-----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, B6I75Tdw+UG2tI29e5Hg7YNURsZ9erq6639LW7f5E+DqQ3J6T71s/CDO6A3Y3X7m 3acU2LcgoVGVnvsAlZi3iw== 0000804219-98-000002.txt : 19980401 0000804219-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000804219-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE 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: SEC FILE NUMBER: 001-09311 FILM NUMBER: 98581953 BUSINESS ADDRESS: STREET 1: C/O WHI STREET 2: 4243 HUNT RD CITY: CINCINNATI STATE: OH ZIP: 45242 BUSINESS PHONE: 5138912920 MAIL ADDRESS: STREET 1: C/O WHI STREET 2: 4243 HUNT ROAD CITY: CINCINNATI STATE: OH ZIP: 45242 10-K 1 1997 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, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ................ to ............... Commission File No. 1-9311 PRIME MOTOR INNS LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 22-2754689 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) C/O WHI, 4243 Hunt Road Cincinnati, Ohio 45242 (Registrant's Mailing Address) Registrant's telephone number, including area code: (513) 891-2920 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on which registered Units of Limited Partnership Over the Counter Bulletin Board Interest 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 10, 1998 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 Over the Counter Bulletin Board on that date, was approximately $11,125,000. The Exhibit Index is located on page 24. Page 1 of 48 PART I Item 1. Business Prime Motor Inns Limited Partnership (the "Partnership") and its 99% owned subsidiary, AMI Operating Partners, L.P. ("AMI"), were formed in October 1986 under the Delaware Revised Uniform Limited Partnership Act. The Partnership and AMI 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 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 AMI. 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 AMI (the "Lease"). On September 18, 1990, Prime and certain of its subsidiaries, including AMI Management, filed for reorganization under Chapter 11 of the Bankruptcy Code (the "Prime Bankruptcy") and, effective November 30, 1990, AMI Management rejected the Lease. At that time, AMI, 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. In 1991 the Partnership and AMI asserted claims against Prime and AMI Management in the Prime Bankruptcy with respect to defaults under the Lease and Prime's guaranty (the "Guaranty") of certain obligations under the Lease, the operation and maintenance of the Inns prior to and following the commencement of the Prime Bankruptcy, and the rejection of the Lease and the Guaranty. AMI entered into an agreement with the holders of the Mortgage Notes (the "Mortgage Lenders") under which, among other things, AMI assigned to the Mortgage Lenders its claims (including claims in connection with such disputes) against Prime and AMI Management and agreed that amounts recovered on such claims would be allocated among financial claims (the proceeds of which would be applied to the repayment of the Mortgage Notes) and operating claims (the proceeds of which would be available to finance capital improvements to the Inns). In July, 1992 the Bankruptcy Court administering the Prime Bankruptcy approved a settlement (the "Prime Settlement") among the Mortgage Lenders, Prime and AMI Management under which various claims of the holders of the Mortgage Notes against Prime and AMI Management were allowed; AMI did not make any payments to or for the benefit of any other party; and Prime, AMI Management and AMI exchanged mutual releases. Since 1992, AMI and the Mortgage Lenders received total proceeds as a result of the Prime Settlement of approximately $8,874,000, of which $8,827,000 was utilized to reduce the principal amount of the Mortgage Notes (of which $1,025,000 was recognized in 1995) and $47,000 was used to fund capital improvements. To conserve cash to provide funds to maintain and improve the Inns and pay suppliers, AMI 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 AMI and its advisors and representatives of the Mortgage Lenders and their advisors, the Mortgage Lenders agreed to restructure the Mortgage Notes as part of a "prepackaged" reorganization of AMI 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, AMI 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, AMI paid fees to acquire franchise agreements to replace those that had been held by AMI Management. Holiday Hospitality Corporation, formerly Holiday Inns, Inc., and its affiliates engaged in administering the "Holiday Inn" system (collectively, "HHC") 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. AMI 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 AMI, 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 AMI. 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. All revenues in excess of budgeted or otherwise approved operating and administrative expenses, debt service, a reserve for capital improvements (the "FF&E Reserve") which amounted to 1 1/2% of gross revenues in 1993, 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 AMI to maintain a working capital reserve of $2 million, must be applied by AMI to the repayment of the Tranche B Loan, then deposited into an escrow account held on behalf of the Priming 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 AMI 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 Priming Lenders, of the Partnership's interest in AMI 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 (as restated, 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, pursuant to which, upon the sale of any of the Inns and/or upon the maturity (by acceleration, at the stated maturity date or otherwise) of the Mortgage Loan, a portion of the appreciation, if any, in the value of such Inn (in the case of sale of an Inn) or all of the Inns (in the case of maturity of the Mortgage Loan) over the amount of the Mortgage Loan allocated thereto would be payable as additional interest on the Mortgage Loan. However, no amount is payable as shared appreciation until all obligations under the Priming Loan have been met. During the term of the restructured Mortgage Notes, operating revenues in excess of the $2 million of working capital that AMI 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, AMI and the Partnership deposited the deeds to the Inns and assignments of other assets of AMI 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, AMI 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 AMI files another bankruptcy case, contest the lifting of any stay to permit the Mortgage Lenders to exercise such rights. AMI is currently in compliance with all covenants and requirements of the Priming Loan and Restated Loan Agreement. Following its reorganization, AMI made the capital improvements, refurbishments and repairs necessary to render the condition of the Inns suitable and adequate for AMI's business, to satisfy HHC quality standards, to correct deficiencies at the Inns, and to restore the competitive position of the Inns. AMI also substantially upgraded the Baltimore Inner Harbor Inn. Improvements and refurbishments totaling $13,000,872 were completed in 1994, $11,500,000 of which were funded from the proceeds of the Tranche A Loan and $1,500,872 of which was funded from the FF&E Reserve. Subsequent to the completion of that capital improvement program, AMI has made additional improvements and refurbishments totaling in excess of $7,500,000 funded from the FF&E Reserve, in addition to ongoing maintenance and repairs. Historically, the Inns have experienced cash flow deficiencies in the first quarter of each year, reflecting reduced travel and high operating costs in the winter months. AMI has made borrowings under the Tranche B Loan during the first quarter of each of 1995, 1996 and 1997, and is making borrowings during the first quarter of 1998, and has repaid such borrowings in the second and third quarters of the year. There have not been any unpaid balances under the Tranche B Loan at December 31, 1995, 1996 or 1997. The "Holiday Inn" franchises of ten Inns (one of which was sold in July, 1997) were to expire on June 30, 1997 and the "Holiday Inn" franchises of an additional two Inns were to expire on December 31, 1997. Beginning in August, 1995, the General Partner began efforts to arrange financing for the costs of renewal of those "Holiday Inn" franchises, including seeking the consent of the holders of the Priming Loan and Mortgage Notes to utilize FF&E Reserves to fund HHC Product Improvement Plans ("PIPs") and seeking to refinance the Priming Loan and Mortgage Notes on terms that would provide (or enable AMI to generate internally) additional financing for franchise renewals. Prior to December 31, 1995, HHC had inspected and prepared PIPs for ten of the Inns whose franchises were to expire in 1997 and, during the second quarter of 1996, prepared PIPs for the remaining two Inns. Based on those PIPs and on analyses by W&H, the General Partner estimated the cost of the capital expenditures required by the PIPs to be approximately $13,000,000, although the General Partner believed that the scope of the work and related costs would be subject to negotiation. During 1996 the General Partner continued its efforts to arrange financing for the franchise renewals and/or refinancing of the Priming Loan and Mortgage Notes. At the same time, the General Partner continued its negotiations with HHC as to the scope of work required for the PIPs, entered into negotiations with contractors to minimize the costs of capital improvements, and worked with W&H to identify which capital improvements appeared to enhance the Inns' ability to compete in their markets and add value to the Inns and which capital improvements appeared to be less necessary or to add little value (although HHC has since indicated that it would not grant significant waivers of the scope of the work required by the PIPs). The General Partner also engaged W&H to evaluate the relative benefits and costs of renewing the "Holiday Inn" franchise for each Inn, operating such Inn under other franchises that might be available, and operating such Inn without a franchise affiliation. Based on W&H's evaluation the General Partner determined that the Inns should remain franchised as "Holiday Inns." In 1996, the General Partner determined to sell the Glen Burnie South and Baltimore Moravia Road Inns and in early 1997 entered into a contract for sale of the Glen Burnie South Inn (which sale was completed on July 29, 1997). In early 1997, the General Partner determined also to sell the Baltimore Pikesville, Baltimore Belmont, Frederick MD, Lancaster Rt. 501, York Market Street and Hazleton Inns, and subsequently entered into a contract for sale of the Baltimore Pikesville Inn. Those Inns were either operating at a loss or would not produce a return to the Partnership sufficient to justify the costs of renewal fees and PIPs. However, the net proceeds from the sale of the Glen Burnie South Inn were, and the proceeds from the sale of the other Inns are required to be, applied to pay the 2% prepayment penalty on, and to reduce the outstanding principal balance of, the Priming Loan and, after repayment of the Priming Loan, to reduce the outstanding principal balance of, and to pay the shared appreciation, if any, under the Mortgage Notes. None of such proceeds will be available to finance the PIPs or franchise renewal fees (and the holders of the Priming Loan and Mortgage Notes declined to permit the use of such proceeds for such purpose or for the acquisition of other properties). Beginning in December, 1996, and continuing through the early Spring of 1997, the General Partner received correspondence from Dilworth, Paxson, Kalish & Kaufman LLP (now Dilworth & Paxson LLP) ("D&P"), a law firm purporting to represent five Unitholders. In that correspondence, D&P broadly charged 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 PIPs and requested that the management agreement with W&H be terminated or renewed only on a short term basis. The letters threatened filing of a derivative action on behalf of the Partnership in the event these matters were not resolved to the satisfaction of the five Unitholders and also requested a meeting with the General Partner to discuss these and other matters relating to the Partnership. 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 Lenders will be required for the Partnership to elect to terminate the W&H Management Agreement. In subsequent correspondence, D&P stated that its clients were considering making a tender offer for the Units and requested that additional information be provided to such clients. The General Partner declined to provide any non-public information in the context of a tender offer, but did offer to meet with the clients to discuss the operations and conditions of the Partnerships. In May, 1997 the General Partner met with Jerome Sanzo and members of D&P. Mr. Sanzo stated that he did not have any interest in suing the General Partner and was not then considering a tender offer, but did want the General Partner to support a transaction in which one or more persons (including persons who were not then Unitholders) would contribute capital and/or properties of the Partnership in exchange for an equity interest in the Partnerships. Mr. Sanzo expressed the view that, with the additional resources and some restructuring of its operations, the Partnership could become a growing active real estate business. The General Partner stated, while it could not commit to support any proposed transaction without knowing the terms of the transaction (particularly since the transaction summarized by Mr. Sanzo appeared to involve dilution of the interest of the non-contributing Unitholders), it would not impede presentation to the Unitholders of any proposal that Mr. Sanzo and his associates chose to make. In June, 1997, the General Partner requested that HHC extend the franchise agreements expiring on June 30, 1997, to enable the General Partner and AMI to continue to seek financing for the PIPs and the franchise renewal fees. In consideration of a $125,000 payment by AMI of franchise renewal fees, HHC agreed to extend the franchise expirations for the ten Inns to July 31, 1997 (which was subsequently extended to August 29, 1997) and prepared revised PIPs. Through June, 1997, the General Partner had not received any acceptable financing proposals. The holders of the Priming Loan and Mortgage Notes (collectively the "Lenders") had indicated that they were not interested in providing any of the required financing (and subsequently indicated that they would not permit the FF&E Reserves to be utilized to finance the PIPs), and were not agreeable to the refinancing proposals by the General Partner that called for a discount on the Priming Loan and Mortgage Notes. The General Partner (acting directly in the name and on behalf of AMI, and not through or with the assistance of any financial advisor) approached a number of investment banks and financial institutions recognized for arranging or providing real estate financing (including through securitization of loan portfolios), including CS First Boston, Lehman Brothers, Donaldson, Lufkin & Jenrette, Nomura Asset Capital, General Electric Acceptance Corporation, GIAC (an affiliate of HHC), Prime, General Motors Acceptance Corporation, Winston Hotels, Inc., Mass Mutual, Foothill Capital, United Capital Corp., Deutsche Morgan Grenfell, Inc., Interstate Properties and HFS Franchising. A number of those institutions were not interested in considering a financing transaction. While some of those institutions were willing to propose financing transactions, in each case the amount of financing that the institution was prepared to consider arranging or providing was significantly below the outstanding balance of the Priming Loan and Mortgage Notes and did not provide any financing for the PIPs. In addition, most of the proposals received were contingent upon the Priming Loan and Mortgage Notes being purchased or refinanced at a discount and required that the new lenders receive a substantial equity interest in the Partnership or AMI. The General Partner believed that such proposals were disadvantageous to the Unitholders. The General Partner also received a number of proposals to assist or advise the Partnership in proposals for the sale of interests in, or assets or operations of, AMI and/or to restructure AMI and the Partnership. However, none of those proposals provided any evidence of the terms or sources of any financing or any indication of interest by any party in proceeding with (much less a commitment of any party to complete) a transaction. On June 20, 1997, the General Partner received a communication from D&P stating it had been authorized by Unitholders holding 25% of the Units to request a Special Meeting (the "Special Meeting") to remove Prime-American Realty Corp. ("PARC") as General Partner and to elect a new General Partner. The General Partner and D&P first planned to hold the Special Meeting on August 19, 1997 and then rescheduled the meeting for November 5, 1997. The Notice of meeting for the November 5 Special Meeting, mailed in September, 1997, called for removal of PARC, as General Partner and the election of Davenport Management Corp. ("DMC"), a corporation owned and controlled by Jerome Sanzo, as the substitute General Partner. On October 29, 1997, at the request of DMC, the November 5, Special Meeting was postponed to a date to be determined in the future. In August, 1997, HHC advised the General Partner that it did not desire to renew the franchises of five Inns that were to expire in 1997 (all of which were Inns that the General Partner had therefore determined to sell). HHC also indicated its unwillingness to extend the expiration of the franchises if the General Partner and AMI could not provide realistic plans for financing the PIPs and the franchise renewal fees. HHC extended the time within which the General Partner and AMI must present such plans, first to September 19, then to September 30, October 15 and then to November 14, 1997. AMI submitted a plan for the completion of the PIPs (including the improvements to be made and the schedule therefor) and the sale of seven of the Inns (including six whose Holiday Inn franchises were to expire in 1997 and one whose franchise expires on December 31, 2001). The cost of the PIPs for the remaining five Inns whose franchises were to expire in 1997 was estimated to be approximately $7,500,000. In addition, AMI would be required to pay franchise renewal fees of approximately $438,500 ($500 per room), for renewal of the "Holiday Inn" franchises for the five Inns that are to be retained whose franchises were to expire in 1997. In response to HHC's reluctance to provide further extensions of expiring "Holiday Inns" franchises without a firm financing plan, commencing in August, 1997 the General Partner accelerated its efforts to arrange financing for the PIPs and the franchise renewal fees or to enter into another transaction (including the sale of Inns) to preserve and protect the interests of the Unitholders. Among other things, the General Partner solicited proposals from each party that had approached the General Partner with proposals to provide financing to, or acquire interests in, the Partnership, or to acquire assets or operations of AMI. Among the persons approached were DMC, CS First Boston, Bristol Hotels and Resorts, H.I. Development Corp., InterGroup Corporation, GIAC and Prime. On September 26, 1997 Servico, Inc. made, and on September 29, 1997 publicly announced, an offer to acquire the Partnership's 99% limited partnership interest in AMI (the "Interest") for $8 million in cash. No other complete offers or proposals were submitted (nor any proposal that contemplated a price, or return to the Unitholders, as high as that provided by the Servico offer). After receipt of the Servico offer, the General Partner retained Furman Selz LLC ("Furman Selz") as financial advisor. After extensive analysis of the alternatives (including the possible operation of the Inns under different franchise or without a franchise affiliation; the feasibility of DMC's proposals for the operation of the Partnerships and the Inns; the likelihood of obtaining financing, within the Partnerships' time constraints, through the parties who had, in effect, proposed acting as brokers to find lenders or investors; and the possibility of renegotiating the terms of, and/or negotiating amendments of or waivers under, the Priming Loan and the Mortgage Notes), and of the Servico offer, including discussions with Furman Selz and counsel to the Partnership, the General Partner began negotiations with Servico. While the General Partner believed that improvements had been made in the physical condition and attractiveness of the Inns, the market position and competitiveness of the Inns and the financial condition and results of operations of AMI, the General Partner determined that financing was not available on acceptable terms to take the actions necessary to preserve the Unitholders' interest in the Inns. The General Partner and counsel to the Partnership engaged in extensive and detailed negotiations with Servico, Inc. and its counsel with respect to the terms and conditions of the transaction and the proposed Acquisition Agreement. Among the subjects of negotiation were price, the expense reimbursements, the break-up fee, the indemnities and representations and warranties. Following the conclusion of such negotiations, the General Partner approved the terms and conditions of, and executed and delivered, the Acquisition Agreement. Thereafter, at the request of Servico and the General Partner, HHC extended the franchises that were expiring in 1997 to December 26, 1997 and then to January 6, 1998, February 9, 1998 and, most recently, March 10, 1998 in order to allow time for the Unitholders to consider the Sale. In November, 1997 DMC requested that the theretofore-postponed Special Meeting be called, and DMC and the General Partner agreed on January 29, 1998 as the meeting date. At the meeting on January 29, 1998, DMC reported that the holders of approximately 71% of the Units had voted to remove PARC as General Partner and that holders of approximately 63% of the Units had voted to admit DMC as the replacement General Partner. Since removal of PARC as the General Partner required the consent of the holders of more than 80% of the Units and the election of DMC as the replacement General Partner was conditioned on, among other things, the removal of PARC, the DMC proposals were not adopted at that time. The meeting was adjourned without action to February 24, 1998 to permit DMC to solicit further votes and to supplement its proxy materials. At the February 24 meeting, the vote was substantially unchanged and the meeting was again adjourned to a date to be determined. On February 12, 1998 HHC advised the General Partner that, as a result of AMI's failure timely to accept the license agreements offered by HHC in July 1997 to renew AMI's "Holiday Inn" franchises that were to expire in 1997, HHC had withdrawn the offer. On February 23, 1998, HHC advised the General Partner that it would not extend the "Holiday Inn" franchises when they expired on March 2, 1998. HHC subsequently advised the Partnership that it would extend the "Holiday Inn" franchises for such Inns for 60 days if an application by a "viable" applicant for franchises for the six Inns HHC was willing to keep in the "Holiday Inn" system were submitted, and application fees in the amount of $517,000 were paid, by March 10, 1998. Because of AMI"s inability to arrange financing, HHC does not consider AMI a "viable" applicant. Servico filed an application, and AMI paid the application fees (with the right to have the fee transferred to any other viable applicant in the event that a transaction more favorable to the Unitholders were subsequently proposed), prior to March 10 and the Inns will remain in the "Holiday Inn" system until May 9, 1998. The General Partner has been advised that beginning in late February 1998, Servico, Inc. made open market and privately negotiated purchases of Units at prices ranging from $2.4375 to $3.50 per Unit and, as of March 16, 1998, owns and has the right to vote in excess of 2,000,000 Units. Servico then agreed to amend the terms of the Acquisition Agreement to provide, among other things, that the cash purchase price payable to the Partnership for the Interest be increased from $8,000,000 to $12,000,000. Subsequently, in connection with Servico's agreement to purchase the Units held by Jerome Sanzo, Martin Fields and their associates and reimburse expenses, the Partnership agreed to make a payment of $500,000 to DMC or its designees as payment for its costs and expenses in connection with its proxy solicitation (the "DMC Payment"), all parties agreed to exchange mutual releases, and Servico agreed to vote its Units in favor of the DMC Payment. The Partnership has called a Special Meeting of the Partnership to which the beneficial owners of Units (the "Unitholders") will be asked to (i) consider and vote upon the proposed sale (the "Sale") of the Interest to Servico Acquisition Corp. ("SAC"), a wholly-owned subsidiary of Servico, Inc., and the dissolution and liquidation of the Partnership following the Sale (the "Liquidation"); and (ii) the making of the DMC Payment. The Sale and the Liquidation comprise a single integrated proposal (the "Proposal"), which is subject to, among other things, the consent of the holders of a majority of the Units. The Meeting will be held on April 30, 1998 and persons who are Unitholders at the close of business on March 16, 1998, will be entitled to vote on the matters to be acted on at that Meeting. If the Sale is approved by the Unitholders and consummated, any Interest of the Unitholders in the Inns will be entirely extinguished and any future appreciation in the value of hotel properties in general, and the Inns in particular, will be enjoyed solely by Servico, Inc. and its affiliates. The Partnership has been advised that Servico, which owns and has the right to vote in excess of 2 million Units, intends to vote its Units to approve the Proposal and the DMC Payment. The terms of the sale are embodied in an Acquisition Agreement dated as of November 7, 1997, and amended as of March 12, 1998 (as amended, the "Acquisition Agreement") among Servico, Inc., the Partnership, the General Partner and SAC (unless the context otherwise requires, Servico, Inc. and SAC are collectively referred to as "Servico") and the Liquidation will be governed by the Partnership Agreement, the Delaware Revised Uniform Limited Partnership Act and a Plan of Dissolution and Liquidation (the "Plan"). The material terms of the Acquisition Agreement and the Plan are described below, but such descriptions do not purport to be complete and are qualified in their entirety, by, and subject to the more complete and detailed information set forth in, the Acquisition Agreement and the Plan. Purchase Price. Subject to the terms and conditions of the Acquisition Agreement, at the Closing, the Partnership will sell to Servico, and Servico shall purchase from the Partnership, the Interest for a purchase price of $12,000,000 in cash (the "Purchase Price"). Servico will purchase the Interest subject to AMI's outstanding indebtedness and other obligations. Indemnification. Servico has agreed to indemnify, defend and hold harmless the present directors and officers of the General Partner and certain consultants to the Partnership, AMI and the General Partner (each an "Indemnified Party") against all losses, claims, demands, costs, damages, liabilities, expenses, judgments, fines, settlements and other amounts arising out of actions or omissions occurring at or prior to the Closing to the same extent (including mandatory advancement of expenses), but without limitation as to amount, provided under the organizational documents of the Partnership, AMI and the General Partner. During such period, Servico will maintain in effect a directors' and officers' liability insurance policy or a noncancellable runoff policy insuring the Indemnified Party, with coverage in amount and scope substantially equivalent to the General Partners' existing coverage, for events prior to Closing. Closing Date of the Sale. The Closing of the Sale will take place as promptly as practicable (and, in any event, within three business days) after the satisfaction or waiver (where permissible) of the conditions to the Sale. Representations and Warranties of the Partnership and the General Partner. The Acquisition Agreement includes customary representations and warranties of the Partnership and the General Partner as to, among other things: (i) the due organization, valid existence and good standing of each of the Partnership, the General Partner and AMI and their corporate power and authority to enter into the Acquisition Agreement and the transactions contemplated thereby; (ii) the due authorization, execution and delivery of, and the validity, binding effect and enforceability of, the Acquisition Agreement; (iii) the authority of each of the Partnership, the General Partner and AMI to conduct its business; (iv) the absence of certain defaults, violations of law or conflicts with organizational documents; (v) the absence of any interest of the Partnership, the General Partner or AMI in any subsidiary other than the Partnership's interest in AMI; (vi) the absence of the need for material governmental consents; (vii) timely filing of all reports required to be filed under the Securities Exchange Act of 1934; (viii) the fair presentation, in all material respects of the Partnership's financial position, results of operations and cash flows, in accordance with generally accepted accounting principles, in the financial statement of the Partnership; (ix) compliance with law, including applicable environmental laws; (x) the absence of any pending, or to their knowledge, threatened materially adverse litigation; (xi) the absence of any material adverse changes; (xii) the due authorization and validity of the Interest; (xiii) the absence of any outstanding securities relating to any partnership interest in AMI; (xiv) AMI's ownership of all personal, real and intangible property set forth on schedules to the Acquisition Agreement; and (xv) the absence of the use of any broker, except for Furman Selz as financial advisor, in connection with the transactions contemplated by the Acquisition Agreement. Representations and Warranties of Servico, Inc. and SAC. The Acquisition Agreement includes representations and warranties of Servico, Inc. and SAC as to, among other things: (i) the due organization, valid existence and good standing of each of Servico, Inc. and SAC and their corporate power and authority to enter into the Acquisition Agreement and the transactions contemplated thereby; (ii) the due authorization, execution and delivery of, and the validity and binding effect and enforceability of, the Acquisition Agreement; (iii) the absence of certain defaults, violations of law or conflict with organizational documents; (iv) the absence of the need for material governmental consents; and (v) the absence of the use of any broker in connection with the transactions contemplated by the Acquisition Agreement. Covenants. The Acquisition Agreement contains a number of customary and transaction-specific covenants including the following: (a) The General Partner has agreed, prior to the Closing Date or the earlier termination of the Acquisition Agreement, except as permitted by the Acquisition Agreement, to use its best efforts to cause each of AMI and the Partnership to operate its business only in the usual and ordinary course and not to engage in certain actions specified in the Acquisition Agreement. At the request of Servico, the General Partner has taken off the market two Inns (one whose franchise was to have expired in 1997 and would have required capital expenditures estimated at approximately $1.8 million and franchise renewal fees of $78,500, and one whose franchise expires in 2001) that the General Partner had earlier determined to sell and had listed with brokers for sale. (b) The Partnership and the General Partner have agreed to provide Servico full access to its properties, books, records and to use their reasonable best efforts to cause their employees and agents to assist Servico in its investigation of AMI and the Inns. (c) The Partnership and the General Partner have agreed not (i) to directly or indirectly solicit, encourage or initiate any negotiations with respect to any offer or proposal to acquire all or substantially all of the business and assets or capital stock or partnership interests of the Partnership, the General Partner or AMI or (ii) to disclose any nonpublic information or any other information not customarily disclosed to any person or entity concerning the business and assets of the Partnership, the General Partner and AMI. However, the Partnership, the General Partner and/or AMI may participate in such negotiations with respect to any unsolicited offer or proposal that the Partnership, the General Partner and/or AMI reasonably determines is more favorable to the Limited Partners. Dissolution of the Partnership. Immediately, after the closing. the Partnership will wind up its affairs, dissolve and distribute the Purchase Price to the Limited Partners in accordance with the Partnership Agreement and the Delaware Act. Conditions Precedent to Consummation of the Sale. The respective obligations of the parties to consummate the transactions contemplated by the Acquisition Agreement are subject to the satisfaction or waiver, where permissible, of customary conditions precedent and to the conditions that: (i) the Limited Partners shall have approved the Acquisition Agreement and the transactions contemplated thereby and (ii) Servico shall have entered into a binding agreement with the General Partner pursuant to which Servico will acquire the general partner interest in AMI and Servico or its designee will be substituted and admitted as the general partner of AMI. The respective obligations of each party to consummate the transactions contemplated by the Acquisition Agreement are subject to customary conditions precedent (such as the truth and accuracy at the time of Closing of the representations and warranties of the other party and the performance by the other party of actions required to be performed by it at or prior to Closing). Termination. The Acquisition Agreement may be terminated at any time prior to the Closing Date, whether before or after approval of the Proposal, by mutual written consent of Servico and the Partnership or by either of Servico or the Partnership under certain circumstances, including if (i) the Closing has not occurred by June 1, 1998 or (ii) the Special Meeting has been held and the Limited Partners shall have failed to approve the Proposal. The Acquisition Agreement may be terminated at any time prior to the Closing Date, whether before or after approval of the Proposal, by either party under certain circumstances, including if any of the representations or warranties of the other party are not in all material respects true and correct, or if the other party breaches in any material respect any covenant contained in the Acquisition Agreement and, if such misrepresentation or breach is curable, it is not cured within ten business days after notice thereof, but in any event prior to June 1, 1998. Survival of Representations and Warranties. The representations and warranties of the Partnership, the General Partner and Servico contained in the Acquisition Agreement shall terminate at the Closing. Expenses and Fees. Except as discussed below, each party will bear its own expenses, including the fees and expenses of any attorneys, accountants or other intermediaries, incurred in connection with the Acquisition Agreement and the transactions contemplated thereby. However, AMI will bear up to $700,000 of the fees and expenses payable by the Partnerships in connection with the transactions. If the Acquisition Agreement is terminated as the result of an intentional or willful breach by the Partnership or the General Partner of any representation, warranty or covenant contained therein, then the Partnership will pay Servico an amount equal to all costs and out-of-pocket expenses (including reasonable attorneys' fees and advisors' fees), up to $300,000, incurred by Servico in connection with the Acquisition Agreement and the transactions contemplated thereby. If the Acquisition Agreement is terminated as the result of an intentional or willful breach by Servico of any representation, warranty or covenant contained therein, then Servico will pay the Partnership an amount equal to all costs and out-of-pocket expenses (including reasonable attorneys' fees and advisors' fees, including the fees and expenses of Furman Selz), up to $700,000, incurred by the Partnership, in connection with the Acquisition Agreement and the transactions contemplated thereby. If the Acquisition Agreement is terminated by the Partnership for any reason other than the circumstances described in the preceding paragraph and at the time of such termination, there exists or there is proposed a competing transaction (as defined in Section 7.8(d) of the Acquisition Agreement), then, promptly after the execution of any agreement with respect to the competing transaction (or, if no agreement is executed, the consummation of the competing transaction), the Partnership will pay to Servico $1,000,000. Other Agreements. Prime, which owns all of the capital stock of the General Partner, has entered into an agreement with Servico pursuant to which the General Partner will form a new subsidiary, AMIOP Acquisition Company, and transfer to the new subsidiary the General Partner's 1% general partnership interest in AMI. At the Closing, Servico will acquire the stock of AMIOP Acquisition Company in exchange for a five year warrant to acquire 100,000 shares of Servico common stock at a price of $18.00 per share. On November 6, 1997, the business day immediately preceding such agreement, the reported closing sale price of Servico common stock on the New York Stock Exchange was $16.00 per share and on March 27, 1998, the reported closing sale price of Servico common stock on the New York Stock Exchange was $21.25. As part of that transaction, the General Partner and Prime will waive any rights that they may have to receive any distribution by the Partnership of the proceeds of the sale of the Interest. Pursuant to a consulting contract with the Partnership originally entered into in 1994, S. Leonard Okin, a Vice President and Director of the General Partner, has performed for the Partnerships functions comparable to those that would customarily be performed by a chief executive officer of a corporation. Mr. Okin's consulting contract runs from year to year, is renewed each year for the next year if not terminated by either party, and unless extended will expire on December 31, 1998. During 1998, Mr. Okin's compensation is $140,232 plus reimbursement of certain expenses (which, in 1997, amounted to $36,100) and, if the contract is not renewed at December 31, 1998, Mr. Okin is entitled to a severance payment of $35,058. Under the Acquisition Agreement, Servico (rather than the Partnership) will pay the amounts due under Mr. Okin's consulting contract. The Plan. Immediately after the Closing, the Partnership will wind up its affairs and dissolve and as promptly thereafter as practicable will distribute the Purchase Price, net of (i) entity level taxes payable by the Partnership with respect to operations of AMI between January 1, 1998 and the date of the Sale or with respect to the Sale, (ii) the DMC Payment, and (iii) expenses payable by the Partnership out of the Purchase Price, to the Unitholders in accordance with the Plan, the Partnership Agreement and the Delaware Revised Uniform Limited Partnership Act (the "Liquidation Distribution"). Under the Plan, the General Partner will waive its right to receive its distributive share as general partner, under the Partnership Agreement, of the Liquidation Distribution. So long as AMI owns the Inns or the Partnership owns AMI, the Partnership's investment in the Inns will continue 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 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, AMI or W&H. 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 2536, Jersey City, New Jersey 07303-2536. 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, meeting room 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 As of March 1, 1998, there are approximately 910 persons employed in the operation of the Inns (not including W&H employees engaged in management and supervision). AMI 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 HHC expire, or were to have expired, on various dates 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 Location Opened of Rooms Expiration Date Ownership by AMI Maryland Baltimore Inner Harbor 1964 375 Dec. 31, 2005 Land and building lease Baltimore Washington International Airport 1973(2) 259 June 30, 1997(1) Land and building lease Frederick 1963(3) 157 June 30, 1997(1) Fee Baltimore-Cromwell Bridge Rd. 1972 139 Dec. 31, 1997(1) Fee Baltimore-Moravia Road (4) 1974 139 Dec. 31, 1997(1) Fee Baltimore-Belmont Blvd. 1973 135 Dec. 31, 2001 Fee Baltimore-Glen Burnie North 1973 128 Dec. 31, 1999 Land Lease Baltimore-Pikesville (4) (5) 1963 108 June 30, 1997(1) Fee Pennsylvania Lancaster-Route 30 1971 189 June 30, 1997(1) Land Lease and Fee Lancaster-Route 501 (4) 1964 160 June 30, 1997(1) Land Lease York-Market Street (4) 1964 120 June 30, 1997(1) Land Lease York-Arsenal Road 1970 100 Dec. 31, 1998 Fee Hazleton (4) 1969 107 June 30, 1997(1) Fee Connecticut New Haven 1965 160 June 30, 1997(1) Fee East Hartford 1974 130 June 30, 1997(1) Land and building lease Sub-total 2,406 Baltimore-Glen Burnie So. 1965 100 June 30, 1997 Sold July 29, 1997 Total 2,506 (1) Franchise extended to May 9, 1998 (2) 96 room addition completed in 1985 (3) 63 room addition completed in 1985 (4) Listed for sale (5) Subject to contract for sale
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 AMI to pay the cost of repairs, insurance, and real estate taxes. Each of the properties is subject to mortgage liens securing the Priming Loan and the Mortgage Notes. Each Mortgage Note is cross-collateralized and secured by all of the Inns. In addition, the land and building under lease in the Baltimore Washington International Airport Inn is subject to an additional mortgage held by the Ground Lessor. The following table represents the occupancy percentage, average daily rate (ADR), and revenue per available room (REVPAR) achieved by each Inn for the years indicated:
1997 1996 1995 Occup. Occup. Occup. Location: % ADR REVPAR % ADR REVPAR % ADR REVPAR Maryland Baltimore Inner Harbor 67.9% $103.25 $70.11 66.3% $95.02 $63.01 67.5 $87.52 $59.06 Balt. Washington Int'l Airport 73.5% $ 83.20 $61.13 72.4% $78.08 $56.50 68.5% $73.23 $50.20 Frederick 61.6% $ 54.05 $33.31 60.4% $54.52 $32.96 59.6% $54.61 $32.53 Balt.-Cromwell Bridge Road 63.9% $ 72.70 $46.43 61.1% $69.89 $42.71 58.4% $65.65 $38.31 Balt.-Moravia Road 50.8% $ 50.01 $25.39 43.8% $47.99 $21.02 49.9% $41.89 $20.89 Balt.-Belmont Blvd. 51.2% $ 61.21 $31.33 53.6% $57.73 $30.92 56.9% $52.32 $29.78 Balt.-Glen Burnie N. 63.1% $ 66.40 $41.92 65.3% $59.24 $38.68 56.5% $58.25 $32.94 Balt. Glen Burnie S. (Sold 7/29/97) 69.3% $ 56.68 $39.98 75.4% $53.28 $40.18 77.2% $48.32 $37.29 Balt.-Pikesville 57.9% $ 64.50 $37.31 58.4% $59.10 $34.51 57.8% $51.28 $29.63 Pennsylvania Lancaster-Route 30 53.7% $ 70.35 $37.80 59.6% $67.20 $40.06 60.8% $63.45 $38.60 Lancaster-Route 501 55.2% $ 60.25 $33.27 58.1% $59.86 $34.75 60.7% $56.94 $34.56 York-Market 50.7% $ 54.15 $27.43 43.1% $56.50 $24.37 45.9% $56.86 $26.12 York-Arsenal 54.6% $ 56.98 $31.11 50.9% $57.67 $29.34 55.3% $57.51 $31.79 Hazleton 56.8% $ 56.36 $32.03 53.8% $56.36 $30.31 56.6% $53.07 $30.04 Connecticut New Haven 69.6% $ 76.73 $53.43 65.2% $70.78 $46.17 70.3% $65.76 $46.21 East Hartford 71.1% $ 69.36 $49.33 64.2% $68.37 $43.89 64.7% $62.79 $40.65
Item 3. Legal Proceedings In the ordinary course of business, the Partnership and AMI 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 AMI or others in connection with the Inns. Such claims are generally covered by insurance. Claims not covered by insurance have not, individually or in the aggregate been material. Item 4. Submission of Matters to a Vote of Unitholders No matter was submitted during 1997 to a vote of the Unitholders of the Partnership. During 1997, a Special Meeting was called and a proxy solicitation was mailed by DMC on behalf of certain dissident Unitholders. During 1998, a Special Meeting has been called for April 30, 1998 to consider the Proposal and the DMC Payment. Please see Item 1 above. PART II Item 5. Market for Registrant's Units and Related Unitholder Matters (a) From the time of the initial public offering through June 19, 1997, Depository Receipts evidencing the Units ("Depository Receipts") were traded on the New York Stock Exchange (the "NYSE"). Effective before the opening of the market on June 20, 1997, the Depository Receipts were delisted by the NYSE because 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 fell below the NYSEs continued listing criteria. From June 20, 1997 through July 8, 1997, the Units were traded by brokers who made a market in the Depository Receipts and since July 9, 1997, the Depository Receipts have been traded on the Over the Counter Bulletin Board (the "OTCBB") under the ticker symbol "PMPI". Set forth below for each quarter since January 1, 1996 are the high and low reported sale price per Depository Receipt on the NYSE (as reported in The Wall Street Journal) through June 19, 1997, the high and low reported price quoted by brokers (as reported by National Quotation Bureau, LLC) from June 20, 1997 through July 8, 1997, and the reported high ask and low bid price quoted on the OTCBB (as reported by IDD Informational Services, Tradeline) since July 9, 1997.
1996 High Ask Low Bid First Quarter 13/16 7/16 Second Quarter 1-1/8 9/16 Third Quarter 1 5/8 Fourth Quarter 15/16 5/8 1997: First Quarter 1 5/8 Second Quarter (through June 19) 1 9/16 Second Quarter (from June 20) 1 1/2 Third Quarter (through July 8) 1 3/4 Third Quarter (from July 9) 2-1/2 3/8 Fourth Quarter 2-15/16 1-3/4
(b) On February 27, 1998, there were 533 holders of record of the Partnership's Units. (c) No dividends have been declared or distributed since the second quarter of 1990 (the last complete quarter before Prime's bankruptcy). 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, and then only so long as Mortgage Note payments are maintained and proper reserves are funded as required. Item 6. Selected Financial Data
1997(a) 1996(a) 1995(a) 1994(a) 1993(a) (in thousands except per Unit amounts) Operating Data: Total revenues (b) $ 50,352 $ 49,584 $ 47,469 $ 44,173 $ 46,261 Net loss (3,330) (2,188) (2,280) (4,673) (1,215) Net loss allocable to limited partners (3,297) (2,166) (2,257) (4,626) (1,203) Per Unit loss allocable to limited partners (.82) (0.54) (0.56) (1.16) (0.30) Balance Sheet Data: Total assets $ 51,707 $ 53,972 $ 57,001 $ 60,673 $ 64,009 Long-term debt, net of current maturities 63,544 65,691 65,645 66,627 65,912 Partners' deficit $(21,251) $(17,921) $(15,733) $(13,453) $ (8,780)
(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 through 1995 were 52 week years, 1996 was a 53 week year and 1997 is a 52 week year), that closes for bookkeeping purposes on that Friday which is most proximate to December 31 of any given year, the financial year of AMI for 1997 ended January 2, 1998; for 1996 ended January 3, 1997; for 1995 ended December 29, 1995; for 1994, December 30, 1994; and for 1993, December 31, 1993. (b) Includes $362,000, $361,000, $374,000, $341,000, and $304,000 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively, of other income (principally interest income). In addition, it includes $1,025,000 and $4,389,000 for the years ended December 31, 1995 and 1993, 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:
1997 1996 1995 Average Average Average Occupancy Daily Room Occupancy Daily Room Occupancy Daily Room Percentage Rate Percentage Rate Percentage Rate 1st Quarter 48.9% $66.94 45.3% $63.76 47.8% $59.84 2nd Quarter 70.0% $73.95 68.7% $69.50 69.4% $64.74 3rd Quarter 72.8% $75.01 72.4% $71.44 72.2% $67.06 4th Quarter 55.6% $72.64 57.2% $67.54 56.8% $62.51 Full Year 61.8% $72.56 60.8% $68.53 61.6% $63.95
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Until the end of September, 1997, it had been the intention of AMI to continue to operate the Inns as going concerns. In late September, the General Partner entered into negotiations with Servico for the Sale of the Interest and, on November 7, 1997, entered into an acquisition agreement amended as of March 12, 1998, for such Sale. If the Sale is consented to by a majority of the Unitholders, the Partnership's interest in the Inns will terminate at the Closing and the Partnership will be dissolved and liquidated. AMI sold the Glen Burnie South Inn in July, 1997, has entered into a purchase contract for the Baltimore Pikesville Inn, has listed for sale the Baltimore-Moravia Road, Lancaster-Rt. 501, York-Market Street and Hazleton Inns, and had intended to sell (but, at the request of Servico, has taken off the market) the Baltimore-Belmont and Frederick Inns. These Inns are "highway oriented" properties that, having exterior corridors and being older properties, have a dated appearance and are either losing money or, in the opinion of the General Partner, will not produce a sufficient return to justify the costs to complete the PlPs and the franchise fees for renewal of their "Holiday Inn" franchises. As with the sale of the Glen Burnie South Inn, the net sale proceeds of these Inns will be applied to reduce the outstanding principal balance of the Priming Loan and Mortgage Note, as required by the Priming Loan and Mortgage Note Agreements. So long as the Partnership owns the Interest, the Partnership's 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 HHC of competitor hotels, changes in interest rates, the availability of financing for operating or capital needs (including to finance any PlPs and the renewal of the "Holiday Inn" franchise agreements), the availability of suitable franchise affiliations, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, acts of God (which may result in uninsured losses), condemnation and other factors that are beyond the control of the General Partner, the Partnership, AMI or W&H. Results of Operations The Partnership derives its income from its 99% interest in AMI, whose income is generated from the operations of the Inns. AMI 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):
1997 1996 1995 Operating revenues: Lodging $ 40,852 39,488 36,668 Food & beverage 9,138 9,735 9,402 Totals 49,990 49,223 46,070 Direct operating expenses Lodging 9,622 9,462 8,998 Food & beverage 7,827 8,112 7,809 Marketing 3,521 3,500 3,334 Utilities 2,896 3,053 2,956 Repairs & maintenance 3,600 3,680 3,490 Rent 1,304 1,316 1,317 Insurance 771 705 630 Property taxes 1,395 1,382 1,380 Other 8,644 8,369 7,718 Totals 39,580 39,579 37,632 Operating revenues in excess of direct operating expenses $ 10,410 $ 9,644 $ 8,438
Total revenues increased to $50,352,000 in 1997, from $49,584,000 in 1996 and $47,469,000 in 1995 (including non- recurring income of $1,025,000 in 1995 from the settlement of claims by the Partnerships against Prime and AMI Management in the Prime Bankruptcy (the "Prime Settlement")). The Partnerships' net loss for the year ended December 31, 1997 was $3,330,000 (which includes an expense for accrued shared appreciation of $4,500,000 and $1,011,000 of a gain on the sale of the Glen Burnie South Inn). Net income before the expense for accrued shared appreciation and the gain on sale of the Glen Burnie South Inn was $159,000, as compared to a net loss from operations of $2,188,000 for the year ended December 31, 1996 and a loss of $2,280,000 (which includes non-recurring income of $1,025,000 from the Prime Settlement) for the year ended December 31, 1995. The following table compares the room revenues, occupancy percentage levels and ADR for the years indicated:
1997 1996 1995 Lodging revenues (in thousands) 40,852 39,488 36,668 Occupancy percentage 61.8% 60.8% 61.6% ADR 72.56 68.53 63.95
The continued increase in the ADRs at the Inns has been accomplished 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 of capital improvements during 1995, 1996 and 1997. 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). The repositioning of market segment business contributed to the slight declines in occupancies over 1995 and 1996. However, in 1997, the Inns were able to increase their occupancy 1.0% to 61.8%, compared to 60.8% in 1996. The increase in occupancy was reflective of fair weather conditions in the first quarter of 1997 as compared to the harsh winter weather in the first quarter of 1996. In addition, the Inns were able to increase rooms occupied due to the stable and growing economic conditions and the increase in business and leisure travel during 1997. Since there continues to be intense competition in the geographic areas where the Inns are located, the Partnerships and W&H believe occupancy levels at the Inns will not substantially increase over the next year. This is partially 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). 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 1997 decreased to $9,138,000 from $9,735,000 in 1996 and $9,402,000 in 1995. The decline is partially attributable to the loss in food and beverage sales in the fourth quarter of 1997 (approximately $90,000), from the sale of the Glen Burnie South Inn. During the third and fourth quarter of 1997, breakfast, lunch, dinner and banquet revenues declined substantially, largely as a result of the Inns inability to retain their respective share of the food and beverage market, due to increased restaurant and bar competition. The decline in banquet revenues was partially offset by increased meeting room business, which tends to generate more lodging business, reflected in increased occupancies (and the increased revenues from that use) by the higher rated market segments that the Inns have attracted. Direct operating expenses in 1997 were $39,580,000, as compared to $39,579,000 in 1996 and $37,632,000 in 1995. The increase in lodging expenses is reflective of increased labor costs and increases in expenses that are incurred in servicing the higher rated market segments, such as complimentary room amenities, travel agent commissions, and guest supplies. Food and beverage expenses decreased, primarily as a result of the decrease in food and beverage sales. Increases in marketing expenses, such as advertising costs and hotel promotions, were incurred in an effort to attract and maintain the higher rated market segments. The utility costs decreased in 1997 as a result of the milder weather as compared to 1996. The repair and maintenance costs decreased in 1997 over 1996, although the repairs and maintenance costs were reflective of the age of the Inns. Insurance costs increased due to general liability and property insurance rate increases. 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 HHC, management fees paid to W&H, and credit card commissions. Other general and administrative costs increased due to the additional time and expense incurred with respect to the franchise renewals, review and negotiations of the PIP's and related costs and financing, the Servico transaction and other matters. Depreciation and amortization expense decreased in 1997 due to assets becoming fully depreciated in 1996. In addition, property and equipment expenditures decreased in 1997 as a result of the negotiations with HHC over the PIPs. Interest expense decreased in 1997 as a result of the lower principal amount of the Tranche A portion of the Priming Loan following the application of the net proceeds from the sale of the Glen Burnie South Inn in July, 1997 to reduction of the Tranche A Loan. For 1997, the Partnerships recorded $4,500,000 as additional interest and incentive management fees under the Restated Loan Agreement and the W&H Management Agreement. Liquidity and Capital Resources The changes in cash and cash equivalents are summarized as follows:
1997 1996 1995 Net cash provided by operating activities $ 2,807 $ 2,317 $ 2,092 Net cash used in investing activities (456) (2,275) (2,668) Net cash used in financing activities (2,196) - - Net increase (decrease) in cash and cash equivalents 155 42 (576)
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 $2,116,000) and increases of $24,000 in the interest reserve and tax escrow accounts. AMI 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. 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. In 1997, 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 1997, as compared to 1996, as a result of increased revenues from operations. Cash used in investing activities was $456,000 in 1997, which included additions to property and equipment of $1,519,000 and increases in restricted cash of $1,176,000, offset by the net proceeds from the sale of the Glen Burnie South Inn of $2,239,000. The restricted cash accounts included the net increase in the FF&E Reserve of $970,000 (funding plus interest earned of $2,604,000 less capital expenditures of $1,634,000) and increases of $206,000 in the interest reserve and tax escrow accounts. Net cash used in financing activities totaled $2,196,000 in 1997, from the payment to the Tranche A portion of the Priming Loan from the net proceeds of the sale of the Glen Burnie South Inn. AMI borrowed $1,600,000 under the Tranche B Loan to supplement operating cash flow deficiencies during the first quarter of 1997. The entire Tranche B Loan was repaid from excess working capital prior to the end of the second quarter of 1997. 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. AMI 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, 1997, 1996 and 1995. Approximately $989,000 of working capital cash was on hand as of December 31, 1997. Presently the Partnerships have a capital replacement reserve of approximately $2,165,000, 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 $658,000. 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. As indicated under Item 1, "Business," the General Partner and AMI have been unable to arrange financing necessary for renewal of the "Holiday Inn" franchises that were to have expired in 1997 and the General Partner beleives that sale of the Partnership's Interest, or the sale of the Inns, is the only alternative to loss of the "Holiday Inn" franchises for many of the Inns and a consequent Event of Default under the Priming Loan and Mortgage Notes (which the General Partner beleives will result in foreclosure on the Inns and the loss of the Unitholder's equity in the Partnership. Accordingly, the Partnership has contracted to sell the Interest to Servico, Inc. and anticipates closing the Sale during early 1998 and liquidating. 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 were 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. Effective on January 1, 1998, the Partnership would be treated as a corporation for Federal income tax purposes, unless the Partnership made an election to be treated as an "electing partnership". As an electing partnership, the Partnership would still be treated as a partnership for Federal income tax purposes but would be subject to a 3.5% tax on all gross income earned by the Partnership. The General Partner made this election in 1998. 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 64 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 46 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 55 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 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, AMI 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, 1998. 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, AMI, 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, AMI 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, 1997, 1996 and 1995. Summary Compensation Table:
Name and Other Annual Long Term All Other Principle Position Year Salary ($) Bonus ($) Compensation Compensation Compensation S. Leonard Okin 1997 $133,560 $ - $ - $ - $ - 1996 $126,000 $ - $ - $ - $ - 1995 $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 1997, 1996 and 1995 totaling approximately $36,100, $27,300 and $27,500, respectively (for office rent, secretarial services, utilities, airfare, postage, office supplies, etc.) and $19,000, $18,500 and $6,250, 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. Beginning in 1996, the Partnerships have retained the services of Siegel Rich, Inc., a consulting firm in which Seymour G. Siegel is a shareholder. In 1996 and 1997, the Partnerships paid Siegel Rich, Inc., approximately $16,000 and $44,000, respectively. Item 12. Securities Ownership of Certain Beneficial Owners and Management The following table sets forth, as of December 31, 1997, the number of Units owned by the officers and directors of the General Partner and by all persons owning of record or, to the knowledge of the Partnership, beneficially more than 5% of the outstanding Units. The General Partner does not own any Units.
Ownership of Units Number Total Percentage of Units of Units of Units Name & Address of Owner Held Held Outstanding S. Leonard Okin c/o Prime-American Realty Corp. P.O. Box 230 Hawthorne, NJ 07507-0230 1,000 1,000 0.025% Jerome & Marcella Yunger, 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) Martin W. Field 251 West Dekalb Pike King of Prussia, PA 19406 50,000 Martin W. & Kathleen P. Field 251 West Dekalb Pike King of Prussia, PA 19406 151,500 201,500 (2) 5.0375% (2) Jerome S. Sanzo 1127 High Ridge Road Stamford, CT 06905 5,000 206,500 (3) 5.1625% (3)
(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. (2)Includes 50,000 Units held of record by Martin W. Field and 151,500 Units held of record by Martin W. Field and Kathleen P. Field. (3)Includes 50,000 Units held of record by Martin W. Field, 151,500 Units held of record by Martin W. Field and Kathleen P. Field and 5,000 Units held of record by Jerome S. Sanzo as a "Group" (within the meaning of Rule 13d-5(b) (1)). Item 13. Certain Relationships and Related Transactions During 1997, 1996 and 1995, Mr. Okin as Managing Director and Officer of the General Partner, received $190,160, $171,800 and $153,750, respectively, as cash compensation for his services and reimbursement of expenses. During 1996 and 1997, Siegel Rich, Inc., a consulting firm in which Seymour G. Siegel is a shareholder, was paid approximately $16,000 and $44,000, receptively, 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 listed in the accompanying index on page 30 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 Partnership's 1992 Annual Report on Form 10-K, and a letter of consent agreement dated January 31, 1994, included as Exhibit (10) (j) to the Partnership's 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. (10) (q) Acquisition Agreement dated as of November 7, 1997 among Servico, Inc., Prime Motor Inns Limited Partnership, Prime-American Realty Corp. and Servico Acquisition Corp., included as the Exhibit to the Partnership's Periodic Report on Form 8-K dated November 21, 1997. (10) (r) First Amendment dated March 12, 1998, to Acquisition Agreement, included as Appendix A to Proxy Statement of the Partnership for Special Meeting to be held April 30, 1998. (10) (s) Plan of Dissolution and Liquidation of the Partnership, included as Appendix B to Proxy Statement of the Partnership for Special Meeting to be held April 30, 1998. (21) Subsidiaries of Prime Motor Inns Limited Partnership are as follows: Name Jurisdiction ofIncorporation AMI Operating Partners, L.P. Delaware (27) Financial Data Schedules (b) Reports on Form 8-K Report on Form 8-K filed on June 2, 1997 relating to the New York Stock Exchanges press release announcing the delisting of the Partnership's Depository Receipts. Report on Form 8-K dated on November 21, 1997 relating to the Acquisition Agreement by Servico Aquisition Corp. Report on Form 8-K dated on February 8, 1998 relating to HHC withdrawing their offer to renew the "Holiday Inn" franchises for the twelve Inns whose franchises were to expire in 1997. 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 19, 1998 By: /s/ S. Leonard Okin S. Leonard Okin Vice President & Director Date: March 19, 1998 By: /s/ Robert A. Familant Robert A. Familant Director Date: March 19, 1998 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 19, 1998 S. Leonard Okin of the General Partner; Consultant under the Consulting Services Agreement By: /s/ Robert A. Familant Director of the March 19, 1998 Robert A. Familant General Partner By: /s/ Seymour G. Siegel Director of the March 19, 1998 Seymour G. Siegel General Partner EX-10 2 AUDIT REPORT INDEX Pages Report of Independent Accountants 1 Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996 2-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 4 Consolidated Statements of Partners' Deficit for the years ended December 31, 1997, 1996 and 1995 5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 6 Notes to Consolidated Financial Statements 7-18 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 (the Partnerships) as of December 31, 1997 and 1996, and the related consolidated statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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, 1997. 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 27, 1998, except for Note 2, as to which the date is March 12, 1998, and Note 4b, as to which the date is March 10, 1998 Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Balance Sheets December 31, 1997 and 1996 (dollars in thousands)
ASSETS 1997 1996 Current assets: Cash and cash equivalents $ 989 $ 834 Accounts receivable, net of allowance for doubtful accounts in 1997 and 1996 of $22 and $19, respectively 823 774 Inventories 205 222 Prepaid expenses 719 952 Other current assets 90 106 Total current assets 2,826 2,888 Property and equipment: Land 7,130 7,653 Buildings and leasehold improvements 54,156 55,382 Furniture and equipment 39,227 39,978 100,513 103,013 Less accumulated depreciation and amortization (54,950) (54,188) 45,563 48,825 Cash and cash equivalents restricted for: Acquisition of property and equipment 2,165 1,195 Interest and taxes 728 522 Other assets, net 425 542 Total assets $ 51,707 $ 53,972
Prime Motor Inns Limited Partnership and Subsidiary Limited Partnership Consolidated Balance Sheets, Continued December 31, 1997 and 1996 (dollars in thousands)
LIABILITIES AND PARTNERS' DEFICIT 1997 1996 Current liabilities: Trade accounts payable $ 481 $ 484 Accrued payroll 614 660 Accrued payroll taxes 149 165 Accrued vacation 453 437 Accrued utilities 287 322 Sales tax payable 265 274 Other current liabilities 486 772 Total current liabilities 2,735 3,114 Long-term debt 63,544 65,691 Deferred interest 1,974 2,872 Accrued shared appreciation 4,500 - Other liabilities 205 216 Total liabilities 72,958 71,893 Commitments Partners' deficit: General partner (784) (751) Limited partners (20,467) (17,170) Total partners' deficit (21,251) (17,921) Total liabilities and partners' deficit $ 51,707 $ 53,972
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, 1997, 1996 and 1995 (dollars in thousands, except per unit amounts)
1997 1996 1995 Revenues: Direct operating revenues: Lodging $ 40,852 $ 39,488 $ 36,668 Food and beverage 9,138 9,735 9,402 Other income 362 361 374 Lease settlement proceeds - - 1,025 Total revenues 50,352 49,584 47,469 Direct operating expenses: Lodging 9,622 9,462 8,998 Food and beverage 7,827 8,112 7,809 Marketing 3,521 3,500 3,334 Utilities 2,896 3,053 2,956 Repairs and maintenance 3,600 3,680 3,490 Rent 1,304 1,316 1,317 Insurance 771 705 630 Property taxes 1,395 1,382 1,380 Other 8,644 8,369 7,718 Other general and administrative expenses 887 701 587 Depreciation and amortization 3,838 5,423 5,473 Interest expense 5,888 6,069 6,057 Shared appreciation expense 4,500 - - Net gain on sale of Inn (1,011) - - 53,682 51,772 49,749 Net loss (3,330) (2,188) (2,280) Net loss allocable to general partner (33) (22) (23) Net loss allocable to limited partners $ (3,297) $ (2,166) $ (2,257) Number of limited partner units outstanding 4,000 4,000 4,000 Net loss allocable to limited partners per unit $ (.82) $ (.54) $ (.56)
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, 1997, 1996 and 1995 (dollars in thousands)
General Limited Partner Partner Total 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) Net loss (33) (3,297) (3,330) Balance at December 31, 1997 $ (784) $ (20,467) $ (21,251)
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, 1997, 1996 and 1995 (dollars in thousands)
1997 1996 1995 Cash flows from operating activities: Net loss $ (3,330) $ (2,188) $ (2,280) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property 3,596 5,201 5,158 Lease settlement proceeds - - (1,025) Amortization of other assets 242 222 315 Amortization of debt discount 49 46 43 Long-term borrowings prepayment penalty (43) - - Gain on sale of Inn (1,011) - - Changes in operating assets and liabilities: Accounts receivable (49) (113) 220 Inventories 17 40 10 Prepaid expenses 233 (11) 45 Other current assets 16 7 6 Other assets (125) - 10 Trade accounts payable (3) (84) 166 Accrued payroll (46) (28) (26) Accrued payroll taxes (16) (121) 28 Accrued vacation 16 (36) 37 Accrued utilities (35) (4) 77 Sales tax payable (9) 32 21 Other current liabilities (286) 101 28 Deferred interest (898) (813) (741) Accrued shared appreciation 4,500 - - Other liabilities (11) 66 - Net cash provided by operating activities 2,807 2,317 2,092 Cash flows from investing activities: Net proceeds from sale of Inn 2,239 - - Additions to property and equipment (1,519) (1,880) (2,423) Increase in restricted cash (1,176) (395) (245) Net cash used in investing activities (456) (2,275) (2,668) Cash flows from financing activities: Repayment of long-term borrowings (2,196) - - Borrowings under revolving credit facility 1,600 1,600 1,200 Repayment of revolving credit facility (1,600) (1,600) (1,200) Net cash used in financing activities (2,196) - - Net increase (decrease) in cash and cash equivalents 155 42 (576) Cash and cash equivalents, beginning of year 834 792 1,368 Cash and cash equivalents, end of year $ 989 $ 834 $ 792 Supplementary cash flow data: Interest paid $ 6,737 $ 6,836 $ 6,755 Noncash activities: Lease settlement received from former affiliate in the form of 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. ("AMI"), were formed in October 1986 under the Delaware Revised Uniform Limited Partnership Act. The Partnership and AMI 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 AMI. 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 AMI. AMI 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. At December 31, 1997 the Partnerships operated and maintained 8 Inns in Maryland, 5 in Pennsylvania and 2 in Connecticut, all of which are presently franchised as part of the "Holiday Inn" system (see Note 4b). 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 AMI (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. 1. Organization, Operations and Bankruptcy, Continued: 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). AMI was in default under its mortgage loan agreement as of and prior to December 31, 1990 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, AMI filed with the United States Bankruptcy Court for the Southern District of New York 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 (see 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, 1997. While the General Partner believes that improvements have been made in the physical condition and attractiveness of the Inns, the market position and competitiveness of the Inns and the financial condition and results of operations of AMI, the General Partner believes that financing is not available on acceptable terms to take the actions necessary to preserve the Unitholders' interest in the Inns. Additionally, the General Partner believes that the proposed sale to Servico (see Note 2) maximizes and protects Unitholder value better than any of the available alternative courses of action, including continuing to hold and trying to operate the Inns, and that further delay is likely to result in the loss of certain of the "Holiday Inn" franchises (see Note 4b), foreclosure of the Priming and Mortgage Loans (see Note 6), and diminution or loss of the value of the Unitholders' equity in the Partnership. 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. Proposed Sale of AMI and the General Partner: The Partnerships entered into a definitive agreement dated as of November 7, 1997, as amended as of March 12, 1998, pursuant to which the 99% limited partnership interest in AMI will be sold for $12,000,000 in cash to Service Acquisition Corp., a wholly owned subsidiary of Servico, Inc. ("Servico"). The closing is conditioned on, among other things, approval of the limited partners. Upon closing of the aforementioned transaction, the Partnership's only asset will be the cash received from Servico. It is anticipated that the Partnership will dissolve and wind up its affairs and distribute the net proceeds from the sale to the limited partners in accordance with a Plan of Liquidation. The General Partner and its parent have entered in to an agreement with Servico pursuant to which Servico will acquire the General Partner's 1% general partnership interest in AMI in exchange for a five year warrant to acquire 100,000 shares of Servico Common Stock at a price of $18 per share. 3. 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, AMI. AMI operates on the basis of a 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. Inventories: Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out method. Inventories consist of:
1997 1996 Food $ 130,000 $ 131,000 Beverage 64,000 70,000 Linen 11,000 21,000 $ 205,000 $ 222,000
d. 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, ranging from 15 to 40 years for buildings and leasehold improvements and 3 to 10 years for furniture and equipment, and the terms of the related leases. For federal income tax purposes, accelerated methods are used in calculating depreciation. e. Impairment of Long Lived Assets: The Partnerships review for impairment and recoverability of 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 to fair market value would be required. Properties held for sale are stated at the lower of cost or fair value less cost to sell. No write-downs have been recorded by the Company under the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets". f. 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. g. Net Loss per Unit: Net loss per Unit is calculated based on the net loss allocable to limited partners divided by the 4,000,000 Units outstanding. h. Reclassifications: Certain 1996 amounts have been reclassified to conform to the 1997 presentation. i. Fair Value of Financial Instruments: It is not practicable to estimate the fair value of borrowings under the Partnerships' long term debt due to the lack of quoted market prices for similar debt issues and the lack of current rates which would be offered to the Partnerships for debt with similar terms. 4 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 AMI 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. AMI entered into an agreement in 1992 (the "Omnibus Agreement") under which, among other things, AMI 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; AMI will not make any payments to or for the benefit of any other party; and Prime, AMI Management and AMI exchanged mutual releases. a. Lease and Guaranty: Since 1992, AMI and the mortgage lenders received total proceeds as a result of the Settlement of approximately $8,874,000, of which $8,827,000 was utilized to reduce the principal amount of the Mortgage Notes (of which $1,025,000 was recognized in 1995) and $47,000 was used to fund capital improvements as required by the Omnibus Agreement. Lease settlement proceeds recorded as income in 1995 represent the value assigned to 127,924 shares of Prime common stock allocated to the Partnerships during 1995 related to the settlement of financial claims. In accordance with the terms of the Omnibus Agreement, the settlement proceeds were required to be applied to the repayment of the Mortgage Notes. b. Franchise Agreements: The Inns are operated as part of the "Holiday Inn" system which is administrated by Holiday Hospitality Corporation, formerly Holiday Inns Inc., and its affiliates (collectively "HHC"). The Holiday Inn franchise agreements for four Inns expire one each in 1998, 1999, 2001 and 2005. During 1997, eleven of the Inns' franchise agreements expired, which subsequently were extended through March 10, 1998. For five of these Inns, HHC has advised the Partnerships that they do not intend to renew such franchises. However, HHC agreed that if, by March 10, 1998, it received franchise license applications from a "viable" applicant for the remaining six Inns and were paid application fees of $517,000, it would extend the franchises for all eleven Inns for 60 days. Applications were filed by Servico, and the fees were paid by the Partnerships, on or prior to March 10, 1998. HHC has also notified the Partnerships that certain capital expenditure projects at the Inns will be required to renew the Inns' franchise status, the scope and cost of which are currently not determinable. The loss of the Holiday Inn franchise status of these Inns may have a near term adverse impact on 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 AMI 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 AMI, without cause or penalty, upon ninety days written notification. At December 31, 1997 and 1996, the Partnerships had approximately $57,000 and $61,000, respectively, in receivables from an entity controlled by W&H which manages certain of the Inns' lounges. d. Properties Sold and Held for Sale: In July 1997, the Partnerships sold an Inn located in Glen Burnie, Maryland for $2,400,000 in cash, which resulted in a gain of $1,011,000. Direct revenues of approximately $945,000, $1,724,000 and $1,565,000, and direct expenses of $813,000, $1,364,000 and $1,295,000, related to this Inn were included in the Consolidated Statement of Operations of the years ended December 31, 1997, 1996 and 1995, respectively. The Partnerships intend to sell the five Inns whose franchises will not be renewed (see Note 4b). Direct revenues of approximately $9,148,000, $8,875,000 and $8,735,000, and direct expenses of $7,908,000, $7,876,000 and $7,645,000, related to these five Inns were included in the Consolidated Statement of Operations for the years ended December 31, 1997, 1996 and 1995, respectively. The components of other assets are as follows (in thousands):
1997 1996 Deferred lease costs $ 21 $ 21 Debt acquisition costs 2,839 2,839 Franchise fees 945 820 Other 4 4 3,809 3,684 Less accumulated amortization 3,384 3,142 $ 425 $ 542
In June 1997, the Partnerships paid $125,000 to HHC to extend the Holiday Inn franchises to July 31, 1997, which were subsequently extended to May 9, 1998 (See Note 4b). Amortization of debt acquisition costs charged to expense was $163,000, $161,000 and $174,000 in 1997, 1996 and 1995, respectively. Amortization of franchise fees charged to expense was $79,000, $61,000 and $141,000 in 1997, 1996 and 1995, respectively. 6. Debt:
Long-term debt consists of: 1997 1996 Mortgage notes, net of unamortized discount of $109,000 in 1997 and $158,000 in 1996 $ 54,240,000 $ 54,191,000 Priming loan, interest at 11% 9,304,000 11,500,000 $ 63,544,000 $ 65,691,000
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 AMI 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 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, 1997 and 1996. 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 AMI 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, 1997 or 1996. As of December 31, 1997 and 1996, the outstanding balance under the Priming loan was $9,304,000 and $11,500,000, respectively, and the entire amount in 1997 and 1996 represents borrowings under the Tranche A Loan. The Priming Loan agreement places certain restrictions on the use of AMI's 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 first to 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. During 1997, the Partnerships sold an Inn and received net proceeds of approximately $2,239,000 (See Note 4d). As required by the Priming Loan, the proceeds were used to repay approximately $2,196,000 of outstanding borrowings under the Tranche A Loan and to pay a prepayment premium of approximately $43,000. 7. Shared Appreciation: The Restated Loan Agreement and the W&H Management Agreement provide for a shared appreciation feature that calls for AMI to pay additional interest and an additional incentive management fee to the lenders and W&H, respectively, based on (i) in the case of any Inn sold prior to the maturity date of the Mortgage Notes, the amount (if any) by which the net sale price of the Inn exceeds the amount of the Mortgage Notes allocated to it, and (ii) in the case of the Inns still owned by AMI at the maturity date of the Mortgage Notes (December 31, 1999 or upon acceleration), the amount (if any) by which the sale price or appraised value of such Inns exceeds the then outstanding principal amount of the Mortgage Notes, with such computations also being net of any obligations under the Priming Loan. However, no amount is payable as additional interest or incentive management fees until all obligations under the Priming Loan have been paid. The Partnerships periodically estimate the fair value of the Inns to determine if an accrual is needed for future payments to the Lenders and W&H under the shared appreciation feature. The Partnerships did not provide for additional interest or incentive management fees in 1995 or 1996. For 1997, the Partnerships recorded $4,500,000 as additional interest and incentive management fees under the Restated Loan Agreement and the W&H Management Agreement. The additional interest and incentive management fees are based on estimates of fair value of ten of the Inns at December 31, 1999 and the estimated sales proceeds for the five Inns held for sale. However, such amounts (if any) as the Partnerships will ultimately realize upon the sale of any of the Inns and the appraised values of the Inns owned by AMI at the maturity date of the Mortgage Notes, could differ materially from the estimated fair values used in the determination of the additional interest and incentive management fee. In addition, any amount of shared appreciation that may be paid is subject to interpretation or negotiation by the Partnerships, the Lenders and W&H. 8. Commitments: 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 inflation indexes, which adjust 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 1998 $ 1,324,000 1999 1,324,000 2000 1,332,000 2001 1,308,000 2002 1,308,000 2003 and thereafter 15,209,000 $ 21,805,000
Rent expense under these leases totaled $1,273,000, $1,258,000 and $1,260,000 in 1997, 1996, and 1995, respectively. 9. 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, effective January 1, 1998, the Partnership will be treated as a corporation for federal income tax purposes, unless the Partnership makes an election to be treated as an "electing partnership". As an electing partnership, the Partnership would still be treated as a partnership for federal income tax purposes, but would be subject to a 3.5% tax on all gross income earned by the Partnership. The Partnership made this election. 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, 1997. EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 U.S. DOLLARS YEAR DEC-31-1997 DEC-31-1997 1000 989 0 845 (22) 205 809 100513 (54950) 51707 2375 0 0 0 0 0 51707 49990 50352 17449 39580 8214 0 5888 0 0 0 0 0 0 (3330) (.82) (.82)
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