<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRIME HOSPITALITY CORP.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 22-2640625
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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700 ROUTE 46 EAST
FAIRFIELD, NEW JERSEY 07007-2700
(201) 882-1010
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
JOSEPH BERNADINO
SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
PRIME HOSPITALITY CORP.
700 ROUTE 46 EAST
FAIRFIELD, NEW JERSEY 07007-2700
(201) 882-1010
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
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<S> <C>
WILLIAM N. DYE JOHN D. WATSON, JR.
WILLKIE FARR & GALLAGHER LATHAM & WATKINS
ONE CITICORP CENTER 1001 PENNSYLVANIA AVENUE, N.W.
153 EAST 53RD STREET SUITE 1300
NEW YORK, NEW YORK 10022 WASHINGTON, D.C. 20004
(212) 821-8000 (202) 637-2200
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this
Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
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Common Stock, $.01 par value(2)........... 8,625,000 shares $16.44 $141,795,000 $48,895
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 1,125,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED JULY 2, 1996
7,500,000 SHARES
PRIME LOGO
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by Prime Hospitality Corp. ("Prime" or the "Company"). The Company's Common
Stock is traded on the New York Stock Exchange under the symbol "PDQ." On July
1, 1996, the last reported sale price of the Common Stock on the New York Stock
Exchange was $16.625 per share. See "Price Range of Common Stock and Dividend
Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
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Price to Underwriting Proceeds to
Public Discount(1) Company(2)(3)
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Per Share.............................. $ $ $
Total(3)............................... $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $450,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,125,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $ , the Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the certificates representing such shares will be made against
payment therefor at the office of Montgomery Securities on or about
, 1996.
------------------------
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SMITH BARNEY INC.
, 1996
<PAGE> 3
[MAP]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN MARKET PRICES OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
[PHOTOGRAPHS]
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in or incorporated by reference in this Prospectus.
Unless the context indicates or requires otherwise, references in this
Prospectus to the "Company" or "Prime" are to Prime Hospitality Corp. and its
subsidiaries. All information in this Prospectus assumes that the overallotment
option granted to the Underwriters has not been exercised. EBITDA represents
earnings before extraordinary items, interest expense, provision for income
taxes and depreciation and amortization and excludes interest income on cash
investments and other income. EBITDA is used by the Company for the purpose of
analyzing its operating performance, leverage and liquidity. Such data are not a
measure of financial performance under generally accepted accounting principles
and should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity. Unless otherwise indicated, industry data is based on
reports of Smith Travel Research.
THE COMPANY
Prime is a leading national hotel company, with a portfolio of 98 hotels
containing 14,006 rooms located in 23 states and the U.S. Virgin Islands (the
"Portfolio"). Prime controls two high-quality hotel brands: AmeriSuites(R)
all-suites hotels and Wellesley Inns(R) limited-service hotels. The Company's
hotels are modern, well-maintained assets, with an average age of approximately
12 years. The Company emphasizes hotel equity ownership, owning and operating 82
of the 98 hotels in its Portfolio (the "Owned Hotels") and managing the
remaining 16 hotels for third parties (the "Managed Hotels"), with financial
interests in 9 of the 16 Managed Hotels. The Company believes it creates
long-term value through the development of its proprietary brands. Of the
Company's 98 hotels, an aggregate of 55 hotels are included in Prime's
proprietary AmeriSuites and Wellesley Inns brands.
Over the past three years, Prime has achieved rapid growth in its
Portfolio, increasing the number of owned rooms from 4,198 at January 1, 1993 to
10,866 at July 1, 1996. Prime has attained this strong Portfolio growth while
consistently increasing profit levels. From 1993 to 1995, the Company grew
EBITDA at a compound annual rate of 38.9%, from $32.0 million in 1993 to $61.8
million in 1995. Over the same period, recurring net income per share grew at a
compound annual rate of 64.3%, from $0.20 in 1993 to $0.54 in 1995. These
positive trends continued in the first quarter of 1996, compared to the first
quarter of 1995. EBITDA grew 32.9% from $14.6 million to $19.4 million and
recurring net income per share grew 30.8% from $0.13 to $0.17.
The Company's hotels serve three major lodging industry segments: the
all-suites segment, under the Company's proprietary AmeriSuites brand; the
upscale full-service segment, under major national franchises; and the mid-price
limited-service segment, primarily under the Company's proprietary Wellesley
Inns brand.
All-Suites: Prime owns and operates 25 all-suites hotels under the
AmeriSuites brand name. AmeriSuites are upper mid-price, all-suites hotels
containing approximately 125 suites and located primarily in the Southern and
Central United States. Since January 1, 1994, AmeriSuites has been the fastest
growing all-suites hotel chain in the United States, expanding from 9 hotels to
25 hotels at July 1, 1996, an increase of 178%. An additional 20 AmeriSuites are
currently under construction, with sites for 25 more under contract.
Full-Service: Prime operates 33 upscale full-service hotels under franchise
agreements with national hotel brands such as Marriott, Radisson, Sheraton,
Crowne Plaza, Holiday Inn and Ramada. Prime owns 20 of these hotels and has a
financial interest in 8 of the 13 other properties that it manages. Prime's
full-service hotels typically offer substantial food, beverage and banquet
facilities. Prime achieved a gross operating profit margin of 36% at its
full-service hotels in 1995, a 16% premium to the full-service industry average
of 31% for the comparable period.
Limited-Service: A total of 30 of Prime's 40 mid-price limited-service
hotels are operated under its Wellesley Inns brand name. Prime owns 100% of
these Wellesley Inns. The remaining limited-service hotels, seven of which are
owned by Prime, are operated under franchise agreements with well-known national
chains.
3
<PAGE> 6
Wellesley Inns compete primarily with hotels such as Hampton Inns and La Quinta
Inns. Wellesley Inns generated an average daily room rate ("ADR") and occupancy
percentage in 1995 of $51.28 and 75.4%, respectively.
GROWTH STRATEGY
Prime's principal growth strategy is the accelerated expansion of its
AmeriSuites brand through the construction of new AmeriSuites hotels. The
Company believes that AmeriSuites, which offers an excellent guest experience
and desirable suite accommodations at mid-scale prices, is well-positioned to
become a preeminent brand in the rapidly growing all-suites segment. Prime
expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have
more than 70 AmeriSuites open by the end of 1997. At present, 25 AmeriSuites are
open, with an additional 20 hotels under construction and sites for 25 more
under contract.
AmeriSuites are positioned in the upper mid-price segment of the lodging
industry, competing predominantly with other mid-price and upscale brands such
as Courtyard by Marriott and Holiday Inn. The Company markets AmeriSuites as
"America's Affordable All-Suite Hotel," emphasizing superior price/value
relative to traditional mid-price hotels by focusing on the chain's spacious
suites, upscale facilities and considerable amenity package. The Company is
committed to the expansion of the AmeriSuites brand for the following reasons:
- Attractive Economic Returns: Due to low all-in development costs
along with a rapid ramp up in occupancy and ADR after opening, AmeriSuites
have generated attractive unit level returns. AmeriSuites opened since 1992
have, in their first 12 months of operation, produced hotel-level EBITDA
constituting, on average, 15.7% of the hotel development cost.
- Broad Customer Appeal: The AmeriSuites concept offers the benefits
of an all-suites room at a price that appeals to a wide variety of
customers. Business travelers are attracted to the fully-equipped business
centers, meeting rooms, convenient locations and in-room features,
including computer data ports and voice mail. Leisure travelers enjoy the
exercise room, complimentary continental breakfast, living room sleeper
sofa and heated swimming pool. In addition, the layout of the AmeriSuites
room, each of which includes a kitchenette, appeals to the fast-growing
extended-stay market segment. The Company believes AmeriSuites offers a
level of amenities and services exceeding those typically found in
extended-stay hotels.
- High-Growth, High-Quality Brand: Prime believes it has the ability
to create significant brand value by rapidly expanding AmeriSuites while
consistently maintaining uniformly high quality standards. Because Prime
owns and operates every AmeriSuites, it can maintain a high level of
consistency and quality throughout the entire chain, and can implement
chain-wide programs quickly and efficiently.
- Fast Growing, Fragmented Market: The all-suites segment has seen
above-market demand growth in recent years. During the 1991-1995 period,
demand for all-suites rooms grew at more than double the rate of demand
growth experienced by the lodging industry as a whole, and exceeded
all-suites supply growth by 67%. Given the fast-growing demand for
all-suites accommodations and the absence of a dominant competitor in the
mid-price all-suites market, Prime believes that it can establish
AmeriSuites as a preeminent brand in this market while continuing to
generate attractive returns.
- Proven Operating Performance: The AmeriSuites concept has been in
existence since 1990 and currently operates in 20 different markets. In
addition, AmeriSuites hotels have consistently generated strong operating
results, with average revenue per available room ("REVPAR") for hotels open
at least one year increasing by 13.7% and 11.9% in 1994 and 1995 and 19.9%
in the first quarter of 1996, respectively, over comparable prior period
results.
Prime believes that it has sufficient resources available to fund its
AmeriSuites growth strategy, including capital from the following sources: (i)
net proceeds from the Offering; (ii) borrowings under its five-year secured
revolving credit facility; and (iii) internally generated free cash flow from
its Portfolio of 98 hotels. In addition, Prime may enter into sale/leaseback
transactions involving certain of its mid-price limited-service and upscale
full-service hotels, or seek additional debt financing secured by the Company's
hotels.
4
<PAGE> 7
OPERATING PERFORMANCE/INTERNAL GROWTH
In addition to revenue and earnings growth generated by the expansion of
the AmeriSuites brand, Prime seeks to achieve internal growth through continued
operating improvements at its existing hotels. Prime has demonstrated its
ability to operate its hotels effectively in each of its three segments,
achieving REVPAR increases in 1995 at its comparable AmeriSuites, full-service
and limited-service hotels of 11.9%, 8.7% and 9.2%, respectively, versus 1994
results. These trends continued in the first quarter of 1996, as Prime grew
REVPAR by 19.9%, 10.1% and 7.5% at its comparable AmeriSuites, full-service and
limited-service hotels, respectively, over first quarter 1995 levels.
The Company's emphasis on efficient operations has increased operating
margins, thus translating its top-line REVPAR growth into increased earnings.
Prime's gross operating profit margins in 1995 of 51% at AmeriSuites, 36% at
full-service hotels and 49% at limited-service hotels represented premiums of
3%, 16% and 4%, respectively, versus comparable industry statistics for these
industry segments.
RECENT EVENTS
The Company recently entered into certain transactions that have allowed it
to consolidate control over its proprietary Wellesley Inns brand and to obtain
additional capital to fund its AmeriSuites growth strategy.
Purchase of Wellesley Inns: On March 6, 1996, Prime acquired 18
mid-price limited-service hotels with approximately 1,713 rooms (including
the remaining 16 Wellesley Inns it did not already own) for $65.1 million.
As a result, Prime now has full control over 100% of its proprietary
Wellesley Inns chain. The total purchase price plus the estimated cost of
planned renovations equals a price per room ranging from approximately
$42,000 to $43,000, which represents a discount to the average replacement
cost of these hotels. See "Business -- Prime's Lodging Operations."
Revolving Credit Facility: On June 28, 1996, the Company established
a $100 million, five-year secured revolving credit facility (the "Revolving
Credit Facility") bearing an interest rate of 2.25% over LIBOR. The
Revolving Credit Facility is secured by certain of the Company's
limited-service, AmeriSuites and full-service hotels. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
INDUSTRY OVERVIEW
The lodging industry as a whole has experienced four consecutive years in
which the growth in room demand has exceeded the growth in supply. In 1995,
industry wide percentage growth in demand for hotel rooms was nearly double
industry-wide percentage growth in supply of hotel rooms (3.0% versus 1.6%). In
the three price levels in which the Company's hotels operate, upscale, mid-price
and economy, percentage growth in demand outpaced percentage growth in supply by
0.7%, 1.4% and 1.0%, respectively. These trends continued in the first quarter
of 1996 with the exception of the upscale price level. On an industry-wide
basis, demand growth exceeded supply by 1.2%. Demand growth continued to exceed
supply growth in the mid-price and economy segments by 0.5% and 1.1%
respectively. However, in the upscale segment, supply growth exceeded demand
growth by a modest 0.1%. The Company believes that quarterly data are not
necessarily indicative of a full year's results and that first quarter results
were adversely affected by severe seasonal weather in January.
Coopers & Lybrand L.L.P.'s Hospitality Directions (May 1996) ("Coopers and
Lybrand Hospitality Directions") estimates that the percentage growth in
industry-wide demand will exceed the percentage growth in supply by 0.8% and
0.2% in 1996 and 1997, respectively. The excess of demand growth over supply
growth in the past several years has led to industry-wide increases in occupancy
percentages and ADR, with occupancy rising to 65.4% in 1995 from 64.7% in 1994,
and ADR increasing 5.0% in 1995 over 1994 levels. Coopers & Lybrand Hospitality
Directions indicates that occupancy is expected to increase in 1996 and 1997 to
65.9% and 66.0%, respectively, and that ADR is expected to increase 5.4% in 1996
over 1995 levels and 4.8% in 1997 over 1996 levels. Historical industry
performance, however, may not be indicative of future results, and there can be
no assurance that such projections will be realized.
5
<PAGE> 8
The Company is a Delaware corporation incorporated in 1985. The principal
office of the Company is located at 700 Route 46 East, Fairfield, New Jersey
07007-2700 and its telephone number is (201) 882-1010.
THE OFFERING
Common Stock offered by the Company....... 7,500,000 shares
Common Stock to be outstanding after the
Offering.................................. 38,649,158 shares(1)
Use of Proceeds........................... To be used as part of the
financing of the Company's
AmeriSuites expansion.
New York Stock Exchange symbol............ PDQ
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(1) Does not include 1,800,316 shares of Common Stock issuable upon the exercise
of outstanding stock options and 1,443,057 shares of Common Stock issuable
upon the exercise of outstanding warrants as of March 31, 1996. See
"Description of Capital Stock -- Warrants."
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The table below presents summary consolidated financial data derived from
the Company's historical financial statements as of and for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and
1996. This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements, related notes and other financial information included and
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Total revenues.................................. $108,860 $134,303 $205,628 $ 48,238 $ 58,614
Costs and expenses:
Direct hotel operating expenses............... 51,335 66,620 116,565 27,179 31,548
Occupancy and other operating................. 9,827 9,799 11,763 2,611 3,482
General and administrative.................... 15,685 15,089 15,515 3,872 4,219
Depreciation and amortization................. 7,117 9,427 15,974 3,976 5,224
------ ------ ------ ----- -----
Total costs and expenses................. 83,964 100,935 159,817 37,638 44,473
------ ------ ------ ----- -----
Operating income................................ 24,896 33,368 45,811 10,600 14,141
Interest expense................................ (16,116) (13,993) (21,603) (4,100) (5,851)
Net income:
Income from recurring operations.............. 5,928 12,805 17,442 4,208 5,733
Other income (expense) -- non-recurring(2).... 2,247 5,453 23 -- 2,059
------ ------ ------ ----- -----
Income before extraordinary items............. 8,175 18,258 17,465 4,208 7,792
Extraordinary items(3)........................ 3,989 172 104 7 149
------ ------ ------ ----- -----
Net income...................................... $ 12,164 $ 18,430 $ 17,569 $ 4,215 $ 7,941
====== ====== ====== ===== =====
Fully diluted net income per common share(4):
Income from recurring operations.............. $ 0.20 $ 0.40 $ 0.54 $ 0.13 $ 0.17
Other income (expense) -- non-recurring....... 0.07 0.17 -- -- 0.05
------ ------ ------ ----- -----
Income before extraordinary items............. 0.27 0.57 0.54 0.13 0.22
Extraordinary items........................... 0.13 0.01 -- -- --
------ ------ ------ ----- -----
Fully diluted net income per common share....... $ 0.40 $ 0.58 $ 0.54 $ 0.13 $ 0.22
====== ====== ====== ===== =====
OTHER DATA:
EBITDA(5)....................................... $ 32,013 $ 42,795 $ 61,785 $ 14,576 $ 19,365
Net cash provided by operating activities....... 19,728 28,672 40,851 4,849 8,655
Net cash provided by (used in) investing
activities.................................... 2,281 (34,248) (90,927) (12,918) (88,201)
Net cash provided by (used in) financing
activities.................................... (17,056) (23,469) 87,085 37,939 53,642
HOTEL DATA:
All-suites:
Number of locations........................... 8 12 19 13 22
Number of rooms............................... 993 1,494 2,319 1,620 2,640
REVPAR(6)..................................... $ 36.01 $ 39.50 $ 43.98 $ 37.60 $ 43.67
Full-service(7):
Number of locations........................... 30 31 32 32 32
Number of rooms............................... 5,797 6,152 6,301 6,301 6,301
REVPAR(6)..................................... $ 48.02 $ 51.69 $ 53.64 $ 45.10 $ 51.59
Limited-service:
Number of locations........................... 36 40 40 40 40
Number of rooms............................... 3,669 4,164 4,164 4,164 4,164
REVPAR(6)..................................... $ 34.61 $ 34.60 $ 37.46 $ 40.66 $ 42.58
</TABLE>
7
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<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(8)
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities....................... $ 31,628 $150,099
Property, equipment and leasehold improvements............................ 529,916 529,916
Total assets.............................................................. 642,876 761,347
Current portion of debt................................................... 5,699 5,699
Long-term debt, net of current portion.................................... 335,271 335,271
Total stockholders' equity................................................ 242,974 361,445
</TABLE>
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(1) In December 1994, the Company acquired ownership of the Marriott's
Frenchman's Reef Beach Resort (the "Frenchman's Reef") as a result of the
restructuring of a mortgage note receivable, which was secured by the hotel.
This transaction has not had a material impact on operating income but has
affected revenue and operating margins significantly. For the years ended
December 31, 1993 and 1994, the Company recorded revenues related to the
Frenchman's Reef in the form of interest income and management fees with no
corresponding operating expenses. For the year ended December 31, 1995, the
Company recorded the operating revenues and operating expenses related to
this hotel.
(2) Other income (expense) -- non-recurring consists primarily of income and
expenses related to asset sales and other property transactions and is not
considered part of the Company's recurring operations.
(3) Extraordinary items consist of gains on discharges of indebtedness, net of
income taxes of $2.8 million in 1993, $120,000 in 1994 and $70,000 in 1995
and $4,000 and $100,000 for the three months ended March 31, 1995 and 1996.
(4) Fully diluted net income per common share, in addition to the adjustments
for primary net income per common share, reflects the elimination of
interest expense and the issuance of additional common shares from the
assumed conversion of the 7% Convertible Subordinated Notes due 2002 from
their issuance in April 1995.
(5) EBITDA represents earnings before extraordinary items, interest expense,
provision for income taxes and depreciation and amortization and excludes
interest income on cash investments and other income. EBITDA is used by the
Company for the purpose of analyzing its operating performance, leverage and
liquidity. Such data are not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.
(6) "REVPAR" means revenue per available room, which is equal to total room
revenue divided by the number of rooms available for sale.
(7) For purposes of showing operating trends, the results of the Frenchman's
Reef have been excluded from Hotel data due to the effects of the September
1995 hurricane. For full-service operating results including the Frenchman's
Reef, see "Business -- Prime's Lodging Operations."
(8) As adjusted to reflect the Offering. See "Use of Proceeds" and
"Capitalization."
The following table sets forth for the five years ended December 31, 1995
and the three months ended March 31, 1995 and 1996, operating data for the 79
Owned Hotels (hotels owned or leased by Prime) in the Company's Portfolio at
March 31, 1996. Operating data for the Owned Hotels built or acquired during the
period are presented from the dates such hotels commenced operations or became
Owned Hotels. For purposes of showing operating trends, the results of seven
Owned Hotels that were managed by the Company prior to their acquisition by the
Company during the period are presented as if they had been Owned Hotels from
the dates the Company began managing the hotels.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C>
Number of locations..................... 54 57 61 68 76 74 79
Number of rooms......................... 7,284 7,632 8,121 9,187 10,161 9,909 10,482
Occupancy %............................. 66.4% 67.9% 71.2% 69.6% 69.8% 65.4% 64.9%
ADR(1).................................. $ 60.14 $ 60.73 $ 62.58 $ 65.28 $ 69.52 $ 75.03 $ 73.56
REVPAR.................................. $ 39.94 $ 41.21 $ 44.57 $ 45.45 $ 48.52 $ 49.04 $ 47.76
Room revenues........................... $105,983 $113,664 $128,512 $140,347 $169,295 $ 40,575 $ 44,956
Gross operating profit(2)............... $ 54,974 $ 51,948 $ 59,504 $ 67,651 $ 83,926 $ 19,981 $ 20,653
Gross operating profit %(2)............. 35.60% 32.24% 31.16% 35.16% 37.77% 37.57% 37.16%
</TABLE>
- ---------------
(1) "ADR" means average daily rate, which is equal to total room revenue divided
by number of occupied rooms.
(2) Gross operating profit is defined as total hotel revenues less direct hotel
operating expenses, including room, food and beverage and selling and
general expenses.
For operating data with respect to the 16 Managed Hotels (hotels managed
for third parties) in the Company's Portfolio at March 31, 1996, see
"Business -- Prime's Lodging Operations."
8
<PAGE> 11
RISK FACTORS
Prospective purchasers of Common Stock should carefully consider, among
other things, the following risk factors before purchasing the Common Stock
offered hereby.
AMERISUITES EXPANSION RISKS
The Company is committed to expanding its AmeriSuites hotel brand to meet
growing demand in the all-suites hotel segment. The Company will be required to
expend significant management and financial resources to expand the AmeriSuites
hotel brand and develop brand name identification. The Company competes with
other companies in the all-suites segment, some of which have greater brand
recognition and financial resources than the Company. As a result, there is no
assurance that the Company can successfully expand the AmeriSuites hotel brand
or compete effectively with these other franchises. Expansion of the AmeriSuites
brand may present operating and marketing challenges that are different from
those currently encountered by the Company in its existing markets. There can be
no assurance that the Company will anticipate all of the changing demands that
expanding operations will impose on its management and management information
system or its reservation service. The failure to adapt its systems and
procedures could have a material adverse effect on the Company's business.
The expansion of the AmeriSuites brand will require significant capital.
The Company believes that the proceeds of the Offering, the availability under
the Revolving Credit Facility and cash flow from operations will be sufficient
to fund the near term growth of AmeriSuites. However, there can be no assurance
that the Company will be able to obtain financing to fund the growth of
AmeriSuites beyond the near term. If the Company is unable to obtain additional
financing, the growth prospects for AmeriSuites and the financial results of the
Company would be adversely effected.
The Company's growth strategy of developing new AmeriSuites hotels will
subject the Company to pre-opening and pre-stabilization costs. As the Company
opens additional AmeriSuites hotels, such costs may adversely affect the
Company's results of operations. Newly opened hotels historically begin with
lower occupancy and room rates that improve over time. While the Company has in
the past successfully opened new AmeriSuites hotels, there can be no assurance
that the Company will be able to continue to do so successfully. Construction of
hotels involves certain risks, including the possibility of construction cost
overruns and delays, site acquisition cost and availability, uncertainties as to
market potential, market deterioration after commencement of the development and
possible unavailability of financing on favorable terms. Although the Company
seeks to manage its construction activities so as to minimize such risks, there
can be no assurance that the AmeriSuites expansion will perform in accordance
with the Company's expectations.
The opening of the new AmeriSuites hotels will be contingent upon, among
other things, receipt of all required licenses, permits and authorizations. The
scope of the approvals required for a new hotel is extensive, including, without
limitation, state and local land-use permits, building and zoning permits and
health and safety permits. In addition, unexpected changes or concessions
required by local, regulatory and state authorities could involve significant
additional costs and could delay or prevent the completion of construction or
the opening of a new AmeriSuites hotel. There can be no assurance that the
necessary permits, licenses and approvals for the construction and operation of
the new AmeriSuites hotels will be obtained, or that such permits, licenses and
approvals will be obtained within the anticipated time frame.
Of the Company's 25 AmeriSuites, eight, or 32%, have been open less than
one year and ten, or 40%, have been open less than two years. Consequently, the
results achieved by these hotels to date may not be indicative of future results
for these hotels or for other new hotels. Although the revenue and profitability
of the AmeriSuites have improved as the hotels have matured, there can be no
assurance that future hotels will experience similar results.
9
<PAGE> 12
RISKS OF THE LODGING INDUSTRY; COMPETITION
The Company's business is subject to all of the risks inherent in the
lodging industry. These risks include, among other things, adverse effects of
general and local economic conditions, changes in local market conditions,
oversupply of hotel space, a reduction in local demand for hotel rooms, changes
in travel patterns, changes in governmental regulations that influence or
determine wages, prices or construction costs, changes in interest rates, the
availability of credit and changes in real estate taxes and other operating
expenses. The Company's ownership of real property, including hotels, is
substantial. Real estate values are sensitive to changes in local market and
economic conditions and to fluctuations in the economy as a whole. Due in part
to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits.
The lodging industry is highly competitive. During the 1980s, construction
of lodging facilities in the United States resulted in an excess supply of
available rooms. This oversupply had an adverse effect on occupancy levels and
room rates in the industry, although the oversupply has since largely been
absorbed. Competitive factors in the industry include reasonableness of room
rates, quality of accommodations, brand recognition, service levels and
convenience of locations. The Company's hotels generally operate in areas that
contain numerous other competitors. There can be no assurance that demographic,
economic or other changes in markets will not adversely affect the convenience
or desirability of the sites in which the Company's hotels are located.
Furthermore, there can be no assurance that, in the markets in which the
Company's hotels operate, competing hotels will not pose greater competition for
guests than presently exists, or that new hotels will not enter such locales.
See "Business -- Industry Overview."
HOTEL ACQUISITION RISKS
The Company's growth strategy includes the selective acquisition of hotels
with repositioning potential, notably in the full-service segment and in
locations where the Company presently operates. There can be no assurance that
suitable hotel acquisition candidates will be located, that hotel acquisitions
can be consummated successfully or that acquired hotels can be operated
profitably or integrated successfully into the Company's operations. Growth
through acquisition entails certain risks that the acquired hotels could be
subject to unanticipated business uncertainties or legal liabilities.
GEOGRAPHIC CONCENTRATION OF HOTELS
Many of the Company's hotels are located in Florida, New Jersey and New
York, and such geographic concentration exposes the Company's operating results
to events or conditions which specifically affect those areas, such as local and
regional economic, weather and other conditions. Adverse developments which
specifically affect those areas may have a material adverse effect on the
results of operations of the Company. While the Company's AmeriSuites expansion
is expected to reduce these risks, the Company will remain subject to the risks
associated with geographic concentration until the proposed AmeriSuites hotels
are opened and their operations are stabilized.
In addition, the Company owns the Marriott's Frenchman's Reef Beach Resort
(the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands. The Company
obtained ownership and control of this hotel in December 1994 pursuant to the
restructuring of a note receivable. The Frenchman's Reef accounted for
approximately 16.7% of the Company's operating income for the year ended
December 31, 1995. The Frenchman's Reef's operating results have been adversely
affected in recent years by hurricanes and a disruption in airline service. As a
resort hotel primarily operated for leisure travelers, operating results at the
Frenchman's Reef also are subject to adverse developments in general economic
conditions and changes in travel patterns. Adverse developments with respect to
the Frenchman's Reef may have a material adverse effect on the results of
operations of the Company.
In September 1995, the Frenchman's Reef suffered hurricane damage when
Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance
carrier have agreed to settle the Company's property and business interruption
insurance claim for $25.0 million. Due to this insurance coverage, the Company's
liquidity will be affected only to the extent of its insurance deductibles, for
which the Company provided a
10
<PAGE> 13
reserve of $2.2 million in 1995. The Company has continued to operate the hotel
and has repaired a majority of the damaged rooms on an interim basis. However,
the impact of the hurricane has caused operating profits to decline from the
1995 level. The Company is currently assessing the extent of further
refurbishment required at the Frenchman's Reef.
LEVERAGE
As of March 31, 1996, the Company's total long-term debt (including current
portion) was $341.0 million. The Company expects it will incur additional
indebtedness, including additional secured indebtedness, in connection with the
implementation of its growth strategy. The degree to which the Company is
leveraged, as well as its rent expense, could have important consequences to
holders of Common Stock, including: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of the Company's cash flow from operations may be dedicated to the
payment of principal and interest on its indebtedness and rent expense, thereby
reducing the funds available to the Company for its operation; and (iii) certain
of the Company's indebtedness, including the Revolving Credit Facility, contains
financial and other restrictive covenants, including those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets, as well as those imposing minimum net worth
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
EMPLOYMENT AND OTHER GOVERNMENT REGULATION
The lodging industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and beverage (such as health and liquor license laws) and building and
zoning requirements. Also, the Company is subject to laws governing its
relationship with employees, including minimum wage requirements, overtime,
working conditions and work permits requirements. The failure to obtain or
retain liquor licenses or an increase in the minimum wage rate, employee benefit
costs or other costs associated with employees, could adversely affect the
Company. Both at the federal and state level, there are proposals under
consideration to increase the minimum wage and introduce a system of mandated
health insurance. Under the Americans with Disabilities Act of 1990 (the "ADA"),
all public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. While the Company believes its
hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. These and other
initiatives could adversely affect the Company as well as the lodging industry
in general.
ENVIRONMENTAL REGULATION
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released ACMs. Environmental laws also may impose restrictions on the manner in
which property may be used or businesses may be operated, and these restrictions
may require expenditures. In connection with the ownership or operation of
hotels, the Company may be potentially liable for any such costs. Although the
Company is currently not aware of any material environmental claims pending or
threatened against it, no assurance can be given that a material environmental
claim will not be asserted against the Company or against the Company and its
Managed Hotels. The cost of defending against claims of liability or of
remediating a contaminated property could have a material adverse effect on the
results of operations of the Company.
11
<PAGE> 14
IMPORTANCE OF FRANCHISOR RELATIONSHIPS
The Company currently enjoys good relationships with its major franchisors,
Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard
Johnson, and the Company has no reason to believe that such relationships will
not continue. However, under the applicable franchise agreements, the franchisor
can terminate the agreement if, among other things, its quality standards are
not maintained or if payments due are not made in a timely fashion. If any of
the franchise agreements were terminated by the franchisor, the Company could
explore entering into a franchise agreement with another franchisor. There can
be no assurance, however, that a desirable replacement relationship would be
available.
DEPENDENCE ON KEY EMPLOYEES
The Company is dependent on its President, Chief Executive Officer and
Chairman of the Board, David A. Simon, its Executive Vice President and Chief
Financial Officer, John M. Elwood, its Executive Vice President of Operations,
Paul H. Hower, and on certain other key members of its executive management
staff, the loss of whose services could have a material adverse effect on the
Company's business and future operations. See "Management."
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $118.5 million (approximately $136.3 million if
the Underwriters' over-allotment option is exercised in full) after deducting
the underwriting discounts and commissions and estimated expenses related to the
Offering. The Company intends to use the net proceeds as part of the financing
of the Company's AmeriSuites expansion. The Company expects to have 39
AmeriSuites in operation by the end of 1996 and seeks to have more than 70
AmeriSuites open by the end of 1997. Until used, the net proceeds of this
Offering will be invested in short-term investment grade marketable securities
or money market funds.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "PDQ." The following table sets forth, for the periods indicated, the
high and low closing price of the Common Stock as reported on the New York Stock
Exchange.
<TABLE>
<CAPTION>
PRICE RANGE
-------------
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
1st Quarter.......................................................... $8 1/8 $5 3/8
2nd Quarter.......................................................... 7 5/8 5 3/8
3rd Quarter.......................................................... 8 3/4 6 3/4
4th Quarter.......................................................... 9 6 7/8
YEAR ENDED DECEMBER 31, 1995
1st Quarter.......................................................... $10 3/8 $7 3/8
2nd Quarter.......................................................... 10 5/8 9 1/4
3rd Quarter.......................................................... 11 9 1/2
4th Quarter.......................................................... 10 1/4 9 3/8
YEAR ENDED DECEMBER 31, 1996
1st Quarter.......................................................... $13 5/8 $9 5/8
2nd Quarter.......................................................... 17 12 1/8
3rd Quarter (through July 1, 1996)................................... 16 5/8 16 5/8
</TABLE>
The closing price of the Common Stock as reported on the New York Stock
Exchange Composite Tape was $16.625 on July 1, 1996. As of July 1, 1996, there
were approximately 2,500 holders of record of the Common Stock.
The Company has not declared any cash dividends on its Common Stock since
January 1, 1994, and does not currently anticipate paying any dividends on the
Common Stock in the foreseeable future. The Company currently anticipates that
it will retain any future earnings for use in its business. The Company is
prohibited by the terms of its 10% Senior Secured Notes due 1999, and limited by
the terms of its Revolving Credit Facility, 9 1/4% First Mortgage Notes due 2006
and 7% Convertible Subordinated Notes due 2002, as well as certain other debt
instruments, from paying cash dividends on its Common Stock.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of March 31, 1996 and as adjusted to give effect to the Offering.
This table should be read in conjunction with the Consolidated Financial
Statements and notes thereto included and incorporated by reference in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of debt(2)......................................... $ 5,699 $ 5,699
======== ========
Long-term debt(3):
9 1/4% First Mortgage Notes due 2006............................. $120,000 $120,000
10% Senior Secured Notes due 1999................................ 24,403 24,403
Notes and Mortgages payable, less current portion(2)............. 104,618 104,618
7% Convertible Subordinated Notes due 2002....................... 86,250 86,250
-------- --------
Total long-term debt..................................... 335,271 335,271
Stockholders' equity:
Preferred stock, par value $.10 per share; 20,000,000 shares
authorized; none issued....................................... -- --
Common stock, par value $.01 per share; 75,000,000 shares
authorized; 31,049,512 shares issued and outstanding;
38,549,512 shares issued and outstanding as adjusted.......... 310 385
Capital in excess of par value................................... 185,166 303,562
Retained earnings................................................ 57,498 57,498
-------- --------
Total stockholders' equity............................... 242,974 361,445
-------- --------
Total capitalization..................................... $578,245 $696,716
======== ========
</TABLE>
- ---------------
(1) As adjusted to reflect the Offering.
(2) See Note 8 of Notes to Consolidated Financial Statements as to interest
rates and maturities on long-term debt, including current portion.
(3) The Revolving Credit Facility provides for availability of funds up to the
lesser of $100.0 million and a borrowing base determined under the
agreement. As of July 1, 1996, the Company had borrowed $40.0 million under
the Revolving Credit Facility and had additional borrowing availability of
approximately $22.0 million.
14
<PAGE> 17
RECENT SELECTED CONSOLIDATED FINANCIAL DATA
The table below presents recent selected consolidated financial data
derived from the Company's historical financial statements as of and for the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1995 and 1996. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Selected Consolidated Financial Data of the Company and its Predecessor" and
the Consolidated Financial Statements, related notes and other financial
information included and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Revenues:
Lodging.................................... $ 69,487 $ 88,753 $146,184 $34,375 $41,974
Food and beverage.......................... 12,270 18,090 37,955 8,884 8,024
Management and other fees.................. 10,831 10,021 8,115 1,637 1,692
Interest on mortgages and notes
receivable............................... 14,765 15,867 11,895 3,026 2,681
Business interruption insurance............ -- -- -- -- 3,739
Rental and other........................... 1,507 1,572 1,479 316 504
-------- -------- -------- ------- -------
Total revenues........................ 108,860 134,303 205,628 48,238 58,614
-------- -------- -------- ------- -------
Costs and expenses:
Direct hotel operating expenses:
Lodging.................................. 19,925 25,490 38,383 8,698 10,624
Food and beverage........................ 10,230 13,886 28,429 6,657 6,914
Selling and general...................... 21,180 27,244 49,753 11,824 14,010
Occupancy and other operating............ 9,827 9,799 11,763 2,611 3,482
General and administrative............... 15,685 15,089 15,515 3,872 4,219
Depreciation and amortization............ 7,117 9,427 15,974 3,976 5,224
-------- -------- -------- ------- -------
Total costs and expenses.............. 83,964 100,935 159,817 37,638 44,473
-------- -------- -------- ------- -------
Operating income.............................. 24,896 33,368 45,811 10,600 14,141
Investment income............................. 1,267 1,966 4,861 514 1,265
Interest expense.............................. (16,116) (13,993) (21,603) (4,100) (5,851)
Other income.................................. 3,809 9,089 2,239 -- 3,432
Other expense................................. -- -- (2,200) -- --
-------- -------- -------- ------- -------
Income before income taxes and extraordinary
items...................................... 13,856 30,430 29,108 7,014 12,987
Provision for income taxes.................... 5,681 12,172 11,643 2,806 5,195
-------- -------- -------- ------- -------
Income before extraordinary items............. 8,175 18,258 17,465 4,208 7,792
Extraordinary items(2)........................ 3,989 172 104 7 149
-------- -------- -------- ------- -------
Net income.................................... $ 12,164 $ 18,430 $ 17,569 $ 4,215 $ 7,941
======== ======== ======== ======= =======
Net income per common share(3):
Primary:
Income before extraordinary items........ $ 0.27 $ 0.57 $ 0.54 $ 0.13 $ 0.24
Extraordinary items...................... 0.13 0.01 -- -- --
-------- -------- -------- ------- -------
Net income per common share................ $ 0.40 $ 0.58 $ 0.54 $ 0.13 $ 0.24
======== ======== ======== ======= =======
Fully diluted:
Income before extraordinary items........ $ 0.27 $ 0.57 $ 0.54 $ 0.13 $ 0.22
Extraordinary items...................... 0.13 0.01 -- -- --
-------- -------- -------- ------- -------
Net income per common share................ $ 0.40 $ 0.58 $ 0.54 $ 0.13 $ 0.22
======== ======== ======== ======= =======
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT HOTEL DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)............................. $ 32,013 $ 42,795 $ 61,785 $14,576 $19,365
Net cash provided by operating
activities.......................... 19,728 28,672 40,851 4,849 8,655
Net cash provided by (used in)
investing activities................ 2,281 (34,248) (90,927) (12,918) (88,201)
Net cash provided by (used in)
financing activities................ (17,056) (23,469) 87,085 37,939 53,642
HOTEL DATA:
All-suites:
Number of locations................. 8 12 19 13 22
Number of rooms..................... 993 1,494 2,319 1,620 2,640
REVPAR.............................. $ 36.01 $ 39.50 $ 43.98 $ 37.60 $ 43.67
Full-service(5):
Number of locations................. 30 31 32 32 32
Number of rooms..................... 5,797 6,152 6,301 6,301 6,301
REVPAR.............................. $ 48.02 $ 51.69 $ 53.64 $ 45.10 $ 51.59
Limited-service:
Number of locations................. 36 40 40 40 40
Number of rooms..................... 3,669 4,164 4,164 4,164 4,164
REVPAR.............................. $ 34.61 $ 34.60 $ 37.46 $ 40.66 $ 42.58
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------- AS OF MARCH 31,
1993 1994 1995 1996
-------- -------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
marketable securities............ $ 41,569 $ 13,641 $ 61,462 $ 31,628
Property, equipment and leasehold
improvements..................... 172,786 299,291 398,201 529,916
Total assets........................ 410,685 434,932 573,241 642,876
Current portion of debt............. 19,282 5,284 5,731 5,699
Long-term debt, net of current
portion.......................... 168,618 178,545 276,920 335,271
Total stockholders' equity.......... 171,364 204,065 232,916 242,974
</TABLE>
- ---------------
(1) In December 1994, the Company acquired ownership of the Frenchman's Reef as
a result of the restructuring of a mortgage note receivable, which was
secured by the hotel. This transaction has not had a material impact on
operating income but has affected revenue and operating margins
significantly. For the years ended December 31, 1993 and 1994, the Company
recorded revenues related to the Frenchman's Reef in the form of interest
income and management fees with no corresponding operating expenses. For the
year ended December 31, 1995, the Company recorded the operating revenues
and operating expenses related to this hotel.
(2) Extraordinary items consist of gains on discharges of indebtedness, net of
income taxes of $2.8 million in 1993, $120,000 in 1994 and $70,000 in 1995
and $4,000 and $100,000 for the three months ended March 31, 1995 and 1996.
(3) Primary net income per common share was computed based on the weighted
average number of common shares and common share equivalents (dilutive stock
options and warrants) outstanding during each period. The weighted average
number of common shares used in computing primary net income per common
share was 30,721,000, 32,022,000 and 32,461,000 for the years ended December
31, 1993, 1994 and 1995, respectively, and 32,365,000 and 32,865,000 for the
three months ended March 31, 1995 and 1996, respectively. Fully diluted net
income per common share, in addition to the adjustments for primary net
income per common share, reflects the elimination of interest expense and
the issuance of additional common shares from the assumed conversion of the
7% Convertible Subordinated Notes due 2002 from their issuance in April
1995. The weighted average number of common shares used in computing fully
diluted net income per common share was 37,423,000 for the year ended
December 31, 1995 and 32,365,000 and 40,346,000 for the three months ended
March 31, 1995 and 1996, respectively.
16
<PAGE> 19
(4) EBITDA represents earnings before extraordinary items, interest expense,
provision for income taxes and depreciation and amortization and excludes
interest income on cash investments and other income. EBITDA is used by the
Company for the purpose of analyzing its operating performance, leverage and
liquidity. Such data are not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity.
(5) For purposes of showing operating trends, the results of the Frenchman's
Reef have been excluded from Hotel data due to the effects of the September
1995 hurricane. For full-service operating results including the Frenchman's
Reef, see "Business -- Prime's Lodging Operations."
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading hotel owner/operator which owns or leases 82
hotels (the "Owned Hotels") and manages 16 hotels (the "Managed Hotels") for
third parties. The Company has a financial interest in the form of mortgages or
profit participations (primarily incentive management fees) in 9 of the Managed
Hotels. The Company consolidates the results of operations of its Owned Hotels
and records management fees (including incentive management fees) and interest
income, where applicable, on the Managed Hotels.
The Company's principal growth strategy is the accelerated expansion of its
AmeriSuites brand through the construction of new AmeriSuites hotels. For the
three months ended March 31, 1996, earnings from recurring operations increased
by 36.2% over the comparable period in 1995, attributable to an 11.3% increase
in REVPAR at comparable hotels, the addition of 32 hotels primarily through
construction or acquisition in the past two years and the impact of increased
operating leverage. Although future results of operations may be adversely
affected in the short-term by the costs associated with the construction and
acquisition of new hotels, it is expected that this impact will be offset, after
an initial period, by revenues generated by these new hotels. The Company
believes that it is well positioned to benefit from the expected continued
improvements in the lodging industry due to its growth strategy and its hotel
equity ownership position.
On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley
Inns and two other limited-service hotels for approximately $65.1 million in
cash. The transaction enabled the Company to establish full control over its
30-hotel proprietary Wellesley Inn brand. In connection with this transaction,
the Company also terminated its management agreement and junior subordinated
mortgages related to the 18 hotels. Revenues and expenses from these hotels have
been included in reported results from the date of acquisition. Prior to the
acquisition, the Company recorded revenues in the form of management fees and
interest income, with no corresponding operating expenses.
On June 28, 1996, the Company established the Revolving Credit Facility
with a group of financial institutions providing for availability of funds up to
the lesser of $100 million and a borrowing base determined under the agreement.
The Revolving Credit Facility is secured by certain of the Company's hotels with
recourse to the Company. Additional hotels may be added subject to the approval
of the lenders. As of July 1, 1996, the Company had borrowed $40.0 million under
the Revolving Credit Facility and had additional borrowing availability of
approximately $22.0 million. The proceeds were used to retire $20.0 million of
interim financing with the remainder to be utilized principally for the
development of AmeriSuites hotels. See "-- Liquidity and Capital Resources."
In September 1995, the Frenchman's Reef suffered hurricane damage when
Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance
carrier have agreed to settle the Company's property and business interruption
insurance claim for $25.0 million. Due to this insurance coverage, the Company's
liquidity will be affected only to the extent of its insurance deductibles, for
which the Company provided a reserve of $2.2 million in 1995. The Company has
continued to operate the hotel and has repaired a majority of the damaged rooms
on an interim basis. However, the impact of the hurricane has caused operating
profits to decline from the prior year level. The Company is currently assessing
the extent of further refurbishment required at the Frenchman's Reef. For the
three months ended March 31, 1996, the Company continued to record the operating
revenues and expenses of the Frenchman's Reef. In addition, the Company
estimated its business interruption insurance proceeds assuming no growth over
the prior year's profit level and recorded revenue and a corresponding
receivable of $3.7 million.
This Prospectus contains forward-looking statements which involve risks and
uncertainties relating to future events. Prospective investors are cautioned
that the Company's actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
actual results to differ materially from those indicated by such forward-looking
statements include the matters set forth under the caption "Risk Factors."
18
<PAGE> 21
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1995
The following table presents the components of operating income, operating
expense margins and other data for the Company and the Company's comparable
Owned Hotels for the three months ended March 31, 1996 and 1995. The results of
the two hotels divested during 1995 and 1996 are not material to an
understanding of the results of the Company's operations in such periods and,
therefore, are not separately discussed.
<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
------------------- -------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1995 1996 1995 1996
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND
REVPAR)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lodging........................................... $34,375 $41,974 $25,033 $28,279
Food and Beverage................................. 8,884 8,024 5,336 5,908
Management and Other Fees......................... 1,637 1,692
Interest on Mortgages and Notes Receivable........ 3,026 2,681
Business Interruption Insurance................... -- 3,739
Rental and Other.................................. 316 504
------- -------
Total Revenues............................... 48,238 58,614
Direct Hotel Operating Expenses:
Lodging........................................... 8,698 10,624 6,832 7,240
Food and Beverage................................. 6,657 6,914 4,382 4,884
Selling and General............................... 11,824 14,010 8,274 9,237
Occupancy and Other Operating....................... 2,611 3,482
General and Administrative.......................... 3,872 4,219
Depreciation and Amortization....................... 3,976 5,224
------- -------
Operating Income.................................... 10,600 14,141
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue....... 25.3% 25.3% 27.3% 25.6%
Food and Beverage, as a percentage of food and
beverage revenue............................. 74.9% 86.2% 82.1% 82.7%
Selling and General, as a percentage of lodging
and
food and beverage revenue...................... 27.3% 28.0% 27.2% 27.0%
Occupancy and Other Operating, as a percentage
of lodging and food and beverage revenue....... 6.0% 7.0%
General and Administrative, as a percentage
of total revenue............................... 8.0% 7.2%
OTHER DATA(2):
Occupancy......................................... 63.7% 65.9% 63.7% 66.8%
Average Daily Rate ("ADR")........................ $ 65.97 $ 69.78 $ 65.97 $ 70.03
Revenue Per Available Room ("REVPAR")............. $ 42.02 $ 45.95 $ 42.02 $ 46.75
Gross Operating Profit............................ $10,881 $17,194 $10,881 $12,826
</TABLE>
- ---------------
(1) For purposes of this discussion of results of operations for 1996 compared
to 1995, comparable Owned Hotels refers to 46 Owned Hotels that were owned
or leased by the Company during all of the three months ended March 31, 1995
and 1996. The Frenchman's Reef has not been classified as a comparable Owned
Hotel due to the effect of the hurricane damage.
(2) For purposes of showing operating trends, the results of the Frenchman's
Reef and the two disposed hotels have been excluded from the Other Data
section of the table.
19
<PAGE> 22
Lodging revenues, which include room revenues and other related revenues
such as telephone and vending, increased by $7.6 million, or 22.1%, during the
three months ended March 31, 1996 over the same period of the prior year. The
increase was primarily due to incremental lodging revenues of $8.9 million from
the 32 new hotels added during 1995 and 1996 with the balance coming from growth
in revenues at comparable Owned Hotels. Lodging revenues for comparable Owned
Hotels increased by $3.2 million, or 13.0%, for the three months ended March 31,
1996 as compared to the same period of the prior year, driven primarily by
strong results at the Company's AmeriSuites hotels. The revenue gains were
partially offset by a decrease of $4.2 million at the Frenchman's Reef
attributable to the impact of the 1995 hurricane.
The Company operates in three major segments of the industry: all-suites,
full-service and limited-service. The following table illustrates the growth in
REVPAR for the comparable Owned Hotels for the three months ended March 31, 1996
as compared to the same period in the prior year by industry segment:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1996
--------------
<S> <C>
All-suites................................................... 19.9%
Full-service................................................. 10.1%
Limited-service.............................................. 7.5%
Total.............................................. 11.3%
</TABLE>
The REVPAR growth at comparable Owned Hotels reflects strong results in all
of the Company's industry segments: its all-suites AmeriSuites, full-service and
its limited-service Wellesley Inns. Repositioning efforts at both full-service
and limited-service hotels contributed to the foregoing REVPAR increases. The
improvements in REVPAR were generated by increases in ADR, which rose by 6.2%,
and occupancy gains of 4.8% for the three month period as compared to the same
period in the prior year.
Food and beverage revenues decreased by $860,000, or 9.7%, for the three
months ended March 31, 1996 compared to the same period in the prior year. This
decrease was primarily due to lower food and beverage revenues at the
Frenchman's Reef which declined by $2.4 million from the same period in the
prior year due to the hurricane damage. This was partially offset by additional
revenues of $1.0 million attributable to the new hotels and increased revenues
at comparable Owned Hotels. Food and beverage revenues for comparable Owned
Hotels increased by $572,000, or 10.7%, for the three months ended March 31,
1996, due primarily to increased banquet business at several hotels.
Management and other fees consist of base and incentive fees earned under
management agreements, fees for additional services rendered to Managed Hotels
and sales commissions earned by the Company's national sales group, Market
Segments, Inc. ("MSI"). Management and other fees increased by $55,000, or 3.4%,
for the three months ended March 31, 1996 as compared to the same period in the
prior year due primarily to increased incentive management fees partially offset
by the conversions of Managed Hotels into Owned Hotels.
Interest on mortgages and notes receivable during the period primarily
related to mortgages secured by certain Managed Hotels. Interest on mortgages
and notes receivable decreased by $345,000, or 11.4%, for the three months ended
March 31, 1996 as compared to the same period in the prior year, primarily due
to the Company's conversions of notes receivable into cash or hotel assets
during 1995 and 1996. Interest on mortgages and notes receivable will continue
to decrease and operating revenues and expenses will increase due to the March
31, 1996 conversion of a $22.4 million note into a long-term lease.
Direct lodging expenses increased by $1.9 million, or 22.1%, for the three
months ended March 31, 1996 compared to the same period in the prior year due
primarily to the addition of new hotels. Direct lodging expenses, as a
percentage of lodging revenue, remained constant at 25.3% during the three month
periods. For comparable Owned Hotels, direct lodging expenses as a percentage of
lodging revenues decreased from 27.3% to 25.6% for the three month period due
primarily to increases in ADR which had minimal corresponding increases in
expenses.
20
<PAGE> 23
Direct food and beverage expenses increased by $257,000, or 3.9%, for the
three months ended March 31, 1996 as compared to the same period in the prior
year primarily due to increased banquet business. As a percentage of food and
beverage revenues, direct food and beverage expenses increased from 74.9% to
86.2% for the three month period. The increase was primarily due to the impact
of decreased revenues from the food and beverage operations at the Frenchman's
Reef. For comparable Owned Hotels direct food and beverage expenses, as a
percentage of food and beverage revenue, remained relatively stable for both
periods as the higher margins associated with the increased banquet business
were offset by lower margins at the Hasbrouck Heights Crowne Plaza due to the
refurbishing of the hotel. The Company anticipates completing this project
during the second quarter of 1996.
Direct hotel selling and general expenses consist primarily of hotel
expenses for Owned Hotels which are not specifically allocated to rooms or food
and beverage activities, such as administration, selling and advertising,
utilities, repairs and maintenance. Direct hotel selling and general expenses
increased by $2.2 million, or 18.5%, for the three months ended March 31, 1996
as compared to the same period in the prior year due primarily to the addition
of new hotels. As a percentage of hotel revenues (defined as lodging and food
and beverage revenues), direct hotel selling and general expenses increased from
27.3% to 28.0% for the three month period due to increased utility and snow
removal costs related to the severe winter weather. For comparable Owned Hotels,
direct selling and general expenses as a percentage of revenues decreased
slightly from 27.2% to 27.0% for the three month periods, as the higher
weather-related costs were offset by the impact of improved revenues.
Occupancy and other operating expenses consist primarily of insurance, real
estate and other taxes and rent expense. For the three months ended March 31,
1996, occupancy and other operating expenses increased by $871,000, or 33.4%, as
compared to the same period in the prior year primarily due to the addition of
new hotels and increased real estate taxes on certain hotels which were
partially assessed in the prior year. As a result, occupancy and other operating
expenses as a percentage of hotel revenues increased from 6.0% to 7.0% for the
three month period.
General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating both the Owned Hotels and
Managed Hotels and general corporate expenses. General and administrative
expenses increased by $347,000, or 9.0%, for the three months ended March 31,
1996, primarily due to increased personnel, advertising and training costs
associated with opening new hotels. As a percentage of total revenues, general
and administrative expenses decreased from 8.0% to 7.2% for the three month
period due to operating leverage.
Depreciation and amortization expense increased by $1.2 million, or 31.4%,
for the three months ended March 31, 1996 as compared to the same period in the
prior year due to the impact of new hotel properties acquired or opened in the
past year and refurbishment efforts at several hotels.
Interest expense increased by $1.8 million, or 42.7%, for the three months
ended March 31, 1996 as compared to the same period in the prior year primarily
due to the issuance of $86.3 million of 7% Convertible Subordinated Notes due
2002 (the "Convertible Notes") in April 1995 and a net increase of $68.4 million
in debt, after application of the proceeds to repay indebtedness, from the
$120.0 million 9 1/4% First Mortgage Notes due 2006 (the "First Mortgage Notes")
issued in January 1996. The Company anticipates incurring additional
indebtedness under the Revolving Credit Facility in connection with the
development of its AmeriSuites hotels. While a majority of this interest will be
capitalized during the construction period, the Company expects that these
borrowings will increase net interest expense. Investment income increased by
$751,000 for the three month period primarily due to higher average cash
balances generated by the new borrowings.
Other income consists of items which are not part of the Company's
recurring operations. Other income for the three months ended March 31, 1996
consisted of a gain on the settlement of a note receivable of $1.8 million and a
gain on the sale of a hotel of $1.6 million.
Pretax extraordinary gains of approximately $249,000 relate to the
retirement of secured notes with a face value of $8.5 million. Pretax
extraordinary gains of approximately $11,000 for the three months ended March
31, 1995 relate to the retirement of debt with a face value of $388,000.
21
<PAGE> 24
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1994
The following table presents the components of operating income, operating
expense margins and other data for the Company and the Company's comparable
Owned Hotels for the years ended December 31, 1995 and 1994. The results of the
four hotels divested during 1994 and 1995 are not material to an understanding
of the results of the Company's operations in such periods and, therefore, are
not separately discussed.
<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
--------------------- -------------------
1994 1995 1994 1995
-------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lodging......................................... $ 88,753 $146,184 $76,604 $83,190
Food and Beverage............................... 18,090 37,955 13,601 13,299
Management and Other Fees....................... 10,021 8,115
Interest on Mortgages and Notes Receivable...... 15,867 11,895
Rental and Other................................ 1,572 1,479
-------- --------
Total Revenues.......................... 134,303 205,628
Direct Hotel Operating Expenses:
Lodging......................................... 25,490 38,383 20,722 21,908
Food and Beverage............................... 13,886 28,429 10,634 10,467
Selling and General............................. 27,244 49,753 23,009 24,338
Occupancy and Other Operating..................... 9,799 11,763
General and Administrative........................ 15,089 15,515
Depreciation and Amortization..................... 9,427 15,974
-------- --------
Operating Income.................................. 33,368 45,811
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue..... 28.7% 26.3% 27.1% 26.3%
Food and Beverage, as a percentage of food and
beverage revenue............................. 76.8% 74.9% 78.2% 78.7%
Selling and General, as a percentage of lodging
and food and beverage revenue................ 25.5% 27.0% 25.5% 25.2%
Occupancy and Other Operating, as a percentage
of lodging and food and beverage revenue..... 9.2% 6.4%
General and Administrative, as a percentage of
total revenue................................ 11.2% 7.5%
OTHER DATA:
Occupancy....................................... 68.0% 69.2% 70.4% 72.3%
Average Daily Rate.............................. $ 60.36 $ 73.28 $ 59.92 $ 63.97
Revenue Per Available Room...................... $ 41.04 $ 50.71 $ 42.21 $ 46.22
Gross Operating Profit.......................... $ 40,223 $ 67,605 $35,824 $39,926
</TABLE>
- ---------------
(1) For purposes of this discussion of results of operations, comparable Owned
Hotels refers to the 37 Owned Hotels that were owned or leased by the
Company during all of 1994 and 1995.
Lodging revenues, which include room revenues and other related revenues
such as telephone and vending, increased by $57.4 million, or 64.7%, from $88.8
million in 1994 to $146.2 million in 1995. The increase was due to $52.1 million
of lodging revenues from the addition of the Frenchman's Reef and the 19 new
hotels added during 1994 and 1995 with the balance coming from growth in
revenues at comparable Owned Hotels. Lodging revenues for comparable Owned
Hotels increased by $6.6 million, or 8.6%, in 1995 as compared to 1994.
22
<PAGE> 25
The Company operates in three major segments of the industry: all-suites,
full-service and limited-service. The following table sets forth the growth in
REVPAR at the comparable Owned Hotels for 1995, as compared to 1994, by industry
segment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
All-suites................................................... 11.9%
Full-service................................................. 8.7%
Limited-service.............................................. 9.2%
Total.............................................. 9.5%
</TABLE>
The REVPAR growth at comparable Owned Hotels reflects strong results in
each of the Company's industry segments. Repositioning efforts at both
full-service and limited-service hotels also contributed to the REVPAR
increases. The improvements in REVPAR were generated by increases in ADR, which
rose by 6.8% and gains in occupancy of 2.7%.
Food and beverage revenues increased by $19.9 million, or 109.8%, from
$18.1 million in 1994 to $38.0 million in 1995. The increase was primarily due
to the additional food and beverage operations related to the Frenchman's Reef
and six other full-service hotels acquired since January 1, 1994. Food and
beverage revenues for comparable Owned Hotels decreased by $302,000 in 1995
compared to 1994. The decrease was primarily due to decreased banquet business
and lower beverage revenues at the Company's sports lounges.
Management and other fees consist of base and incentive fees earned under
management agreements, fees for additional services rendered to Managed Hotels
and sales commissions earned by the Company's national sales group, MSI.
Management and other fees decreased by $1.9 million, or 19.0%, from $10.0
million in 1994 to $8.1 million in 1995. The decrease was primarily due to the
loss of management fees on five Managed Hotels acquired by the Company during
1994 and 1995 and six additional hotels which were sold by a third party hotel
owner in 1994. Partially offsetting these decreased management fees were
increased base and incentive management fees associated with the remaining
Managed Hotels and increased revenues generated by MSI.
Interest on mortgages and notes receivable primarily relate to mortgages
secured by certain Managed Hotels. Interest on mortgages and notes receivable
decreased by $4.0 million, or 25.0%, from $15.9 million in 1994 to $11.9 million
in 1995, primarily due to the Company's conversion of a $50.0 million note
receivable secured by the Frenchman's Reef into an operating hotel asset in
December 1994. Partially offsetting the decrease was interest income related to
the purchase of $17.4 million of first mortgages secured by two hotels for $12.7
million in June 1995.
Direct lodging expenses increased by $12.9 million, or 50.6%, from $25.5
million in 1994 to $38.4 million in 1995, due primarily to the addition of new
hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased
from 28.7% in 1994 to 26.3% in 1995. This decrease was primarily due to
increases in ADR which had minimal corresponding increases in expenses. For
comparable Owned Hotels, direct lodging expenses as a percentage of lodging
revenues decreased from 27.1% in 1994 to 26.3% in 1995.
Direct food and beverage expenses increased by $14.5 million, or 104.7%,
from $13.9 million in 1994 to $28.4 million in 1995, primarily due to the
addition of seven new full-service hotels. As a percentage of food and beverage
revenues, direct food and beverage expenses decreased from 76.8% in 1994 to
74.9% in 1995. The decrease was primarily due to increased revenues in higher
margin areas such as banquet departments at the new hotels. For comparable Owned
Hotels, direct food and beverage expenses as a percentage of food and beverage
revenue increased slightly from 78.2% in 1994 to 78.7% in 1995.
Direct hotel selling and general expenses consist primarily of hotel
expenses for Owned Hotels which are not specifically allocated to rooms or food
and beverage activities, such as administration, selling and advertising,
utilities, repairs and maintenance. Direct hotel selling and general expenses
increased by $22.6 million, or 82.6%, from $27.2 million in 1994 to $49.8
million in 1995, due primarily to the addition of new hotels. As a percentage of
hotel revenues (defined as lodging and food and beverage revenues), direct hotel
selling and general expenses increased from 25.5% in 1994 to 27.0% in 1995 due
to the addition of new full-
23
<PAGE> 26
service properties which generally require higher levels of unallocated
expenses. For comparable Owned Hotels, direct selling and general expenses as a
percentage of revenues decreased slightly from 25.5% in 1994 to 25.2% in 1995.
Occupancy and other operating expenses consist primarily of insurance, real
estate and other taxes and rent expense. Occupancy and other operating expenses
increased by $2.0 million, or 20.0%, from $9.8 million in 1994 to $11.8 million
in 1995 as the additional costs associated with the new hotels were offset by
real estate tax refunds of approximately $600,000 during the year. As a
percentage of hotel revenues, occupancy and other operating expenses decreased
from 9.2% in 1994 to 6.4% in 1995, primarily due to operating leverage.
General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating both the Owned Hotels and
Managed Hotels and general corporate expenses. General and administrative
expenses increased by $426,000, or 2.8%, from $15.1 million in 1994 to $15.5
million in 1995, due to ordinary inflationary increases which were partially
offset by central office payroll reductions. As a percentage of total revenues,
general and administrative expenses decreased from 11.2% in 1994 to 7.5% in 1995
due to operating leverage.
Depreciation and amortization expense increased by $6.6 million, or 69.4%,
from $9.4 million in 1994 to $16.0 million in 1995, due to the impact of new
hotel properties acquired in the past year and refurbishment efforts at several
hotels.
Interest expense increased by $7.6 million, or 54.4%, from $14.0 million in
1994 to $21.6 million in 1995, primarily due to new mortgage borrowings of $39.0
million incurred in February 1995 and $86.3 million of 7% Convertible
Subordinated Notes due 2002 (the "Convertible Notes") issued in April 1995.
Investment income increased by $2.9 million from $2.0 million in 1994 to $4.9
million in 1995 primarily due to higher average cash balances generated by the
new borrowings.
Other income consists of items which are not part of the Company's
recurring operations. For the year ended December 31, 1995, other income
consisted of a gain on the settlement of a note receivable of $822,000 and gains
on the sale of land parcels of $1.4 million. Other income for the year ended
December 31, 1994 consisted primarily of a gain on the settlement of the Rose
and Cohen note receivable of $6.2 million (see "Business -- Litigation"), gains
on property sales of $1.0 million and rebates of prior years' insurance premiums
of $1.2 million. Other expense of $2.2 million for the year ended December 31,
1995 consists of a reserve for insurance deductibles related to hurricane damage
at the Frenchman's Reef.
Pretax extraordinary gains of approximately $174,000 for the year ended
December 31, 1995 relate to the retirement of secured notes with a face value of
$22.2 million. Pretax extraordinary gains of approximately $292,000 for the year
ended December 31, 1994 relate to the retirement of debt with a face value of
$8.3 million.
24
<PAGE> 27
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1993
The following table presents the components of operating income, operating
expense margins and other data for the Company and the Company's comparable
Owned Hotels for 1993 and 1994. The results of the four hotels divested during
1993 and 1994 are not material to an understanding of the results of the
Company's operations in such periods and, therefore, are not separately
discussed.
<TABLE>
<CAPTION>
COMPARABLE OWNED
TOTAL HOTELS(1)
--------------------- -------------------
1993 1994 1993 1994
-------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lodging......................................... $ 69,487 $ 88,753 $62,305 $66,821
Food and Beverage............................... 12,270 18,090 10,875 11,410
Management and Other Fees....................... 10,831 10,021
Interest on Mortgages and Notes Receivable...... 14,765 15,867
Rental and Other................................ 1,507 1,572
-------- --------
Total Revenues.......................... 108,860 134,303
Direct Hotel Operating Expenses:
Lodging......................................... 19,925 25,490 16,870 17,281
Food and Beverage............................... 10,230 13,886 9,029 9,143
Selling and General............................. 21,180 27,244 17,779 18,889
Occupancy and Other Operating..................... 9,827 9,799
General and Administrative........................ 15,685 15,089
Depreciation and Amortization..................... 7,117 9,427
-------- --------
Operating Income.................................. 24,896 33,368
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue..... 28.7% 28.7% 27.1% 25.9%
Food and Beverage, as a percentage of food and
beverage revenue............................. 83.4% 76.8% 83.0% 80.1%
Selling and General, as a percentage of lodging
and food and beverage revenue................ 25.9% 25.5% 24.3% 24.1%
Occupancy and Other Operating, as a percentage
of lodging and food and beverage revenue..... 12.0% 9.2%
General and Administrative, as a percentage of
total revenue................................ 14.4% 11.2%
OTHER DATA:
Occupancy....................................... 70.4% 68.0% 73.2% 73.1%
Average Daily Rate.............................. $ 56.14 $ 60.36 $ 56.84 $ 61.16
Revenue Per Available Room...................... $ 39.52 $ 41.04 $ 41.61 $ 44.71
Gross Operating Profit.......................... $ 30,422 $ 40,223 $29,500 $32,917
</TABLE>
- ---------------
(1) For purposes of this discussion of results of operations for 1994 compared
to 1993, comparable Owned Hotels refers to the 31 Owned Hotels that were
owned or leased by the Company during all of 1994 and 1993.
Lodging revenues increased by $19.3 million, or 27.7%, from $69.5 million
in 1993 to $88.8 million in 1994. This increase was primarily due to incremental
lodging revenues of $17.6 million from hotels acquired or built in 1993 and 1994
and an increase in lodging revenues at comparable Owned Hotels. Lodging revenues
for comparable Owned Hotels increased by $4.5 million, or 7.2%, in 1994 compared
to 1993 due to improvements in ADR. ADR increased by $4.22 or 7.5% for all
hotels and $4.32 or 7.6% for comparable Owned Hotels due to repositioning and
refurbishment efforts at several full-service hotels and the continued
improvements in the lodging industry. In 1994, the industry continued its
recovery, as demand growth continued to outpace new
25
<PAGE> 28
hotel supply growth, resulting in higher occupancy levels which have allowed the
industry to increase room rates. The Company has pursued a strategy of
increasing ADR, which has a greater impact on net operating income than changes
in occupancy. Occupancy rates for all hotels decreased from 70.4% in 1993 to
68.0% in 1994 due to the lower occupancy rates normally associated with new
hotels, including both newly constructed hotels and repositioned hotels during
the refurbishment period. Occupancy rates for comparable Owned Hotels remained
constant in 1994 compared to 1993.
The Company operates in three major segments of the industry: all-suites,
full-service, and limited-service. The following table sets forth the growth in
REVPAR at the comparable Owned Hotels for the year ended December 31, 1994 as
compared to the prior year, by industry segment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
All-suites................................................. 13.1%
Full-service............................................... 7.7%
Limited-service............................................ 4.1%
Total............................................ 7.5%
</TABLE>
Food and beverage revenues increased by $5.8 million, or 47.4%, from $12.3
million in 1993 to $18.1 million in 1994. This increase was primarily due to the
impact of incremental revenues of $5.7 million from additional food and beverage
operations of four full-service hotels acquired in 1994. Food and beverage
revenues for comparable Owned Hotels increased by $535,000, or 4.9%, in 1994
compared to 1993 primarily as a result of increased banquet sales and the
repositioning of three lounges to a sports bar theme.
Management and other fees consist of base and incentive fees earned under
management agreements, fees for additional services rendered to Managed Hotels
and sales commissions earned by the Company's national sales group, MSI.
Management and other fees decreased by $810,000, or 7.5%, from $10.8 million in
1993 to $10.0 million in 1994 primarily due to the loss of management fees on
four Managed Hotels acquired by the Company during 1994. In addition, the
Company's management contracts covering six additional hotels were terminated
during 1994 upon divestiture of those hotels by the third party hotel owners.
Partially offsetting these decreased management fees were the addition of two
new management contracts and increased revenues associated with the remaining
Managed Hotels.
Interest on mortgages and notes receivable in 1993 and 1994 primarily
related to mortgages secured by certain Managed Hotels including the Frenchman's
Reef. Interest income on mortgages and notes receivable increased by $1.1
million, or 7.5%, from $14.8 million in 1993 to $15.9 million in 1994 primarily
due to interest recognized on the Company's cash flow notes, which are
subordinated or junior mortgages which remit payment based on hotel cash flow.
In accordance with fresh start reporting adopted on July 31, 1992, assets and
liabilities were recorded at their then-current fair market values. As these
cash flow notes bear many of the characteristics and risks of operating hotel
equity investments, no value was assigned to these notes on the Company's
balance sheet due to substantial doubt as to their recoverability. The Company's
policy is to recognize interest on cash flow notes when cash is received. In
1994, the portion of interest on mortgages and other notes receivable
attributable to cash flow notes increased to $2.0 million from $1.0 million in
1993 primarily due to the execution of revised cash flow note agreements on
three hotels and the improved operating performance of the underlying hotels.
See "Business -- Mortgages and Notes Receivable."
Approximately $4.3 million and $4.6 million of interest on mortgages and
notes receivable in 1993 and 1994, respectively, was derived from the Company's
$50.0 million note receivable secured by the Frenchman's Reef. This note was
restructured in December 1994 and pursuant to such restructuring, the Company
obtained ownership and control of the Frenchman's Reef. See "-- Liquidity and
Capital Resources."
Direct lodging expenses increased by $5.6 million, or 27.9%, from $19.9
million in 1993 to $25.5 million in 1994 due primarily to the addition of new
hotels. As a percentage of lodging revenue, direct lodging expenses remained
constant at 28.7% in 1993 and 1994. For comparable Owned Hotels, direct lodging
expenses increased $411,000, or 2.4%, but decreased as a percentage of
comparable lodging revenue from 27.1% in 1993 to 25.9% in 1994 primarily due to
increases in ADR which had minimal corresponding increases in expenses.
26
<PAGE> 29
Direct food and beverage expenses increased by $3.7 million, or 35.7%, from
$10.2 million in 1993 to $13.9 million in 1994 due primarily to the addition of
new full-service hotels. As a percentage of food and beverage revenue, direct
food and beverage expenses decreased from 83.4% in 1993 to 76.8% in 1994
primarily due to increased revenues in higher margin areas such as banquet
departments and sports lounges. For comparable Owned Hotels, direct food and
beverage expenses increased $114,000, or 1.3%, but decreased as a percentage of
food and beverage revenue from 83.0% in 1993 to 80.1% in 1994.
Direct hotel selling and general expenses consist primarily of hotel
expenses for Owned Hotels which are not specifically allocated to rooms or food
and beverage activities, such as administration, selling and advertising,
utilities, repairs and maintenance. Direct hotel selling and general expenses
increased by $6.1 million, or 28.6%, from $21.2 million in 1993 to $27.2 million
in 1994 due primarily to the addition of 11 new hotels. Of these 11 hotels, four
were managed by the Company in 1993 or during a portion of 1994, while the other
seven had no previous relationship to the Company. As a percentage of hotel
revenues (defined as rooms and food and beverage revenues), direct hotel selling
and general expenses decreased slightly from 25.9% in 1993 to 25.5% in 1994. For
comparable Owned Hotels, direct selling and general expenses increased $1.1
million, or 6.2%, but decreased slightly as a percentage of comparable Owned
Hotel revenues from 24.3% in 1993 to 24.1% in 1994.
Occupancy and other operating expenses, which consist primarily of
insurance, real estate and other taxes, and rent expense, decreased by $28,000
in 1994. As a percentage of hotel revenues, occupancy and other operating
expenses decreased from 12.0% in 1993 to 9.2% in 1994 primarily due to operating
leverage, lower property and liability insurance charges based on favorable
claims experiences and reductions in real estate taxes as a result of successful
tax appeals on certain properties.
General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating both the Owned Hotels and
Managed Hotels and general corporate expenses. General and administrative
expenses decreased by $596,000, or 3.8%, from $15.7 million in 1993 to $15.1
million in 1994 primarily due to savings realized from the restructuring of the
Company's centralized management operations in 1993. As a percentage of total
revenues, general and administrative expenses decreased from 14.4% in 1993 to
11.2% in 1994.
Depreciation and amortization expense increased by $2.3 million, or 32.5%,
from $7.1 million in 1993 to $9.4 million in 1994, due to the impact of new
hotel properties acquired in the past year and refurbishment efforts at several
hotels.
Interest expense decreased by $2.1 million, or 13.2%, from $16.1 million in
1993 to $14.0 million in 1994, primarily due to the net reduction of
approximately $27.4 million of debt over the past two years. Interest income on
cash investments increased by approximately $700,000, or 55.2%, from $1.3
million in 1993 to $2.0 million in 1994 due to higher average cash balances in
1994.
Other income for 1994 consisted primarily of a gain of approximately $6.2
million related to the settlement of the Rose and Cohen note receivable (see
"Business -- Litigation"), gains on sales of other hotel assets of approximately
$1.0 million and rebates of prior years' insurance premiums of $1.2 million.
Pretax extraordinary gains of approximately $292,000 for 1994 relate to the
retirement of secured notes with a face value of $8.3 million. Pretax
extraordinary gains of approximately $6.8 million in 1993 relate to the
retirement of debt with a face value of $25.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Prime's principal growth strategy is the accelerated expansion of its
AmeriSuites brand through the construction of new AmeriSuites hotels. Prime
expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have
more than 70 AmeriSuites open by the end of 1997.
Prime believes it has sufficient resources available to fund its
AmeriSuites growth strategy, including capital from the following sources: (i)
net proceeds from the Offering; (ii) borrowings under its five-year
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<PAGE> 30
secured Revolving Credit Facility; and (iii) internally generated free cash flow
from its Portfolio of 98 hotels. In addition, Prime may enter into
sale/leaseback transactions involving certain of its mid-price limited-service
and upscale full-service hotels, or seek additional debt financing secured by
the Company's hotels.
At March 31, 1996, the Company had cash and cash equivalents of $23.6
million, current marketable securities of $8.0 million and restricted cash,
which is primarily collateral for various debt obligations, of $9.4 million.
Cash and cash equivalents and current marketable securities decreased by $29.8
million during the three months ended March 31, 1996 primarily due to the
acquisition and development of hotels and repayment of debt, partially offset by
new borrowings.
The Company's major sources of cash for the three months ended March 31,
1996 were net proceeds of approximately $115.0 million from the issuance of the
$120.0 million First Mortgage Notes in January 1996, cash flow from operations
of $8.7 million and collections of mortgage and notes receivable of $8.3
million. The Company's major uses of cash during the quarter were capital
expenditures relating primarily to acquisitions and development of $103.6
million and debt payments of $61.5 million.
Cash flow from operations increased to $8.7 million for the three months
ended March 31, 1996 as compared to $4.9 million for the same period in the
prior year due to the improved operating results. Cash flow from operations was
positively impacted by the utilization of net operating loss carry forwards
("NOLs") of $2.0 million for the three months ended March 31, 1996 as compared
to $1.4 million for the same period in the prior year. At March 31, 1996, the
Company had federal NOLs relating to its predecessor, PMI, of approximately
$119.2 million which are subject to annual utilization limitations and expire
beginning in 2005 and continuing through 2007. See Note 10 to the Consolidated
Financial Statements.
Cash flow from operations was approximately $40.9 million for the year
ended 1995 as compared to $28.7 million in 1994. Cash flow from operations was
positively impacted by the utilization of NOLs and other tax basis differences
of $9.5 million and $12.8 million in 1995 and 1994, respectively.
The Company's other major sources of cash during 1995 were net proceeds of
approximately $83.2 million from the issuance of the Convertible Notes, mortgage
financings of $39.0 million and collections of mortgages and notes receivable of
$27.6 million. The Company's major uses of cash in 1995 were capital
expenditures of $113.5 million, debt payments of $34.0 million, the purchase of
first mortgage notes for $12.7 million and purchases of marketable securities of
$11.5 million.
Debt. On June 28, 1996, the Company established the Revolving Credit
Facility with a group of financial institutions providing for availability of
funds up to the lesser of $100.0 million and a borrowing base determined under
the agreement. The Revolving Credit Facility is secured by certain of the
Company's hotels with recourse to the Company. Additional hotels may be added
subject to the approval of the lenders. The Revolving Credit Facility bears
interest at LIBOR plus 2.25% and is available for five years. The Revolving
Credit Facility contains covenants requiring the Company to maintain certain
financial ratios. The Revolving Credit Facility also contains certain covenants
which limit the incurrence of debt, liens, dividend payments, certain
investments, transactions with affiliates, asset sales, mergers and
consolidations and any change of control of the Company. The aggregate amount of
the Revolving Credit Facility will be reduced to $87.0 million on June 28, 1999
and $75.0 million on June 28, 2000. As of July 1, 1996, the Company had borrowed
$40.0 million under the Revolving Credit Facility and had additional borrowing
availability of approximately $22.0 million. The proceeds were used to retire
$20.0 million of interim financing with the remainder to be utilized principally
for the development of AmeriSuites hotels.
In May 1996, the Company borrowed $20.0 million from a financial
institution with interest at LIBOR plus 2.25%. Proceeds were utilized for the
development of AmeriSuites hotels. The borrowing was subsequently repaid with
the proceeds from the Revolving Credit Facility.
In January 1996, the Company issued $120.0 million of First Mortgage Notes.
Interest on the First Mortgage Notes is payable semi-annually on January 15 and
July 15. The notes are secured by 15 hotels and contain certain covenants
including limitations on the incurrence of debt, dividend payments, certain
investments, transactions with affiliates, asset sales and mergers and
consolidations. The First Mortgage Notes are redeemable, in whole or in part, at
the option of the Company on or after January 15, 2001 at premiums to
28
<PAGE> 31
principal which decline on each anniversary date thereafter. The Company
utilized a portion of the proceeds to pay down approximately $51.6 million of
indebtedness, with the remainder of the proceeds used to finance the development
or acquisition of hotels or hotel portfolios.
During the first quarter, the Company prepaid and retired $6.0 million of
its senior secured notes resulting in pre-tax extraordinary gains of $60,000.
The Company also retired $2.4 million of debt in conjunction with the sale of a
hotel which resulted in a pre-tax extraordinary gain of $189,000. In April 1996,
the Company, utilizing the proceeds from the settlement of a note receivable,
prepaid and retired $6.5 million of senior secured notes. A pre-tax
extraordinary gain of $45,000 will be recorded in the second quarter.
The Company has $31.6 million of debt related to the Frenchman's Reef which
was scheduled to mature in December 1996. In March 1996, the Company and the
lender entered into an agreement to extend the maturity of the loan to July
1997. The loan bears interest at the same rate currently in effect and principal
payments are waived until July 1997. All other terms and conditions of the loan
remain in effect.
Capital Investments. The Company's capital spending in the first quarter
of 1996 was focused on the development of its AmeriSuites hotel chain and the
consolidation of its Wellesley Inns chain. The Company spent approximately $92.9
million through March 31, 1996 on acquisitions and construction funded primarily
by a combination of existing cash balances, cash flow from operations and the
issuance of the First Mortgage Notes.
The Company intends to rapidly expand its AmeriSuites chain through new
construction. The Company has opened six new AmeriSuites hotels to date in 1996,
in Miami (2), Dallas (2), Cleveland and Detroit, bringing the number of
AmeriSuites to 25 as of July 1, 1996. The Company currently has 20 AmeriSuites
hotels under construction and 25 additional AmeriSuites sites under contract.
The Company expects to have 39 AmeriSuites in operation by the end of 1996 and
seeks to have more than 70 AmeriSuites open by the end of 1997. During the first
quarter of 1996, the Company spent $27.8 million on constructing new AmeriSuites
hotels. The Company expects to spend a total of approximately $250 million on
constructing new AmeriSuites hotels in 1996.
On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley
Inns and two other limited service hotels for approximately $65.1 million in
cash. The acquisition enabled the Company to establish full control over its
proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated
by the Company. The Company intends to spend approximately $7 million to $8
million to refurbish these hotels to ensure consistent quality and enhance the
value of its brand.
The Company and its insurance carrier have agreed to settle the Company's
property and business interruption insurance claim with respect to the
Frenchman's Reef for $25.0 million. Due to this insurance coverage, the
Company's liquidity will be affected only to the extent of its insurance
deductibles, for which the Company provided a reserve of $2.2 million in 1995.
Additionally, the Company's debt in the amount of $31.6 million related to the
Frenchman's Reef is further secured by an assignment of property insurance
proceeds. The lender has sole discretion concerning the utilization of such
proceeds for refurbishment. The Company is discussing with the lender the terms
under which the lender will make such funds available.
During the first quarter of 1996, the Company spent approximately $10.7
million on capital improvements at its Owned Hotels, of which approximately $4.6
million related to refurbishments and repositionings of recently acquired
hotels. The Company intends to spend an additional $12 million to $13 million in
1996 relating to the refurbishing and repositioning of the Hasbrouck Heights
Crowne Plaza and the 16 recently acquired Wellesley Inns.
Asset Realizations. The Company has pursued a strategy of converting
mortgage notes receivable and other assets into cash or operating hotel assets.
Since July 31, 1992, the Company has received $122.9 million in cash and added
ten operating hotel assets through note settlements, lease terminations and
property sales. During the first quarter, the Company received $8.3 million in
cash in settlement of notes receivable and $3.7 million in cash on sales of
properties resulting in gains of $3.4 million. In January 1996, the Company
obtained control of the 210-room Cocoa Beach Howard Johnson Hotel by converting
its $9.7 million mortgage note receivable into a long-term lease. On March 31,
1996, the Company obtained control of the 204-room Fairfield Radisson by
converting its $22.4 million mortgage note receivable into a long-term lease.
29
<PAGE> 32
SELECTED CONSOLIDATED FINANCIAL DATA
OF THE COMPANY AND ITS PREDECESSOR
The Company is the successor in interest to the Company's predecessor,
Prime Motor Inns, Inc. ("PMI"), which emerged from chapter 11 reorganization on
July 31, 1992 (the "Effective Date"). PMI had filed for protection under chapter
11 of the United States Bankruptcy Code in September 1990. The Company
implemented "fresh start" reporting pursuant to the Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code" of
the American Institute of Certified Public Accountants, as of the Effective
Date. Accordingly, the consolidated financial statements of the Company are not
comparable in all material respects to any such financial statement as of any
date or for any period prior to the Effective Date. Subsequent to the Effective
Date, the Company changed its fiscal year end from June 30 to December 31. The
table below presents selected consolidated financial data derived from: (i) the
Company's historical financial statements for the years ended December 31, 1993,
1994 and 1995 and each of the three months ended March 31, 1995 and 1996, (ii)
the Company's historical financial statements as of and for the five-month
period ended December 31, 1992, (iii) the Company's "fresh start" balance sheet
as of the Effective Date and (iv) the historical consolidated financial
statements of PMI for the one month ended July 31, 1992 and for the years ended
June 30, 1991 and 1992. This data should be read in conjunction with the
Consolidated Financial Statements, related notes and other financial information
included and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
PRE-REORGANIZATION POST-REORGANIZATION
-------------------------------- -----------------------------------------------------------------------------
FOR THE AS OF AND
AS OF AND FOR THE ONE FOR THE AS OF AND FOR THE
YEAR MONTH FIVE MONTHS AS OF AND FOR THE YEAR ENDED THREE MONTHS ENDED
ENDED JUNE 30, ENDED AS OF ENDED DECEMBER 31, MARCH 31,
--------------------- JULY 31, JULY 31, DEC. 31, ------------------------------ -------------------
1991(1) 1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 1995 1996
--------- --------- -------- -------- ----------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Total
revenues... $ 205,699 $ 134,190 $ 8,793 -- $ 41,334 $108,860 $134,303 $205,624 $ 48,238 $ 58,614
Valuation
writedowns
and
reserves... (59,149) (62,123) (13,000) -- -- -- -- -- -- --
Reorganization
items..... (181,655) (23,194) 1,796 -- -- -- -- -- -- --
Other income
(expense)... -- -- -- -- -- 3,809 9,089 39 -- 3,432
Income
(loss)
from
continuing
operations
before
extraordinary
items(2)... (246,110) (71,965) (10,274) -- 1,393 8,175 18,258 17,465 4,208 7,792
Extraordinary
items-gains
on
discharge
of
indebtedness
(net of
income
taxes).... -- -- 249,600 -- -- 3,989 172 104 7 149
Net income
(loss).... (227,188) (71,965) 239,326 -- 1,393 12,164 18,430 17,569 4,215 7,941
BALANCE SHEET
DATA:
Total
assets.... $ 679,916 $ 554,118 -- $468,650 $ 403,314 $410,685 $434,932 $573,241 $492,438 $642,876
Long-term
debt, net
of current
portion... 2,851 8,921 -- 204,438 192,913 168,618 178,545 276,920 221,726 335,271
Stockholders'
equity
(deficiency).. (157,327) (229,292) -- 135,600 137,782 171,364 204,065 232,916 210,176 242,974
</TABLE>
- ---------------
(1) PMI filed for chapter 11 bankruptcy protection on September 18, 1990, at
which time it owned or managed 141 hotels. During its approximately two-year
reorganization, PMI restructured its assets, operations and capital
structure. On the Effective Date, the Company emerged from chapter 11
reorganization with 75 Owned Hotels or Managed Hotels, $135.6 million of
stockholders' equity and $266.4 million of total debt.
(2) Approximately $2.3 million, $28.0 million and $25.3 million of contractual
interest expense during the one month ended July 31, 1992 and for the fiscal
years ended June 30, 1992 and 1991, respectively, was not accrued and was
not paid due to the chapter 11 proceeding.
30
<PAGE> 33
BUSINESS
THE COMPANY
Prime is a leading national hotel company, with a portfolio of 98 hotels
containing 14,006 rooms located in 23 states and the U.S. Virgin Islands (the
"Portfolio"). Prime controls two high-quality hotel brands: AmeriSuites(R)
all-suites hotels and Wellesley Inns(R) limited-service hotels. The Company's
hotels are modern, well-maintained assets, with an average age of approximately
12 years. The Company emphasizes hotel equity ownership, owning and operating 82
of the 98 hotels in its Portfolio (the "Owned Hotels") and managing the
remaining 16 hotels for third parties (the "Managed Hotels"), with financial
interests in 9 of the 16 Managed Hotels. The Company believes it creates
long-term value through the development of its proprietary brands. Of the
Company's 98 hotels, an aggregate of 55 hotels are included in Prime's
proprietary AmeriSuites and Wellesley Inns brands.
Over the past three years, Prime has achieved rapid growth in its
Portfolio, increasing the number of owned rooms from 4,198 at January 1, 1993 to
10,866 at July 1, 1996. Prime has attained this strong Portfolio growth while
consistently increasing profit levels. From 1993 to 1995, the Company grew
EBITDA at a compound annual rate of 38.9%, from $32.0 million in 1993 to $61.8
million in 1995. Over the same period, recurring net income per share grew at a
compound annual rate of 64.3%, from $0.20 in 1993 to $0.54 in 1995. These
positive trends continued in the first quarter of 1996, compared to the first
quarter of 1995. EBITDA grew 32.9% from $14.6 million to $19.4 million and
recurring net income per share grew 30.8% from $0.13 to $0.17.
The Company's hotels serve three major lodging industry segments: the
all-suites segment, under the Company's proprietary AmeriSuites brand; the
upscale full-service segment, under major national franchises; and the mid-price
limited-service segment, primarily under the Company's proprietary Wellesley
Inns brand.
All-Suites. Prime owns and operates 25 all-suites hotels under the
AmeriSuites brand name. AmeriSuites are upper mid-price, all-suites hotels
containing approximately 125 suites and located primarily in the Southern and
Central United States. Since January 1, 1994, AmeriSuites has been the fastest
growing all-suites hotel chain in the United States, expanding from 9 hotels to
25 hotels at July 1, 1996, an increase of 178%. An additional 20 AmeriSuites are
currently under construction, with sites for 25 more under contract.
Full-Service. Prime operates 33 upscale full-service hotels under
franchise agreements with national hotel brands such as Marriott, Radisson,
Sheraton, Crowne Plaza, Holiday Inn and Ramada. Prime owns 20 of these hotels
and has a financial interest in 8 of the 13 other properties that it manages.
Prime's full-service hotels typically offer substantial food, beverage and
banquet facilities. Prime achieved a gross operating profit margin of 36% at its
full-service hotels in 1995, a 16% premium to the full-service industry average
of 31% for the comparable period.
Limited-Service. A total of 30 of Prime's 40 mid-price limited-service
hotels are operated under its Wellesley Inns brand name. Prime owns 100% of
these Wellesley Inns. The remaining limited-service hotels, seven of which are
owned by Prime, are operated under franchise agreements with well-known national
chains. Wellesley Inns compete primarily with hotels such as Hampton Inns and La
Quinta Inns. Wellesley Inns generated an average daily room rate ("ADR") and
occupancy percentage in 1995 of $51.28 and 75.4%, respectively.
GROWTH STRATEGY
Prime's principal growth strategy is the accelerated expansion of its
AmeriSuites brand through the construction of new AmeriSuites hotels. The
Company believes that AmeriSuites, which offers an excellent guest experience
and desirable suite accommodations at mid-scale prices, is well-positioned to
become a preeminent brand in the rapidly growing all-suites segment. Prime
expects to have 39 AmeriSuites in operation by the end of 1996 and seeks to have
more than 70 AmeriSuites open by the end of 1997. At present, 25 AmeriSuites are
open, with an additional 20 hotels under construction and sites for 25 more
under contract.
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<PAGE> 34
AmeriSuites are positioned in the upper mid-price segment of the lodging
industry, competing predominantly with other mid-price and upscale brands such
as Courtyard by Marriott and Holiday Inn. The Company markets AmeriSuites as
"America's Affordable All-Suite Hotel," emphasizing superior price/value
relative to traditional mid-price hotels by focusing on the chain's spacious
suites, upscale facilities and considerable amenity package. The Company is
committed to the expansion of the AmeriSuites brand for the following reasons:
- Attractive Economic Returns: Due to low all-in development costs
along with a rapid ramp up in occupancy and ADR after opening, AmeriSuites
have generated attractive unit level returns. AmeriSuites opened since 1992
have, in their first 12 months of operation, produced hotel-level EBITDA
constituting, on average, 15.7% of the hotel development cost.
- Broad Customer Appeal: The AmeriSuites concept offers the benefits
of an all-suites room at a price that appeals to a wide variety of
customers. Business travelers are attracted to the fully-equipped business
centers, meeting rooms, convenient locations and in-room features,
including computer data ports and voice mail. Leisure travelers enjoy the
exercise room, complimentary continental breakfast, living room sleeper
sofa and heated swimming pool. In addition, the layout of the AmeriSuites
room, each of which includes a kitchenette, appeals to the fast-growing
extended-stay market segment. The Company believes AmeriSuites offers a
level of amenities and services exceeding those typically found in
extended-stay hotels.
- High-Growth, High-Quality Brand: Prime believes it has the ability
to create significant brand value by rapidly expanding AmeriSuites while
consistently maintaining uniformly high quality standards. Because Prime
owns and operates every AmeriSuites, it can maintain a high level of
consistency and quality throughout the entire chain, and can implement
chain-wide programs quickly and efficiently.
- Fast Growing, Fragmented Market: The all-suites segment has seen
above-market demand growth in recent years. During the 1991-1995 period,
demand for all-suites rooms grew at more than double the rate of demand
growth experienced by the lodging industry as a whole, and exceeded
all-suites supply growth by 67%. Given the fast-growing demand for
all-suites accommodations and the absence of a dominant competitor in the
mid-price all-suites market, Prime believes that it can establish
AmeriSuites as a preeminent brand in this market while continuing to
generate attractive returns.
- Proven Operating Performance: The AmeriSuites concept has been in
existence since 1990 and currently operates in 20 different markets. In
addition, AmeriSuites hotels have consistently generated strong operating
results, with average REVPAR for hotels open at least one year increasing
by 13.7% and 11.9% in 1994 and 1995 and 19.9% in the first quarter of 1996,
respectively, over comparable prior period results.
Prime believes that it has sufficient resources available to fund its
AmeriSuites growth strategy, including capital from the following sources: (i)
net proceeds from the Offering; (ii) borrowings under its five-year secured
Revolving Credit Facility; and (iii) internally generated free cash flow from
its Portfolio of 98 hotels. In addition, Prime may enter into sale/leaseback
transactions involving certain of its mid-price limited-service and upscale
full-service hotels, or seek additional debt financing secured by the Company's
hotels.
OPERATING PERFORMANCE/INTERNAL GROWTH
In addition to revenue and earnings growth generated by the expansion of
the AmeriSuites brand, Prime seeks to achieve internal growth through continued
operating improvements at its existing hotels. Prime has demonstrated its
ability to operate its hotels effectively in each of its three segments,
achieving REVPAR increases in 1995 at its comparable AmeriSuites, full-service
and limited-service hotels of 11.9%, 8.7% and 9.2%, respectively, versus 1994
results. These trends continued in the first quarter of 1996, as Prime grew
REVPAR by 19.9%, 10.1% and 7.5% at its comparable AmeriSuites, full-service and
limited-service hotels, respectively, over first quarter 1995 levels.
The Company's emphasis on efficient operations has increased operating
margins, thus translating its top-line REVPAR growth into increased earnings.
Prime's gross operating profit margins in 1995 of 51% at
32
<PAGE> 35
AmeriSuites, 36% at full-service hotels and 49% at limited-service hotels
represented premiums of 3%, 16% and 4%, respectively, versus comparable industry
statistics for these industry segments.
RECENT EVENTS
The Company recently entered into certain transactions that have allowed it
to consolidate control over its proprietary Wellesley Inns brand and to obtain
additional capital to fund its AmeriSuites growth strategy.
- Purchase of Wellesley Inns: On March 6, 1996, Prime acquired 18
mid-price limited-service hotels with approximately 1,713 rooms (including
the remaining 16 Wellesley Inns it did not already own) for $65.1 million.
As a result, Prime now has full control over 100% of its proprietary
Wellesley Inns chain. The total purchase price plus the estimated cost of
planned renovations equals a price per room ranging from approximately
$42,000 to $43,000, which represents a discount to the average replacement
cost of these hotels. See "-- Prime's Lodging Operations."
- Revolving Credit Facility: On June 28, 1996, the Company
established the $100 million, five-year secured Revolving Credit Facility
bearing an interest rate of 2.25% over LIBOR. The Revolving Credit Facility
is secured by certain of the Company's limited-service, AmeriSuites and
full-service hotels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
INDUSTRY OVERVIEW
The lodging industry as a whole has experienced four consecutive years in
which the growth in room demand has exceeded the growth in supply. In 1995,
industry wide percentage growth in demand for hotel rooms was nearly double
industry-wide percentage growth in supply of hotel rooms (3.0% versus 1.6%). In
the three price levels in which the Company's hotels operate, upscale, mid-price
and economy, percentage growth in demand outpaced percentage growth in supply by
0.7%, 1.4% and 1.0%, respectively. These trends continued in the first quarter
of 1996 with the exception of the upscale price level. On an industry-wide
basis, demand growth exceeded supply by 1.2%. Demand growth continued to exceed
supply growth in the mid-price and economy segments by 0.5% and 1.1%
respectively. However, in the upscale segment, supply growth exceeded demand
growth by a modest 0.1%. The Company believes that quarterly data are not
necessarily indicative of a full year's results and that first quarter results
were adversely affected by severe seasonal weather in January.
Coopers & Lybrand L.L.P.'s Hospitality Directions (May 1996) ("Coopers and
Lybrand Hospitality Directions") estimates that the percentage growth in
industry-wide demand will exceed the percentage growth in supply by 0.8% and
0.2% in 1996 and 1997, respectively. The excess of demand growth over supply
growth in the past several years has led to industry-wide increases in occupancy
percentages and ADR, with occupancy rising to 65.4% in 1995 from 64.7% in 1994,
and ADR increasing 5.0% in 1995 over 1994 levels. Coopers & Lybrand Hospitality
Directions indicates that occupancy is expected to increase in 1996 and 1997 to
65.9% and 66.0%, respectively, and that ADR is expected to increase 5.4% in 1996
over 1995 levels and 4.8% in 1997 over 1996 levels. Historical industry
performance, however, may not be indicative of future results, and there can be
no assurance that such projections will be realized.
The following table was compiled from industry operating data as reported
by Smith Travel Research and highlights industry data for the United States and
the regions in which most of the Company's hotels are located: the Middle
Atlantic region, which is comprised of New Jersey, New York and Pennsylvania;
and the South Atlantic region, which is comprised of Florida, Georgia, South
Carolina, North Carolina, Virginia, West Virginia, Maryland and Delaware. The
table also includes operating data concerning the three price levels (of the
five price levels classified by Smith Travel Research) in which the Company
competes: upscale,
33
<PAGE> 36
mid-price and economy. REVPAR data was calculated by the Company based on
occupancy and ADR data supplied by Smith Travel Research.
<TABLE>
<CAPTION>
% CHANGE IN:
------------------------------------------------------------------------------------------------------
ROOM SUPPLY ROOM DEMAND REVPAR
-------------------------------- -------------------------------- --------------------------------
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1996 1996 1996
V. THREE V. THREE V. THREE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
1994V. 1995V. MARCH 31, 1994V. 1995V. MARCH 31, 1994V. 1995V. MARCH 31,
1993 1994 1995 1993 1994 1995 1993 1994 1995
------ ------ -------------- ------ ------ -------------- ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... 1.4% 1.6% 1.8% 4.7% 3.0% 3.0% 7.3% 6.1% 7.4%
BY REGION:
Middle Atlantic......... 0.4 1.1 1.0 4.0 1.2 2.6 10.5 5.8 5.6
South Atlantic.......... 1.1 1.3 1.4 3.2 3.6 3.1 4.9 6.9 7.8
BY SERVICE
(PRICE LEVEL):
Upscale................. 2.0 1.9 2.5 3.8 2.6 2.4 5.0 4.7 4.9
Mid-Price............... 2.0 2.4 2.6 4.2 3.8 3.1 5.5 5.9 6.5
Economy................. 1.1 2.0 1.6 2.6 3.0 2.7 5.0 6.2 7.2
</TABLE>
PRIME'S LODGING OPERATIONS
The following table sets forth information with respect to the Owned Hotels
and Managed Hotels as of July 1, 1996:
<TABLE>
<CAPTION>
MANAGED WITH
FINANCIAL
OWNED(1) INTEREST(2) OTHER MANAGED TOTAL
----------------- ---------------- ---------------- -----------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
All-Suites:
AmeriSuites................. 25 3,024 0 0 0 0 25 3,024
Full-Service:
Marriott.................... 1 517 0 0 1 525 2 1,042
Radisson.................... 2 476 0 0 1 192 3 668
Sheraton.................... 3 589 0 0 0 0 3 589
Crowne Plaza................ 3 717 0 0 0 0 3 717
Holiday Inn................. 1 240 4 810 0 0 5 1,050
Ramada...................... 8 1,214 3 672 2 276 13 2,162
Howard Johnson.............. 1 210 1 116 1 115 3 441
Independent................. 1 149 0 0 0 0 1 149
-- - - --
------ ----- ----- ------
Total Full-Service... 20 4,112 8 1,598 5 1,108 33 6,818
Limited-Service:
Wellesley Inn............... 30 3,013 0 0 0 0 30 3,013
Howard Johnson.............. 4 372 1 149 2 285 7 806
Other....................... 3 345 0 0 0 0 3 345
-- - - --
------ ----- ----- ------
Total Limited-Service..... 37 3,730 1 149 2 285 40 4,164
-- - - --
------ ----- ----- ------
Total................ 82 10,866 9 1,747 7 1,393 98 14,006
== ====== = ===== = ===== == ======
</TABLE>
- ---------------
(1) Of the 82 Owned Hotels, 11 are leased. The leases covering the Company's
leased hotels provide for fixed lease rents and, in most instances,
additional percentage rents based on a percentage of room revenues. The
leases also generally require the Company to pay the cost of repairs,
insurance and real estate taxes. In addition, some of the Company's Owned
Hotels are located on land subject to long-term leases, generally for terms
in excess of the depreciable lives of the improvements.
(2) Nine Managed Hotels in which the Company holds a mortgage or profit
participation on the property.
34
<PAGE> 37
The following table sets forth the location of the Company's hotels as of
July 1, 1996:
<TABLE>
<CAPTION>
MANAGED WITH
FINANCIAL
OWNED INTEREST OTHER MANAGED TOTAL
--------------- -------------------- -------------- ---------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona............................... 1 118 -- -- -- -- 1 118
Arkansas.............................. 1 130 -- -- -- -- 1 130
California............................ -- -- -- -- 1 96 1 96
Connecticut........................... 4 589 -- -- -- -- 4 589
Florida............................... 23 2,529 -- -- 1 115 24 2,644
Georgia............................... 3 351 -- -- 1 189 4 540
Illinois.............................. 1 113 -- -- -- -- 1 113
Indiana............................... 1 126 -- -- -- -- 1 126
Kansas................................ 1 126 -- -- -- -- 1 126
Kentucky.............................. 1 123 -- -- -- -- 1 123
Maryland.............................. 1 84 -- -- 1 525 2 609
Michigan.............................. 1 128 -- -- -- -- 1 128
Nevada................................ 2 350 -- -- -- -- 2 350
New Jersey............................ 15 2,331 7 1,489 3 468 25 4,288
New York.............................. 8 941 -- -- -- -- 8 941
North Carolina........................ 1 126 -- -- -- -- 1 126
Ohio.................................. 4 508 -- -- -- -- 4 508
Oregon................................ 1 161 -- -- -- -- 1 161
Pennsylvania.......................... 3 467 2 258 -- -- 5 725
South Carolina........................ 1 111 -- -- -- -- 1 111
Tennessee............................. 2 251 -- -- -- -- 2 251
Texas................................. 2 256 -- -- -- -- 2 256
U.S. Virgin Islands................... 1 517 -- -- -- -- 1 517
Virginia.............................. 4 430 -- -- -- -- 4 430
-- -- -- --
----- ----- ----- ------
Total........................ 82 10,866 9 1,747 7 1,393 98 14,006
== ===== == ===== == ===== == ======
</TABLE>
35
<PAGE> 38
The following table sets forth for the five years ended December 31, 1995
and the three months ended March 31, 1995 and 1996, operating data for the 95
hotels in the Company's portfolio as of March 31, 1996. Operating data for the
Owned Hotels built or acquired during the period are presented from the dates
such hotels commenced operations or became Owned Hotels. For purposes of showing
operating trends, the results of 27 Owned Hotels that were managed by the
Company prior to their acquisition by the Company are presented as if they had
been Owned Hotels from the dates the Company began managing the hotels.
<TABLE>
<CAPTION>
MANAGED WITH
OWNED FINANCIAL INTEREST OTHER MANAGED TOTAL
------------------------- ------------------------- ------------------------- -------------------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
--------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991............... 54 7,284 9 1,747 4 993 67 10,024
1992............... 57 7,632 9 1,747 4 993 70 10,372
1993............... 61 8,121 9 1,747 5 1,108 75 10,976
1994............... 68 9,187 9 1,747 7 1,393 84 12,327
1995............... 76 10,161 9 1,747 7 1,393 92 13,301
*1995.............. 74 9,909 9 1,747 7 1,393 90 13,049
*1996.............. 79 10,482 9 1,747 7 1,393 95 13,622
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------ --------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991............... 66.4% $60.14 $39.94 61.6% $56.97 $35.11 61.6% $82.44 $50.74 65.1% $61.74 $40.20
1992............... 67.9 60.73 41.21 70.7 58.50 41.33 66.2 82.83 54.81 68.2 62.39 42.54
1993............... 71.2 62.58 44.57 72.9 60.72 44.26 67.2 84.09 56.47 71.1 64.16 45.63
1994............... 69.6 65.28 45.45 72.1 66.42 47.88 69.5 77.58 53.94 70.0 66.92 46.84
1995............... 69.8 69.52 48.52 73.5 69.55 51.09 71.9 80.95 58.18 70.5 70.80 49.93
*1995.............. 65.4 75.03 49.04 66.2 67.52 44.67 62.4 77.15 48.16 65.1 74.18 48.32
*1996.............. 64.9 73.56 47.76 68.6 70.92 48.64 75.5 78.79 59.49 66.5 73.82 49.08
</TABLE>
- ---------------
* Through March 31.
All-Suites Hotels
Prime expects to have 39 AmeriSuites in operation by the end of 1996 and
seeks to have more than 70 AmeriSuites open by the end of 1997. The Company
currently owns 25 AmeriSuites hotels. AmeriSuites are all-suites, upper
mid-price hotels which offer guests an attractively designed suite with a
complimentary continental breakfast in a spacious lobby cafe, remote-control
cable television, fully-equipped business centers, fitness centers and pool
facilities. The hotels provide group meeting space, but do not include
restaurant or lounge facilities. AmeriSuites attract customers principally
because of the quality of the guest suites, which offer distinct living,
sleeping and kitchen areas and the consistency of product quality. Each
AmeriSuites contains approximately 128 suites and two to four meeting rooms.
AmeriSuites are primarily located near corporate office parks and travel
destinations in the Southern and Central parts of the United States. The target
customer is primarily the business traveler with an average length of stay of
two to three nights. AmeriSuites are marketed primarily through direct sales,
national marketing programs and a central reservation system.
The Company believes it has outlined a comprehensive strategy for the rapid
development of the AmeriSuites brand while maintaining control of the
development process.
Detailed Site Selection. The Company undertakes an extensive review
process in selecting sites for new AmeriSuites. Key factors in the selection of
sites include close proximity to demand generators, superior visibility, ease of
access and nearby guest amenities. Sites are initially identified with the
assistance of a nationwide network of brokers. Once identified, the Company
qualifies the sites before entering into a letter of intent. After a letter of
intent is signed, the Company assesses the feasibility of the sites, which
includes extensive reconnaissance by the Company's operations and sales and
marketing staffs as well as independent consultants. Upon satisfactory
completion of economic feasibility, the Company will enter into a contract for
36
<PAGE> 39
the site and commence legal, engineering and environmental due diligence. The
entire process, from site selection to completion of construction and opening,
takes approximately 18 months.
Suburban Market Focus. The Company believes that suburban markets offer a
number of features which permit the rapid expansion of AmeriSuites. As opposed
to major metropolitan markets, suburban markets offer ample land to construct
new hotels. More importantly, the Company believes that suburban locations
appeal to multiple demand generators. In addition to the business traveler, who
is the target customer for AmeriSuites, the weekend/leisure traveler is
attracted by the close proximity to nearby dining, shopping and entertainment
amenities.
Cluster Strategy. The Company intends to expand into new regions by first
developing hotels in cities which it has targeted as "key" cities. The Company
will then add additional hotels in that region in cities which are logical
destinations from the "key" cities. This strategy permits the Company to quickly
build brand recognition of AmeriSuites in a particular region.
The following table sets forth for the five years ended December 31, 1995
and the three months ended March 31, 1995 and 1996, certain data with respect to
AmeriSuites hotels, all of which are owned by the Company. Operating data for
the hotels built during the period are presented from the dates such hotels
commenced operations.
<TABLE>
<CAPTION>
HOTELS ROOMS OCCUPANCY ADR REVPAR
------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1991......................... 4 497 48.5% $55.33 $26.83
1992......................... 6 749 59.9 54.99 32.97
1993......................... 8 993 64.1 56.21 36.01
1994......................... 12 1,494 65.9 59.90 39.50
1995......................... 19 2,319 67.2 65.45 43.98
*1995........................ 13 1,620 61.2 61.47 37.60
*1996........................ 22 2,640 64.9 67.29 43.67
</TABLE>
-----------------------
*Through March 31.
The Company believes that the all-suites segment will continue to be a high
growth segment of the industry. During the 1991-1995 period, demand for
all-suites rooms grew at more than double the rate of demand growth experienced
by the lodging industry as a whole, and exceeded all-suites supply growth by
67%. The operating performance of the AmeriSuites hotels is benefiting from this
favorable trend. For the eight owned AmeriSuites hotels which were open for all
of 1995 and 1994, REVPAR increased by 11.9% during 1995.
The Company plans to develop the AmeriSuites brand primarily through new
construction to assure product consistency and quality. The average age of the
AmeriSuites hotels as of July 1, 1996 was 4.5 years. The Company believes that
AmeriSuites provide attractive economic returns due to their reasonable cost and
rapid stabilization rate. The Company's AmeriSuites have generally achieved
positive net operating income within 12 months after opening. The Company
believes that economic returns from AmeriSuites development have generally
equaled or exceeded those prevalent in the hotel acquisition markets. In 1995,
six new AmeriSuites hotels were opened in Atlanta, Greensboro, Jacksonville,
Chicago, Columbia and Augusta. In addition, in 1996, the Company has opened six
new AmeriSuites hotels in Miami (2), Dallas (2), Cleveland and Detroit, bringing
the number of AmeriSuites owned and operated by the Company to 25. The Company
currently has 20 AmeriSuites hotels under construction and 25 additional
AmeriSuites sites under contract.
Full-Service Hotels
The Company operates 33 full-service hotels under franchise agreements with
Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn, Ramada and Howard
Johnson. The full-service hotels are concentrated in the Northeast. The hotels
are generally positioned along major highways within close proximity to
corporate headquarters, office parks, airports, convention or trade centers and
other major facilities. The customer base
37
<PAGE> 40
for full-service hotels consists primarily of business travelers. Consequently,
the Company's sales force markets to companies which have a significant number
of employees traveling in the Company's operating regions who consistently
produce a high volume demand for hotel room nights. In addition, the Company's
sales force actively markets meeting and banquet services to groups and
individuals for seminars, business meetings, holiday parties and weddings. The
hotels are also marketed through national franchisor programs and central
reservation systems.
The Company's full-service hotels generally have between 150 and 300 rooms
and pool, restaurant, lounge, banquet and meeting facilities. Other amenities
include fitness rooms, room service, remote-control cable television and
facsimile services. In order to enhance guest satisfaction, the Company also has
theme concept lounges such as sports bars, fifties clubs and country and western
bars in a number of its hotels. In recent years, the Company has received
recognition from various franchisors and associations for its hotel quality and
service.
The Company owns and operates one resort hotel, the Frenchman's Reef in St.
Thomas, U.S. Virgin Islands. The Frenchman's Reef is a 517-room resort hotel
which includes a 421-room eight-story building and 96 rooms in the adjacent
Morningstar Beach Resort. The Frenchman's Reef has seven restaurants, extensive
convention facilities, complete sports and beach facilities and a self-contained
total energy system. Certain of these facilities were damaged in the September
1995 hurricane described in the following paragraph. The Frenchman's Reef is
marketed directly through its own sales force in New York City and at the hotel,
and through the Marriott reservation system. The Frenchman's Reef market
includes tour groups, corporate meetings, conventions and individual
vacationers.
In September 1995, the Frenchman's Reef suffered hurricane damage when
Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance
carrier have agreed to settle the Company's property and business interruption
insurance claim for $25.0 million. Due to this insurance coverage, the Company's
liquidity will be affected only to the extent of its insurance deductibles, for
which the Company provided a reserve of $2.2 million in 1995. The Company has
continued to operate the hotel and has repaired a majority of the damaged rooms
on an interim basis. However, the impact of the hurricane has caused operating
profits to decline from the 1995 level. The Company is currently assessing the
extent of further refurbishment required at the Frenchman's Reef.
38
<PAGE> 41
The following table sets forth for the five years ended December 31, 1995
and the three months ended March 31, 1995 and 1996, operating data for the 33
full-service hotels in the Company's portfolio as of March 31, 1996. Operating
data for the hotels built or acquired during the period are presented from the
dates such hotels commenced operations or became Owned Hotels. For purposes of
showing operating trends, the results of eight Owned Hotels that were managed by
the Company prior to their acquisition by the Company during the five-year
period are presented as if they had been Owned Hotels from the dates the Company
began managing the hotels.
<TABLE>
<CAPTION>
OWNED TOTAL
------------------------ ------------------------
HOTELS ROOMS HOTELS ROOMS
------ ----- ------ -----
<S> <C> <C> <C> <C>
1991.................................... 18 3,608 30 6,199
1992.................................... 18 3,608 30 6,199
1993.................................... 18 3,608 31 6,314
1994.................................... 19 3,963 32 6,669
1995.................................... 20 4,112 33 6,818
*1995.................................... 20 4,112 33 6,818
*1996.................................... 20 4,112 33 6,818
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1991.................................... 62.9% $76.09 $47.86 62.5% $72.55 $45.37
1992.................................... 63.7 78.23 49.86 66.2 73.63 48.72
1993.................................... 67.9 81.68 55.44 69.4 76.51 53.06
1994.................................... 66.6 86.36 57.52 68.8 81.28 55.90
1995.................................... 66.4 91.00 60.41 69.2 85.67 59.26
*1995.................................... 60.3 99.26 59.86 62.4 89.03 55.53
*1996.................................... 58.9 92.26 54.37 63.8 86.13 54.97
</TABLE>
- ---------------
* Through March 31.
The Company has taken advantage of opportunities for acquisitions of
full-service hotels at attractive multiples of cash flow or at significant
discounts to replacement values. In 1995, the Company acquired the 240-room
Princeton Ramada Inn in New Jersey, which the Company has since converted to a
Holiday Inn, and the 149-room St. Tropez Hotel and Shopping Center in Las Vegas,
Nevada.
The majority of the Company's repositioning efforts have been performed at
the full-service hotels. Since 1993, the Company successfully completed the
repositioning of ten of its full-service hotels which included changing the
franchise affiliations of five such hotels. The Company recently completed the
repositioning of the Hasbrouck Heights Sheraton Hotel to a Crowne Plaza.
Limited-Service Hotels
The Company's limited-service hotels consist of 30 Wellesley Inns and 10
other hotels operated under franchise agreements, primarily with Howard Johnson.
On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley Inns
and two other limited-service hotels for approximately $65.1 million in cash.
The acquisition enables the Company to establish full control over its
proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated
by the Company. The acquisition should also provide the Company with significant
new opportunities to maximize the value of its brand.
Of the Company's 30 Wellesley Inns, 16 are located in Florida and the
remainder in the Middle Atlantic and Northeast United States. The prototypical
Wellesley Inn has 105 rooms and is distinguished by its classic stucco exterior,
spacious lobby and amenities such as pool facilities, complimentary continental
breakfast, remote control cable television and facsimile services. In connection
with the acquisition of the 16 Wellesley Inns, the Company intends to refurbish
these hotels to ensure consistent product quality throughout the chain.
39
<PAGE> 42
Marketing efforts for the Wellesley Inn chain will continue to rely heavily on
direct marketing and billboard advertising. In Florida, where the population has
grown rapidly and development opportunities continue to exist, the Company has
built a geographically concentrated group of Wellesley Inns, thereby developing
regional brand name recognition in Florida. The majority of the Florida
Wellesley Inns were constructed within the past five years. The Company
historically has constructed these properties at a cost of approximately $40,000
per room and a construction period of approximately seven to nine months.
Florida Wellesley Inns have a low cost structure and have had rapid
stabilization periods generally within six to twelve months of opening.
The Company's other limited-service hotels have an average of between 100
and 120 rooms and offer complimentary continental breakfast, remote control
cable television, pool facilities and facsimile services, generally with
restaurant facilities within a short distance of the hotel. They are designed to
appeal primarily to business travelers.
The following table sets forth for the five years ended December 31, 1995
and the three months ended March 31, 1995 and 1996, operating data for the 40
limited-service hotels as of March 31, 1996. Operating data for the Owned Hotels
built or acquired during the period are presented from the dates such hotels
commenced operations or became Owned Hotels. For purposes of showing operating
trends, the results of 18 Owned Hotels that were managed by the Company prior to
their acquisition by the Company are presented as if they had been Owned Hotels
from the dates the Company began managing the hotels.
<TABLE>
<CAPTION>
OWNED TOTAL
------------------------- ---------------------------
HOTELS ROOMS HOTELS ROOMS
------ ------ ------ ------
<S> <C> <C> <C> <C>
1991................................... 32 3,179 33 3,328
1992................................... 33 3,275 34 3,424
1993................................... 35 3,520 36 3,669
1994................................... 37 3,730 40 4,164
1995................................... 37 3,730 40 4,164
*1995.................................. 37 3,730 40 4,164
*1996.................................. 37 3,730 40 4,164
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1991................................... 72.6% $44.57 $32.37 71.8% $44.78 $32.16
1992................................... 74.3 44.41 32.97 73.6 44.46 32.74
1993................................... 76.8 45.43 34.89 76.1 45.46 34.61
1994................................... 73.9 47.57 35.15 73.1 47.31 34.60
1995................................... 74.7 50.77 37.93 74.1 50.53 37.46
*1995.................................. 72.4 58.26 42.19 71.0 57.26 40.66
*1996.................................. 71.6 60.17 43.09 71.9 59.23 42.58
</TABLE>
- ---------------
* Through March 31.
REFURBISHMENT PROGRAM
The Company continuously refurbishes its Owned Hotels in order to maintain
consistent quality standards. The Company generally spends approximately 4% to
6% of hotel revenue on capital improvements at its Owned Hotels and typically
refurbishes each hotel approximately every five years. The Company believes that
its Owned Hotels are in generally good physical condition, with over half of the
Owned Hotels being five years old or less. The Company recommends the
refurbishment and repair projects on its Managed Hotels although spending
amounts vary based on the plans of such hotels' owners and the significance of
the Company's interest as a mortgagee.
In addition to making normal capital improvements, the Company reviews on
an on-going basis each hotel's competitive position in the local market in order
to decide the types of product that will best meet the market's demand
characteristics. During the past three years, the Company has implemented a
program of
40
<PAGE> 43
repositioning its Owned Hotels. Repositioning a hotel generally requires
renovation and refurbishment of the exterior and interior of the building and
may result in a change of brand name. In 1993, 1994 and 1995, the Company spent
$2.8 million, $8.9 million and $13.7 million, respectively, on the repositioning
of 16 of its Owned Hotels, which included changing the franchise affiliation of
ten of such hotels. In 1996, the Company completed the repositioning of the
Hasbrouck Heights Crowne Plaza. Major refurbishment efforts during the remainder
of 1996 will focus on the 18 hotels acquired on March 6, 1996, 16 of which are
Wellesley Inns. The Company expects to spend approximately $7 million to $8
million in connection with the Wellesley Inns repositionings.
MORTGAGES AND NOTES RECEIVABLE
As of March 31, 1996, mortgages and notes receivable totaled $26.6 million
(including the current portion) and consisted of an aggregate principal amount
of $9.1 million of mortgages and notes secured by Managed Hotels, $13.8 million
of mortgages secured by hotels that are leased by the Company from third parties
and $3.7 million of other mortgages and notes secured primarily by other hotels.
The Company has pursued a strategy of converting its mortgage and notes
receivable into cash or operating hotel assets and has received $105.8 million
in cash and added nine operating hotel assets through note settlements since
July 31, 1992. In 1996, the Company obtained control of the 210-room Cocoa Beach
Howard Johnson Plaza and the 204-room Fairfield Radisson by converting these
mortgage notes receivable into long-term leasehold positions. See Note 5 to
Consolidated Financial Statements.
MANAGEMENT AGREEMENTS
As of July 1, 1996, the Company provided hotel management services to third
party hotel owners of 16 Managed Hotels. Management fees are based on fixed
percentages of the property's total revenues and incentive payments based on
certain measures of hotel income. Additional fees are also generated from the
rendering of specific services such as accounting services, construction
services, design services and sales commissions. The Company's fixed management
fee percentages range from 1.0% to 5.0% and average 3.5% of total revenues
before giving consideration to performance related incentive payments. The base
and incentive fees comprised 56.2%, or $4.6 million, of the total management and
other fees for 1995. Terms of the management agreements vary but the majority
are short-term and, therefore, there are risks associated with termination of
these agreements. Although management agreements may be terminated in connection
with a change in ownership of the underlying hotels, such risks may be limited
due to the Company's other financial interests in these hotels. The Company
holds financial interests in the form of mortgages or profit participations in 9
of the 16 Managed Hotels.
OPERATIONS
As a leading domestic hotel operating company, the Company enjoys a number
of operating advantages over other lodging companies. With 98 hotels covering a
number of price points and broad geographic regions, the Company possesses the
critical mass to support sophisticated operating, marketing and financial
systems. The Company believes that its broad array of central services permits
on-site hotel general managers to effectively focus on providing guest services,
results in economies of scale and leads to above-market hotel profit margins. As
a result of these operating strategies, the Company's hotels generated average
operating profit margins that exceeded comparable industry averages for 1995, as
reported by industry sources, by approximately 3% for all-suites hotels, 16% for
full-service hotels and 4% for limited-service hotels.
The Company's operating strategy combines operating service and guidance
from its central management team with decentralized decision-making authority
delegated to each hotel's on-site management. The on-site hotel management teams
consist of a general manager and, depending on the hotel's size and market
positioning, managers of sales and marketing, food and beverage, front desk
services, housekeeping and engineering. The Company's operating objective is to
exceed guest expectations by providing quality services and comfortable
accommodations at a fair value. On-site hotel management is responsible for
efficient expense controls and uses operating standards provided by the Company.
Within parameters established in the operating and capital planning process,
on-site management possesses broad decision-making authority on
41
<PAGE> 44
operating issues such as guest services, marketing strategies, hiring practices
and incentive programs. Each hotel's management team is empowered to take all
necessary steps to ensure guest satisfaction within established guidelines. Key
on-site personnel participate in an incentive program based on hotel revenues
and profits.
The central management team, located in Fairfield, New Jersey, provides
four major categories of services: (i) operations management, (ii) sales and
marketing management, (iii) financial reporting and control and (iv) hotel
support services.
Operations Management. Operations management consists of the development,
implementation and monitoring of hotel operating standards and is provided by a
network of regional operating officers who are each responsible for the
operations of 10 to 30 hotels. They are supported by training, food and beverage
and human resources departments, each staffed full-time by specialized
professionals. The cornerstone of operations management is employee training,
with a staff of professionals dedicated to training in sales, housekeeping, food
service, front desk services and leadership. The Company believes these efforts
increase employee effectiveness, reduce turnover and improve the level of guest
services.
The Company's cost-effective centralized management services benefit not
only its existing operations but also provide additional opportunities for
growth and development from acquisitions. In all of the recently acquired
hotels, the Company's central management has assumed certain of the operational
responsibilities which previously had been performed by the on-site hotel
management. In addition, the Company believes it has improved operating
efficiencies for each of the hotels that it has acquired.
Sales and Marketing Management. Aggressive sales and marketing is a top
operating priority. Sales and marketing management is directed by a corporate
staff of 20 professionals, including regional marketing directors who are
responsible for each hotel's sales and marketing strategies, and the Company's
national sales group, Market Segments, Inc. ("MSI"). In cooperation with the
regional marketing staff, on-site sales management develops and implements
short- and intermediate-term marketing plans. The Company focuses on yield
management techniques, which optimize the relationship between hotel rates and
occupancies and seek to maximize profitability. In addition, the Company assumes
prominent roles in franchise marketing associations to obtain maximum benefit
from franchise affiliations. The Company's in-house creative department develops
hotel advertising materials and programs at cost-effective rates.
Complementing regional and on-site marketing efforts, MSI's marketing team
targets specific hotel room demand generators including tour operators, major
national corporate accounts, athletic teams, religious groups and others with
segment-specialized sales initiatives. MSI's primary objective is to book hotel
rooms at the Company's hotels and its secondary objective is to market its
services on a commission basis to hotels throughout the industry. Sales
activities on behalf of non-affiliated hotels increase the number of hotels
where bookings can be made to support marketing efforts and defray the costs of
the marketing organization.
Financial Reporting and Control. The Company's system of centralized
financial reporting and control permits management to closely monitor
decentralized hotel operations without the cost of financial personnel on site.
Centralized accounting personnel produce detailed financial and operating
reports for each hotel. Additionally, central management directs budgeting and
analysis, processes payroll, handles accounts payable, manages each hotel's
cash, oversees credit and collection activities and conducts on-site hotel
audits.
Hotel Support Services. The Company's hotel support services combine a
number of technical functions in central, specialized management teams to attain
economies of scale and minimize costs. Central management handles purchasing,
directs construction and maintenance and provides design services. Technical
staff teams support each hotel's information and communication systems needs.
Additionally, the Company directs safety/risk management activities and provides
central legal services.
FRANCHISE AGREEMENTS
The Company enters into non-exclusive franchise licensing agreements with
franchisors, which agreements typically have a ten year term and allow the
Company to benefit from franchise brand recognition and loyalty. The
non-exclusive nature of the franchise agreement allows the Company the
flexibility to continue to
42
<PAGE> 45
develop properties with the brands that have shown success in the past or to
develop in conjunction with other brand names. This flexibility also plays an
important role in the Company's repositioning strategy, which emphasizes proper
positioning of its properties within their respective markets to maximize their
return on investment. Over the past three years, the Company has repositioned
several hotels. These repositionings include the Portland, Oregon Crowne Plaza
(formerly Howard Johnson), the Las Vegas, Nevada Crowne Plaza (formerly Howard
Johnson), the Saratoga Springs, New York Sheraton (formerly Ramada Renaissance),
the Fairfield, New Jersey Radisson (formerly Sheraton), the Orlando, Florida
Shoney's Inn (formerly Howard Johnson), the Trevose, Pennsylvania Radisson
(formerly Ramada), the Princeton, New Jersey Holiday Inn (formerly Ramada) and
the Hasbrouck Heights Crowne Plaza (formerly Sheraton). The Company believes its
relationships with numerous nationally recognized franchisors provides
significant benefits for both its existing hotel portfolio and prospective hotel
acquisitions. While the Company currently enjoys good relationships with its
franchisors, there can be no assurance that a desirable replacement would be
available if any of the franchise agreements were to be terminated.
The franchise agreements require the Company to pay annual fees, to
maintain certain standards and to implement certain programs which require
additional expenditures by the Company such as remodeling or redecorating. The
payment of annual fees, which typically total 7% to 8% of room revenues, cover
royalties and the costs of marketing and reservation services provided by the
franchisors. Franchise agreements, when initiated, generally provide for an
initial fee in addition to annual fees payable to the franchisor.
LITIGATION
In May 1996, the Company received a favorable ruling from the U.S. Court of
Appeals for the 11th Circuit (the "Court of Appeals") in its litigation with
Financial Security Assurance, Inc. ("FSA") in which FSA sought approximately
$31,200,000 received by the Company in settlement of a note and guaranty from
Allen V. Rose and Arthur Cohen ("Rose and Cohen"). The Company had reached a
settlement in 1993 with Rose and Cohen which provided for Rose or his affiliate
to pay the Company $25,000,000 plus proceeds from the sale of approximately
1,100,000 shares of the Company's common stock held by Rose, bringing the total
settlement proceeds to approximately $31,200,000. FSA asserted that, under the
terms of an intercreditor agreement, it was entitled to receive the settlement
proceeds otherwise payable to the Company. The U.S. Bankruptcy Court for the
Southern District of Florida (the "Bankruptcy Court") ruled in April 1994 that
the Company alone was entitled to the settlement proceeds, and the Company used
$25,000,000 of the settlement proceeds to retire certain senior secured notes.
FSA appealed to the U.S. District Court for the Southern District of Florida
(the "District Court"), which affirmed the Bankruptcy Court's ruling. On May 12,
1995, the Company used the remaining proceeds plus accrued interest to prepay
the remaining senior secured notes outstanding. FSA appealed to the Court of
Appeals, which on May 21, 1996 affirmed the District Court's ruling. While the
decision of the Court of Appeals is subject to appeal, the Company believes that
any further appeal will affirm the Court of Appeals ruling and that there will
be no effect on the Company's financial position, results of operations or
liquidity.
43
<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- --------------------------------------------------------------
<S> <C> <C>
David A. Simon........... 44 President, Chief Executive Officer and Chairman of the Board
of Directors
John M. Elwood........... 42 Executive Vice President, Chief Financial Officer and Director
Howard M. Lorber(1)...... 47 Director
Herbert Lust, II(1)...... 69 Director
Jack H. Nusbaum.......... 55 Director
Allen J. Ostroff(1)...... 60 Director
A.F. Petrocelli(1)....... 52 Director
Paul H. Hower............ 62 Executive Vice President
Timothy E. Aho........... 52 Senior Vice President/Development
Denis W. Driscoll........ 51 Senior Vice President/Human Resources
John H. Leavitt.......... 44 Senior Vice President/Sales and Marketing
Joseph Bernadino......... 49 Senior Vice President, Secretary and General Counsel
Richard T. Szymanski..... 39 Vice President and Corporate Controller
Douglas W. Vicari........ 36 Vice President and Treasurer
</TABLE>
- ---------------
(1) Member of the Compensation and Audit Committee.
The following is a biographical summary of the experience of the directors
and executive officers of the Company:
David A. Simon has been President, Chief Executive Officer and a Director
since 1992 and Chairman of the Board of Directors of the Company since 1993. Mr.
Simon was a director of PMI from 1991 to 1992. Mr. Simon was the Chief Executive
Officer of PMI from 1991 to 1992.
John M. Elwood has been a Director and Executive Vice President of the
Company since 1992 and Chief Financial Officer since 1993. Mr. Elwood was the
Director of Reorganization of PMI from 1991 to 1992.
Howard M. Lorber has been a Director and a member of the Compensation and
Audit Committee since 1994. Mr. Lorber is Chairman of the Board of Directors of
Nathan's Famous, Inc. and Hallman & Lorber Associates, Inc. and a director of
New Valley Corporation, United Capital Corp. and Alpine Lace Brands, Inc. Mr.
Lorber has been Chief Executive Officer of Hallman & Lorber Associates, Inc. for
more than the past five years, President and Chief Operating Officer of New
Valley Corporation since 1994 and Chief Executive Officer of Nathan's Famous,
Inc. since 1993. Mr. Lorber has also been a general partner or shareholder of a
corporate general partner of various limited partnerships organized to acquire
and operate real estate properties.
Herbert Lust, II has been a Director since 1992 and Chairman of the
Compensation and Audit Committee of the Company since 1993. Mr. Lust was a
member of the Committee of Unsecured Creditors of PMI from 1991 to 1992. Mr.
Lust has been a private investor and President of Private Water Supply Inc. for
more than the past five years. Mr. Lust is a director of BRT Realty Trust.
Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the Chairman
of the law firm of Willkie Farr & Gallagher, where he has been a partner for
more than the past twenty-five years. He also is a director of Pioneer
Companies, Inc., W.R. Berkley Corporation, The Topps Company, Inc. and Fine Host
Corporation.
Allen J. Ostroff has been a Director since 1992 and a member of the
Compensation and Audit Committee since 1993. Mr. Ostroff has been a Managing
Director of the Prudential Realty Group, a
44
<PAGE> 47
subsidiary of The Prudential Insurance Company of America, since June 1994 and
was a Senior Vice President of the Prudential Realty Group from 1991 to June
1994.
A.F. Petrocelli has been a Director since 1992 and a member of the
Compensation and Audit Committee since 1993. Mr. Petrocelli has been the
Chairman of the Board of Directors and Chief Executive Officer of United Capital
Corp. for more than the past five years. He is also a director of Nathan's
Famous, Inc.
Paul H. Hower has been an Executive Vice President of the Company since
1993. Mr. Hower was President of Integrity Hospitality Services from 1991 to
1993 and Vice President and Hotel Division Manager of B.F. Saul Co. in 1991.
Timothy E. Aho has been a Senior Vice President of the Company since 1994.
Mr. Aho was a Senior Vice President of Development for Boykin Management Company
from 1993 to 1994 and Vice President of Development for Interstate Hotels
Corporation from 1991 to 1993.
Denis W. Driscoll has been a Senior Vice President of the Company since
1993. Mr. Driscoll was President of Driscoll Associates, a human resources
consulting organization, from 1991 to 1993.
John H. Leavitt has been a Senior Vice President of the Company since 1992.
Mr. Leavitt was a Senior Vice President of PMI from 1991 to 1992 and a Senior
Vice President of Medallion Hotel corporation in 1991.
Joseph Bernadino has been Senior Vice President, Secretary and General
Counsel of the Company since 1992. Mr. Bernadino was an Assistant Secretary and
Assistant General Counsel of PMI from 1991 to 1992.
Richard T. Szymanski has been a Vice President and Corporate Controller of
the Company since 1992. Mr. Szymanski was Corporate Controller of PMI from 1991
to 1992.
Douglas W. Vicari has been a Vice President and Treasurer of the Company
since 1992 and was Vice President and Treasurer of PMI during 1992. Mr. Vicari
was the Director of Budget and Financial Analysis of PMI from 1991 to 1992.
45
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 75,000,000 shares
of Common Stock and 20,000,000 shares of Preferred Stock.
COMMON STOCK
At March 31, 1996, 31,049,512 shares of Common Stock were issued and
outstanding. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the Company's stockholders, including the
election of directors. The Common Stock does not have cumulative voting rights.
Subject to the preferential rights of any outstanding series of Preferred Stock,
the holders of Common Stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors from funds legally
available therefor, and will be entitled to receive pro rata all assets of the
Company available for distribution to such holders upon liquidation. All shares
of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has authority to establish the designations,
liquidation preferences, dividend rights, terms of redemption, conversion
rights, sinking fund terms and all other preferences and rights (including
voting rights) of any series of Preferred Stock. The ability of the Board of
Directors to issue Preferred Stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could, among other
things, adversely affect the voting powers of holders of Common Stock and, under
certain circumstances, may discourage an attempt by others to gain control of
the Company.
WARRANTS
Warrants to purchase 2,106,383 shares of Common Stock were issued to former
shareholders of the Company's predecessor, PMI, in partial settlement of their
bankruptcy interests. The warrants became exercisable on August 31, 1993 at an
exercise price of $2.71 per share. The exercise price was determined from the
average per share daily closing price of the Common Stock during the year
following the effective date of the PMI reorganization. As of March 31, 1996,
warrants to purchase 663,326 shares of Common Stock had been exercised.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate of Incorporation and Bylaws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in a
premium over the market price for the shares held by stockholders.
Staggered Board of Directors. The Certificate of Incorporation and the
Bylaws provide that the Board of Directors will be divided into three classes of
Directors, each class constituting approximately one-third of the total number
of Directors and with the classes serving staggered three-year terms. The
classification of Directors will have the effect of making it more difficult for
shareholders to change the composition of the Board of Directors. The Company
believes, however, that the longer time required to elect a majority of a
classified Board of Directors will help to ensure continuity and stability of
the Company's management and policies.
The classification provisions could also have the effect of discouraging a
third party from accumulating large blocks of the Company's stock or attempting
to obtain control of the Company, even though such an attempt might be
beneficial to the Company and its stockholders. Accordingly, stockholders could
be deprived of certain opportunities to sell their shares of Common Stock at a
higher market price than might otherwise be the case.
Fair Price Provisions. Provisions of the Certificate of Incorporation (the
"Fair Price Provisions") limit the ability of an Interested Stockholder (defined
as the beneficial owner of 20% of outstanding voting shares) to effect certain
transactions involving the Company. Unless the Fair Price Provisions are
satisfied, an
46
<PAGE> 49
Interested Stockholder may not engage in a business combination involving the
Company unless approved by 75% of the Company's outstanding voting shares or a
majority of the Disinterested Directors (as defined therein). A business
combination includes a merger, consolidation, sale of assets valued at over
$25.0 million or issuance or transfer of securities valued at over $25.0
million, or a similar transaction. In general, the Fair Price Provisions require
that an Interested Stockholder pay shareholders at least the same amount of cash
or the same amount and type of consideration paid by the Interested Stockholder
when it initially acquired the Company's shares.
The Fair Price Provisions are designed to discourage attempts to take over
the Company in non-negotiated transactions utilizing two-tier pricing tactics,
which typically involve the accumulation of a substantial block of the target
corporation's stock followed by a merger or other reorganization of the acquired
company on terms determined by the purchaser. Due to the difficulties of
complying with the requirements of the Fair Price Provisions, the Fair Price
Provisions generally discourage attempts to obtain control of the Company.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation provides that no director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or redemptions or repurchases pursuant to
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. The effect of
these provisions is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of fiduciary duty as a director
(including breaches resulting from grossly negligent behavior), except in the
situations described above. These provisions will not limit the liability of
directors under Federal securities laws.
CERTAIN PROVISIONS OF DELAWARE LAW REGARDING AN INTERESTED STOCKHOLDER
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates or associates of
such person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder becomes an interested stockholder, unless (i) the business
combination is approved by the corporation's board of directors prior to the
date the interested stockholder becomes an interested stockholder; (ii) the
interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder; or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
47
<PAGE> 50
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock opposite their respective names at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares if they purchase any.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities................................................
BT Securities Corporation............................................
Smith Barney Inc. ...................................................
---------
Total...................................................... 7,500,000
=========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Common Stock to the public on the terms set forth on the cover page of
this Prospectus. The Underwriters may allow to selected dealers a concession of
not more than $ per share, and the Underwriters may allow, and such
dealers may reallow, a discount of not more than $ per share to other
dealers. The public offering price and the concession and discount to dealers
may be changed by the Underwriters after the public offering of the shares. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 1,125,000 shares of Common Stock solely to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed to purchase such additional
shares in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company and its directors and executive officers have agreed not to
offer for sale, sell, distribute or otherwise dispose of any shares of Common
Stock, or any securities convertible into or warrants to purchase shares of
Common Stock, now owned or hereafter acquired for a period of approximately 90
days after the date of this Prospectus, except under certain circumstances,
without prior written consent of Montgomery Securities.
BT Securities Corporation is an affiliate of Bankers Trust Company, which
is the agent and a lender under the Revolving Credit Facility, and with respect
to which Bankers Trust Company has received and will receive customary
compensation. Bankers Trust Company and its affiliates have provided other
commercial and investment banking services to the Company, with respect to which
Bankers Trust Company and its affiliates have received customary compensation.
Smith Barney Inc. from time to time has provided financial advisory
services to the Company. Smith Barney Inc. has received customary fees for such
services.
LEGAL MATTERS
Certain legal matters with respect to the legality of the shares of Common
Stock offered hereby will be passed upon for the Company by Willkie Farr &
Gallagher, New York, New York. Certain legal matters relating to the Offering
will be passed upon for the Underwriters by Latham & Watkins, Washington, D.C.
Jack H. Nusbaum, a Director of the Company who beneficially owns 10,000 shares
of Common Stock and an additional 40,000 shares of Common Stock underlying stock
options, is a partner in the law firm of Willkie Farr & Gallagher.
48
<PAGE> 51
EXPERTS
The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
49
<PAGE> 52
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). The reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade
Center, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material also can be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 at prescribed rates. The Company's Common Stock, par value $.01 per share,
9 1/4% First Mortgage Notes due 2006 and 7% Convertible Subordinated Notes due
2002 are listed on the New York Stock Exchange. Reports, proxy materials and
other information concerning the Company may also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which are omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement, including the exhibits
and schedules. The Registration Statement, together with its exhibits and
schedules thereto, may be inspected, without charge, at the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20459, and also at
the regional offices of the Commission listed above. Copies of such material may
also be obtained from the Commission upon the payment of prescribed fees.
Statements contained in the Prospectus as to any contracts, agreements or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract, agreement or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof, and each
such statement in the Prospectus is qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, the Company's Current Report on Form 8-K, as amended on Form
8-K/A, dated March 6, 1996 and the description of the Common Stock contained in
the Company's Registration Statement on Form 8-A dated June 5, 1992, as amended
on July 9, 1992 and December 21, 1992, each previously filed by the Company with
the Commission, are incorporated herein by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and before the
termination of the Offering shall be deemed incorporated herein by reference,
and such documents shall be deemed to be a part hereof from the date of filing
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement as so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the request of any such person, a copy of any or all
of the above documents incorporated herein by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
into the documents that this Prospectus incorporates). Requests should be
directed to Prime Hospitality Corp., 700 Route 46 East, Fairfield, New Jersey
07007-2700, Attention: Joseph Bernadino, Senior Vice President, Secretary and
General Counsel, (201) 882-1010.
50
<PAGE> 53
PRIME HOSPITALITY CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated:
Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited).................. F-2
Statements of Income (Unaudited) for the Three Months Ended March 31, 1995 and March
31, 1996......................................................................... F-3
Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1995 and
March 31, 1996................................................................... F-4
Notes to Interim Consolidated Financial Statements.................................... F-5
Report of Arthur Andersen LLP......................................................... F-7
Consolidated:
Balance Sheets at December 31, 1994 and 1995........................................ F-8
Statements of Income for the Years Ended December 31, 1993, 1994 and 1995........... F-9
Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and
1995............................................................................. F-10
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995....... F-11
Notes to Consolidated Financial Statements............................................ F-12
</TABLE>
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
Separate financial statements of 50% or less owned entities accounted for
by the equity method have been omitted because such entities considered in the
aggregate as a single subsidiary would not constitute a significant subsidiary.
F-1
<PAGE> 54
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 49,533 $ 23,629
Marketable securities available for sale........................... 11,929 7,999
Restricted cash.................................................... 8,973 9,434
Accounts receivable, net of reserves............................... 13,139 14,318
Current portion of mortgages and notes receivable.................. 1,533 1,173
Other current assets............................................... 8,070 9,928
-------- --------
Total current assets....................................... 93,177 66,481
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization...................................... 398,201 529,916
Mortgages and notes receivable, net of current portion............... 64,962 25,405
Other assets......................................................... 16,901 21,074
-------- --------
TOTAL ASSETS............................................... $573,241 $ 642,876
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt............................................ $ 5,731 $ 5,699
Other current liabilities.......................................... 38,961 40,250
-------- --------
Total current liabilities.................................. 44,692 45,949
Long-term debt, net of current portion............................... 276,920 335,271
Other liabilities.................................................... 18,713 18,682
-------- --------
Total liabilities.......................................... 340,325 399,902
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share; 20,000,000 shares
authorized; none issued......................................... -- --
Common stock, par value $.01 per share; 75,000,000 shares
authorized; 31,004,499 and 31,049,512 shares issued and
outstanding at December 31, 1995 and March 31, 1996,
respectively.................................................... 310 310
Capital in excess of par value....................................... 183,050 185,166
Retained earnings.................................................... 49,556 57,498
-------- --------
Total stockholders' equity................................. 232,916 242,974
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $573,241 $ 642,876
======== ========
</TABLE>
See Accompanying Notes to Interim Consolidated Financial Statements.
F-2
<PAGE> 55
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
------- -------
<S> <C> <C>
Revenues:
Lodging.............................................................. $34,375 $41,974
Food and beverage.................................................... 8,884 8,024
Management and other fees............................................ 1,637 1,692
Interest on mortgages and notes receivable........................... 3,026 2,681
Business interruption insurance...................................... -- 3,739
Rental and other..................................................... 316 504
------- -------
Total revenues............................................... 48,238 58,614
------- -------
Costs and expenses:
Direct hotel operating expenses:
Lodging........................................................... 8,698 10,624
Food and beverage................................................. 6,657 6,914
Selling and general............................................... 11,824 14,010
Occupancy and other operating........................................ 2,611 3,482
General and administrative........................................... 3,872 4,219
Depreciation and amortization........................................ 3,976 5,224
------- -------
Total costs and expenses..................................... 37,638 44,473
------- -------
Operating income....................................................... 10,600 14,141
Investment income...................................................... 514 1,265
Interest expense....................................................... (4,100) (5,851)
Other income........................................................... -- 3,432
------- -------
Income before income taxes and extraordinary items..................... 7,014 12,987
Provision for income taxes............................................. 2,806 5,195
------- -------
Income before extraordinary items...................................... 4,208 7,792
Extraordinary items -- gains on discharges of indebtedness
(net of income taxes)................................................ 7 149
------- -------
Net income............................................................. $ 4,215 $ 7,941
======= =======
Earnings per common share:
Primary:
Income before extraordinary items.................................... $ .13 $ .24
Extraordinary items.................................................. -- --
------- -------
Net earnings........................................................... $ .13 $ .24
======= =======
Fully diluted:
Income before extraordinary items.................................... $ .13 $ .22
Extraordinary items.................................................. -- --
------- -------
Net earnings........................................................... $ .13 $ .22
======= =======
</TABLE>
See Accompanying Notes to Interim Consolidated Financial Statements.
F-3
<PAGE> 56
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1995 1996
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 4,215 $ 7,941
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 3,976 5,224
Business interruption insurance revenue........................ -- (3,739)
Utilization of net operating loss carryforwards................ 1,418 1,958
Gains on settlements of notes receivable....................... -- (1,778)
Gains on discharges of indebtedness............................ (11) (249)
Gains on sales of assets....................................... -- (1,956)
Compensation expense related to stock options.................. 12 --
Increase (decrease) from changes in other operating assets and
liabilities:
Accounts receivable............................................ (1,965) (1,179)
Other current assets........................................... (538) 1,883
Other liabilities.............................................. (2,258) 550
-------- ---------
Net cash provided by operating activities...................... 4,849 8,655
-------- ---------
Cash flows from investing activities:
Net proceeds from mortgages and other notes receivable............ 3,211 8,275
Disbursements for mortgages and notes receivable.................. -- (800)
Proceeds from sales of property, equipment and leasehold
improvements................................................... 13 3,706
Purchases of property, equipment and leasehold improvements....... (16,072) (103,648)
Increase in restricted cash....................................... (585) (461)
Proceeds from sales of marketable securities...................... 100 4,856
Other............................................................. 415 (129)
-------- ---------
Net cash used in investing activities..................... (12,918) (88,201)
-------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt................................ 39,000 114,979
Payments of debt.................................................. (1,533) (61,494)
Proceeds from the exercise of stock options and warrants.......... 472 157
-------- ---------
Net cash provided by financing activities................. 37,939 53,642
-------- ---------
Net increase (decrease) in cash and cash equivalents................ 29,870 (25,904)
Cash and cash equivalents at beginning of period.................... 12,524 49,533
-------- ---------
Cash and cash equivalents at end of period.......................... $ 42,394 $ 23,629
======== =========
</TABLE>
See Accompanying Notes to Interim Consolidated Financial Statements.
F-4
<PAGE> 57
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, the accompanying interim unaudited
consolidated financial statements of Prime Hospitality Corp. and subsidiaries
(the "Company") contain all material adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of the Company
as of March 31, 1996 and the results of its operations for the three months
ended March 31, 1995 and 1996 and cash flows for the three months ended March
31, 1995 and 1996.
The financial statements for the three months ended March 31, 1995 and 1996
were prepared on a consistent basis with the audited consolidated financial
statements for the year ended December 31, 1995.
The consolidated results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results to be expected for the full
year. These interim unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
NOTE 2 -- ACQUISITIONS
On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley
Inns and two other limited-service hotels for approximately $65,100,000 in cash.
The acquisition enabled the Company to establish full control over its
proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated
by the Company. The acquisition price was comprised of approximately $60,400,000
to purchase the first mortgage on the 18 hotels with a face value of
approximately $70,500,000 and $4,700,000 to purchase the interests of the three
partnerships which owned the hotels. Approximately $1,900,000 of the total
purchase price was paid to a partnership in which a general partner is the
father of the Company's President and Chief Executive Officer. In connection
with the transaction, the Company also terminated its management agreements and
junior subordinated mortgages related to the 18 hotels. The transaction has been
accounted for as a purchase and, accordingly, the revenues and expenses of these
hotels have been included in reported results from the date of acquisition. If
these operations had been included in the consolidated financial statements
since January 1, 1996, reported results would not have been materially
different.
NOTE 3 -- DEBT
On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First
Mortgage Notes due 2006. Interest on the notes is payable semi-annually on
January 15 and July 15. The notes are secured by 15 hotels and contain certain
covenants including limitations on the incurrence of debt, dividend payments,
certain investments, transactions with affiliates, asset sales and mergers and
consolidations. These notes are redeemable, in whole or in part, at the option
of the Company after January 15, 2001 at premiums to principal which decline on
each anniversary date. The Company utilized a portion of the proceeds to pay
down $51,601,000 of debt.
NOTE 4 -- EARNINGS PER COMMON SHARE
Primary earnings per common share was computed based on the weighted
average number of common shares and common share equivalents (dilutive stock
options and warrants) outstanding during each period. The weighted average
number of common shares used in computing primary earnings per share was
32,365,000 and 32,865,000 for the three months ended March 31, 1995 and 1996,
respectively.
Fully diluted earnings per share, in addition to the adjustments for
primary earnings per share, reflects the elimination of interest expense and the
issuance of additional common shares from the assumed conversion of the 7%
convertible subordinated notes from their issuance in April 1995. The weighted
average number of
F-5
<PAGE> 58
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
common shares used in computing fully diluted earnings per share was 32,365,000
and 40,346,000 for the three months ended March 31, 1995 and 1996, respectively.
NOTE 5 -- BUSINESS INTERRUPTION INSURANCE REVENUE
In September 1995, the Company-owned Marriott's Frenchman's Reef Hotel (the
"Frenchman's Reef") in St. Thomas U.S. Virgin Islands suffered hurricane damage.
Due to extensive property and business interruption insurance, the Company
believes that its liquidity will be affected only to the extent of its insurance
deductibles for which the Company provided a reserve of $2,200,000 in 1995. The
Company has continued to operate the hotel and has repaired a majority of the
damaged rooms on an interim basis. However, the impact of the hurricane has
caused operating profits to decline from the prior year level. For the three
months ended March 31, 1996, the Company continued to record the operating
revenues and expenses of the Frenchman's Reef. In addition, the Company
estimated its business interruption insurance proceeds assuming no growth over
the prior year's profit level and recorded revenue and a corresponding
receivable of $3,739,000. The Company is currently engaged in discussions with
its insurance carrier regarding the amount of property and business interruption
insurance proceeds to be paid and is assessing the extent of refurbishment
required at the Frenchman's Reef.
NOTE 6 -- OTHER INCOME
Other income consists of items which are not considered part of the
Company's recurring operations. For the three months ended March 31, 1996, other
income consisted of a gain on the settlement of a note receivable of $1,778,000
and a gain on the sale of a hotel of $1,654,000.
NOTE 7 -- SUBSEQUENT EVENT
On July 2, 1996, the Company filed a registration statement covering the
sale of 7.5 million shares of its common stock. The Company intends to use the
net proceeds from this offering to fund the development and growth of its
AmeriSuites all-suites hotel brand. The offering is subject to a number of risks
that should be considered by prospective investors. See "Risk Factors" included
elsewhere in this Registration Statement.
F-6
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Prime Hospitality Corp.:
We have audited the accompanying consolidated balance sheets of Prime
Hospitality Corp. (a Delaware corporation) and subsidiaries (the "Company") as
of December 31, 1994 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prime Hospitality Corp. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 31, 1996, except with
respect to the matters discussed in
Note 16 as to which the date is
July 2, 1996
F-7
<PAGE> 60
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 12,524 $ 49,533
Marketable securities available for sale............................. 1,117 11,929
Restricted cash...................................................... 9,725 8,973
Accounts receivable, net of reserves of $125 and $213 in
1994 and 1995, respectively....................................... 7,819 13,139
Current portion of mortgages and notes receivable.................... 1,925 1,533
Other current assets................................................. 7,196 8,070
-------- --------
Total current assets......................................... 40,306 93,177
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization............................ 299,291 398,201
Mortgages and notes receivable, net of current portion................. 81,260 64,962
Other assets........................................................... 14,075 16,901
-------- --------
TOTAL ASSETS................................................. $434,932 $573,241
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt.............................................. $ 5,284 $ 5,731
Other current liabilities............................................ 23,904 38,961
-------- --------
Total current liabilities.................................... 29,188 44,692
Long-term debt, net of current portion................................. 178,545 276,920
Other liabilities...................................................... 23,134 18,713
-------- --------
Total liabilities............................................ 230,867 340,325
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share; 20,000,000 shares
authorized; none issued........................................... -- --
Common stock, par value $.01 per share; 75,000,000 shares
authorized 30,409,371 and 31,004,499 shares issued and
outstanding in 1994 and 1995, respectively........................ 304 310
Capital in excess of par value......................................... 171,774 183,050
Retained earnings...................................................... 31,987 49,556
-------- --------
Total stockholders' equity................................... 204,065 232,916
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $434,932 $573,241
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE> 61
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Lodging.................................................. $ 69,487 $ 88,753 $146,184
Food and beverage........................................ 12,270 18,090 37,955
Management and other fees................................ 10,831 10,021 8,115
Interest on mortgages and notes receivable............... 14,765 15,867 11,895
Rental and other......................................... 1,507 1,572 1,479
------- -------- --------
Total revenues................................... 108,860 134,303 205,628
------- -------- --------
Costs and expenses:
Direct hotel operating expenses:
Lodging............................................... 19,925 25,490 38,383
Food and beverage..................................... 10,230 13,886 28,429
Selling and general................................... 21,180 27,244 49,753
Occupancy and other operating............................ 9,827 9,799 11,763
General and administrative............................... 15,685 15,089 15,515
Depreciation and amortization............................ 7,117 9,427 15,974
------- -------- --------
Total costs and expenses......................... 83,964 100,935 159,817
------- -------- --------
Operating income........................................... 24,896 33,368 45,811
Investment income.......................................... 1,267 1,966 4,861
Interest expense........................................... (16,116) (13,993) (21,603)
Other income............................................... 3,809 9,089 2,239
Other expense.............................................. -- -- (2,200)
------- -------- --------
Income before income taxes and extraordinary items......... 13,856 30,430 29,108
Provision for income taxes................................. 5,681 12,172 11,643
------- -------- --------
Income before extraordinary items.......................... 8,175 18,258 17,465
Extraordinary items -- gains on discharges of indebtedness
(net of income taxes of $2,772, $120 and $70 in 1993,
1994 and 1995, respectively)............................. 3,989 172 104
------- -------- --------
Net income................................................. $ 12,164 $ 18,430 $ 17,569
======= ======== ========
Net income per common share:
Income before extraordinary items........................ $ .27 $ .57 $ .54
Extraordinary items...................................... .13 .01 --
------- -------- --------
Net income per common share................................ $ .40 $ .58 $ .54
======= ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-9
<PAGE> 62
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN
------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
---------- ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992..................... 29,912,794 $299 $ 136,090 $ 1,393 $137,782
Net income.................................... -- -- -- 12,164 12,164
Utilization of net operating loss
carryforwards............................... -- -- 4,525 -- 4,525
Federal income tax refund..................... -- -- 16,462 -- 16,462
Compensation expense related to stock option
plan........................................ -- -- 225 -- 225
Proceeds from exercise of stock options....... 30,000 -- 81 -- 81
Proceeds from exercise of stock warrants...... 45,880 1 124 -- 125
----------- ---- -------- ------- --------
Balance December 31, 1993..................... 29,988,674 300 157,507 13,557 171,364
Net income.................................... -- -- -- 18,430 18,430
Utilization of net operating loss
carryforwards............................... -- -- 5,861 -- 5,861
Amortization of pre-fresh start tax basis
differences................................. -- -- 6,954 -- 6,954
Federal income tax refund..................... -- -- 200 -- 200
Compensation expense related to stock option
plan........................................ -- -- 60 -- 60
Proceeds from exercise of stock options....... 216,080 2 640 -- 642
Proceeds from exercise of stock warrants...... 204,617 2 552 -- 554
----------- ---- -------- ------- --------
Balance December 31, 1994..................... 30,409,371 304 171,774 31,987 204,065
Net income.................................... -- -- -- 17,569 17,569
Utilization of net operating loss
carryforwards............................... -- 3,370 -- 3,370
Amortization of pre-fresh start tax........... -- -- 6,167 -- 6,167
Compensation expense related to stock option
plan........................................ -- -- 16 -- 16
Proceeds from exercise of stock options....... 220,159 2 705 -- 707
Proceeds from exercise of stock warrants...... 374,969 4 1,018 -- 1,022
----------- ---- -------- ------- --------
Balance December 31, 1995..................... 31,004,499 $310 $ 183,050 $ 49,556 $232,916
=========== ==== ======== ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-10
<PAGE> 63
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 12,164 $ 18,430 $ 17,569
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 7,117 9,427 15,974
Utilization of net operating loss carryforwards....... 4,525 5,861 3,370
Gains on settlements of notes receivable.............. -- (6,224) (822)
Gains on discharges of indebtedness................... (6,761) (292) (174)
Gains on sales of assets.............................. (1,769) (1,099) (1,957)
Amortization of pre-fresh start tax basis
differences......................................... -- 6,954 6,167
Deferred income taxes................................. 1,541 (205) 1,556
Compensation expense related to stock options......... 225 60 16
Increase (decrease) from changes in other operating
assets and liabilities:
Accounts receivable................................... 269 (1,945) (5,320)
Other current assets.................................. (1,791) 127 (887)
Other liabilities..................................... 4,208 (2,422) 5,359
-------- -------- --------
Net cash provided by operating activities............. 19,728 28,672 40,851
-------- -------- --------
Cash flows from investing activities:
Net proceeds from mortgages and other notes receivable... 10,861 36,198 27,603
Disbursements for mortgages and notes receivable......... (515) (1,100) (12,704)
Proceeds from sales of property, equipment and leasehold
improvements.......................................... 3,715 1,480 8,167
Purchases of property, equipment and leasehold
improvements.......................................... (14,346) (63,360) (113,517)
Decrease in restricted cash.............................. 1,903 1,268 752
Proceeds from sales of marketable securities............. -- 1,116 2,928
Purchase of marketable securities........................ -- (5,885) (11,520)
Insurance advances in excess of renovation payments...... -- -- 6,518
Other.................................................... 663 (3,965) 846
-------- -------- --------
Net cash provided by (used in) investing activities... 2,281 (34,248) (90,927)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of debt....................... 2,771 19,026 119,360
Payments of debt......................................... (30,890) (43,771) (33,961)
Proceeds from the exercise of stock options and
warrants.............................................. 206 1,196 1,729
Principal proceeds from federal income tax refund........ 16,462 200 --
Reorganization items after emergence from bankruptcy..... (5,605) (120) (43)
-------- -------- --------
Net cash provided by (used in) financing activities... (17,056) (23,469) 87,085
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 4,953 (29,045) 37,009
Cash and cash equivalents at beginning of period........... 36,616 41,569 12,524
-------- -------- --------
Cash and cash equivalents at end of period................. $ 41,569 $ 12,524 $ 49,533
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-11
<PAGE> 64
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES:
Prime Hospitality Corp. (the "Company") is a hotel owner/operator with
ownership or management of hotels in the United States and the U.S. Virgin
Islands. The Company's hotels primarily provide moderately priced, quality
accommodations in secondary markets, and operate under franchise agreements with
national hotel chains or under the Company's proprietary Wellesley Inns or
AmeriSuites brand names.
BASIS OF PRESENTATION:
The Company emerged from the Chapter 11 reorganization proceeding of its
predecessor, Prime Motor Inns, Inc. and certain of its subsidiaries ("PMI"),
which consummated its Plan of Reorganization ("the Plan") on July 31, 1992.
Pursuant to the American Institute of Certified Public Accountant's
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start
reporting as of July 31, 1992. Under fresh start reporting, the reorganization
value of the entity was allocated to the reorganized Company's assets on the
basis of the purchase method of accounting. The reorganization value (the
approximate fair value) of the assets of the emerging entity was determined by
consideration of many factors and various valuation methods, including
discounted cash flows and price/earnings and other applicable ratios believed by
management to be representative of the Company's business and industry.
Liabilities were recorded at face values, which approximate the present values
of amounts to be paid determined at appropriate interest rates. Under fresh
start reporting, the consolidated balance sheet as of July 31, 1992 became the
opening consolidated balance sheet of the emerging Company.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS:
Cash equivalents are highly liquid unrestricted investments with a maturity
of three months or less when acquired.
MARKETABLE SECURITIES:
Marketable securities consist primarily of commercial paper and other
corporate debt and equity securities which mature or are available for sale
within one year. Marketable securities are valued at current market value, which
approximates cost.
F-12
<PAGE> 65
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH:
Restricted cash consists primarily of highly liquid investments that serve
as collateral for debt obligations due within one year.
MORTGAGES AND NOTES RECEIVABLE:
Mortgages and notes receivable are reflected at their fair value as of July
31, 1992, adjusted for payments and other advances since that date. The amount
of interest income recognized on mortgages and notes receivable is generally
based on the stated interest rate and the carrying value of the notes. The
Company has a number of subordinated or junior mortgages which remit payment
based on hotel cash flow. Because there was substantial doubt that the Company
would recover any value, these mortgages were assigned no value in the Company's
consolidated financial statements when the Company adopted fresh-start reporting
on July 31, 1992. Interest on cash flow mortgages and delinquent loans is
generally recognized when cash is received.
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") 114, "Accounting by Creditors for Impairment of a Loan (SFAS 114)" and
SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures (SFAS 118)". As defined in SFAS 114 and SFAS 118, a
loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS 114 and SFAS 118 require that the
measurement of impairment of a loan be based on the present value of expected
future cash flows (net of estimated costs to sell) discounted at the loan's
effective interest rate. Impairment can also be measured based on a loan's
observable market price or the fair value of collateral, if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, the Company will establish a valuation
allowance, or adjust existing valuation allowances, with a corresponding charge
or credit to operations. The effect of adopting these new accounting standards
was immaterial in 1995.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Property, equipment and leasehold improvements that the Company intends to
continue to operate are stated at their fair market value as of July 31, 1992
plus the cost of acquisitions subsequent to that date less accumulated
depreciation and amortization from August 1, 1992. Provision is made for
depreciation and amortization using the straight-line method over the estimated
useful lives of the assets. Properties identified for disposal are stated at
their estimated net realizable value.
During 1995, the Company adopted SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121)".
Following this standard, the Company evaluates whether impairment has occurred
at each of its properties based upon the future cash flows (undiscounted and
before interest charges) as compared to the carrying value of the property.
Based upon its evaluation as of December 31, 1995, the Company has determined
that no impairment has occurred.
OTHER ASSETS:
Other assets consist primarily of deferred issuance costs related to the
Company's 7% Convertible Subordinated Notes due 2002 and other debt obligations.
Deferred issuance costs are amortized over the respective terms of the loans
using the effective interest method.
SELF-INSURANCE PROGRAMS:
The Company uses an incurred loss retrospective insurance plan for general
and auto liability and workers' compensation. Predetermined loss limits have
been arranged with insurance companies to limit the Company's per occurrence and
aggregate cash outlay.
F-13
<PAGE> 66
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains a self-insurance program for major medical and
hospitalization coverage for employees and dependents which is partially funded
by payroll deductions. Payments for major medical and hospitalization below
specified aggregate annual amounts are self-insured by the Company. Claims for
benefits in excess of these amounts are covered by insurance purchased by the
Company.
Provisions have been made in the combined financial statements which
represent the expected future payments based on the estimated ultimate cost for
incidents incurred through the balance sheet date.
INCOME TAXES:
The Company and its subsidiaries file a consolidated Federal income tax
return. For financial reporting purposes, the Company follows SFAS No. 109
"Accounting for Income Taxes". In accordance with SFAS 109, as well as SOP 90-7,
income taxes have been provided at statutory rates in effect during the period.
Tax benefits associated with net operating loss carryforwards and other
temporary differences that existed at the time fresh start reporting was adopted
are reflected as a contribution to stockholders' equity in the period in which
they are realized.
NET INCOME PER COMMON SHARE:
Primary net income per common share is computed based on the weighted
average number of common shares and common share equivalents (dilutive stock
options and warrants) outstanding during each year. The weighted average number
of common shares used in computing primary net income per share was 30,721,000,
32,022,000 and 32,461,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
Fully diluted net income per share, in addition to the adjustments for
primary net income per share, reflects the elimination of interest expense and
the issuance of additional common shares from the assumed conversion of the 7%
Convertible Subordinated Notes from their issuance in April 1995. The weighted
average number of common share used in computing fully diluted net income per
share was 37,423,000 for the year ended December 31, 1995. Fully diluted net
income per share has not been presented in the consolidated financial statements
because the dilutive effect is not material.
PRE-OPENING COSTS:
Non-capital expenditures incurred prior to opening new or renovated hotels
such as payroll and other operating supplies are deferred and expensed within
one year after opening. Preopening costs charged to expense were $0, $86,000 and
$364,000 for the years ended December 31, 1993, 1994 and 1995. As of December
31, 1995, $261,000 of pre-opening costs are included in other current assets.
INTEREST RATE SWAPS:
The Company has entered into an interest rate swap agreement which reduces
the Company's exposure to interest rate fluctuations. The accounting treatment
for the Company's off balance sheet interest rate swap agreement is to accrue
net interest to be received or to be paid as an adjustment to interest expense.
RECLASSIFICATIONS:
Certain reclassifications have been made to the December 31, 1993 and 1994
consolidated financial statements to conform them to the December 31, 1995
presentation.
NOTE 2 -- HOTEL PROPERTY ACQUISITIONS
In March 1995, the Company acquired the option of ShoLodge, Inc.
("ShoLodge") to purchase a 50% interest in eleven of the Company's AmeriSuites
hotels and also acquired the remaining AmeriSuites hotel not
F-14
<PAGE> 67
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
already owned by the Company. In 1993, the Company and its wholly-owned
subsidiary, Suites of America, Inc. ("SOA") entered into agreements with
ShoLodge, a company controlled by a former director, designed to further the
growth of its AmeriSuites hotels from the six hotels owned by the Company at
that time. Pursuant to these agreements, (i) ShoLodge agreed to build and
finance six additional AmeriSuites hotels and received an option to purchase a
50% interest in SOA and (ii) the Company received an option pursuant to which it
could require ShoLodge to purchase a 50% interest in SOA. The exercise of the
option by ShoLodge was scheduled to occur in January 1995, when the Company and
ShoLodge began to negotiate the Company's buyout of ShoLodge's option. The
consideration payable by the Company was based upon the fair market value of the
properties. The consideration totaled $19,700,000 and was comprised of (i)
$16,100,000 in cash, which was paid in 1995, plus (ii) $18,500,000 in notes
maturing in 1997, less (iii) $14,900,000 of existing debt on five hotels, which
was forgiven at face value. The transaction resulted in a net increase of
approximately $3,600,000 of long-term debt. No gain or loss was recorded on the
forgiveness of debt. As a result of this transaction, the Company assumed
management of these hotels.
In August 1995, the Company entered into an agreement to purchase four
Bradbury Suites hotels for $18,700,000. The hotels, comprising 447 rooms, were
subsequently converted to the Company's proprietary AmeriSuites brand. In August
1995, the Company also purchased the 149 room all-suite St. Tropez Hotel and
Shopping Center in Las Vegas for $15,200,000. Revenues and expenses from these
transactions have been included in reported results from the date of
acquisition. If these operations had been included in the consolidated financial
statements for the full year, reported results would not have been materially
different.
NOTE 3 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Cash..................................................... $ 5,953 $ 4,312
Commercial paper and other cash equivalents.............. 6,571 45,221
------- -------
Totals......................................... $12,524 $49,533
======= =======
</TABLE>
NOTE 4 -- MARKETABLE SECURITIES
Marketable securities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Equity securities......................................... $1,117 $ 3,796
Corporate debt securities................................. -- 8,133
------ -------
Totals.......................................... $1,117 $11,929
====== =======
</TABLE>
F-15
<PAGE> 68
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Properties operated by the Company(a).................... $60,609 $57,171
Other(b)................................................. 22,576 9,324
------- -------
Total.......................................... 83,185 66,495
Less current portion..................................... (1,925) (1,533)
------- -------
Long-term portion........................................ $81,260 $64,962
======= =======
</TABLE>
- ---------------
(a) At December 31, 1995, the Company is the holder of mortgage notes receivable
with a book value of $43,293,000 secured primarily by four hotel properties
operated by the Company under management agreements and $13,878,000 in
mortgages secured primarily by four properties operated under lease
agreements. These notes bear interest at rates ranging from 8.0% to 13.5%
and mature through 2015. The mortgages were derived from the sales of hotel
properties.
The loans secured by hotel properties operated under management agreements
pay interest and principal based upon available cash and include a
participation in the future excess cash flow of such hotel properties. Two
of these mortgages have been structured to include a "senior portion"
featuring defined payment terms, and a "junior portion" payable annually
based on cash flow.
In addition to the mortgage positions referred to above, the Company holds
junior or cash flow mortgages and subordinated interests on six other hotel
properties operated by the Company under management agreements. Pursuant to
these mortgage agreements, the Company is entitled to receive the majority
of excess cash flow generated by these hotel properties and to participate
in any future sales proceeds. With regard to these properties, third parties
hold significant senior mortgages. The junior mortgages mature on various
dates from 1999 through 2002.
In accordance with the adoption of fresh start reporting under SOP 90-7, no
value was assigned to the junior portions of the notes or the junior
mortgages and subordinated interests on the other hotels as there was
substantial doubt at the time of valuation that the Company would recover
any of their value. As a result, interest income on these junior or cash
flow mortgages is recognized when cash is received. During 1993, 1994 and
1995, the Company recognized $976,000, $2,000,000 and $1,950,000,
respectively, of interest income related to these mortgages. Future
recognition of interest income on these mortgages is dependent primarily
upon the net cash flow of the underlying hotels after debt service, which is
senior to the Company's junior positions.
(b) Other notes receivable currently bear interest at effective rates ranging
from 4.0% to 10.0%, mature through 2011 and are secured primarily by hotel
properties not currently managed by the Company.
F-16
<PAGE> 69
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- YEARS OF
1994 1995 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Land and land leased to others............. $ 49,438 $ 69,765
Hotels..................................... 200,706 246,278 20 to 40
Furniture, fixtures and autos.............. 46,021 67,001 3 to 10
Leasehold improvements..................... 11,336 26,038 3 to 40
Construction in progress................... 1,457 22,667
Properties held for sale................... 8,898 --
-------- --------
Sub-total................................ 317,856 431,749
Less accumulated depreciation and
amortization.......................... (18,565) (33,548)
-------- --------
Totals........................... $299,291 $398,201
======== ========
</TABLE>
At December 31, 1995, the Company was the lessor of land and certain
restaurant facilities in Company-owned hotels with an approximate aggregate book
value of $7,493,000 pursuant to noncancelable operating leases expiring on
various dates through 2013. Minimum future rentals under such leases are
$9,599,000, of which $4,079,000 is scheduled to be received in the aggregate
during the five-year period ending December 31, 2000.
Depreciation and amortization expense on property, equipment and leasehold
improvements was $7,015,000, $9,300,000 and $14,800,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
During the years ended December 31, 1993, 1994 and 1995, the Company
capitalized $0, $836,000 and $2,596,000, respectively, of interest related to
borrowings used to finance hotel construction.
NOTE 7 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Accounts payable......................................... $ 4,436 $ 6,940
Interest................................................. 3,115 3,616
Accrued payroll and related benefits..................... 2,490 3,151
Accrued expenses......................................... 4,182 4,303
Insurance reserves....................................... 5,123 6,007
Hurricane damage reserve................................. -- 8,718
Other.................................................... 4,558 6,226
------- -------
Totals......................................... $23,904 $38,961
======= =======
</TABLE>
In September 1995, the Marriott's Frenchman's Reef Hotel (the "Frenchman's
Reef") in St. Thomas, United States Virgin Islands suffered damages when
Hurricane Marilyn struck the U.S. Virgin Islands. At December 31, 1995, the
Company has a reserve of $8,718,000 which consists of a $2,200,000 reserve (See
Notes 8 and 11) established to cover the cost of the insurance deductible and
$6,518,000 of insurance advances, net of funds that have been used to begin the
restoration process.
F-17
<PAGE> 70
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
10% Senior Secured Notes(a)............................ $ 52,580 $ 30,374
7% Convertible Subordinated Notes(b)................... -- 86,250
Mortgages and other notes payable(c)................... 131,249 158,904
Capitalized lease obligations(d)....................... -- 7,123
-------- --------
Total debt............................................. 183,829 282,651
Less current maturities................................ (5,284) (5,731)
-------- --------
Long-term debt, net of current portion....... $178,545 $276,920
======== ========
</TABLE>
- ---------------
(a) The 10% Senior Secured Notes were issued pursuant to the Plan, and mature on
July 31, 1999. The collateral for the 10% Senior Secured Notes consists
primarily of mortgages and notes receivable and real property, net of
related liabilities (the "10% Senior Secured Note Collateral"), with a book
value of $68,812,000 as of December 31, 1995.
Interest on the 10% Senior Secured Notes is payable semi-annually. The 10%
Senior Secured Notes require that 85% of the cash proceeds from the 10%
Senior Secured Note Collateral be applied first to interest then to
prepayment of principal. Aggregate principal payments on the 10% Senior
Secured Notes are required in order that one-third of the principal balance
outstanding on December 31, 1996 is paid by July 31, 1998 and all of the
balance is paid by July 31, 1999. To the extent the cash proceeds from the
10% Senior Secured Note Collateral are insufficient to pay interest or
required principal payments on the 10% Senior Secured Notes, the Company
will be obligated to pay any deficiency out of its general corporate funds.
The 10% Senior Secured Notes contain covenants which, among other things,
require the Company to maintain a net worth of at least $100,000,000, and
preclude cash distributions to stockholders, including dividends and
redemptions, until the 10% Senior Secured Notes have been paid in full. As
of December 31, 1995, the Company was in compliance with all covenants
applicable to the 10% Senior Secured Notes.
During 1994 the Company purchased through a third party agent approximately
$5,200,000 of its 10% Senior Secured Notes for aggregate consideration of
approximately $4,800,000. These notes are currently held by the third party
agent and have not been retired due to certain restrictions under the note
agreements. The purchases were recorded as investments on the Company's
balance sheet and no gains are recorded until the notes mature or are
redeemed. During 1994, approximately $1,137,000 of the notes were retired
resulting in a pretax extraordinary gain of approximately $105,000. During
1995, approximately $1,738,000 of the notes were retired resulting in a
pretax extraordinary gain of $174,000. As of December 31, 1995, the Company
had unrecognized holding gains of approximately $177,000 related to these
securities.
(b) In 1995, the Company sold $86,250,000 of 7% Convertible Subordinated Notes
due 2002. The notes are convertible into common stock at a price of $12 per
share at the option of the holder and mature on April 15, 2002. The notes
are redeemable, in whole or in part, at the option of the Company after
April 17, 1998 at premiums to principal which decline on each anniversary
date.
(c) The Company has mortgage and other notes payable of approximately
$158,904,000 that are secured by mortgage notes receivable and hotel
properties with a book value of $260,116,000.
F-18
<PAGE> 71
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal and interest on these mortgages and notes are generally paid
monthly. At December 31, 1995 these notes bear interest at rates ranging
from 6.6% to 10.5%, with a weighted average interest rate of 9.3%, and
mature from 1996 through 2007.
Subsequent to December 31, 1995, the Company entered into an agreement to
extend the maturity of a loan in the amount of $32,097,000 secured by the
Frenchman's Reef from December 1996 to July 1997. The loan will bear
interest at the same rate currently in effect and principal payments will be
waived until July 1997. All other terms and conditions of the loan shall
remain in effect. The December 31, 1995 consolidated financial statements
reflect the impact of this amendment.
Additionally, the Company's debt related to the Frenchman's Reef is further
secured by an assignment of property insurance proceeds related to the
hurricane damage (See Notes 7 and 11). The lender has sole discretion
concerning the utilization of such proceeds for refurbishment. The Company
is discussing with the lender the terms under which the lender will make
such funds available for refurbishment.
(d) The Company has $7,123,000 of capital lease obligations. Principal and
interest on these capital lease obligations are generally paid monthly. At
December 31, 1995, these leases bear interest at rates ranging from 6.7% to
12.45%, with a weighted average interest rate of 10.8%, and mature through
2001.
In August 1995, the Company entered into an interest rate protection
agreement with a major financial institution which reduces the Company's
exposure to fluctuations in interest rates by effectively fixing interest
rates on $40 million of variable interest rate debt. Under the agreement, on
a monthly basis the Company will pay a fixed rate of interest of 6.18% and
will receive a floating interest rate payment equal to the 30 day LIBOR rate
on a $40 million notional principal amount. The agreement commenced in
October 1995 and expires in 1999.
Maturities of long-term debt for the next five years ending December 31 are
as follows (in thousands):
<TABLE>
<S> <C>
1996.............................................. $ 5,731
1997.............................................. 83,127
1998.............................................. 4,877
1999.............................................. 33,714
2000.............................................. 28,277
Thereafter........................................ 126,925
--------
Total................................... $282,651
========
</TABLE>
On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First
Mortgage Notes due 2006 (See Note 16). The Company utilized a portion of the
proceeds to pay down $51,601,000 of debt outstanding at December 31, 1995.
Included in this amount was $45,798,000 due in 1997.
NOTE 9 -- LEASE COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various hotels under lease agreements with initial terms
expiring at various dates from 1998 through 2022. The Company has options to
renew certain of the leases for periods ranging from 1 to 99 years. Rental
payments are based on minimum rentals plus a percentage of the hotel properties'
revenues in excess of stipulated amounts.
F-19
<PAGE> 72
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule, by year, of future minimum lease payments
required under the remaining operating leases that have terms in excess of one
year as of December 31, 1995 (in thousands):
<TABLE>
<S> <C>
1996............................................... $ 4,854
1997............................................... 4,808
1998............................................... 4,762
1999............................................... 4,976
2000............................................... 4,681
Thereafter......................................... 42,829
-------
Total.................................... $66,910
=======
</TABLE>
Rental expense for all operating leases, including those with terms of less
than one year, consist of the following for the years ended December 31, 1993,
1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Rentals.................................................. $5,009 $4,654 $4,630
Contingent rentals....................................... 764 823 745
------ ------ ------
Rental expense................................. $5,773 $5,477 $5,375
====== ====== ======
</TABLE>
EMPLOYEE BENEFITS
The Company does not provide any material post employment benefits to its
current or former employees.
CONTINGENT CLAIMS
In April 1995, the Company received a second favorable ruling in its
litigation with Financial Security Assurance, Inc. ("FSA") in which FSA sought
approximately $31,200,000 previously received by the Company in settlement of a
note and guaranty from Allen V. Rose and Arthur Cohen ("Rose and Cohen"). In an
order dated April 25, 1995, the U.S. District Court for the Southern District of
Florida (the "U.S. District Court") affirmed a lower court ruling approving the
Company's settlement with Rose and Cohen and finding that the Company alone was
entitled to the settlement proceeds. The Company had previously reached a
settlement in 1993 with Rose and Cohen which provided for Rose or his affiliate
to pay the Company $25,000,000 plus proceeds from the sale of approximately
1,100,000 shares of the Company's common stock held by Rose, bringing the total
settlement proceeds to approximately $31,200,000. FSA asserted that, under the
terms of an intercreditor agreement, it was entitled to receive the settlement
proceeds otherwise payable to the Company. The U.S. Bankruptcy Court for the
Southern District of Florida (the "Bankruptcy Court") ruled in favor of the
Company in April 1994 and the Company used $25,000,000 of the settlement
proceeds to retire certain senior secured notes. FSA appealed to the U.S.
District Court, which affirmed the Bankruptcy Court's ruling. On May 12, 1995,
the Company used the remaining proceeds plus accrued interest to prepay the 10%
Senior Secured Notes. On May 23, 1995, FSA filed a notice of appeal with the
U.S. Court of Appeals for the 11th Circuit. The Company believes that the U.S.
Court of Appeals will affirm the U.S. District Court ruling and that there will
be no effect on the Company's financial position or results of operations.
The Company is involved in various other proceedings incidental to the
normal course of its business. The Company believes that the resolution of these
contingencies will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-20
<PAGE> 73
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INCOME TAXES
The provision for income taxes (including amounts applicable to
extraordinary items) consisted of the following for the years ended December 31,
1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Current:
Federal.............................................. $2,167 $ 970 $ 320
State................................................ 220 28 299
------ ------- -------
2,387 998 619
------ ------- -------
Deferred:
Federal.............................................. 5,049 9,780 9,929
State................................................ 1,017 1,514 1,165
------ ------- -------
6,066 11,294 11,094
------ ------- -------
Total........................................ $8,453 $12,292 $11,713
====== ======= =======
</TABLE>
Income taxes are provided at the applicable federal and state statutory
rates.
The tax effects of the temporary differences in the areas listed below
resulted in deferred income tax provisions for the years ended December 31,
1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Utilization of net operating loss...................... $4,525 $ 5,861 $ 3,370
Amortization of pre-fresh start basis
differences -- properties and notes.................. 1,322 5,632 6,167
Depreciation........................................... 144 200 1,400
Leasehold reserves..................................... -- 450 158
Property transactions.................................. -- 320 --
Compensation expense................................... -- -- 604
Other.................................................. 75 (1,169) (605)
------ ------- -------
Total........................................ $6,066 $11,294 $11,094
====== ======= =======
</TABLE>
At December 31, 1995, the Company had available federal net operating loss
carryforwards of approximately $114,271,000 which will expire beginning in 2005
and continuing through 2007. Of this amount, $96,080,000 is subject to an annual
limitation of $8,735,000 under the internal revenue code due to a change in
ownership of the company upon consummation of the Plan. The Company also has
potential state income tax benefits relating to net operating loss carryforwards
of approximately $8,673,000 which will expire during various periods from 1996
to 2006. Certain of these potential benefits are subject to annual limitations
similar to federal requirements due to factors such as the level of business
conducted in each state and the amount of income subject to tax within each
state's carryforward period.
In accordance with SFAS 109, the Company has not recognized the future tax
benefits associated with the net operating loss carryforwards or with other
temporary differences. Accordingly, the Company has provided a valuation
allowance of approximately $39,995,000 against the deferred tax asset as of
December 31, 1995. To the extent any available carryforwards or other tax
benefits are utilized, the amount of tax benefit realized will be treated as a
contribution to stockholders' equity and will have no effect on the income tax
provision for financial reporting purposes. For the years ended December 31,
1993, 1994 and 1995, the
F-21
<PAGE> 74
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recognized $4,525,000, $5,861,000 and $3,370,000, respectively of such
benefits as a contribution to stockholders' equity.
Additionally, the Company recognized $6,954,000 and $6,167,000 as a
contribution to stockholders' equity for the years ended December 31, 1994 and
1995, which represents the amortization of pre-fresh start tax basis differences
related to properties and notes receivable. As a result of reflecting
substantially all of the deferred tax provisions as a contribution to
stockholders' equity, the Company had no material deferred tax assets or
liabilities as of December 31, 1994 and 1995.
NOTE 11 -- OTHER INCOME/EXPENSE
Other income consists of items which are not considered part of the
Company's recurring operations and is composed of the following as of December
31, 1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Gains on settlements of notes receivable................. $ -- $6,355 $ 822
Gain on sale of property................................. 2,109 1,099 1,417
Rebates of prior year's insurance........................ -- 1,579 --
premiums Interest on federal income tax refund........... 1,200 56 --
Other.................................................... 500 -- --
------ ------ ------
Total.......................................... $3,809 $9,089 $2,239
====== ====== ======
</TABLE>
Other expense of $2,200,000 for the year ended December 31, 1995, consists
of a reserve for insurance deductibles related to hurricane damage at the
Frenchman's Reef (See Note 7).
NOTE 12 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The fair values of non-current financial assets and liabilities and other
financial instruments are shown below (in thousands). The fair values of current
assets and current liabilities are assumed to be equal to their reported
carrying amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage and notes receivable........... $ 81,260 $ 91,604 $ 64,962 $ 76,058
Long-term debt.......................... 178,545 178,250 276,920 278,899
Other financial instruments (Interest
rate swap agreement).................. -- -- -- (15)
</TABLE>
The fair value for mortgages and notes receivable is based on the valuation
of the underlying collateral utilizing discounted cash flows and other methods
applicable to the industry. Valuations for long-term debt are based on quoted
market prices or at current rates available to the Company for debt of the same
maturities. The fair value of the interest rate swap agreement is based on the
estimated amount the Company would pay to terminate the agreement.
The Company's mortgages and other notes receivable (See Note 5) are derived
primarily from and are secured by hotel properties, which constitutes a
concentration of credit risk. These notes are subject to many of the same risks
as the Company's operating hotel assets. A significant portion of the collateral
is located in the Northeastern and Southeastern United States.
F-22
<PAGE> 75
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- RELATED PARTY TRANSACTIONS
The following summarizes significant financial information with respect to
transactions with present and former officers, directors, their relatives and
certain entities they control or in which they have a beneficial interest for
the years ended December 31, 1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994 1995
---- ------ ------
<S> <C> <C> <C>
Management and other fee income(a)......................... $810 $1,165 $1,427
Interest income(a)......................................... 14 1,283 518
Management fee expense(b).................................. 222 679 --
Interest expense(b)........................................ 475 461 --
Reservation fee expense(b)................................. 468 317 --
</TABLE>
- ---------------
(a) During 1995, the Company managed 15 hotels for partnerships in which related
parties own various interests. The income amounts shown above primarily
include transactions related to these hotel properties. On March 6, 1996,
the Company acquired nine of these hotels (See Note 16).
(b) In 1991, the Company entered into an agreement with ShoLodge, a company
controlled by a former director, whereby ShoLodge was appointed the
exclusive agent to develop and manage certain hotel properties.
In March 1995, the Company acquired ShoLodge's option to purchase the
remaining 50% interest in all eleven hotels developed by ShoLodge and also
acquired the ownership interest of the remaining AmeriSuites hotel not
already owned by the Company (See Note 2).
NOTE 14 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS
Stock Options
The Company has adopted various stock option and performance incentive
plans under which options to purchase shares of common stock may be granted to
directors, officers or key employees under terms determined by the Board of
Directors. Total options reserved under these plans (net of amounts granted to
date) as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1995 Employee Stock Option Plan............................................ 574,000
1995 Non-Employee Director Stock Option Plan............................... 250,000
-------
Total............................................................ 824,000
=======
</TABLE>
Under the 1995 Employee Stock Option Plan, options to purchase shares of
common stock may be granted at the fair market value of the common stock at the
date of grant. Options can generally be exercised during a participant's
employment with the Company in equal annual installments over a three-year
period and expire ten years from the date of grant. During 1995, options to
purchase 648,000 shares of common stock were granted under this plan.
Under the 1995 Non-Employee Director Stock Option Plan, options to purchase
10,000 shares of common stock are automatically granted to each non-employee
director at the fair market value of the common stock at the date of grant. All
options will be fully vested and exercisable one year after the date of grant
and will expire ten years after the date of grant, or earlier if the
non-employee director ceases to be a director. During 1995, options to purchase
50,000 shares of common stock were granted under this plan.
Under the Company's 1992 Stock Option and Performance Incentive Plans,
options to purchase 413,000, 367,000 and 15,000 shares of common stock were
issued to employees in 1993, 1994 and 1995, respectively. The options were
granted at prices which approximate fair market value at the date of grant.
Generally, these
F-23
<PAGE> 76
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options can be exercised during a participant's employment in equal annual
installments over a three year period and expire six years from the date of
grant.
Options to purchase 315,000, 30,000 and 60,000 shares of common stock were
issued to non-employee directors of the Company in 1993, 1994 and 1995,
respectively, under the Company's 1992 Stock Option Plan. The options were
granted at prices which approximate fair market value at the date of grant.
Generally, one-third of these options were exercisable at the date of grant and
the remaining options vest in equal annual installments over a two-year period.
The options expire six years after the date of grant.
During 1992, options to purchase 350,000 shares were granted to employee
officers and directors under the Company's 1992 Stock Option Plan. All 350,000
shares are currently exercisable at December 31, 1995. In addition, options to
purchase 330,000 shares were granted to a former officer in 1992. At December
31, 1995, all of these options were exercised. The exercise prices of the above
options are based on the average market price one year from the date of grant
which was determined to be $2.71 per share. Based on this exercise price, the
amount of compensation expense attributable to these options was $225,000,
$60,000 and $16,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
During 1995, the Financial Accounting Standards Board issued "Accounting
for Stock Based Compensation (SFAS 123)." The new standard specifies permissible
methods for valuing compensation attributable to stock options, as well as
certain required disclosures. The Company is required to adopt the new standard
beginning in 1996.
The Company intends to continue to follow the compensation measurement
method currently used, which is one of the permissible methods under SFAS 123.
As a result, compensation expense attributable to stock option plans will
continue to be measured by the excess, if any, of the market price of the
Company's common stock on the date of grant over the exercise price of the
option. Additional disclosures showing the pro forma effect of an alternative
method will be included in the notes to financial statements.
The following is a summary of the various stock option plans:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARES
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1993........................... 1,301,000
Granted.................................................... 397,000 $7.38-$ 7.63
Exercised.................................................. (216,000) $2.71-$ 3.63
Canceled................................................... (40,000) $3.63-$ 7.63
---------
Outstanding at December 31, 1994........................... 1,442,000
---------
Granted.................................................... 773,000 $9.25-$10.88
Exercised.................................................. (222,000) $2.71-$ 7.63
Canceled................................................... (165,000) $3.63-$ 9.63
---------
Outstanding at December 31, 1995........................... 1,828,000
=========
Exercisable at December 31, 1995........................... 798,000 $2.71-$ 9.31
=========
</TABLE>
Warrants
Pursuant to the Plan, warrants to purchase 2,106,000 shares of the
Company's common stock were issued to former shareholders of the Company's
predecessor, PMI, in partial settlement of their bankruptcy interests. The
warrants became exercisable on August 31, 1993 at an exercise price of $2.71 per
share and expire five years after the date of grant. The exercise price was
determined from the average per share daily closing price of the Company's
common stock during the year following its reorganization on July 31, 1992. As
of December 31, 1995 warrants to purchase 625,466 shares have been exercised.
F-24
<PAGE> 77
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes non-cash investing and financing activities for
the years ended December 31, 1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994 1995
------ ------- ------
<S> <C> <C> <C>
Hotels acquired in exchange for the assumption of
mortgage notes payable................................ $9,161 $18,718 $5,120
Hotels received in settlement of mortgage notes
receivable............................................ 3,500 54,521 2,702
Sale of hotel in exchange for a mortgage note
receivable............................................ $6,500 $ 1,497 $ --
</TABLE>
Cash paid for interest was $16,347,000, $15,504,000 and $22,444,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
Cash paid for income taxes was $2,697,000, $1,900,000 and $1,237,000 for
the years ended December 31, 1993, 1994 and 1995, respectively.
NOTE 16 -- SUBSEQUENT EVENTS
On January 23, 1996, the Company issued $120,000,000 of 9 1/4% First
Mortgage Notes due 2006. Interest on the notes will be payable semi-annually on
January 15 and July 15. The notes are secured by 15 hotels and contain certain
covenants including limitations on the incurrence of debt, dividend payments,
certain investments, transactions with affiliates, asset sales and mergers and
consolidations. These notes are redeemable, in whole or in part, at the option
of the Company after five years at premiums to principal which decline on each
anniversary date. The Company utilized a portion of the proceeds to pay down
$51,601,000 of debt outstanding as of December 31, 1995.
On March 6, 1996, the Company acquired 18 hotels consisting of 16 Wellesley
Inns and two other limited-service hotels for approximately $65,100,000 in cash.
The acquisition enables the Company to establish full control over its
proprietary Wellesley Inns brand with all 30 Wellesley Inns owned and operated
by the Company. The acquisition price was comprised of approximately $60,400,000
to purchase the first mortgage on the 18 hotels with a face value of
approximately $70,500,000 and $4,700,000 to purchase the interests of the three
partnerships which owned the hotels. Approximately $1,900,000 of the total
purchase price was paid to a partnership in which a general partner is the
father of David A. Simon, the Company's President and Chief Executive Officer.
In connection with the transaction, the Company also terminated its management
agreements and junior subordinated mortgages related to the 18 hotels.
On July 2, 1996, the Company filed a registration statement covering the
sale of 7.5 million shares of its common stock. The Company intends to use the
net proceeds from this offering to fund the development and growth of its
AmeriSuites all-suites hotel brand. The offering is subject to a number of risks
that should be considered by prospective investors. See "Risk Factors" included
elsewhere in this Registration Statement.
F-25
<PAGE> 78
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesman or other person is authorized to give any information or
to make any representation in connection with this offering not contained in
this Prospectus, and any information or representation not contained herein must
not be relied upon as having been authorized by the Company or the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy of any securities other than the Common Stock or an offer to any
person in any jurisdiction where such offer would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 13
Capitalization........................ 14
Recent Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Selected Consolidated Financial Data
of the Company and its
Predecessor......................... 30
Business.............................. 31
Management............................ 44
Description of Capital Stock.......... 46
Underwriting.......................... 48
Legal Matters......................... 48
Experts............................... 49
Available Information................. 50
Incorporation of Certain Documents by
Reference........................... 50
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
7,500,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SMITH BARNEY INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the Notes being registered which will be paid solely by
the Company. All the amounts shown are estimates, except the Securities and
Exchange Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee:
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 48,895
NASD Fee.................................................................. 14,680
Printing and Engraving Expenses........................................... 100,000
Legal Fees and Expenses................................................... 175,000
Accounting Fees and Expenses.............................................. 50,000
Blue Sky Fees and Expenses................................................ 20,000
Transfer Agent Fees and Expenses.......................................... 25,000
Miscellaneous Expenses.................................................... 16,425
--------
Total........................................................... $450,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final action of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending such action, provided that the director or officer undertakes to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses (including attorneys' fees) which he or she actually
and reasonably incurred in connection therewith. The indemnification provided is
not deemed to be exclusive of any other rights to which an officer or director
may be entitled under any corporation's by-law, agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, Article 8 of the Company's
Restated Certificate of Incorporation (the "Restated Certificate") and the
Company's By-Laws (the "By-Laws") provide that the Company shall indemnify to
the fullest extent permitted under and in accordance with the laws of the State
of Delaware any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative by reason of the fact that he
is or was a director, officer, employee or agent of the Company, or is or was
serving at the request
II-1
<PAGE> 80
of the Company as director, officer, trustee, employee or agent of or in any
other capacity with another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The indemnification
provided by the Restated Certificate and the By-Laws shall not be deemed
exclusive of any other rights to which any of those seeking indemnification or
advancement of expenses may be entitled under any other contract or agreement
between the Company and any officer, director, employee or agent of the Company.
Expenses incurred in defending a civil or criminal action, suit or proceeding
shall (in the case of any action, suit or proceeding against a director of the
Company) or may (in the case of any action, suit or proceeding against an
officer, trustee, employee or agent) be paid by the Company in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
of Directors of the Company upon receipt of an undertaking by or on behalf of
the indemnified person to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the Company. Subparagraph (d) of
Article 8 of the Restated Certificate provides that neither the amendment or
repeal of, nor the adoption of any provision inconsistent with, the
above-referenced provisions of the Restated Certificate shall eliminate or
reduce the effect of such provisions in respect of any matter occurring before
such amendment, repeal or adoption of an inconsistent provision or in respect of
any cause of action, suit or claim relating to any such matter which would have
given rise to a right of indemnification or right to receive expenses pursuant
to such provisions if any such provision had not been so amended or repealed or
if a provision inconsistent therewith had not been so adopted. Subparagraph (e)
of Article 8 of the Restated Certificate provides that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
any amendment thereto or successor provision thereto, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
DGCL is amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Company shall be eliminated or limited to the fullest extent permitted by the
DGCL as so amended.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT REPORT OR REGISTRATION STATEMENT IN
NUMBER DESCRIPTION WHICH DOCUMENT IS CONTAINED
- ------ ------------------------------------- -------------------------------------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement Filed herewith
2.1 -- Senior Secured Revolving Credit To be filed by amendment
Agreement, dated as of June 26, 1996,
among the Company, the lenders party
thereto, Credit Lyonnais New York
Branch, as Documentation Agent, and
Bankers Trust Company, as Agent
4.1 -- Specimen Common Stock Certificate Filed as Exhibit 1(a) to the
Company's Form 8-A dated June 5, 1992
5.1 -- Opinion of Willkie Farr & Gallagher To be filed by amendment
23.1 -- Consent of Willkie Farr & Gallagher Contained within Exhibit 5.1
23.2 -- Consent of Arthur Andersen LLP Filed herewith
24.1 -- Power of Attorney Included on the signature page hereto
</TABLE>
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Certificate, By-Laws, the
II-2
<PAGE> 81
Underwriting Agreement or otherwise, the Registrant has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) The Registrant hereby undertakes that
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and this Offering of such securities at that time shall be
deemed to be the initial bona fide Offering thereof.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements of filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 2nd day of July,
1996.
PRIME HOSPITALITY CORP.
By: /s/ DAVID A. SIMON
------------------------------------
David A. Simon,
Chairman of the Board,
President and Chief Executive
Officer
POWER OF ATTORNEY
The undersigned officers and directors of Prime Hospitality Corp., hereby
severally constitute and appoint David A. Simon and John M. Elwood, and each of
them, attorneys-in-fact for the undersigned, in any and all capacities, with the
power of substitution, to sign any amendments to this Registration Statement
(including post-effective amendments) and any subsequent registration statement
for the same offering which may be filed under Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully and to all interests and purposes as he
might or could do in person, hereby ratifying and confirming all that each said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
II-4
<PAGE> 83
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons, in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ ------------------------------------- -------------
<C> <S> <C>
/s/ DAVID A. SIMON Chairman of the Board, President, July 2, 1996
- ------------------------------------------ Chief Executive Officer and
David A. Simon Director (principal executive
officer)
/s/ JOHN M. ELWOOD Chief Financial Officer, Executive July 2, 1996
- ------------------------------------------ Vice President and Director
John M. Elwood (principal
financial and accounting officer)
/s/ HERBERT LUST, II Director July 2, 1996
- ------------------------------------------
Herbert Lust, II
/s/ JACK H. NUSBAUM Director July 2, 1996
- ------------------------------------------
Jack H. Nusbaum
/s/ ALLEN J. OSTROFF Director July 2, 1996
- ------------------------------------------
Allen J. Ostroff
/s/ A.F. PETROCELLI Director July 2, 1996
- ------------------------------------------
A.F. Petrocelli
/s/ HOWARD M. LORBER Director July 2, 1996
- ------------------------------------------
Howard M. Lorber
</TABLE>
II-5
<PAGE> 84
APPENDIX I
This Registration Statement contains spaces for the following graphic and
image materials:
(1) The front cover will be folded. The inside front cover contains a map
of the United States showing the states where the Company's hotels are located
or under development.
(2) The fold-out portion of the front cover contains photographs of hotels
and a map. The left side contains photographs of AmeriSuites hotels and a map
indicating the location of AmeriSuites hotels. The right side contains
photographs of additional AmeriSuites hotels in the Company's Portfolio.
(3) The inside back cover contains additional photographs of full-service
and limited-service hotels in the Company's Portfolio.
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
REPORT OR REGISTRATION STATEMENT SEQUENTIALLY
EXHIBIT IN NUMBERED
NUMBER DESCRIPTION WHICH DOCUMENT IS CONTAINED PAGES
- ------ --------------------------------------- --------------------------------- ------------
<S> <C> <C> <C> <C>
1.1 -- Form of Underwriting Agreement Filed herewith
2.1 -- Senior Secured Revolving Credit To be filed by amendment
Agreement, dated as of June 26, 1996,
among the Company, the lenders party
thereto, Credit Lyonnais New York
Branch, as Documentation Agent, and
Bankers Trust Company, as Agent
4.1 -- Specimen Common Stock Certificate Filed as Exhibit 1(a) to the
Company's Form 8-A dated
June 5, 1992
5.1 -- Opinion of Willkie Farr & Gallagher To be filed by amendment
23.1 -- Consent of Willkie Farr & Gallagher Contained within Exhibit 5.1
23.2 -- Consent of Arthur Andersen LLP Filed herewith
24.1 -- Power of Attorney Included on the signature page
hereto
</TABLE>
<PAGE> 1
EXHIBIT 1.1
PRIME HOSPITALITY CORP.
____________ Shares of Common Stock
UNDERWRITING AGREEMENT
July __, 1996
MONTGOMERY SECURITIES
BT SECURITIES CORP.
SMITH BARNEY, INC.
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
SECTION 1. Introductory. Prime Hospitality Corp., a Delaware
corporation (the "Company"), proposes to issue and sell __________ shares of
common stock, par value $.01, of the Company ("Firm Shares") to the several
underwriters named in Schedule A hereto (the "Underwriters"). The Company also
proposes to issue and sell to the Underwriters not more than ___________ shares
of additional shares (the "Additional Shares") of common stock, if requested by
the Underwriters as provided in Section 4 hereof. The Firm Shares and the
Additional Shares are herein collectively called the "Shares". The shares of
common stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock".
The Underwriters have advised the Company that they propose to make a
public offering of their respective portions of the Shares on the effective date
of the registration statement hereinafter referred to, or as soon thereafter as
in their judgment is advisable.
The Company hereby confirms its agreements with respect to the purchase
of the Shares by the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The Company
hereby represents and warrants to the Underwriters that:
(a) A registration statement on Form S-3 (Registration No.
333-________) with respect to the Shares, including a preliminary form
of prospectus, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act") and
the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission; one or
1
<PAGE> 2
more amendments to such registration statement may have been so
prepared and may have been, or may be, so filed, including either (i)
prior to effectiveness of such registration statement, a further
amendment to such registration statement (including the form of final
prospectus) or (ii) after effectiveness of such registration statement,
a final prospectus in accordance with Rules 430A and 424(b)(1) or (4)
under the Act. Copies of such registration statement and amendments,
each related preliminary prospectus (the "Preliminary Prospectus")
(including three fully executed copies of the registration statement
and each amendment thereto) and the pre-effective prospectus or final
form of prospectus have been delivered to the Underwriters. Such
registration statement as amended at the time it becomes effective or,
if a post-effective amendment is filed with respect thereto, as amended
by such post-effective amendment at the time of its effectiveness,
including in each case information incorporated by reference therein
and financial statements and exhibits, and the information (if any)
contained in a prospectus subsequently filed with the Commission
pursuant to Rule 424(b) under the Act and deemed to be a part of the
registration at the time of its effectiveness pursuant to Rule 430A
under the Act, is hereinafter referred to as the "Registration
Statement;" and such prospectus as then amended including such
information incorporated by reference therein, or first used to confirm
sales, whether or not filed with the Commission pursuant to Rule 424(b)
under the Act, is herein after referred to as the "Prospectus."
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, or to the
knowledge of the Company, has been threatened to be issued.
(c) Each part of the Registration Statement, when such part
became or becomes effective, each Preliminary Prospectus, on the date
of filing thereof with the Commission, and the Prospectus and any
amendment or supplement thereto, on the date of filing thereof with the
Commission, or as first used to confirm sales, at the Closing Date (as
hereinafter defined), and at any Option Closing Date (as hereinafter
defined), conformed or will conform in all material respects with the
requirements of the Act and the Rules and Regulations; each part of the
Registration Statement, when such part became or becomes effective, did
not or will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; each Preliminary
Prospectus, on the date of filing thereof with the Commission, and the
Prospectus and any amendment or supplement thereto, on the date of
filing thereof with the Commission, or when first used to confirm
sales, at the Closing Date, and at any Option Closing Date, did not or
will not include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were or will be made, not
misleading; except that the foregoing shall not apply to statements in
or omissions from any such document in reliance upon, and in conformity
with, written information relating to the Underwriters furnished to the
Company by or on behalf of the Underwriters, specifically for use in
the preparation thereof. The documents incorporated by reference in the
Prospectus, when they were filed with the Commission, conformed in all
material respects to the requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder, and none of such documents contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading.
2
<PAGE> 3
(d) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit __ to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1995. The Company and each
of the Company's subsidiaries has been duly incorporated and is an
existing corporation in good standing under the laws of its respective
jurisdiction of incorporation, has full power and authority (corporate
and other) to conduct its business as described in the Registration
Statement and Prospectus and is duly qualified to do business in each
jurisdiction in which it owns or leases real property or in which the
conduct of its business requires such qualification except where the
failure to be so qualified, considering all such cases in the
aggregate, would not have a material adverse effect on the condition
(financial or other), business, property or results of operations of
the Company and its subsidiaries taken as a whole (a "Material Adverse
Effect").
(e) The Company has an authorized and outstanding capital
stock as set forth under the heading "Capitalization" in the
Prospectus; the Common Stock (including the Shares) has been duly
authorized and validly issued, are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, conform to the
description thereof contained in the Prospectus and, when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any preemptive
or similar rights.. All issued and outstanding shares of capital stock
of each subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable and (except as otherwise
stated in the Registration Statement) are owned beneficially by the
Company subject to no security interest, other encumbrance or adverse
claim. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in
the Registration Statement, accurately and fairly presents the
information required to be shown with respect to such plans,
arrangements, options and rights.
(f) This Agreement has been duly authorized, executed and
delivered by the Company. The performance of this Agreement and the
consummation of the transactions herein contemplated will not result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it
is bound or to which any of the property of the Company or any of its
subsidiaries is subject, the charter or by-laws of the Company or any
of its subsidiaries, or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their respective properties; no consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
issuance or sale of the Shares by the Company, except such as may be
required under the Act or state securities laws; and the Company has
full power and authority to authorize, issue and sell the Shares as
contemplated by this Agreement.
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(g) Arthur Andersen LLP is an independent public accountant
with respect to the Company as required by the Act.
(h) The financial statements and schedules of the Company and
its predecessor and the related notes thereto, included in the
Registration Statement and the Prospectus present fairly the financial
position of the Company and its predecessor, as the case may be, as of
the respective dates of such financial statements and schedules, and
the results of operations and changes in financial position of the
Company and its predecessor, as the case may be, for the respective
periods covered thereby. Such statements, schedules and related notes
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis as certified by Arthur
Andersen LLP. No other financial statements or schedules are required
to be included in the Registration Statement. The selected financial
data set forth in the Prospectus under the captions "Capitalization,"
"Summary Recent Financial and Other Data," "Recent Consolidated
Financial Data," and "Selected Consolidated Financial Data of the
Company and its Predecessor," fairly present the information set forth
therein on the basis stated in the Registration Statement.
(i) Neither the Company nor any of its subsidiaries is in
violation of its charter or by-laws or in default in the performance of
any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any other
agreement, indenture, mortgage, deed of trust or other contract, lease
or other instrument to which the Company or any of its subsidiaries is
a party or by which they or any of their property is bound, or to which
any of the property or assets of the Company or any of its subsidiaries
is subject except for any such violation or default that could not have
a Material Adverse Effect.
(j) The descriptions in the Registration Statement and the
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown. There are no contracts or documents
of the Company or any of its subsidiaries that are required to be filed
as exhibits to the Registration Statement by the Act or by the Rules
and Regulations that have not been so filed.
(k) Except as contemplated in the Prospectus, subsequent to
the respective dates as of which information is given in the
Registration Statement and the Prospectus, none of the Company or any
of its subsidiaries has incurred any liabilities or obligations, direct
or contingent, or entered into any transactions, not in the ordinary
course of business, that are material to the Company and its
subsidiaries, and there has not been any material adverse change, on a
consolidated basis, in the capital stock, short-term debt or long-term
debt of the Company and its subsidiaries, or any material adverse
change, or any development involving a prospective material adverse
change, in the condition (financial or other), business, net worth or
results of operations of the Company and its subsidiaries, taken as a
whole.
(l) There is (i) no action, suit or proceeding before or by
any court, arbitrator or governmental agency, body or official,
domestic or foreign, now pending, or to the knowledge of the Company,
threatened or contemplated to which the Company or any of its
subsidiaries is or may be a party or to which the business or property
of the Company or any of its subsidiaries is or may be subject, (ii) to
the knowledge of the Company, no statute, rule, regulation or order
that has been enacted, adopted or issued by any governmental agency or
that has been proposed
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<PAGE> 5
by any governmental body (other than Blue Sky laws, regulations or
orders), or (iii) no injunction, restraining order or order of any
nature by a federal or state court of competent jurisdiction to which
the Company or any of its subsidiaries is or may be subject issued and
outstanding that, in the case of clauses (i), (ii) and (iii) above, (1)
is required to be disclosed in the Registration Statement or the
Prospectus and that is not so disclosed, (2) might suspend the
effectiveness of the Registration Statement, (3) might prevent or
suspend the use of any Preliminary Prospectus in any jurisdiction, (4)
except as disclosed in the Registration Statement or the Prospectus,
might have a Material Adverse Effect, (5) would interfere with or
adversely affect the transactions contemplated by this Agreement in any
material respect, or (6) might in any manner invalidate any provisions
of this Agreement.
(m) Except as otherwise disclosed in the Prospectus, the
Company and each of its subsidiaries has good and marketable title,
free and clear of all liens, claims, encumbrances and restrictions, to
all property and assets described in the Prospectus as being owned by
it, except for (i) liens for taxes not yet due and payable and (ii)
such liens, claims, encumbrances and restrictions as are not material
to the condition (financial or other), business, net worth or results
of operations of the Company and its subsidiaries, taken as a whole.
(n) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
described in or specifically contemplated by the Prospectus: (i) the
Company and its subsidiaries have not incurred any material liabilities
or obligations, direct, indirect or contingent, or entered into any
material verbal or written agreement or other transaction which is not
in the ordinary course of business or which could result in a material
reduction in the future earnings of the Company and its subsidiaries;
(ii) the Company and its subsidiaries have not sustained any material
loss or interference with their respective businesses or properties
from fire, flood, windstorm, accident or other calamity, whether or not
covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock and
the Company and its subsidiaries are not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock or indebtedness (other
than the Shares) material to the Company and its subsidiaries (other
than in the ordinary course of business); and (v) there has not been
any material adverse change in the condition (financial or otherwise),
business, properties or results of operations of the Company and its
subsidiaries, taken as a whole.
(o) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own, lease and operate its
respective properties and to conduct its business in the manner
described in the Prospectus, subject to such qualifications as may be
set forth in the Prospectus; the Company and each of its subsidiaries
has fulfilled and performed all of its material obligations with
respect to such permits and no event has occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of
the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus; and except as
described in the Prospectus, such permits contain no restrictions that
are materially burdensome to the Company or any of its subsidiaries.
(p) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient
trademarks, trade names, patent rights, mask works,
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<PAGE> 6
copyrights, licenses, approvals and governmental authorizations to
conduct their businesses as now conducted; and the Company has no
knowledge of any material infringement by it or its subsidiaries of
trademark, trade name, patent, mask works, copyrights, licenses, trade
secret or other similar rights of others, and there is no claim being
made against the Company or its subsidiaries regarding trademark, trade
name, patent, mask work, copyright, license, trade secret or other
infringement which could have a Material Adverse Effect.
(q) The Company has not been advised, and has no reason to
believe, that either it or any of its subsidiaries is not conducting
business in compliance with all applicable laws, rules and regulations
of the jurisdictions in which it is conducting business, the failure to
comply with which could have a Material Adverse Effect. None of the
Company or any of its subsidiaries is in violation of any safety or
similar law applicable to its business, nor any federal, state or
foreign law relating to discrimination in the hiring, promotion or pay
of employees, nor any applicable federal, state or foreign wages and
hours laws, nor any provisions of the Employee Retirement Income
Security Act, as amended, or the rules and regulations promulgated
thereunder ("ERISA"), which in each case could have a Material Adverse
Effect.
(r) Neither the Company nor any of its subsidiaries is
involved in any material labor dispute nor, to the best of the
knowledge of the Company and its subsidiaries, is any material labor
dispute threatened which, if such dispute were to occur, would have a
Material Adverse Effect.
(s) Except as disclosed in the Registration Statement, the
Company and its subsidiaries are in compliance with all applicable
existing federal, state, local and foreign laws and regulations
relating to the protection of human health or the environment or
imposing liability or requiring standards of conduct concerning any
Hazardous Materials ("Environmental Laws"), except for such instances
of noncompliance which, either singly or in the aggregate, would not
have a Material Adverse Effect. The term "Hazardous Material" means (a)
any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, (b) any
"hazardous waste" as defined by the Resource Conservation and Recovery
Act, as amended, (c) any petroleum or petroleum product, (d) any
polychlorinated biphenyl and (e) any pollutant or contaminant or
hazardous, dangerous or toxic chemical, material, waste or substance
regulated under or within the meaning of any other Environmental Law.
There is no alleged liability, or to the best knowledge and information
of the Company potential liability (including, without limitation,
alleged or potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) of the Company or any of its
subsidiaries arising out of, based on or resulting from (i) the
presence or release into the environment of any Hazardous Material at
any location at which the Company or any of its subsidiaries has
previously conducted or is currently conducting any business (whether
or not owned by the Company or any of its subsidiaries) or has
previously owned or currently owns any property or (ii) any violation
or alleged violation of any Environmental Law, in either case (x) which
alleged or potential liability is required to be disclosed in the
Registration Statement, other than as disclosed therein, or (y) which
alleged or potential liability, singly or in the aggregate, would have
a Material Adverse Effect.
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<PAGE> 7
(t) All tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, except to
the extent such failure to file would not, individually or in the
aggregate, have a Material Adverse Effect, and all material taxes
(including, but not limited to, withholding taxes, penalties and
interest, assessments, fees and other charges due or claimed to be due
from any taxing authority) have been paid other than those (i) being
contested in good faith and for which adequate reserves have been
provided or (ii) currently payable without penalty or interest.
(u) The Company is not an "investment company" under the
Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
(v) The Company has not distributed and will not distribute
any offering material in connection with the offering and sale of the
Shares other than the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(w) The Company and each of its subsidiaries maintain
insurance insuring against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company and
each of its subsidiaries and their respective businesses, except where
the failure to maintain such insurance could not have a Material
Adverse Effect.
(x) Neither the Company nor any of its subsidiaries has at any
time (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
(y) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(z) Any material real property leases to which the Company or
any of its subsidiaries is a party are valid and binding and no default
has occurred and is continuing thereunder which would result in any
Material Adverse Effect, and the Company and its subsidiaries enjoy
peaceful and undisturbed possession under all such material real
property leases to which any of them is party as lessee with such
exceptions as do not materially interfere with the use made of such
property by the Company or such subsidiary.
(aa) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company any brokerage or finder's fee or other fee or commission as a
result of any of the transactions contemplated by this Agreement.
(ab) The Company has complied with all provisions of Section
517.075 Florida Statutes, relating to doing business with the
Government of Cuba or with any person or any affiliate located in Cuba.
(ac) The Company maintains a system of internal accounting
controls sufficient to provide assurance that: (1) transactions are
executed in accordance with management's general
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<PAGE> 8
or specific authorizations; (2) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP
and to maintain accountability for assets; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(ad) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement, or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(ae) The order confirming the Company's (or its predecessor's)
plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy
Code (the "Code") is a valid and binding order (i) as to which a notice
of appeal or petition for certiorari can no longer be timely filed and
as to which no timely-filed appeal or certiorari proceeding is pending
and (ii) which has not been overturned by a court of competent
jurisdiction. There has been "substantial consummation" (as defined in
Section 1101(2) of the Code) of the Plan.
(af) The Shares have been approved for listing on the New York
Stock Exchange subject to official notice of issuance.
(ag) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
SECTION 3. Representations and Warranties of the Underwriters. The
Underwriters represent and warrant to the Company that the information set forth
(i) on the cover page of the Prospectus with respect to price, underwriting
discounts and commissions and terms of offering and (ii) under "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the Underwriters
for use in connection with the preparation of the Registration Statement and the
Prospectus and is correct in all material respects.
SECTION 4. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to issue and sell to
the Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $______ per share (the
"Purchase Price"), the respective number of Firm Shares set forth opposite the
name of such Underwriter in Schedule A hereto.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to issue and sell up to ___________ Additional Shares and the
Underwriters shall have the right to purchase, severally and not jointly, up to
__________ Additional Shares from the Company at the Purchase Price. Additional
Shares may be purchased solely for the purpose of covering over-allotments made
in connection with the offering of the Firm Shares. The Underwriters may
exercise their right to purchase Additional Shares in whole or in
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<PAGE> 9
part from time to time by giving written notice thereof to the Company within 30
days after the date of this Agreement. Such notice shall specify the aggregate
number of Additional Shares to be purchased pursuant to such exercise and the
date for payment and delivery thereof. The date specified in such notice shall
be a business day (a) no earlier than the Closing Date, (b) no later than ten
business days after such notice has been given and (c) no earlier than two
business days after such notice has been given. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Company the number of Additional Shares (subject to such adjustments to
eliminate fractional shares) which bears the same proportion to the total number
of Additional Shares to be purchased from the Company as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule A bears to
the total number of Firm Shares.
Delivery of certificates for the Firm Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Underwriters) at such time
and date, not later than the fifth full business day following the first date
that any of the Shares are released by the Underwriters for sale to the public,
as the Underwriters shall designate by at least 48 hours prior notice to the
Company (or at such other time and date, not later than one week after such
fifth full business day as may be agreed upon by the Company and the
Underwriters) (the "Closing Date"); provided, however, that if the Prospectus is
at any time prior to the Closing Date recirculated to the public, the Closing
Date shall occur upon the later of the fifth full business day following the
first date that any of the Shares are released by the Underwriters for sale to
the public or the date that is 48 hours after the date that the Prospectus has
been so recirculated.
Delivery of certificates for the Additional Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Underwriters) on the date
specified in the applicable exercise notice given pursuant to this Section 4 (an
"Option Closing Date"). Any such Option Closing Date and the location of
delivery of and the form of payment for such Additional Shares may be varied by
agreement between the Underwriters and the Company.
Delivery of certificates for the Shares shall be made by or on behalf
of the Company to the Underwriters against payment by the Underwriters of the
purchase price therefor by certified or official bank checks payable in next day
funds to the order of the Company. The certificates for the Shares shall be
registered in such names and denominations as the Underwriters shall have
requested at least two full business days prior to the Closing Date or an Option
Closing Date, as the case may be, and shall be made available for checking and
packaging on the business day preceding the Closing Date or an Option Closing
Date, as the case may be, at a location in New York, New York, as may be
designated by the Underwriters. Time shall be of the essence, and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Shares as soon after
the effective date of the Registration Statement as in the judgment of the
Underwriters is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the Prospectus.
SECTION 5. Covenants of the Company. The Company covenants and agrees
that:
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(a) The Company will cause the Prospectus to be filed with the
Commission as required by Section 2(a) hereof (but only if the
Underwriters have not reasonably objected thereto by notice to the
Company after having been furnished a copy a reasonable time prior to
filing) and will notify the Underwriters promptly of such filing; the
Company will notify the Underwriters promptly of the time when any
subsequent amendment to the Registration Statement has become effective
or any supplement to the Prospectus has been filed and of any request
by the Commission for any amendment or supplement to the Registration
Statement or Prospectus or for additional information; the Company will
prepare and file with the Commission, promptly upon the Underwriters'
request, any amendments or supplements to the Registration Statement or
Prospectus that, in the Underwriters' opinion, may be necessary or
advisable in connection with the distribution of the Shares by the
Underwriters; and the Company will file no amendment or supplement to
the Registration Statement or Prospectus to which the Underwriters
shall reasonably object by notice to the Company after having been
furnished a copy a reasonable time prior to the filing.
(b) The Company will advise the Underwriters, promptly after
it shall have received notice or obtained knowledge thereof, of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction,
or of the initiation or threatening of any proceeding for any such
purpose; and the Company will promptly use its best efforts to prevent
the issuance of any stop order or to obtain its withdrawal if such a
stop order should be issued.
(c) Within the time during which a prospectus relating to the
Shares is required to be delivered under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by
the Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Shares as
contemplated by the provisions hereof and the Prospectus. If during
such period any event occurs as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing,
not misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the
Act, the Company will promptly notify the Underwriters and will amend
the Registration Statement or supplement the Prospectus (at the expense
of the Company) so as to correct such statement or omission or effect
such compliance.
(d) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15
months after the end of the Company's current fiscal quarter, an
earnings statement (which need not be audited) covering a 12-month
period beginning after the effective date of the Registration Statement
that shall satisfy the provisions of Section 11(a) of the Act.
(e) The Company will furnish to the Underwriters copies of the
Registration Statement (four of which will be signed and will include
all exhibits), each Preliminary Prospectus, the Prospectus, and all
amendments and supplements to such documents, in each case as soon as
available and in such quantities as the Underwriters may from time to
time reasonably request.
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(f) The Company will use its best efforts to qualify the
Shares for sale under the securities laws of such jurisdictions as the
Underwriters reasonably designate and to continue such qualifications
in effect so long as required for the distribution of the Shares but in
no event for more than 180 days, except that the Company shall not be
required in connection therewith to qualify as a foreign corporation or
to execute a general consent to service of process in any jurisdiction
or to subject itself to general taxation in respect of doing business
in any jurisdiction in which it is not otherwise so subject. The
Company will also arrange for the determination of the eligibility for
investment of the Shares under the laws of such jurisdictions as the
Underwriters reasonably request.
(g) During the period of five years hereafter, the Company
will furnish to the Underwriters: (i) as soon as practicable after the
end of each fiscal year, copies of the Annual Report of the Company
containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report
filed by the Company with the Commission the National Association of
Securities Dealers, Inc. ("NASD") or any securities exchange; and (iii)
as soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock.
(h) During the period of 90 days after the first date that any
of the Shares are released by the Underwriters for sale to the public,
without the prior written consent of Montgomery Securities (which
consent may be withheld at the sole discretion of Montgomery
Securities), the Company will not, and will obtain the agreement of
each of the directors and executive officers of the Company listed
under the heading "Management" contained in the Prospectus not to
issue, offer, sell, grant options to purchase or otherwise dispose of
any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security.
(i) The Company will apply the net proceeds from the sale of
the Shares to be sold by it hereunder for the purposes set forth in the
Prospectus.
The Underwriters, may, in their sole discretion waive in writing the
performance by the Company of any one or more of the foregoing covenants or
extend the time for their performance.
SECTION 6. Payment of Expenses. The Company, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
prevented from becoming effective under the provisions of Section 13(a) hereof
or is terminated, will pay all expenses incident to the performance of its
obligations hereunder, will pay the expenses of printing all documents relating
to the offering, and will reimburse the Underwriters for any expenses (including
reasonable fees and disbursements of counsel) incurred by the Underwriters in
connection with the matters referred to in Section 5(f) hereof and the
preparation of memoranda relating thereto and for any filing fee of the NASD
relating to the Shares; provided, however, that except as provided in this
Section 6 and in Section 8, the Underwriters shall pay their own costs and
expenses, including the costs and expenses of their counsel and any costs and
expenses incurred by the Underwriters for any advertising in connection with the
sale of the Shares.
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The Company shall not in any event be liable to the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
SECTION 7. Conditions of the Obligations of the Underwriters. The
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date or Option Closing Date, as the case may be, shall be subject to the
accuracy of the representations and warranties on the part of the Company herein
set forth as of the date hereof and as of the Closing Date or such Option
Closing Date, as the case may be, to the accuracy of the statements of Company's
officers made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Washington, D.C. time, on the date of this
Agreement or at such later time as shall have been consented to by the
Underwriters; if the filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b) of the Rules and
Regulations, the Prospectus shall have been filed in the manner and
within the time period required by Rule 424(b) of the Rules and
Regulations; and prior to such Closing Date or Option Closing Date, as
the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted or shall be pending or, to the
knowledge of the Company or the Underwriters, shall be contemplated by
the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or otherwise,
shall have been complied with to the Underwriters' satisfaction.
(b) The Underwriters shall be reasonably satisfied that since
the respective dates as of which information is given in the
Registration Statement and Prospectus, (i) there shall not have been
any change in the capital stock of the Company or any of its
subsidiaries or any material change in the indebtedness (other than as
a result of the sale of the Shares or in the ordinary course of
business) of the Company or any of its subsidiaries, (ii) except as set
forth or contemplated by the Registration Statement or the Prospectus,
no material verbal or written agreement or other transaction shall have
been entered into by the Company or any of its subsidiaries, which is
not in the ordinary course of business or which could result in a
material reduction in the future earnings of the Company and its
subsidiaries, (iii) no loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries shall have been
sustained which could have a Material Adverse Effect, (iv) no legal or
governmental action, suit or proceeding affecting the Company or any of
its subsidiaries which is material to the Company and its subsidiaries
or which affects or may affect the transactions contemplated by this
Agreement shall have been instituted or threatened, and (v) there shall
not have been any material change in the condition (financial or
otherwise), business, management results of operations or prospects of
the Company and its subsidiaries which makes it impractical or
inadvisable in the judgment of the Underwriters to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(c) There shall have been furnished to the Underwriters on
each Closing Date, in form and substance satisfactory to the
Underwriters, except as otherwise expressly provided below:
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(i) An opinion of Willkie Farr & Gallagher, counsel
for the Company, addressed to the Underwriters and dated such
Closing Date, to the effect that:
(A) The Company and each of the Company's
Significant Subsidiaries (as defined under Rule 1-02 of
Regulation S-X under the Exchange Act) has been duly
incorporated and is an existing corporation in good standing
under the laws of its respective jurisdiction of
incorporation, has full power and authority (corporate and
other) to conduct its business as described in the
Registration Statement and Prospectus and is duly qualified to
do business in each jurisdiction in which it owns or leases
real property or in which the conduct of its business requires
such qualification except where the failure to be so
qualified, considering all such cases in the aggregate, would
not have a Material Adverse Effect.
(B) The Shares have been duly authorized and
reserved for issuance and will be validly issued, fully paid
and nonassessable and will conform in all material respects to
the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable and
conform in all material respects to the description thereof
contained in the Prospectus; the Company has authorized and
outstanding capital stock as set forth under "Capitalization"
and "Description of Capital Stock" in the Prospectus; and the
stockholders of the Company have no preemptive rights created
by the Delaware General Corporation Law or by the Certificate
of Incorporation or By-laws of the Company with respect to the
Shares.
(C) The Registration Statement has become
effective under the Act; the Prospectus has been filed with
the Commission as required by Section 2(a) hereof and to the
best knowledge of such counsel no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceeding for that purpose has been instituted or, to
the knowledge of such counsel, threatened by the Commission.
(D) Each part of the Registration Statement,
when such part became effective, and the Prospectus, and any
amendment or supplement thereto, as of the respective date
thereof, complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations (other
than the financial statements and related schedules and
financial and statistical data therein, as to which such
counsel need express no opinion).
(E) The descriptions in the Registration
Statement and Prospectus of statutes, legal and governmental
proceedings, contracts and other documents are accurate in all
material respects and fairly present the information required
to be shown; and such counsel does not know of any statutes or
legal or governmental proceedings required to be described in
the Prospectus that are not described as required, or of any
contracts or documents of a character required to be described
in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement that are not described
and filed as required.
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(F) The Company is not an "investment
company" under the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(G) To such counsel's knowledge, there is
(i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic
or foreign, now pending or threatened, to which the Company or
any of its Significant Subsidiaries is or may be a party or to
which the business or property of the Company or any of its
Significant Subsidiaries is or may be subject, and (ii) no
injunction, restraining order or order of any nature by a
federal or state court of competent jurisdiction to which the
Company or any of its Significant Subsidiaries is or may be
subject issued that, in the case of clauses (i) and (ii)
above, (a) is required to be disclosed in the Registration
Statement or the Prospectus and that is not so disclosed, (b)
might suspend the effectiveness of the Registration Statement,
(c) to such counsel's knowledge, might prevent or suspend the
use of any preliminary prospectus in any jurisdiction, (d)
except as disclosed in the Registration Statement or the
Prospectus, would have a Material Adverse Effect or (e) would
in any manner invalidate any provisions of this Agreement.
(I) No consent, approval, authorization or
order of, or filing or qualification with, any governmental
agency or body or any court is required to be obtained or made
by the Company for the consummation of the transactions
contemplated by this Agreement or in connection with the sale
of the Shares by the Company pursuant to this Agreement,
except such as have been obtained and made under the Act and
such as may be required under state securities law or by the
NASD.
(J) This Agreement has been duly authorized,
executed and delivered by the Company. The performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under,
any statute or any agreement or instrument filed as an exhibit
to the Registration Statement, the charter or by-laws of the
Company, or, to such counsel's knowledge, any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; and
the Company has full power and authority to authorize, issue
and sell the Shares as contemplated by this Agreement.
In addition, such counsel shall state that they have
participated in conferences with officers and other
representatives of the Company, representatives of the
independent certified public accountants of the Company and
the Underwriters at which the contents of the Registration
Statement, the Prospectus and any amendment thereof or
supplement thereto and related matters were discussed and,
although such counsel has not undertaken to investigate or
verify independently, and does not assume any responsibility
for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto on the basis of
the foregoing (relying as to materiality to a large extent
upon the opinions of officers and other representatives) no
facts have come to the attention of such counsel that would
lead them to believe that either the Registration Statement at
the time it became effective (or any amendment thereof made
prior to the Closing Date, as the case may be, as of the
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<PAGE> 15
date of such amendment) contained an untrue statement of a
material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus as of the date
thereof (of any amendment thereof or supplement thereto made
prior to the Closing Date as of the date of such amendment or
supplement) contained an untrue statement of a material fact
or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading (it being understood that in each such case such
counsel expresses no belief or opinion with respect to the
financial statements and schedules and other financial or
statistical data included therein).
(ii) An opinion of Joseph Bernadino, Esq., Senior
Vice President, Secretary and General Counsel of the Company,
addressed to the Underwriters and dated such Closing Date, to
the effect that:
(A) To the best knowledge of such counsel,
none of the Company or any of its subsidiaries is in violation
of any safety or similar law applicable to its business, nor
any federal, state or foreign law relating to discrimination
in the hiring, promotion or pay of employees, nor any
applicable federal, state or foreign wages and hours laws, nor
any provisions of ERISA, which in each case would have a
Material Adverse Effect.
(B) To the best knowledge of such counsel,
except as set forth in the Registration Statement, the Company
and its subsidiaries are in compliance with all applicable
existing federal, state, local and foreign laws and
regulations relating to Environmental Laws, except for such
instances of noncompliance which, either singly or in the
aggregate, would not have a Material Adverse Effect. There is
no alleged liability, or, to the best of his knowledge,
potential liability (including, without limitation, alleged or
potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages,
property damages, personal injuries, or penalties) of the
Company or any of its subsidiaries arising out of, based on or
resulting from (i) the presence or release into the
environment of any Hazardous Material at any location at which
the Company or any of its subsidiaries has previously
conducted or is currently conducting any business (whether or
not owned by the Company or any of its subsidiaries) or has
previously owned or currently owns any property or (ii) any
violation or alleged violation of any Environmental Law, in
either case (x) which alleged or potential liability is
required to be disclosed in the Registration Statement, other
than as disclosed therein, or (y) which alleged or potential
liability, singly or in the aggregate, would have a Material
Adverse Effect.
(C) Neither the Company nor any of its
Subsidiaries is involved in any material labor dispute nor, to
the best of his knowledge, is any material labor dispute
threatened which, if such dispute were to occur, would have a
Material Adverse Effect.
(D) Except as would not have a Material
Adverse Effect, neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws and, to
the best of his knowledge, neither the Company nor any of its
subsidiaries is in default in the
15
<PAGE> 16
performance of any obligation, agreement or condition
contained in any of the agreements filed as an exhibit to the
Registration Statement.
(E) All of the outstanding shares of capital
stock of each such subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable and (except
as otherwise stated in the Registration Statement), to the
best of his knowledge, are owned beneficially by the Company
subject to no security interest, other encumbrance or adverse
claim.
(iii) Such opinion or opinions of Latham & Watkins,
counsel for the Underwriters, dated such Closing Date, with
respect to the validity of the Shares, the Registration
Statement, the Prospectus and other related matters as you
reasonably may request, and such counsel shall have received
such papers and information as they reasonably request to
enable them to pass upon such matters.
(iv) A certificate of the Company executed by the
Chairman of the Board or President and the chief financial or
accounting officer of the Company, dated such Closing Date, to
the effect that:
(A) The representations and warranties of
the Company set forth in Section 2 of this Agreement
are true and correct as of the date of this Agreement
and as of the Closing Date and the Company has
complied with all the agreements and satisfied all
the conditions on its part to be performed or
satisfied under this Agreement on or prior to such
Closing Date;
(B) The Commission has not issued any order
preventing or suspending the use of the Prospectus or
any Preliminary Prospectus filed as a part of the
Registration Statement or any amendment thereto; no
stop order suspending the effectiveness of the
Registration Statement has been issued; and to the
best of the knowledge of the respective signers, no
proceedings for that purpose have been instituted or
are pending or contemplated under the Act;
(C) Each of the respective signers of the
certificate has carefully examined the Registration
Statement and the Prospectus; in his opinion and to
the best of his knowledge, the Registration Statement
and the Prospectus and any amendments or supplements
thereto contain all statements required to be stated
therein regarding the Company and its subsidiaries;
and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or
omits to state any material fact required to be
stated therein or necessary to make the statements
therein not misleading; and
(D) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, (a) there has not
been any material adverse change or a development
involving a material adverse change in the condition
(financial or otherwise), business, properties,
results of operations or
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<PAGE> 17
management of the Company and its subsidiaries; (b)
no legal or governmental action, suit or proceeding
is pending or, to the best of their knowledge,
threatened against the Company or any of its
subsidiaries which is material to the Company and its
subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of
business, or which may adversely affect the
transactions contemplated by this Agreement; (c)
since such dates and except as so disclosed, neither
the Company nor any of its subsidiaries has (i)
entered into any verbal or written agreement or other
transaction which is not in the ordinary course of
business, which could result in a material reduction
in the future earnings of the Company or which should
have been set forth in an amendment to the
Registration Statement or in a supplement to or
amendment of any prospectus which has not been
disclosed in such supplement or prospectus, (ii)
incurred, other than in the ordinary course of
business, any material liability or obligation,
direct, indirect or contingent, (iii) made any change
in its capital stock, (iv) made any material change
in its short-term debt or funded debt or (v)
repurchased or otherwise acquired any of the
Company's capital stock; and (d) the Company has not
declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock
payable to stockholders of record on a date prior to
such Closing Date.
(v) On the date this Agreement is executed and also
on the Closing Date, a letter addressed to you, as
Representatives of the Underwriters, from Arthur Andersen LLP,
independent accountants, the first one to be dated the date of
this Agreement and the second one to be dated such Closing
Date, in form and substance satisfactory to you.
(vi) On or before such Closing Date, letters from
each of the directors and executive officers of the Company
listed under the heading "Management" contained in the
Prospectus, in form and substance satisfactory to the
Underwriters, confirming that for a period of 90 days after
the first date that any of the Common Stock are released by
the Underwriters for sale to the public, such person will not
directly or indirectly sell or offer to sell or otherwise
dispose of any shares of Common Stock or any right to acquire
such shares without the prior written consent of Montgomery
Securities, which consent may be withheld at the sole
discretion of Montgomery Securities, as the case may be.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Latham & Watkins, counsel for the Underwriters. The Company shall furnish you
with such manually signed or conformed copies of such opinions, certificates,
letters and documents as you request. Any certificate signed by any officer of
the Company and delivered to the Underwriters or to counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company to the
Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the Closing Date is not so satisfied, this Agreement at
the Underwriters' election will terminate upon notification by the Underwriters
to the Company without liability on the part of any Underwriter or the Company
except for the expenses to be paid or reimbursed by the Company pursuant to
Sections 6 and 7 hereof and except to the extent provided in Section 10 hereof.
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SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by the
Underwriters pursuant to Section 7, or if the sale to the Underwriters of the
Shares at the Closing or any Option Closing, as the case may be, is not
consummated because of any refusal, inability or failure on the part of the
Company, at or prior to the Closing Date or Option Closing Date, as the case may
be, to perform any agreement herein or to comply with any provision hereof
(unless such failure to perform or comply be due to any default or omission by
any Underwriter), the Company agrees to reimburse the Underwriters upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Underwriters in connection with the Underwriters' investigation, preparing to
market and marketing the Common Stock or in contemplation of performing the
Underwriters' obligations hereunder, including but not limited to reasonable
fees and disbursements of counsel, printing expenses, travel expenses, postage,
telegraph charges and telephone charges relating directly to the offering
contemplated by the Prospectus. Any such termination shall be without liability
of any party to any other party except that the provisions of this Section. This
Section 8, Section 6 and Section 10 shall at all times be effective and shall
apply.
SECTION 9. Effectiveness of Registration Statement. The Underwriters
and the Company will use their and its best efforts to cause the Registration
Statement to become effective, to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.
SECTION 10. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person if any, who controls any Underwriter within
the meaning of the Act against any losses, claims, damages, liabilities
or expenses, joint or several, to which such Underwriter or such
controlling person may become subject, under the Act, the Exchange Act
or other federal or state statutory law or regulation, or at common law
or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company),
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to
state in any of them a material fact required to be stated therein or
necessary to make the statements in any of them not misleading, or
arise out of or are based in whole or in part on any inaccuracy in the
representations and warranties of the Company contained herein or any
failure of the Company to perform its obligations hereunder or under
law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage, liability or expense arises
out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with the information
furnished by or on behalf of the Underwriters to the Company
specifically for use in the preparation of the Registration Statement;
and, provided, further, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of
any
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Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Shares or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or
supplemented, if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities. In addition to its other obligations
under this Section 10(a), the Company agrees that as an interim measure
during the pendency of any claim action, investigation inquiry or other
proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company herein or failure to
perform its obligations hereunder, all as described in this Section
10(a), it will reimburse each Underwriter on a quarterly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation,
inquiry or other proceeding notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper,
each Underwriter shall promptly return it to the Company together with
interest compounded daily, determined on the basis of the prime rate
(or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America NT&SA, San
Francisco, California (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30
days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter will severally indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, and each person if any, who controls
the Company within the meaning of the Act against any losses, claims,
damages, liabilities or expenses to which the Company, or any such
director, officer, or controlling person may become subject, under the
Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of
any litigation, if such settlement is effected with the written consent
of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated
below) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in
each case to the extent but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon
and in conformity with the information furnished by or on behalf of the
Underwriters to the Company specifically for use in the preparation of
the Registration Statement, and will reimburse the Company, or any such
director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or
controlling person in connection with investigating defending,
compromising or paying any such loss, claim, damage, liability, expense
or action. In addition
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<PAGE> 20
to its other obligations under this Section 10(b), each Underwriter
severally agrees that as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out
of or based upon any statement or omission or any alleged statement or
omission, described in this Section 10(b) which relates to information
furnished by the Underwriters to the Company specifically for use in
the preparation of the Registration Statement, it will reimburse the
Company (and, to the extent applicable, each officer, director or
controlling person) on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending
any such claim, action investigation inquiry or other proceeding
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Underwriters' obligation to
reimburse the Company (and, to the extent applicable, each officer,
director or controlling person) for such expenses and the possibility
that such payments might later be held to have been improper by a court
of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director or controlling
person) shall promptly return it to the Underwriters together with
interest compounded daily, determined on the basis of the Prime Rate.
Any such interim reimbursement payments which are not made to the
Company within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of any claim or the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under this Section, notify the
indemnifying party in writing of the claim or the commencement of such
action, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified
party for contribution or otherwise under the indemnity agreement
contained in this Section 10 except to the extent it is prejudiced by
such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying parties similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such
action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there
may be a conflict between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election
so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel, approved by the
Underwriters in the case of paragraph (a), representing the indemnified
parties who are parties to such action)
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<PAGE> 21
or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement
of the action in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party. Each indemnified
party shall use its best efforts to cooperate with the indemnifying
party in the defense of any action or claim. No indemnifying party
shall be liable for any settlement effected without its written
consent.
(d) If the indemnification provided for in this Section 10 is
required by its terms but is for any reason held to be unavailable to
or otherwise insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of any losses, claims, damages,
liabilities or expenses referred to herein (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company
and the Underwriters from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Underwriters in connection with the
statements or omissions or inaccuracies in the representations and
warranties herein which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the
Company and the Underwriters shall be deemed to be in the same
proportion, in the case of the Company as the total price paid to the
Company for the Shares sold by it to the Underwriters (net of
underwriting commissions but before deducting expenses) bears to the
total price to the public set forth on the cover of the Prospectus, and
in the case of the Underwriters, as the underwriting commissions
received by them bears to the total price to the public set forth on
the cover of the Prospectus. The relative fault of the Company and the
Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty
relates to information supplied by the Company or the Underwriters and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in subparagraph (c) of
this Section 10, any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in subparagraph (c) of
this Section 10 with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be
required with respect to any action for which notice has been given
under subparagraph (c) for purposes of indemnification. The Company and
the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 10 were determined solely by pro
rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this
paragraph. Notwithstanding the provisions of this Section 10, no
Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting commissions received by such
Underwriter in connection with the Shares underwritten by it and
distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such
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fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 10 are several in proportion to
their respective underwriting commitments and not joint.
SECTION 11. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company to sell and deliver the Shares
hereunder, and of each Underwriter to purchase the Shares in the manner as
described herein, that, except as hereinafter in this paragraph provided, each
of the Underwriters shall purchase and pay for all the Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Underwriters of all
such Shares in accordance with the terms hereof. If either Underwriter defaults
in its obligation to purchase Shares hereunder on the Closing Date or an Option
Closing Date, as the case may be, and the aggregate amount of Shares which such
defaulting Underwriter agreed but failed to purchase on the Closing Date or an
Option Closing Date, as the case may be, does not exceed 10% of the total amount
of Shares which the Underwriters are obligated to purchase on such Closing Date
or an Option Closing Date, as the case may be, the non-defaulting Underwriter
shall be obligated to purchase the Shares which such defaulting Underwriter
agreed but failed to purchase on such Closing Date or an Option Closing Date, as
the case may be. If either Underwriter so defaults and the aggregate amount of
Shares with respect to which such default occurs is more than the above
percentage and arrangements satisfactory to the non-defaulting Underwriter and
the Company for the purchase of such Shares by other persons are not made within
48 hours after such default, this Agreement will terminate without liability on
the part of the non-defaulting Underwriter or the Company except for the
expenses to be paid by the Company pursuant to Sections 6 and 8 hereof and
except to the extent provided in Section 10 hereof.
In the event that Shares to which a default relates are to be purchased
by the non-defaulting Underwriter or by another party or parties, the
non-defaulting Underwriter or the Company shall have the right to postpone the
Closing Date or an Option Closing Date, as the case may be, for not more than
five business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement the term "Underwriter"
includes any person substituted for an Underwriter under this Section. Nothing
herein will relieve a defaulting Underwriter from liability for its default.
SECTION 12. Effective Date. This Agreement shall become effective
immediately as to Sections 6, 8, 10, 13 and 14 and, as to all other provisions,
(i) if at the time of execution of this Agreement, the Registration Statement
has not become effective, at 11:00 a.m., New York City time, on the first full
business day following the effectiveness of the Registration Statement, or (ii)
if at the time of execution of this Agreement, the Registration Statement has
been declared effective, at 11:00 a.m., New York City time, on the first full
business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as the Underwriters may determine on
and by notice to the Company or by release of any of the Shares for sale to the
public. For the purposes of this Section 12, the Shares shall be deemed to have
been so released upon the release for publication of any newspaper advertisement
relating to the Shares or upon the release by the Underwriters of telegrams (i)
advising the Underwriters that the Shares are released for public offering, or
(ii) offering the Shares for sale to securities dealers, whichever may occur
first.
SECTION 13. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
22
<PAGE> 23
(a) This Agreement may be terminated by the Company by notice
to the Underwriters or by the Underwriters by notice to the Company at
any time prior to the time this Agreement shall become effective as to
all its provisions, and any such termination shall be without liability
on the part of the Company to any Underwriter (except for the expenses
to be paid or reimbursed by the Company pursuant to Sections 6 and 8
hereof and except to the extent provided in Section 10 hereof) or of
any Underwriter to the Company (except to the extent provided in
Section 10 hereof).
(b) This Agreement may also be terminated by the Underwriters
prior to the Closing Date by notice to the Company (i) if additional
material governmental restrictions, not in force and effect on the date
hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the
New York Stock Exchange or on the American Stock Exchange or in the
over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such Exchange or in the over the
counter market by the NASD, or a general banking moratorium shall have
been established by federal, New York or California authorities, (ii)
if an outbreak of major hostilities or other national or international
calamity or any substantial material adverse change in political,
financial or economic conditions shall have occurred or shall have
accelerated or escalated to such an extent, as, in the judgment of the
Underwriters, to affect adversely the marketability of the Shares,
(iii) if any adverse event shall have occurred or shall exist which
makes untrue or incorrect in any material respect any statement or
information contained in the Registration Statement or Prospectus or
which is not reflected in the Registration Statement or Prospectus but
should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect,
or (iv) if there shall be any action suit or proceeding pending or
threatened, or there shall have been any development or prospective
development involving particularly the business or properties or
securities of the Company or any of its subsidiaries or the
transactions contemplated by this Agreement, which, in the reasonable
judgment of the Representatives, may materially and adversely affect
the Company's business or earnings and makes it impracticable or
inadvisable to offer or sell the Shares. Any termination pursuant to
this subsection (b) shall be without liability on the part of any
Underwriter to the Company or on the part of the Company to any
Underwriter (except for expenses to be paid or reimbursed by the
Company pursuant to Sections 6 and 8 hereof and except to the extent
provided in Section 10 hereof).
SECTION 14. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the Underwriters set forth in
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or the
Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
SECTION 15. Notices. All communications hereunder shall be in writing
and, if sent to the Underwriters shall be mailed, delivered or telegraphed and
confirmed to the Underwriters at 600 Montgomery Street, San Francisco,
California 94111, Attention: George W. Yandell, III, with a copy to John D.
Watson, Esq., Latham & Watkins, 1001 Pennsylvania Avenue, Suite 1300,
Washington, D.C. 20004; and if sent to the Company shall be mailed, delivered or
telegraphed and confirmed to the Company at 700 Route 46 East, Fairfield, New
Jersey 07004 with a copy to William N. Dye, Esq.,
23
<PAGE> 24
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022. The Company or the Underwriters may change the address for
receipt of communications hereunder by giving notice to the others.
SECTION 16. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 11 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 10, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 17. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 18. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 19. General. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original and all of which shall
constitute one and the same document.
In this Agreement the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Underwriters.
[signature page follows]
24
<PAGE> 25
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement between the Company and the Underwriters, all in
accordance with its terms.
Very truly yours,
PRIME HOSPITALITY CORP.
By: __________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
San Francisco, California as of the date first above written.
MONTGOMERY SECURITIES
BT SECURITIES CORP.
SMITH BARNEY, INC.
MONTGOMERY SECURITIES
By: _____________________________
Name:
Title:
25
<PAGE> 26
SCHEDULE A
<TABLE>
<CAPTION>
Shares of
Underwriter Common Stock
----------- ------------
<S> <C>
Montgomery Securities...............................
BT Securities Corp..................................
Smith Barney, Inc...................................
Total.....................................
===========
</TABLE>
26
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Prime Hospitality Corp.:
As independent public accountants, we hereby consent to the use of our
report dated January 31, 1996, except with respect to the matters discussed in
Note 16 as to which the date is July 2, 1996, covering the Company's
consolidated financial statements for the years ended December 31, 1993, 1994
and 1995 and to all references to our firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
July 2, 1996
