PRIME HOSPITALITY CORP, 424B1, 1996-07-30

PRIME HOSPITALITY CORP
424B1, 1996-07-30
HOTELS & MOTELS

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<PAGE> 1
Filed pursuant to Rule No. 424(b)(1)
Registration No. 333-7431

7,500,000 SHARES

PRIME HOSPITALITY CORP. [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
29, 1996, the last reported sale price of the Common Stock on the New York Stock
Exchange was $18.25 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.
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount(1) Company(2)(3)
- ------------------------------------------------------------------------------------------------------
Per Share.............................. $18.00 $0.83 $17.17
Total(3)............................... $135,000,000 $6,225,000 $128,775,000
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</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 $155,250,000, the Underwriting Discount will total
$7,158,750 and the Proceeds to Company will total $148,091,250. 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 August 2,
1996.

------------------------

MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SMITH BARNEY INC.

July 29, 1996

<PAGE> 2

[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> 3

[PHOTOGRAPHS]
<PAGE> 4

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 one of the
fastest growing all-suites hotel chains 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

3
<PAGE> 5

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 13.1% 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> 6

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

For the quarter ending June 30, 1996, the Company's recurring net income
increased by 57.4% to $7.2 million, or $0.20 per share, from $4.6 million, or
$0.14 per share, in the comparable period in 1995. Net income, which includes
gains on property sales and other items not considered part of recurring
operations, increased by 44.7% to $7.2 million, or $0.20 per share, from $5.0
million, or $0.15 per share, in the comparable period in 1995. For the six
months ending June 30, 1996, recurring net income increased by 47.2% to $12.9
million, or $0.37 per share, from $8.8 million, or $0.27 per share, and net
income increased by 64.8% to $15.1 million, or $0.42 per share, from $9.2
million, or $0.28 per share, in the comparable period in 1995.

The results reflect revenue gains of 35.2% and 28.6%, respectively, and
EBITDA increases of 47.1% and 40.3%, respectively, for the three and six month
periods. The improvements were primarily attributable to the addition of 35
hotels over the past 18 months and an increase in REVPAR at comparable Owned
Hotels of 11.7% and 11.4% for the three and six month periods, respectively.
Results were driven by the strong performance of the AmeriSuites hotels, which
registered 15.9% and 17.6% REVPAR increases for comparable hotels for the three
and six month periods, respectively. In addition, the Company's comparable
full-service and limited-service hotels reported REVPAR increases of 11.6% and
7.0%, respectively, for the three month period and 10.9% and 7.3%, respectively,
for the six month period.

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

5
<PAGE> 7

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 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.

<TABLE>
THE OFFERING
<S> <C>
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
</TABLE>

- ---------------
(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> 8

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>

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<PAGE> 9

<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(8)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities....................... $ 31,628 $159,953
Property, equipment and leasehold improvements............................ 529,916 529,916
Total assets.............................................................. 642,876 771,201
Current portion of debt................................................... 5,699 5,699
Long-term debt, net of current portion.................................... 335,271 335,271
Total stockholders' equity................................................ 242,974 371,299
</TABLE>

- ---------------
(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 $128,472 $140,347 $169,295 $ 40,575 $ 44,956
Gross operating profit(2)............... $ 54,974 $ 51,948 $ 59,458 $ 67,614 $ 83,875 $ 19,979 $ 20,653
Gross operating profit %(2)............. 35.60% 32.24% 33.15% 35.14% 37.75% 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> 10

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> 11

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.

10
<PAGE> 12

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> 13

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> 14

USE OF PROCEEDS

The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $128.3 million (approximately $147.6 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 29, 1996).................................. 19 1/4 16 5/8
</TABLE>

The closing price of the Common Stock as reported on the New York Stock
Exchange Composite Tape was $18.25 on July 29, 1996. As of July 29, 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> 15

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................................... 185,166 313,416
Retained earnings................................................ 57,498 57,498
-------- --------
Total stockholders' equity............................... 242,974 371,299
-------- --------
Total capitalization..................................... $578,245 $706,570
======== ========
</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 29, 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> 16

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> 17

<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> 18

(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> 19

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 29, 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."

18
<PAGE> 20

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."

19
<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.

20
<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.

21
<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.

22
<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.

23
<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.

24
<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.

25
<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

26
<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.

27
<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

28
<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 29, 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

29
<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.

30
<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
--------------------------------
FOR THE
AS OF AND FOR THE ONE
YEAR MONTH
ENDED JUNE 30, ENDED
--------------------- JULY 31,
1991(1) 1992(1) 1992(1)
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... $ 205,699 $ 134,190 $ 8,793
Valuation writedowns and
reserves.............................. (59,149) (62,123) (13,000)
Reorganization items...................... (181,655) (23,194) 1,796
Other income (expense).................. -- -- --
Income (loss) from continuing
operations before extraordinary
items(2).............................. (246,110) (71,965) (10,274)
Extraordinary items-gains on
discharge of indebtedness (net of
income taxes)......................... -- -- 249,600
Net income (loss)....................... (227,188) (71,965) 239,326

BALANCE SHEET DATA:
Total assets............................ $ 679,916 $ 554,118 --
Long-term debt, net of current portion.. 2,851 8,921 --
Stockholders' equity (deficiency)....... (157,327) (229,292) --

POST-REORGANIZATION
-----------------------------------------------------------------------------
AS OF AND
FOR THE AS OF AND FOR THE
FIVE MONTHS AS OF AND FOR THE YEAR ENDED THREE MONTHS ENDED
AS OF ENDED DECEMBER 31, MARCH 31,
JULY 31, DEC. 31, ------------------------------ -------------------
1992(1) 1992 1993 1994 1995 1995 1996
-------- ----------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... -- $ 41,334 $108,860 $134,303 $205,624 $ 48,238 $ 58,614
Valuation writedowns and
reserves.............................. -- -- -- -- -- -- --
Reorganization items...................... -- -- -- -- -- -- --
Other income (expense).................. -- -- 3,809 9,089 39 -- 3,432
Income (loss) from continuing
operations before extraordinary
items(2).............................. -- 1,393 8,175 18,258 17,465 4,208 7,792
Extraordinary items-gains on
discharge of indebtedness (net of
income taxes)......................... -- -- 3,989 172 104 7 149
Net income (loss)....................... -- 1,393 12,164 18,430 17,569 4,215 7,941

BALANCE SHEET DATA:
Total assets............................ $468,650 $ 403,314 $410,685 $434,932 $573,241 $492,438 $642,876
Long-term debt, net of current portion.. 204,438 192,913 168,618 178,545 276,920 221,726 335,271
Stockholders' equity (deficiency)....... 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.

31
<PAGE> 33

BUSINESS

THE COMPANY

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 one of the
fastest growing all-suites hotel chains 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

32
<PAGE> 34

- 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 13.1% 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

33
<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

- 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.

34
<PAGE> 36

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, 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>

35
<PAGE> 37

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.

36
<PAGE> 38

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>

37
<PAGE> 39

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>
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 125 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

38
<PAGE> 40

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 4.0 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

39
<PAGE> 41

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.

40
<PAGE> 42

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 12 of its full-service hotels which included changing the
franchise affiliations of six 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.

41
<PAGE> 43

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

42
<PAGE> 44

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 19 of its Owned Hotels, which included changing the franchise affiliation of
12 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

43
<PAGE> 45

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

44
<PAGE> 46

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.

45
<PAGE> 47

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.......... 56 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

46
<PAGE> 48

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.

47
<PAGE> 49

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

48
<PAGE> 50

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.

49
<PAGE> 51

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.

50
<PAGE> 52

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.

51
<PAGE> 53

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, proxy materials and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
materials 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,
IllinwReference Section of the Commission, Washington, D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is http://www.
sec. gov. 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, the Company's Current Report on Form 8-K, dated July
17, 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.

52
<PAGE> 54

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> 55

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
------------ ---------
(UNAUDITED)
<S> <C> <C>
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> 56

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> 57

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> 58

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> 59

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> 60

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> 61

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> 62

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> 63

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> 64

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> 65

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> 66

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> 67

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> 68

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> 69

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> 70

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> 71

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> 72

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> 73

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> 74

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> 75

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> 76

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> 77

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> 78

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.

F-25
<PAGE> 79

- ------------------------------------------------------
- ------------------------------------------------------

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......................... 31
Business.............................. 32
Management............................ 46
Description of Capital Stock.......... 48
Underwriting.......................... 50
Legal Matters......................... 50
Experts............................... 51
Available Information................. 52
Incorporation of Certain Documents by
Reference........................... 52
Index to Financial Statements......... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------

7,500,000 SHARES

PRIME HOSPITALITY CORP. [LOGO]

COMMON STOCK

------------------------

PROSPECTUS

------------------------
MONTGOMERY SECURITIES

BT SECURITIES CORPORATION

SMITH BARNEY INC.

July 29, 1996

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