 Rd. 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 and Fee 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 inflation 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. Item 3. Legal Proceedings 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. Starting in December, 1996, the General Partner received correspondence from a lawyer purporting to represent five holders of Units. In this correspondence, the lawyer broadly charges the General Partner with breaches of fiduciary duty and gross negligence by reason of an alleged failure to oversee W&H, as manager of the Inns, and to make adequate provision for the cost of improvements that will purportedly be required to be made to the Inns. The lawyer requested that the management agreement with W&H be terminated or renewed only on a short term basis. The letters threaten filing of a derivative action on behalf of the Partnership in the event these matters are not resolved to the satisfaction of the five Unitholders and also request a meeting with the General Partner to discuss these and other matters relating to the Partnership. The General Partner has denied the allegations of wrongdoing made in this correspondence and has indicated a willingness to meet with those Unitholders to discuss the issues they have raised, subject to those Unitholders entering into a suitable confidentiality agreements. The General Partner has not yet met with those Unitholders. No action has been filed by those Unitholders. Item 4. Submission of Matters to a Vote of Unitholders No matter was submitted during 1996 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 (the "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 Exchange:
1996 1995 1994 Fiscal Period High Low High Low High Low First Quarter 13/16 7/16 3/4 1/2 1 3/4 1/2 Second Quarter 1 1/8 9/16 3/4 1/2 1 1/2 5/8 Third Quarter 1 -- 5/8 5/8 3/8 1 3/8 3/4 Fourth Quarter 15/16 5/8 1/2 1/4 3/4 3/8
In March, 1997, the Partnership received a letter from the Exchange advising the Partnership that the aggregate market value of the Units, the three-year average net income of the Partnership and the net tangible assets of the Partnership available to the Units fall below the Exchange's continued listing criteria. The letter from the Exchange advised the Partnership that it was the Exchange's "preliminary conclusion that there is not a sufficient basis for maintaining the listing of the [Units]." The Partnership intends to make a submission to the Exchange recommending the continued listing of the Units. However, there can be no assurance that the Partnership will be able to maintain the listing of the Units on the Exchange or to arrange for the Units to be listed on any other national securities exchange or admitted to trading on the NASDAQ Stock Market. (b) On February 28, 1997, there were 585 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
1996 (a) 1995 (a) 1994 (a) 1993 (a) 1992 (a) (in thousands except per Unit amounts) Operating Data: Total revenues (b) $ 49,584 $ 47,469 $ 44,173 $ 46,261 $ 44,001 Net loss (2,188) (2,280) (4,673) (1,215) (2,911) Net loss allocable to limited partners (2,166) (2,257) (4,626) (1,203) (2,882) Per Unit loss allocable to limited partners $ (0.54) $ (0.56) $ (1.16) $ (0.30) $ (0.72) Balance Sheet Data: Total assets $ 53,972 $ 57,001 $ 60,673 $ 64,009 $ 66,645 Long-term debt, net of current maturities 65,691 65,645 66,627 65,912 67,108 Partners' deficit $ (17,921) $(15,733) $(13,453) $ (8,780) $ (7,565)
(a) As a result of the fact that W&H's system of accounting for all properties under its management, operates under a 52/53 week year (1992 - 1995 were 52 week years and 1996 is a 53 week year), and 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 1996 ended January 3, 1997; for 1995 ended December 29, 1995; for 1994, December 30, 1994; for 1993, December 31, 1993; and for 1992, January 1, 1993. (b) Includes $361,000, $374,000, $341,000, $304,000, and $360,000 for the years ended December 31, 1996, 1995, 1994, 1993, and 1992, 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 settlement of claims by the Partnerships against Prime and AMI Management in the Prime bankruptcy. The Inns' room statistics are as follows:
1996 1995 1994 Average Average Average Daily Room Occupancy Daily Room Occupancy Daily Room Occupancy Rate Percentage Rate Percentage Rate Percentage 1st Quarter $63.76 45.3% $59.84 47.8% $56.33 48.0% 2nd Quarter $69.50 68.7% $64.74 69.4% $61.79 69.4% 3rd Quarter $71.44 72.4% $67.06 72.2% $61.10 72.7% 4th Quarter $67.54 57.2% $62.51 56.8% $58.72 57.5% Full Year $68.53 60.8% $63.95 61.6% $59.82 61.9%
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership wishes to caution readers that uncertainties relating to the Partnerships' ability to negotiate the timing and cost of the PIPs, to finance the PIPs and the franchise renewal costs and/or to obtain the consent of the Lenders to necessary actions, could affect the Partnership's actual results and could cause the Partnership's 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):
1996 1995 1994 Operating revenues: Lodging $ 39,488 $ 36,668 $ 34,463 Food & beverage 9,735 9,402 9,369 Totals 49,223 46,070 43,832 Direct operating expenses: Lodging 9,462 8,998 8,674 Food & beverage 8,112 7,809 7,509 Marketing 3,500 3,334 3,244 Utilities 3,053 2,956 2,875 Repairs & maintenance 3,680 3,490 3,379 Rent 1,316 1,317 1,301 Insurance 705 630 670 Property taxes 1,382 1,380 1,300 Other 8,369 7,718 7,593 Totals 39,579 37,632 36,545 Operating revenues in excess of direct operating expenses $ 9,644 $ 8,438 $ 7,287
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 continue to sigificantly increase average daily room rates (ADR). Operating revenues have, therefore, increased to improve the cash flows to cover operating expenses, pay debt service (including the 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 the Inns as going concerns. It is, however, the present intention of Operating Partners to sell both the Baltimore Moravia Road and Baltimore Glen Burnie South Inns. Operating Partners believes that both of these Inns 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 has entered into a contract for the sale of the Glen Burnie South Inn, subject to a due diligence review by the buyer (which is to be completed on or before April 9, 1997), and, subject to that review, a closing is to occur by May 9, 1997. Operating Partners has 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 either of these two Inns. Operating Partners has received some unsolicited proposals, to purchase the Partnerships assets or to purchase certain of the Inns. Operating Partners is carefully evaluating these proposals. 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, franchise affiliation, 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 (including to finance the renewal of the Holiday Inn franchise agreements), changes in real estate tax rates and other operating expenses, adverse changes governmental rules and fiscal policies, act 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 increased to $49,584,000 in 1996, from $47,469,000 (including non-recurring income of $1,025,000) in 1995 and $44,173,000 in 1994. The Partnerships' net loss was $2,188,000 for the year ended December 31, 1996 as compared to a loss of $2,280,000 (which includes non-recurring income of $1,025,000 from the settlement of claims by the Partnerships against Prime and AMI Management in the Prime bankruptcy (the "Prime Settlement")) for the year ended December 31, 1995 and a loss of $4,673,000 in 1994. The following table compares the room revenues, occupancy percentage levels and ADR for the years indicated:
1996 1995 1994 Lodging revenues (in thousands) $ 39,488 $ 36,668 $ 34,463 Occupancy percentage 60.8% 61.6% 61.9% ADR $ 68.53 $ 63.95 $ 59.82
The Inns have been able to increase their respective ADRs by attracting and maintaining the higher ADR market segments (hotel guests categorized as individual business, leisure and government guests, etc. and groups such as corporate, association, tours, crews, etc.). 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 fo capital improvements during 1995 and 1996. 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 slight decline in occupancies over 1995 and 1996. Also, the harsh winter weather in the first quarter of 1996, as compared to the first quarter of 1995, contributed to the decline in occupancy. There continues to be intense competition in the geographic areas where the Inns are located, including conversions of competitor hotels to HII franchises. Therefore, the Partnerships and W&H believe occupancy levels at the Inns will not substantially increase over the next year, but is expected to show some growth. The occupancy growth projected is due to the stable and growing economic conditions, and the stabilization of supply and demand in the region where the Inns are located. However, due to the fact 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), slow occupancy growth is expected. Also, these "highway oriented" Inns have an external dated appearance due to their age, which contributes to their median occupancy levels. Food and beverage revenues in 1996 increased to $9,735,000 from $9,402,000 and $9,369,000 in 1995 and 1994, respectively. The increase in food and beverage revenues is attributable primarily to the greater use of meeting room, banquet and lounge facilities ( and the increased revenues from that use) by the higher rated market segments that the Inns have attracted. Direct operating expenses in 1996 were $39,579,000 , as compared to $37,632,000 in 1995 and $36,545,000 in 1994. 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 and beverage costs. In an effort to attract and maintain the higher rated market segments, the Inns have increased spending in marketing, such as advertising costs and hotel promotions. The repair and maintenance costs have increased in 1996 over 1995, which is reflective of the age of the Inns. Insurance costs increased due to general liability and property insurance rate increases. The Inns' utility cost increases are attributable to the combination of increases in utility rates and the harsh weather suffered in the first quarter of 1996 as compared to the same period of 1995. The increases in other expenses, included in direct operating expenses, reflect higher administrative and general expenses directly incurred in the operations of the Inns, such as administrative labor, employment and training costs, protection expense, and in costs that vary with revenues, such as franchise fees paid to HII, management fees paid to W&H, and credit card commissions. Other general and administrative costs increased in 1996 over 1995 due primarily to the additional time and expense incurred in the franchise brand analysis of the Inns, required as a result of the pending expiration in 1997 of the Holiday Inn franchises for twelve of the Inns. Depreciation and amortization expense decreased in 1996, due to the original debt acquisition costs having been fully amortized in the first quarter of 1995. The interest expense increase in 1996 is a result of the slower pay back in 1996 of the operating funds borrowed under the Tranche B Loan, than in the previous year. Liquidity and Capital Resources The changes in cash and cash equivalents are summarized as follows:
1996 1995 1994 Net cash provided by operating activities $ 2,317 $ 2,092 $ 1,451 Net cash used by investing activities (2,275) (2,668) (2,482) Net cash provided by financing activities - - 675 Net increase (decrease) in cash and cash equivalents $ 42 $ (576) $ (356)
In 1994, 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. 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. Net cash used in investing activities was $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 under 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. In 1996, cash from operating activities exceeded cash used for operating expenses of the Inns and of the Partnerships, which resulted in net cash being provided by operating activities. Net cash provided by operating activities increased in 1996, as compared to 1995, as a result of increased revenues from operations and control of operating expenses. Cash used in investing activities was $2,275,000 in 1996, which included $1,880,000 of additions to property and equipment, and $395,000 of increases in restricted cash. The restricted cash accounts included the net increase in the FF&E Reserve of $364,000 (funding plus interest earned of $2,517,000, less capital expenditures of $2,153,000) and increases of $31,000 in the interest reserve and tax escrow accounts. The Partnerships borrowed $1,600,000 under the Tranche B Loan to supplement operating cash flow deficiencies during the first quarter of 1996. The entire Tranche B Loan was repaid from excess working capital prior to the end of the third quarter of 1996. 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; in 1994, at 8% per annum; and after 1994, at 10% per annum (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, 1996. Approximately $834,000 of working capital cash was on hand as of December 31, 1996. Presently the Partnerships have a capital replacement reserve of approximately $1,195,000, 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 $463,000. 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 can 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 continued 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 and the 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 payment requirements under the current 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, as discussed earlier, the "Holiday Inn" franchises of ten of the Inns expire on June 30, 1997 and the franchises of two additional Inns will expire on December 31, 1997. Based on the PIPs prepared by HII for those Inns and on analyses of W&H, Operating Partners estimates that the cost of the capital expenditures that will be required as a condition to the renewal of the franchise agreements for those twelve Inns will be in the range of $13,000,000. In addition, Operating Partners will be required to pay franchise renewal costs of approximately $884,000 ($500 per room) for those Inns. Operating Partners has reached an agreement with HII as to the terms and conditions of the franchise renewals and is awaiting review and approval of the Lenders. In addition, Operating Partners is continuing to evaluate the improvements and expenditures included in each of the PIPs, in order to identify those items that Operating Partners believes will enhance the Inn's ability to continue to compete in its market and that will add value to the Inn; and those improvements or expenditures that Operating Partners believes to be less necessary or which will add little value. Operating Partners is continuing negotiations with HII, as to the scope of work included in each PIP and the length of time within which such improvements will be completed. 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 the capital improvements for the PIPs will be financed partially from the FF&E Reserve and from additional financing, if available. At the present time, the current Lenders have stated that they are not willing to provide any such financing, that will be required. Operating Partners is actively investigating financing possibilities. However, there can be no assurance that additional financing will be available. If financing is not available and Operating Partners is unable to defer the timing and costs of the PIPs, the Inns may have to change franchise affiliations or become independent hotels. Changes in such franchise affiliations could adversely impact the Partnerships' results of operations. Further, 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 continue 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. The Partnership has recently received a letter from the Exchange advising the Partnership that the aggregate market value of the Units, the three-year average net income of the Partnership and the net tangible assets of the Partnership available to the Units fall below the Exchange's continued listing criteria. The letter from the Exchange advised the Partnership that it was the Exchange's "preliminary conclusion that there is not a sufficient basis for maintaining the listing of the [Units]." The Partnership intends to make a submission to the Exchange recommending the continued listing of the Units. However, there can be no assurance that the Partnership will be able to maintain the listing of the Units on the Exchange or to arrange for the Units to be listed on any other national securities exchange or admitted to trading on the NASDAQ Stock Market. As a result of the bankruptcy of Prime, and circumstances beyond the control of the Partnerships, the Partnerships experienced substantial financial difficulties, but will continue to endeavor to improve the results of operations, and thereby increase the value of the Partnership and its Units. 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 63 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 45 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 54 Director of the General Partner since November 21, 1994; President of Siegel Rich, 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. (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 on a yearly basis for a current term ending December 31, 1997. 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 Mr. Okin's compensation paid in respect of the fiscal years ended December 31, 1996, 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 1996 $ 126,000 $ - $ - $ - $ - 1995 $ 120,000 $ - $ - $ - $ - 1994 $ 120,000 $ - $ - $ - $ -
Mr. Okin receives compensation as Managing Director of the corporate General Partner. In addition, Mr. Okin received reimbursement for out-of-pocket expenses in 1996, 1995 and 1994 totaling approximately $27,300, $27,500 and $27,400, respectively (for office rent, secretarial services, utilities, airfare, postage, office supplies, etc.) and $18,500, $6,250 and $3,250, respectively, for attendance at board meetings. 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. The Partnerships have retained the services of Siegel Rich, Inc., a consulting firm in which Seymour G. Siegel is a shareholder. In 1996, the Partnerships paid Siegel Rich, Inc., approximately $16,000. Item 12. Securities Ownership of Certain Beneficial Owners and Management The following table sets forth, as of December 31, 1996, 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 Percentage of Units Total No. of of Units Name & Address of Owner Held Units 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, as Trustees 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 1996, 1995 and 1994, Mr. Okin as Managing Director and Officer of the General Partner, received $171,800, $153,750 and $150,650, respectively, as cash compensation for his services and reimbursement of expenses. During 1996, Siegel Rich, Inc., a consulting firm in which Seymour G. Siegel is a shareholder, was paid approximately $16,000 for services to the Partnerships. 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 25 to financial statements are filed as part of this Form 10-K. 3. Exhibits (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, 1990, included as Exhibit (10) (h) to the Partnership's 1990 Annual Report on Form 10-K is incorporated herein by reference. (10) (i) Sixth Amendment to the Replacement Management Agreement among Operating Partners Sixteen Hotels, Inc. and W&H, as Manager, to be effective January 4, 1997. (10) (j) 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) (k) 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 Partnerships 1992 Annual Report on Form 10-K, and a letter of consent dated January 31, 1994, included as Exhibit (10) (j) to the Partnerships 1994 Annual Report on Form 10-K, are incorporated herein by reference. (10) (l) 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 a letter of consent agreement dated January 31, 1994, included as Exhibit (10) (k) to the Partnership's 1994 Annual Report on Form 10-K, are incorporated herein by reference. (10) (m) 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) (n) 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) (o) 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. (10) (p) Consulting Agreement among Operating Partners and Siegel Rich, Inc., dated March 11, 1997, formalizing the previously agreed upon terms and conditions. (21) Subsidiaries of Prime Motor Inns Limited Partnership are as follows: Jurisdiction of Name 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 21, 1997 By: /s/ S. Leonard Okin S. Leonard Okin Vice President & Director Date: March 21, 1997 By: /s/ Robert A. Familant Robert A. Familant Director Date: March 21, 1997 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 21, 1997 S. Leonard Okin of the General Partner; Consultant under the Consulting Services Agreement By: /s/ Robert A. Familant Director of the March 21, 1997 Robert A. Familant General Partner By: /s/ Seymour G. Siegel Director of the March 21, 1997 Seymour G. Siegel General Partner EX-10 2 AUDIT REPORT CONTENTS Pages Report of Independent Accountants 25 Financial Statements: Consolidated Balance Sheets - December 31, 1996 and 1995 26 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 28 Consolidated Statements of Partners' Deficit for the years ended December 31, 1996, 1995 and 1994 29 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 30 Notes to Consolidated Financial Statements 31-39 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, 1996 and 1995, and the related consolidated statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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, 1996. 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. Coopers & Lybrand L.L.P. Cincinnati, Ohio February 21, 1997 Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Balance Sheets December 31, 1996 and 1995 (dollars in thousands)
ASSETS 1996 1995 Current assets: Cash and cash equivalents $ 834 $ 792 Accounts receivable, net of allowance for doubtful accounts in 1996 and 1995 of $19 and $20, respectively 774 661 Prepaid expenses 952 941 Other current assets 328 375 Total current assets 2,888 2,769 Property and equipment: Land 7,653 7,653 Buildings and leasehold improvements 55,382 55,389 Furniture and equipment 39,978 38,244 103,013 101,286 Less allowance for accumulated depreciation and amortization (54,188) (49,140) 48,825 52,146 Cash and cash equivalents restricted for: Acquisition of property and equipment 1,195 831 Interest and taxes 522 491 Other assets, net 542 764 Total assets $ 53,972 $ 57,001
Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Balance Sheets, Continued December 31, 1996 and 1995 (dollars in thousands)
LIABILITIES AND PARTNERS' DEFICIT 1996 1995 Current liabilities: Trade accounts payable $ 484 $ 568 Accrued payroll 660 688 Accrued payroll taxes 165 286 Accrued vacation 437 473 Accrued utilities 322 326 Sales tax payable 274 242 Other current liabilities 772 671 Total current liabilities 3,114 3,254 Long-term debt 65,691 65,645 Deferred interest 2,872 3,685 Other liabilities 216 150 Total liabilities 71,893 72,734 Commitments Partners' deficit: General partner (751) (729) Limited partners (17,170) (15,004) Total partners' deficit (17,921) (15,733) Total liabilities and partners deficit $ 53,972 $ 57,001
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, 1996, 1995 and 1994 (dollars in thousands, except per unit amounts)
1996 1995 1994 Revenues: Direct operating revenues: Lodging $ 39,488 $ 36,668 $ 34,463 Food and beverage 9,735 9,402 9,369 Other income 361 374 341 Lease settlement proceeds - 1,025 - Total revenues 49,584 47,469 44,173 Expenses: Direct operating expenses Lodging 9,462 8,998 8,674 Food and beverage 8,112 7,809 7,509 Marketing 3,500 3,334 3,244 Utilities 3,053 2,956 2,875 Repairs and maintenance 3,680 3,490 3,379 Rent 1,316 1,317 1,301 Insurance 705 630 670 Property taxes 1,382 1,380 1,300 Other 8,369 7,718 7,593 Other general and administrative 701 587 606 Depreciation and amortization 5,423 5,473 5,626 Interest expense 6,069 6,057 6,069 Total expenses 51,772 49,749 48,846 Net loss (2,188) (2,280) (4,673) Net loss allocable to general partner (22) (23) (47) Net loss allocable to limited partners $ (2,166) $ (2,257) $ (4,626) Number of limited partner units outstanding 4,000 4,000 4,000 Net loss allocable to limited partners per unit $ (.54) $ (.56) $ (1.16)
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, 1996, 1995 and 1994 (dollars in thousands)
General Limited Partner Partner Total 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) Net loss (22) (2,166) (2,188) Balance at December 31, 1996 $ (751) $ (17,170) $ (17,921)
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, 1996, 1995 and 1994 (dollars in thousands)
1996 1995 1994 Cash flows from operating activities: Net loss $ (2,188) $ (2,280) $ (4,673) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization of property 5,201 5,158 5,126 Lease settlement proceeds - (1,025) - Amortization of other assets 222 315 500 Amortization of debt discount 46 43 40 Changes in operating assets and liabilities: Accounts receivable (113) 220 (12) Prepaid expenses (11) 45 (37) Other current assets 47 16 (117) Other assets - 10 2 Trade accounts payable (84) 166 (206) Accrued payroll (28) (26) 124 Accrued payroll taxes (121) 28 39 Accrued vacation (36) 37 59 Accrued utilities (4) 77 (65) Sales tax payable 32 21 9 Other current liabilities 101 28 82 Deferred interest (813) (741) 580 Other liabilities 66 - - Net cash provided by operating activities 2,317 2,092 1,451 Cash flows from investing activities: Additions to property and equipment (1,880) (2,423) (2,773) Decrease (increase) in restricted cash (395) (245) 291 Net cash used for investing activities (2,275) (2,668) (2,482) Cash flows from financing activities: Long-term borrowings - - 675 Borrowings under revolving credit facility 1,600 1,200 1,763 Repayment of revolving credit facility (1,600) (1,200) (1,763) Net cash provided by financing activities - - 675 Net increase (decrease) in cash and cash equivalents 42 (576) (356) Cash and cash equivalents, beginning of year 792 1,368 1,724 Cash and cash equivalents, end of year $ 834 $ 792 $ 1,368 Supplementary cash flow data: Interest paid $ 6,836 $ 6,755 $ 5,449 Noncash activities: Lease settlement proceeds received from former affiliate in the form stock used to reduce long-term debt $ - $ 1,025 $ -
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 1. 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). 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, 1996. 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, 1996, 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. g. Reclassification: Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. 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 1992 (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 recognized as lease settlement proceeds in the consolidated statements of operations and were used to reduce the principal balance on the Mortgage Notes. b. Franchise Agreements: Holiday Inns, Inc. and it's 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 Inns expire in 1997 and the remaining three Inns' agreements expire one each in 1998, 1999 and 2001. HII has notified the Partnerships that certain capital expenditure projects at the Inns will be required to maintain the Inns' franchise status. For twelve 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. In addition, Operating Partners will be required to pay franchise renewal costs of approximately $884,000 for the twelve Inns whose franchises expire during 1997. 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. 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. The management agreement expires December 31, 2000 and is cancelable by either W&H or the Operating Partners, without cause or penalty, upon ninety days written notification. At December 31, 1996 and 1995, the Partnerships had approximately $61,000, 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):
1996 1995 Deferred lease costs $ 21 $ 21 Debt acquisition costs 2,839 2,839 Franchise fees 820 820 Other 4 4 3,684 3,684 Less accumulated amortization 3,142 2,920 $ 542 $ 764
4. Other Assets, Continued: Amortization of debt acquisition costs charged to expense was $161,000, $174,000 and $359,000 in 1996, 1995 and 1994 respectively. Amortization of franchise fees charged to expense was $61,000 in 1996 and $141,000 in 1995 and 1994. 5. Debt: Long-term debt consists of:
1996 1995 Mortgage notes, net of unamortized discount of $158,000 in 1996 and $204,000 in 1995 $ 54,191,000 $ 54,145,000 Priming loan, interest at 11% 11,500,000 11,500,000 $ 65,691,000 $ 65,645,000
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 1996, 1995 or 1994. 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, 1996 and 1995. 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"). 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, 1996 or December 31, 1995. As of December 31, 1996 and 1995, the outstanding balance under the Priming loan was $11,500,000. The entire amount in 1996 and 1995 represents borrowings under the Tranche A loan. 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 into an escrow account held by or on behalf of the lenders for the payment of a furniture, fixtures and equipment reserve of 5% of gross revenues. 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 1997 1,254,000 1998 1,348,000 1999 1,372,000 2000 1,381,000 2001 1,357,203 2002 and thereafter 19,552,364
Rent expense under these leases totaled $1,258,000, $1,260,000 and $1,253,000 in 1996, 1995, and 1994, 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 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, 1996 and is expected to do so at December 31, 1997. EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 U.S. DOLLARS YEAR DEC-31-1996 DEC-31-1996 1000 834 0 793 (19) 0 328 103013 (54188) 53972 3114 0 0 0 0 0 53972 49223 49584 17574 45703 0 0 6069 (2188) 0 (2188) 0 0 0 (2188) (.54) (.54)
EX-10 4 SIXTH AMENDMENT TO REPLACEMENT MANAGEMENT AGREEMENT This Sixth Amendment to Replacement Management Agreement (the "Sixth Amendment") is entered into on the 31st (day of January, 1997 to be effective as of the 4th day of Januarv, 1997 by and among AMI Operatine Partners, L.P., a limited partnershiporganized and existing under the laws of the State of Delaware (hereinafter referred to as the "Partnership"); Sixteen Hotels, Inc., a corporation organized and existing under the laws of the State of Maryland (hereinafter referred to as the "Corporation"); and Winegardner & Hammons, Inc., a corporation organized and existing under the laws of the State of Ohio with offices at 4243 Hunt Road, Cincinnati, Ohio 45242 (hereinader referred to as "Manager"). PRELIMINARY STATEMENTS 1. The parties have entered into a certain Replacement Management Agreement (the "Management Agreement") to be effective as of January 4, 1992. 2. The parties have also entered into a First Amendment to Replacement Management Agreement (the "First Amendment") to be effective as of December 31, 1992. 3. The parties have also entered into a Second Amendment to Replacement Management Agreement (the ~Second Amendment") to be effective as of October 9, 1996. 4. The parties have also entered into a Third Amendment to Replacement Management Agreement (the "Third Amendment") to be effective as of November 4, 1996. 5. The parties have also entered into a Fourth Amendment to Replacement Management Agreement (the "Fourth Amendment") dated to be effective December 4, 1996. 6. The parties have also entered into a Fifth Amendment Replacement Management Agreement (the "Fifth Amendment") dated to be effective December 20, 1996. 7. For purposes of this Sixth Amendment, the Management Agreement, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment and the Fifth Amendment are collectively referred to as the "Agreement". NOW, THEREFORE. in consideration of the above Preliminary Statements, which shall be and by this reference are incorporated as part of this Sixth Amendment, the continued performance by the parties of their respective obligations under the Management Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows: 1. The fifth line of Arricle 2.02 of the Agreement shall be modified by replacing the word "fifth" with the word "ninth". 2. Article 3.01(b)(i)(aa) and (bb) shall be added to the Agreement to read as follows: "(aa) The Minimum Base fee Multiplier shall be increased from $65,000 tO $75,000 if at any time during either the Initial Term or any Renewal Term, a Qualifying Event shall have occurred with respect to either one or both of the two Baltimore Hotels described on Exhibit A-1 as the Holiday Inn Baltimore-Inner Harbor (Downtown) and the Holiday lnn Baltimore-Int'l. Airport (hereinafter collectively referred to as the "Two Hotels"). (bb) For purposes hereof, a "Qualifying Event" shall mean the occurrence of any one of the following events during the Initial Term or any Renewal Term as respects any one or more of the Two Hotels: Any one or more of the Two Hotels ceases to be operated under a franchise or license issued by Holiday Inns Franchising, Inc.; any one or more of the Two Hotels is sold to a Third Party Purchaser; any one or more of the Hotels is destroyed by fire or other casualty and not rebuilt, or is condemned." 3. Article 3.01(c)(i)(cc) shall be added to the Agreement to read as follows: "(cc) By way of further illustration, if the Qualifying Event described in Article 3.01(b)(i)(bb) above occurred with respect to one of the Two Hotels, the Minimum Base Fee Multiplier would be increased from $65,000 to $75,000 for purposesof computing the Minimum Base Management Fee." 4. Article 3.01(c)(ii)(cc) shall be added to the Agreement to read as follows: "(cc) By way of fiurther illustration, if the Qualifying Event descabed in Article 3.O1(b)(ii)(bb) above occurred with respect to one of the Two Hotels, the Minimum Base Fee Multiplier would be increased from $65,000 to $75.000 for purposes of computing the Minimum Base Management Fee." 5. The fifth line of Article 3.01(d) shall be modified by adding after the words "a Holiday Inn" the words "or any other Franchise". 6. The second line of Article 3.01(h)(ii) shall be modified by replacing the number "$15,000" with the number "$17,500". 7. Article 18.04(iv) shall be replaced in its entirety and rewritten to read as follows: "(iv) Commencing with the first day of Fiscal Year 1997 and continuing thereafter for the remainder of the Initial Term' the Partnership may only terminate the Agreement upon the occurrence of any one of the events collectively defined below as the "Events of Authorized Termination". Thus, commencing with the first day of Fiscal Year 1997, the Partnership specifically waives any rights to terminate the Agreement by the payment to Manager of a Termination Fee or other equivalent fee or payment. The "Events of Authorized Termination" are hereby defined to include any one or more of the following events: (aa) The occurrence of an Event of Default which results in Manager being a Defaulting Party under the Agreement and the subsequent election by the Pastnership to exercise its rights of termination pursuant to Article 14.02 above; (bb) The sale of all of the Hotels identified on Exhibit A to a Third Party Purchaser; or (cc) The acquisition of all of the Hotels identified on Exhibit A by the Successor Entity." 8. Article 18.04(v), (vi), (vii) and (viii) shall be added to the Agreement to read as follows: "(v) If the parties elect to extend the term of the Agreement for any one or more of the Renewal Terms, then during any one of such Renewal Terms, the Agreement mav only be rerminated bv the Partnership if any one of the Events of Authorized Termination occurs during the applicable Renewal Term. (vi) Upon the occurrence of any of the Events of Authorized Termination, the Agreement shall automatically terminate without penalty as of the date of the occurrence of such event. Such termination shall not, however, release either Manager or the Partnership from anv obligations under the Agreement arising or accruing prior to the effective date of the termination of the Agreement. (vii) If the Successor Entity acquires all or some of the Hotels. then the Agreement shall remain in full force and effect, and Manager shall continue to perform its services thereunder for the benefit of the Successor Entiny; provided. however, that the Agreement shall be deemed to have been amended in accordance with the provisions set forth in the Comfort Letter (which amendments include. but are not limited to, the fact that either the Successor Entity or Manager shall have the right to terminate the Agreement at any time, with or without cause, provided that in the event of a termination without cause, the party so terminating shall give the other party not less than ninety (90) days prior written notice of such termination). Notwithstanding the foregoing to the contrary, however, the provisions in the Comfort Letter shall be specifically amended and otherhise modified by the provisions of this Sixth Amendment to provide that, if the Successor Entity is the party terminating the Agreement without cause, such tennination shall not impose anv obligation upon the Successor Entity to pay to Manager any Termination Fee. At the request of any one of the Holders or Lenders, Manager shall enter into appropriate modifications to the Comfort Letter to reflect modifications set forth in the prececding sentence. (viii) If the Successor Entity acquires some (but not all) of the Hotels, then, as between Manager and Partnership the Agreement shall remain in effect only with respect to those Hotels which have not been acquired by any Successor Entity. Upon such an occurence, the provisions relative to the payment of a Minimum Base Management Fee as set forth in Article 3.01(b) and (c) of the Agreement shall be applicable." 9. Article 18.06 shall be added to the Agreement to read as follows: "18.06 Lien Rights. Nothing contained in the Agreement shall be construed or otherwise interrupted as granting to Manager a security interest in and/or to any one or more of the Hotels or shall otherwise constitute a lien or encumbrance on or against the land on which any one or more of the Hotels is located." 10. Article 18.07 shall be added to the Agreement to read as follows: "18.07 Assignment of Interest in Mortgage Loans and Ternination Rights of any Successor Entity. (a) The parties acknowledge and confirm that: (i) ALI Inc. is the successor in interest to, and has been substituted for certain of the fimns named as Lenders or Holders and included in the Lending Group, as those terms are defined in the Agreement and the Comfort Letter; (ii) Definitions and reference in the Agreement or the Comfort Letter to Lenders, Holders, Lending Group, Successor Entity or any other comparable term shall include ALI Inc. and the successors and assicns of ALI Inc. or other member of the Lending Group; (iii) The current listing of the Lenders and Holders is as set forth on Exhibits 2 and 3 attached hereto; (iv) Crown NorthCorp has replaced Norwest Bank Minnesota, N.A. as the "Agent" (which term shall have the meaning as set forth in the Comfort Letter); and (v) To the extent there is any conflict in the terms, provisions or conditions set forth in this Sixth Amendment with the terms, provisions and conditions set forth in the Comfort Letter, the parties acknowledge and agree that the terms, provisions and conditions of the Sixth Amendment shall govern and control." (b) In the event all or some of the Hotels are acquired by any Successor Entity, the provisions set forth in the Comfort Letter, as specifically modified by the provisions set forth in Article 18.04(vii) which have been added to the Agreement by the provisions of this Sixth Amendment, shall govern and control with respect to the termination rights granted to the Successor Entity or Manager." 11. Article 18.08 shall be added to the Agreement to read as follows: ~18.08 Additional Termination Rights of Partnership and Manager. Notwithstanding any of the other provisions set forth in Article 18 of the Agreement. Including but not limited to the provisions set forth in Article 18.04 (iv), either Partnership or Manager shall have the right to terminate the Agreement at any time, with or without cause, provided that in the event of a termination without cause. the parties so terminating shall give the other party not less than ninety (90) days prior written notice of such termination and provided further that the Partnership may not terminate the Agreement without the prior written consent of ALI Inc. or its successors. which consent may be given or withheld in the sole discretion of ALI Inc. or its successors. If the Partnership is the party terminating the Agreement without cause, such termination shall not impose any obligation upon Partnership to pay to Manager any Termination Fee." 12. Article 90.01(v) shall be replaced in its entirety and re-written to read as follows: "(v) Lending Group -- currently the lenders who are listed on Exhibit 3 annexed hereto and who are referred in the Comfort Letter as the Holders who collectively hold the Existing Mortgage to the Partnership." 13. Article 20.01(hh.1) shall be amended by the addition of the following sentence at the end the Article to read as follows: "The current Lenders under the Priming Loan Agreement are as set forth on Exhibit 2 attached hereto, and the current Agent under the Priming Loan Agreement is Crown NorthCorp." 14. Article 21.01(rr), (ss) and (tt) are hereby added to the Agreement to read as follows: "(rr) Comfort Letter - that letter from Manager dated May 6, 1992 addressed to Norwest Banlc, Minnesota, N.A. and IBJ Schroder Bank & Trust Company, a copy of which is attached hereto as Exhibit 1 and incorporated herein by this reference as if fully restated below. (ss) Events of Authorized Ternunation - a collective term to describe each of the events set forth in Article 1 8.04(iv) of the Agreement. (tt) Successor Entity - the term shall have the meaning as set forth in the Comfort Letter." 15. On Exhibit B in Calculation 2 the "schedule" (located at the bottom of page 1 of Exhibit B) used to compute the Incentive Management Fee on an annualized basis shall be replaced in its entirety and rewritten to read as follows: "PRID: Hurdle Incentive Mgt. Fee Applicable Percentage on on an Annualized on an Annualized Amounts in Excess of PRID Basis Basis Hurdle $7,500,000 $0 10.0% $10,000,000 $250.000 17.5% $12,500,000 $687,500 22.5%" 16. The first full paragraph on page 2 of Exhibit B beginning with the words "For purposes of illustration" shall be replaced in its entirety and rewritten to read as follows: "For purposes of illustration, if after the expiration of the first quarter in any Calculation Period, the PRID was $3,750,000; the PRID computed on an annualized basis would be $15,000,000, and the Incentive Management Fee computed on an annualized basis would be $1,250,000 " 17. Paragraph (d) on page 7 of Exhibit B entitled "Applicable Percentage" shall be replaced in its entirety and rewritten to read as follows: "(d) Applicable Percentage~ those percentages set forth in Calculation 2 above (i.e. 10%, 17.5% and 22.5%) which are used to compute the amount of Incentive Management Fee if the PRID computed on an annualized basis is in excess of the PRID Hurdle." 18. The penultimate and last line of Article 2.03 of the Agreement shall be deleted in their entirety and replaced with the words "extend the term of the Agreement at any time". 19. Except as modified above, all other provisions in the Agreement, including but not limited to all of the Amendments thereof and shall remain in full force and effect. IN WITNESS WHEREOF. the parties have duly executed and delivered this Second AmendmeM. effective as of the day and year first above written, to evidence their understanding on such date. PARTNERSHIP: AMI OPERATING PARTNERS, L.P. Witness: By: PRIME-AMERICAN REALTY CORP., its general partner /s/ S. Leonard Okin Its: Vice President CORPORATION: SIXTEEN HOTELS, INC; /s/ J. Erik Kamfjord Its: President MANAGER: Winegardner & Hammons, Inc. /s/ J. Erik Kamfjord Its: President Exhibit 1 WINEGARDNER & HAMMONS, INC. 4243 HUNT ROAD CINCINNATI, OHIO 45242 May 6, 1992 Norwest Bank Minnesota, N.A. 6th Street and Marquette Avenue Minneapolis, Minnesota 55479 Att: Corporate Trust Department IBJ Schroder Bank and Trust Company One State Street New York, New York 0004 Att: Mr. Max Volmar Re: Holiday Inn Hotels listed on Exhibit A Gentlemen: Winegardner & Hammons, Inc. (~W&H"), has entered into a Replacement Management Agreement and a Construction Services Agreement (respectively the "Management Agreement" and the "conseruction Services Agreement", and collectively, the "Agreements", with AMI Operating Partners L.P. ("AMI"), pursuant to which W&H has agreed to provide management and construction supervision services for 16 Holiday Inns owned by AMI and more particularly described in Exhibit A annexed hereto (collectively, the "Hotels"). In connection with the Agreements, you have advised us as follows: A. The Lenders listed in Exhibit 9 annexed hereto (the "Lenders", have agreed to make a loan (the "First Loan"), to AMI secured in part by a mortgage lien on the Hotels, as more particularly set forth in a Loan Agreement dated as of February 28, 1992 (as the same may from time to time be amended, the "Priming Loan Agreement"). The First Loan is held in the name of Norwest Bank Minnesota, N.A. as agent (together with its successors as agent, the "Agent"). B. The Holders listed in Exhihit C annexed hereto (the "Holders") have made a loan ( the "Second Loan") to AMI secured in part by a mortgage lien on the Hotels, as more particularly set forth in a Note Purchase and Loan Agreement dated as of December 15, 1996 (as the same may from time to time be amended, the "Loan Agreement"). The Second Loan ls held in the name of I.B.J. Schroeder Bank and Trust Company, as servicer (together with its successors as servicer or agent, the "Servicer"). C. AMI has filed a petition seeking relief under the provisions of Chaprer 11 of title 11 of the United States Code, Case No. 92B-41245 (PBA) (the "Bankruptcy Proceeding") with the United States Bankruptcy Court, Southern District of New York (the "Bankruptcy Court"). D. Subject to the confirmation by the Bankruptcy Court of the Plan of Reorganization filed by AMI in connection with the Bankruptcy Proceeding, the Lenders will enter into certain modififarions of the First Loan with AMI, and the Holders will enter into certain modifications of the second Loan with AMI. E. The obligations of the Lenders in connection with the First Loan and the modification thereof referred to in clause D above, and the obligations of the Holders in connection with the modification of the Second Loan referred to in clause D above, are contingent upon W&H executing and delivering this letter, and the execution and delivery of this letter by W&H is a material inducement to the Lenders and Holders to enter into such obligations. F. AMI has consented to W&H's allowing the inspection, by the Agent, the Servicer, the Lenders and the Holders, of the books and records held by W&H, and to the receipt by each of said parties of information from W&H regarding the Hotels. Accordingly, we agree with you as follows: 1. As used herein: (a) The term "Loans" shall mean, collectively, the First Loan and the Second Loan. (b) The term "Required Landers" shall have the meaning set forth in the Priming Loan Agreement. (c) The term "Required Holders" shall have the meaning set forth in the Loan Agreement. (d) The term "Successor Entity" shall mean any of (1) the Agent and its successors, (2) the Servicer and its successors, (3) the Lenders or any Lender, (4) any nominee or designee of the Agent, the Lenders or any Lender; (5) the Holders or any Holder, (6) any nominee or designee of the Servicer, the Holders, or any Holder, or (7) any other party aqcuiring title (which shall include, where applicable, aqcuisition of a leasehold interest) to the Hotels or any Hotel pursuant to a foreclosure of either of the Loans or pursuant to a deed in lieu of foreclosure, or from any entity otherwise referred to in clauses (1) through (7) of this Paragraph 1(d). 2. W&H hereby certifies that: (a) The Agreements have been executed and delivered contemporaneously herewith, are unmodified and in full Force and effect, to the best of W&H's knowledge there are no defaults thereunder, and all fees and other payments payable to W&H thereunder are current; (b) There are in existence, and were in existence at the time of the first Advance under the Priming Loan Aqreement, no Plans and Specifications (as defined n the Prining Loan Agreement) other than those relating to the Inner Harbor Alterations (as defined in the Priming Loan Agreement) more particularly described in Exhibit M-7 to the Priming Loan Agreement (the "Inner Harbor Plans and Specifications"); (c) Any existing Contracts (as defined in the Priming Loan Agreement have been approved by W&H and, if required by the Priming Loan Agreement, by the Consulting Professional (as defined in the Priming Loan Agreement); (d) Completion of the Inner Harbor Alterations and the Work in accordance with the Plans and Specifications and the Construction Schedule will satisfy all existing deficiencies raised by Holiday Inns, Inc. and its franchising affiliates (collectively, "HII") with respect to the Hotels, including, without limitation, any Product Improvement Programs; (e) With the exception of the Inner Harbor Alterations and certain of the Work to be performed at the Lancaster East Hotel, none of the Work to be performed requires architect's plans to be prepared; and (f) With the exception of the Inner Harhor Alterations and certain of the work to be performed at the Lancaster East Hotel, none of the Work to be performed requires any approval of HII. 3. W&H hereby consents to the collateral assignment of the Aqreements by AMI to each of the Agent and the Servicer, as security for repayment of the respective Loans (as the same may be modified), but such assignment shall in no event be construed or deemed to be an assumption by the Agent, the Servicer, the Lenders, or the Holders of any obligations of AMI under the Agreements. 4. W&H hereby acknowledges and agrees that, notwithstanding anything to the contrary contained in Section 5.09(b) of the Management Agreement, the Cash Reserve for Capital Replacements (referred to in the Priming Loan Agreement as the "FF&E Account~) shall be held by the Lenders or the Holders, or as they may direct, pursuant to the Priming Loan Agreement or the Loan Agreement, as the same may be modified from time to time. 5. W&H will provide both the Agent and the Servicer at the above addresses (or such other addresses as may be specified in a notice to W&H) with copies of all notices of default on the part of AMI under the Agreements, and shall afford each of the Agent and the Servicer an opportunity to cure such defaults, which rights shall be coincident and coterminous with the right of AMI to effect such cure, except that each of the Agent and the Lender shall have an additional fifteen (15) day period, after the expiration of the period in which AHI is required to effect such cure, to effect the same ( and performance by the Agent or the Servicer shall be accepted by W&H as though the same had heen performed by AMI), and there shall be no default deemed to exist under the Agreements unless such cure shall not have been completed within such period. 6. Anything in the Agreements or by law notwithstanding, W&H will not assert any right it might have to terminate the Agreements or performance of its services thereunder as the result of a default by AMI without giving written notice thereof to the Agent and the Servicer, specifying the claimed default, and notwithstanding the occurrence of any such default, W&H shall take no action to rescind or terminate the Agreements and shall, at the request of either the Agent or the Servicer, continue performance of its obligations thereunder, in accordance with the terms thereof, provided that the default shall be cured (as provided in Paragraph 5 hereof or otherwise), and W&H shall, be paid for its services in accordance with the fee schedules set forth in the Agreements. 7. In the event all or some of the Hotels are acquired by any Successor Entity, the Aqreements shall remain in full force and effect, and W&H shall continue to perform its services thereunder for the benefit of the Successor Entity, provided, however, that the Agreements shall be deemed to have been amended in the following respects (and, at the request of the Successor Entity or W&H, the parties shall enter into modification of the Agreements to evidence such amendments): (a) There shall be no payment by the Successor Entity of any Administrarion Fee, termination Fee or any other fee or charge under the Agreements in connection with the transfer of the Hotels to the Successor Entity (it being understood that the provisions of the Management Agreement relating to Administtation and Termination Fees shall, however, remain applicable in accordance with their terms to future transactions); (b) The Successor Etity or W&H shall have the right to terminate the Agreements at any time, with or without cause, and without payment of any Administration Fee, Termination Fee, or any other fee or charge, provided that in the event of a termination without cause the party so terminating shall give the other party not less than ninety (90) days prior written notice of such termination, and if the Successor Entity is the party terminating without cause, the provisions of the Management Agreement relating to the Termination Fee shall remain applicable in accordance with their terms); (c) Upon termination of the Management Agreement by the Successor Entity, without cause, for less than all of the Hotels, W&H shall be entitled to an Administration Fee as respects the Hotels for which the Management Agreement is terminated, on the terms and conditions set forth in the Management Agreement: (d) Any provisions in either of the Agreements relating to arbitration shall be deemed to have been deleted; (e) W&H shall not be permitted to undertake any actions not provided for in the then-approved Annual Plan (other than in connection with the day-to-day operations of the Hotels) without the prior written consent of the Successor Entity (it being understood that at the time of transfer or thereafter, the Successor Entity may, at its option, consent in advance to certain deviations from an approved Annual Plan); (f) All employees of the Hotels (includinq, without limitation, the Hotels located in the state of Connecticut and the Commonwealth ot Pennsylvania) shall become employees of Sixteen Hotels, Inc., or another affiliate of W&H, it being understood that any sales tax payable in connection therewith shall be deemed to be an operating expense of the Hotels, but will be excluded from the computation of any Incentive Managenent Fee under the Management Agreement; and (g) Any employee benefit plans affecting the Hotels will be subject to the review and approval of the Successor Entity. Neither the Agent, the Servicer, the Lenders or any Lender, or the Holders or any Holder. or any nominee or designee of any of them, shall incur any personal liability to W&H under the Aqreements as the result of any such acquisition or transfer except to the extent that (and for so long as) any such entity becomes the owner of any of the Hotels. 8. If the Agreements shall terminate for any reason, or be rejected or disaffirmed pursuant to any bankruptcy law or any other law affectng creditors' rights. W&H shall, if notice has not theretofore been provided to the Agent or the Servicer, immediately notify the Agent and the Servicer of such termination, rejection or disaffirmance, and the Agent or the Servicer (or entities designated by either of them) shall have the right, exercisable by notice to W&H within sixty (60) days after the Agent or the Servicer (or other Successor Entity) obtains possession of the Hotels, to enter into new agreements for the management and providing of construction supervision services with respect to the Hotels (or those of the Hotels acquired by the Agent, Servicer, or other Successor Entity) on the same terms and conditions as are contained in the Agreements (as amended by clauses (a) through (g) of Paragraph 7) for tbe remainder of the term of the Agreements. The receipt of such new agreements shell be subject to the curinq, by the Agent, Servicer, or other Successor Entity, of any outstanding curable defaults under the Agreements. If both Loans are in effect and both the Agent and the Servicer send the notices referred to in this Paragraph 8, the notice sent by the Agent shall take precedence. The provisions of this Paragraph 8 shall survive the termination of the Agreements. 9. W&H shall not amend, modify or, (subject to the provisions of this letter) terminate the Agreements without the prior written consent of Required Lenders and Required Holders. 10. From time to time, at the request of any of the Agent, the Servicer, Required Landers, or required Holders, W&H will execute and deliver to the party so requestinq an estoppel certificate indicatinq (a) that the Agreenents are unmodified (or, if modified, settinq forth the modifications) and in full force and effect, and that to the knowledge of W&H there is no default (or specifying any default of which W&H has knowledge or notice), the date of expiration of the term of the Aqreements, and the dates through which W&H has received payment under tbe Agreements, it being understood that any such certification may be relied upon by the Agent, the Servicer, the Lenders, the Holders, and any Successor Entity. 11. The Agent, the Servicer, the Lenders, the Holders, and any Successor Entity shall have the same rights as are afforded to AMI under the Agreements to inspect books and records held by W&H with respect to the Hotels, and to the receipt of information regarding the Hotels from W&H. 12. All amounts otherwise payable to AMI under the Agreements shall instead be paid into the Excess Cash Account (as such term is defined in the Priming Loan Agreement) or otherwise applied as required by the Priminq Loan Agreement or the Loan Agreement (as the same may be modified from time to time). 13. Copies of all notices under this letter shall be sent by certified mail, return receipt requested, or by personal delivery (including by nationally recognized courier service). A copy of any notice sent to the Agent or the Servicer shall be sent to Rosenman & Colin, 575 Madison Avenue, New York, New York lOO22, Att: Stephen R. Senie, Esq. Notices shall be deemed to have been received upon the earlier of actual receipt thereof or the third calendar day after mailing. Any party may change its address by notice to the other party in accordance with this Paragraph 13. 14. W&H acknowledges that nothing contained in the Agreements shall be deemed an amendment to either the Priming Loan Agreement or the Loan Agreement, or to constitute a waiver by the Agent, the Servicer, the Lenders or the Holders of any provision thereof. 15. The parties acknowledge that the Agent, the Servicer, the Lenders, the Holders, and W&H are each relying on the matters contained herein. Please indicate agreement with the terms of this letter by signing and returning one copy to W&H. Very truly yours, WINEGARDNER & HAMMONS, INC. By: /s/ J. Erik Kamfjord Title: President AGREED AND ACCEPTED: NORWEST BANK MINNESOTA, N.A. By: /s/ Maya Mortenson Title: Corporate Trust Officer IBJ SCHRODER BANK AND TRUST COMPANY By: Barbara McCluskey Title: Assistant Vice President EXHIBIT A LIST OF PROPERTIES 1 Baltimore South Holiday Inn GLen Burnie, MD 2 Belmont Holiday Inn Baltimore, MD 3 BWI Airport Holiday Inn Baltimore, MD 4 Cromwell Bridge Holiday Inn Towson, MD 5 Frederick Holiday Inn Frederick, MD 6 Glen Burnie Holiday Inn Glen Burnie, MD 7 Inner Harbor Holiday Inn Baltimore, MD 8 Moravia Holiday Inn Baltimore, MD 9 Plkesville Holiday Inn Pikesville, MD 10 Billy Budd Holiday Inn York, PA 11 East Market Street Holiday Inn York, PA 12 Hazleton Holiday Inn Hazleton, PA 13 Lancaster North Holiday Inn Lancaster, PA 14 Lancaster East Holiday Inn Lancaster, PA 15 East Hartford Holiday Inn Hartford, CT 16 New Haven Holiday Inn New Haven, CT EXHIBIT B LENDERS Century Life of America Jackson National Life Insurance Company Messachusetts Mutual Life Insurance Company EXHIBIT C HOLDERS Century Life of America Daiwa Bank Trust Company Foothill Capital Corporation The Hokkaido Takushoku Bank, Ltd. Jackson National Life Insurance Company Massachusetts Mutual Life Insurance Company Pan American Life Insurance United Postal Savings EXHIBIT 2 LENDERS ALI Inc. EXHIBIT 3 HOLDERS ALI Inc. Foothill Capital Corporation TCW Asset Management ING (US) Capital Corporation (10) (p) Siegel Rich INC. Analyze, Facilitate, Resolve. March 11, 1997 Mr. Leonard Okin Prime America Realty 11 Harristown Road Glen Rock, NJ 07452 Re: Prime Motor Inns Limited Partnership and AMI Operating Partners, L.P. Dear Mr. Okin: This letter confirms the engagement of Siegel Rich Inc., by the above-referenced organizations (the "Company") to serve in the capacity of business advisor. It should be understood that our role is strictly advisory and that all decisions and action steps are made by management and not by us. Scope of Engagement To help you develope a focused business strategy. To act as a sounding board, sharing our ideas and insights on all business matters when you feel our input will be of benefit to you in the decision making process. To help coordinating together with you, other professionals and personnel in order to see that your needs are appropriately met in a timely and cost effective manner. To help structure and negotiate potential transactions. To help you weigh the pros and cons of an alternative before you take an action step. Professional Fees Fees for our service are based on the time devoted at $300 per hour plus out-of-pocket disbursements. Indemnification In consideration of the services of Siegel Rich Inc., the Company agrees to indemnify and holds harmless Siegel Rich Inc. and its officers and employees from and against any losses, claims, damages or liabilities (or actions in respect thereof) to which any Indemnified Party may become subject as a result of or in conjunction with Siegel Rich Inc. rendering services hereunder. The Company agrees to reimburse any expenses, including reasonable fees of its separate counsel, as they are incurred in connection with investigating, preparing or defending any action or claim related to or in connection with this Agreement. Please be assured that we are ready to serve you in any appropriate manner. We believe that we are uniquely qualified, by virtue of our backgrounds, and bring the kind of caring that can effectively add to your business. Very truly yours, SEGEL RICH INC. By: /s/ Paul Rich By: /s/ S. Leonard Okin on behalf of Prime Motor Inns Limited Partnership and AMI Operating Partners L.P. -----END PRIVACY-ENHANCED MESSAGE-----