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PURSUANT TO RULE 424 (B)(3) OF THE
SECURITIES AND EXCHANGE ACT OF 1933
PROSPECTUS
[PRIME HOSPITALITY CORP. LOGO]
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF 9 3/4% SERIES B SENIOR
SUBORDINATED NOTES DUE 2007 FOR EACH $1,000 IN PRINCIPAL AMOUNT OF OUTSTANDING
9 3/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
------------------------
Prime Hospitality Corp., a Delaware company (the "Company"), hereby offers
to exchange (the "Exchange Offer") up to $200,000,000 in aggregate principal
amount of its 9 3/4% Series B Senior Subordinated Notes Due 2007 (the "Exchange
Notes") for up to $200,000,000 in aggregate principal amount of its outstanding
9 3/4% Series A Senior Subordinated Notes Due 2007 issued and sold in reliance
upon an exemption from registration under the Securities Act of 1933, as amended
(the "Original Notes" and, together with the Exchange Notes, the "Notes").
The terms of the Exchange Notes will be substantially identical in all
respects (including principal amount, interest rate, maturity and ranking) to
the terms of the Original Notes for which they may be exchanged pursuant to the
Exchange Offer, except that (i) the Exchange Notes will be freely transferable
by holders thereof (except as provided below) and (ii) the Exchange Notes will
be issued without any covenant of the Company regarding registration. The
Exchange Notes will be issued under the indenture governing the Original Notes.
The Exchange Notes will be general unsecured obligations of the Company and will
be subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company. None of the Company's subsidiaries is presently
required to guarantee the Notes, although under certain future circumstances,
the Company may be required to cause one or more Restricted Subsidiaries (as
defined) to guarantee the Notes on a subordinated basis. As of March 31, 1997,
the Company had approximately $155.0 million of Senior Debt outstanding, and, in
addition, subsidiaries of the Company had approximately $21.8 million of
Indebtedness (as defined) outstanding. Upon a Change of Control (as defined),
each holder of the Notes will have the right to require the Company to
repurchase all or a portion of such holder's Notes then outstanding at a
purchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase. The Company's ability to
repurchase the Notes may be limited by, among other things, the Company's
financial resources at the time of repurchase. For a complete description of the
terms of the Exchange Notes, including provisions relating to the ability of the
Company and its Restricted Subsidiaries to create indebtedness that is senior or
pari passu to the Exchange Notes, see "Description of Notes." There will be no
cash proceeds to the Company from the Exchange Offer.
The Notes bear interest from and including their respective dates of
issuance. Holders whose Original Notes are accepted for exchange will receive
accrued interest thereon to, but not including, the date of issuance of the
Exchange Notes, such interest to be payable with the first interest payment on
the Exchange Notes, but will not receive any payment in respect of interest on
the Original Notes accrued after the issuance of the Exchange Notes.
The Original Notes were originally issued and sold on March 26, 1997 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of
the Securities Act and Rule 144A of the Securities Act (the "Initial Offering").
Accordingly, the Original Notes may not be reoffered, resold or otherwise
pledged, hypothecated or transferred in the United States unless so registered
or unless an applicable exemption from the registration requirements of the
Securities Act is available. Based upon interpretations by the Staff (the
"Staff") of the Securities and Exchange Commission (the "Commission") issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Original Notes directly from
the Compay or (iii) a broker-dealer who acquired Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Broker-dealers who
acquired Original Notes as a result of market making or other trading activities
may use this Prospectus, as supplemented or amended, in connection with resales
of the Exchange Notes. The Company has agreed that, for a period not to exceed
180 days after the Exchange Date (as defined), it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. Any
holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
The Original Notes and the Exchange Notes constitute new issues of
securities with no established trading market. Any Original Notes not tendered
and accepted in the Exchange Offer will remain outstanding. To the extent that
Original Notes are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered, and tendered but unaccepted, Original Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders of
Original Notes will continue to be subject to the existing restrictions on
transfer thereof and the Company will have no further obligation to such holders
to provide for the registration under the Securities Act of the Original Notes
except under certain limited circumstances. (See "Original Notes Registration
Rights.") No assurance can be given as to the liquidity of the trading market
for either the Original Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on May 12, 1997, unless extended (the
"Expiration Date"). The date of acceptance for exchange of the Original Notes
(the "Exchange Date") will be the first business day following the Expiration
Date, upon surrender of the Original Notes. Original Notes tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable.
------------------------
SEE "RISK FACTORS" ON PAGE 12 FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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 date of this Prospectus is April 14, 1997
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
Certain statements in this Prospectus under the captions "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and elsewhere constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
important factors include, among others: general economic and business
conditions; industry trends; expansion and construction costs; competition;
changes in business strategy or development plans; availability, terms and
deployment of capital; availability of qualified personnel; changes in, or the
failure or inability to comply with, government regulation, including, without
limitation, environmental regulations; and other factors referenced in this
Prospectus. See "Risk Factors." These forward-looking statements speak only as
of the date of this Prospectus. The Company expressly disclaims any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY........................................ 1
RISK FACTORS................................... 12
Consequences of Failure to Exchange.......... 12
Substantial Leverage and Debt Service
Obligations.................................. 12
Subordination of Notes; Asset Encumbrance.... 13
AmeriSuites Expansion Risks.................. 14
Risks of the Lodging Industry; Competition... 14
Hotel Acquisition Risks...................... 15
Geographic Concentration of Hotels........... 15
Employment and Other Government Regulation... 16
Environmental Regulation..................... 16
Importance of Franchisor Relationships....... 16
Dependence on Key Employees.................. 16
Change of Control............................ 17
Absence of Public Market for the Notes....... 17
USE OF PROCEEDS................................ 18
THE EXCHANGE OFFER............................. 19
Purpose of the Exchange Offer................ 19
Terms of the Exchange........................ 19
Expiration Date; Extensions; Termination;
Amendments................................. 20
How to Tender................................ 20
Terms and Conditions of the Letter of
Transmittal.................................. 22
Withdrawal Rights............................ 23
Acceptance of Original Notes for Exchange;
Delivery of Exchange Notes................. 23
Conditions to the Exchange Offer............. 23
Exchange Agent............................... 24
Solicitation of Tenders; Expenses............ 24
Appraisal Rights............................. 25
Federal Income Tax Consequences.............. 25
Other........................................ 25
CAPITALIZATION................................. 26
RECENT SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA................................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 30
SELECTED CONSOLIDATED FINANCIAL DATA OF THE
COMPANY AND ITS PREDECESSOR.................. 40
BUSINESS....................................... 41
The Company.................................. 41
Operating Performance and Internal Growth.... 42
AmeriSuites Expansion........................ 42
Industry Overview............................ 43
Prime's Lodging Operations................... 45
<CAPTION>
PAGE
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<S> <C>
Operations................................... 51
Refurbishment Program........................ 52
Mortgages and Notes Receivable............... 53
Management Agreements........................ 53
Franchise Agreements......................... 53
Litigation................................... 54
MANAGEMENT..................................... 55
Directors and Executive Officers............. 55
DESCRIPTION OF CERTAIN
INDEBTEDNESS................................. 57
Revolving Credit Facility.................... 57
9 1/4% First Mortgage Notes due 2006......... 57
Other Secured Debt........................... 57
7% Convertible Subordinated Notes due 2002... 58
DESCRIPTION OF NOTES........................... 59
General...................................... 59
Principal, Maturity and Interest............. 59
Optional Redemption.......................... 60
Mandatory Redemption......................... 60
Subordination................................ 60
Repurchase at the Option of Holders.......... 61
Selection and Notice......................... 63
Certain Covenants............................ 64
Subsidiary Guarantees........................ 69
Reports...................................... 70
Events of Default and Remedies............... 71
No Personal Liability of Directors, Officers,
Employees and Stockholders................. 72
Legal Defeasance and Covenant Defeasance..... 72
Satisfaction and Discharge................... 73
Transfer and Exchange........................ 74
Amendment, Supplement and Waiver............. 74
Concerning the Trustee....................... 75
Additional Information....................... 75
Certain Definitions.......................... 75
ORIGINAL NOTES REGISTRATION RIGHTS............. 85
PLAN OF DISTRIBUTION........................... 86
BOOK ENTRY, DELIVERY AND FORM.................. 88
LEGAL MATTERS.................................. 90
EXPERTS........................................ 90
AVAILABLE INFORMATION.......................... 90
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.................................... 90
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..... F-1
</TABLE>
ii
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SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the 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.
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. Hotel EBITDA represents EBITDA generated from the operations of owned
hotels. Hotel EBITDA excludes management fee income, interest income from
mortgages and notes receivable, general and administrative expenses and other
revenues and expenses which do not directly relate to operations of owned
hotels. EBITDA and Hotel EBITDA are not measures of financial performance under
generally accepted accounting principles and should not be considered as
alternatives to net income as an indicator of the Company's operating
performance or as alternatives to cash flows as a measure of liquidity. Unless
otherwise indicated, hotel and room count data is as of March 31, 1997 and
industry data is based on reports of Smith Travel Research.
THE COMPANY
Prime is a leading national hotel company, with a portfolio of 107 hotels
containing 15,287 rooms located in 25 states and the U.S. Virgin Islands (the
"Portfolio"). Prime controls two high-quality hotel brands -- AmeriSuites(R) and
Wellesley Inns(R) -- as well as a portfolio of upscale full-service hotels. One
of the country's largest hotel owner/operators, Prime has positioned itself to
benefit significantly from favorable lodging industry fundamentals that have
prevailed in recent years. From 1994 to 1996, the Company's EBITDA has grown at
a compound annual rate of 44.0%, from $42.8 million in 1994 to $88.8 million in
1996, while recurring net income has grown at a compound annual rate of 48.7%,
from $12.8 million to $28.3 million over the same period.
The Company's strategy is to capitalize on two lodging industry trends: (i)
favorable industry fundamentals, which are producing strong earnings growth due
to the operating leverage inherent in hotel ownership and (ii) growing consumer
preferences for newer all-suite accommodations with strong brand identities.
Reflecting this strategy, the Company owns and operates 94 of the 107 hotels in
the Portfolio (the "Owned Hotels") and holds financial or equity interests in 8
of the remaining 13 hotels managed by the Company for third parties (the
"Managed Hotels"). Furthermore, more than 85% of the Company's capital spending
in 1995 and 1996 was dedicated to the growth of the Company's proprietary
AmeriSuites and Wellesley Inns brands. Through its focus on hotel equity
ownership, the Company is benefiting from the operating leverage inherent in the
lodging industry. Through its development of proprietary brands, the Company is
positioning itself to generate additional revenue not dependent on investment in
real estate.
Prime's Portfolio is modern and well-maintained, with an average hotel age
of approximately 11 years. Over the past three years, the Company has achieved
rapid growth in the Portfolio, from 5,092 owned rooms at January 1, 1994 to
12,610 owned rooms at March 31, 1997. At the same time, the Company has focused
on brand development, with the number of Owned Hotels operated under Prime's
proprietary AmeriSuites and Wellesley Inns brands increasing from 19 of the 41
Owned Hotels at January 1, 1994 to 69 of the 94 Owned Hotels at March 31, 1997.
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
limited-service segment, primarily under the Company's proprietary Wellesley
Inns brand.
All-Suites: Prime owns and operates 41 all-suite hotels under the
AmeriSuites brand name, and currently has another 45 AmeriSuites under
development, including 27 under construction. AmeriSuites are upper mid-price,
all-suite hotels containing approximately 128 suites and located primarily near
suburban commercial centers, corporate office parks and other travel
destinations, with close proximity to dining, shopping and entertainment
amenities. Since January 1, 1995, AmeriSuites has been one of the fastest
<PAGE> 5
growing domestic hotel chains, expanding from 13 hotels to 41 hotels at March
31, 1997, an increase of 215%. In 1996, AmeriSuites contributed approximately
$26.0 million, or 28.6%, of the Company's Hotel EBITDA, a percentage which the
Company believes will increase significantly in 1997.
Full-Service: Prime operates 31 upscale full-service hotels with food
service and banquet facilities under franchise agreements with national hotel
brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and
Ramada. In 1996, the Company's full-service hotels contributed approximately
$44.5 million, or 48.9%, of the Company's Hotel EBITDA.
Limited-Service: Prime operates 35 limited-service hotels, 28 of which are
Wellesley Inns. The Company owns all of the Wellesley Inns, which compete
primarily in the mid-price segment with hotels such as Hampton Inns and La
Quinta Inns. The remaining seven limited-service hotels are operated under
franchise agreements with well-known national chains. In accordance with its
brand development strategy, the Company expects to divest a number of these
seven hotels within the next several years. In 1996, the Company's
limited-service hotels contributed approximately $20.5 million, or 22.5%, of the
Company's Hotel EBITDA.
OPERATING PERFORMANCE AND INTERNAL GROWTH
Prime seeks to achieve internal growth through the use of sophisticated
operating, marketing and financial systems at its hotels. Prime has demonstrated
its ability to operate its hotels effectively in each of its three segments,
achieving revenue per available room ("REVPAR") increases in 1996 at its
comparable AmeriSuites, full-service and limited-service hotels of 11.7%, 15.8%
and 5.2%, respectively, versus 1995 results. Management believes that: (i) the
AmeriSuites chain is positioned to benefit from increased critical mass and name
recognition resulting from the chain's rapid growth, expanded marketing
initiatives and product improvements; (ii) the upscale full-service segment,
located principally in the Northeast, is positioned to benefit from strong
regional and segment fundamentals, including significant barriers to entry; and
(iii) the Company's Wellesley Inns are positioned to benefit from a $9.0 million
renovation and reimaging program which was completed in March 1997.
The Company's emphasis on efficient operations has increased operating
margins, thus translating its top-line REVPAR growth into increased earnings for
each of its three industry segments. In 1996, gross operating profit increased
by 17.0%, 25.9% and 10.4%, respectively, for comparable AmeriSuites,
full-service and limited-service hotels, versus 1995 results. The Company
expects to further improve its operating performance in 1997 through the
implementation of a new proprietary yield management system, an enhanced central
reservations system serving the AmeriSuites and Wellesley Inns chains, digital
telecommunications conversions, improved telephone call accounting systems and
significant increases in employee training programs.
AMERISUITES EXPANSION
Prime's external growth focuses on 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 plans
to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the
end of 1998. At present, 41 AmeriSuites are open, with an additional 45 hotels
under development, including 27 under construction. At these levels, the Company
believes that it is approaching the critical mass necessary to begin development
of franchising programs, which would further leverage the value of its
proprietary brands.
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 All-Suite Hotel," emphasizing superior price/value relative to
2
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traditional mid-price hotels by focusing on the chain's spacious suites, upscale
facilities and attractive amenity package. The Company is committed to the
expansion of the AmeriSuites brand for the following reasons:
- ATTRACTIVE INVESTMENT RETURNS: AmeriSuites have generated strong
investment returns, due to moderate development costs and high operating profit
margins. In 1996, AmeriSuites which were in operation for at least one year
generated an average EBITDA of $1.26 million, representing an average
unleveraged 18.1% return on total invested capital. In approving new AmeriSuites
for development, the Company seeks a projected unleveraged return on total
invested capital of 14% to 16% per year (although actual results may vary
significantly from projected results).
- RAPID STABILIZATION: Due to the attractiveness of the AmeriSuites
product, careful market analysis and extensive pre-opening sales and marketing
efforts, new AmeriSuites have rapidly attained high revenue and profit levels.
In 1996, the new AmeriSuites hotels which were open for at least three months
but less than 18 months achieved REVPAR levels which were within 8% of the
REVPAR levels achieved by stabilized AmeriSuites hotels which were in operation
for more than 18 months.
- BROAD CUSTOMER APPEAL: The AmeriSuites concept offers the benefits of an
all-suite hotel at a price that appeals to a wide variety of customers. Business
travelers are attracted to the specially designed business suites,
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.
- FAST GROWING, FRAGMENTED MARKET: The all-suites segment has seen
above-market demand growth in recent years. From 1992 through 1996, demand for
all-suite hotels grew at more than triple the rate of demand growth experienced
by the lodging industry as a whole, and exceeded all-suites supply growth by
17.7%. Given the fast-growing demand for all-suite 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.
- FAVORABLE OPERATING OUTLOOK: Management expects the AmeriSuites chain to
continue its strong performance, due principally to the following factors:
Increased critical mass: AmeriSuites' historical performance
improvements have been achieved despite the lack of an extensive chain
infrastructure. With more than three times the number of hotels from
January 1995 levels, 28 additional properties expected to be added during
1997 and the addition of an enhanced central reservations system,
AmeriSuites' referral network, name recognition and marketing initiatives
have continued to strengthen. In 1997, Prime plans to double its
AmeriSuites national brand advertising expenditures to further enhance the
chain's market profile.
Upside opportunities vs. key competitors: The Company believes it is
well-positioned to capitalize on the superior price/value characteristics
of the AmeriSuites brand as the chain expands. Despite significant product
advantages over its older, more established non-suite competitors,
AmeriSuites, as a recently established brand in the early stages of
development, has historically generated comparatively lower REVPAR levels.
For example, in 1996 the 296-hotel Courtyard by Marriott chain, a principal
competitor of AmeriSuites, generated an average REVPAR more than 20% higher
than that of AmeriSuites, which management attributes to Courtyard's more
fully developed marketing programs and brand recognition. Management
believes that the growing AmeriSuites infrastructure, consisting of
elements such as improved frequency programs, an enhanced central
reservations system, increased advertising and marketing programs and the
increased visibility from the doubling of the chain's number of hotels in
the past year will permit AmeriSuites to achieve critical mass and
outperform its older, more established competitors.
Impact of product enhancements: Prime continually seeks to refine and
enhance the AmeriSuites product to improve guest satisfaction and economic
returns. In 1996, the Company introduced a larger,
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<PAGE> 7
more upscale lobby and arrival area, standardized indoor pools in Northern
climates and introduced a new concept for business travelers: Taking Care
of Business Suites ("TCB Suites"). TCB Suites comprise approximately 20% of
AmeriSuites rooms and are included in every hotel, offering guests a well
equipped in-suite office environment with the residential atmosphere
typical of the chain's suites. Management believes that these and other
product improvements will continue to enhance operating performance.
Prime believes that it will have access to sufficient resources to
implement its planned expansion of the AmeriSuites brand, including capital from
the following sources: (i) net proceeds from the Initial Offering; (ii)
borrowings under the Company's $100 million revolving credit facility (the
"Revolving Credit Facility"); and (iii) internally generated free cash flow from
hotel operations. With a significant hotel asset base, Prime also expects to
seek additional debt or equity financing or enter into sale/leaseback agreements
with respect to certain of its properties.
INDUSTRY OVERVIEW
The lodging industry as a whole has experienced five consecutive years in
which the growth in room demand has exceeded the growth in supply. In 1996,
industry-wide percentage growth in demand for hotel rooms exceeded industry-wide
percentage growth in supply of hotel rooms by 34.8% (3.1% versus 2.3%). The
excess of demand growth over supply growth in the past several years has led to
industry-wide increases in occupancy percentages and average daily rate ("ADR"),
with occupancy rising to 65.7% in 1996 from 65.1% in 1995, and average daily
rate ADR increasing 6.7% in 1996 over 1995 levels. Historical industry
performance, however, may not be indicative of future results
------------------------
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.
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<PAGE> 8
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering to exchange (the "Exchange
Offer") up to $200,000,000 aggregate principal
amount of 9 3/4% Series B Senior Subordinated Notes
due 2007 (the "Exchange Notes") for up to
$200,000,000 aggregate principal amount of its
outstanding 9 3/4% Series A Senior Subordinated
Notes due 2007 issued and sold in reliance upon an
exemption from registration under the Securities
Act (the "Original Notes"). The terms of the
Exchange Notes will be substantially identical in
all respects (including principal amount, interest
rate, maturity and ranking) to the terms of the
Original Notes for which they may be exchanged
pursuant to the Exchange Offer, except that (i) the
Exchange Notes will be freely transferable by
holders thereof except as provided herein (see "The
Exchange Offer -- Terms of the Exchange" and
"-- Terms and Conditions of the Letter of
Transmittal") and (ii) the Exchange Notes will be
issued without any covenant regarding registration
under the Securities Act.
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Original Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than any
holder which is (i) an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act, (ii) a broker-dealer who acquired Original
Notes directly from the Company or (iii)
broker-dealers who acquired Original Notes as a
result of market making or other trading
activities) without compliance with the
registration and prospectus delivery provisions of
the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged
in, and do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of such Exchange
Notes.
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on May 12, 1997 unless extended
(the "Expiration Date").
Exchange Date.............. The first date of acceptance for exchange for the
Original Notes will be the first business day
following the Expiration Date.
Conditions to the Exchange
Offer.................... The obligation of the Company to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer -- Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such condition.
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date. Any Original Notes not accepted
for any reason will be returned without expense to
the tendering holders thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer.
Procedures for Tendering
Original Notes........... See "The Exchange Offer -- How to Tender."
5
<PAGE> 9
Federal Income Tax
Consequences............. The exchange of Original Notes for Exchange Notes
by holders will not be a taxable exchange for
federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest
income as a result of such exchange.
Effect on Holders of
Original Notes............. As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Original Notes pursuant to the terms of
this Exchange Offer, the Company will have
fulfilled a covenant contained in the terms of the
Original Notes and the Registration Rights
Agreement (the "Registration Rights Agreement")
dated as of March 26, 1997 between the Company and
BT Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Montgomery Securities
and Smith Barney Inc., as initial purchasers (the
"Initial Purchasers"), and, accordingly, the
holders of the Original Notes will have no further
registration or other rights under the Registration
Rights Agreement, except under certain limited
circumstances. See "Original Notes Registration
Rights." Holders of the Original Notes who do not
tender their Original Notes in the Exchange Offer
will continue to hold such Original Notes and will
be entitled to all the rights and limitations
applicable thereto under the Indenture dated as of
March 26, 1997, between the Company and First Bank
National Association, as Trustee (the "Trustee"),
relating to the Original Notes and the Exchange
Notes (the "Indenture"). All untendered, and
tendered but unaccepted, Original Notes will
continue to be subject to the restrictions on
transfer provided for in the Original Notes and the
Indenture. To the extent that Original Notes are
tendered and accepted in the Exchange Offer, the
trading market, if any, for the Original Notes
could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
TERMS OF THE NOTES
The Exchange Offer applies to $200,000,000 aggregate principal amount of
the Original Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Original Notes for which they may be exchanged except that
the Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Notes will
evidence the same debt as the Original Notes and will be entitled to the
benefits of the Indenture. See "Description of Notes."
Notes Offered.............. $200,000,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes due 2007.
Issuer..................... Prime Hospitality Corp.
Maturity Date.............. April 1, 2007.
Interest Rate and
Payment Dates............ Interest on the Notes will accrue from the
respective dates of issuance and will be payable
semi-annually in arrears on April 1 and October 1
of each year, commencing on October 1, 1997, at the
rate of 9 3/4% per annum.
Ranking.................... The Notes are general unsecured obligations of the
Company, subordinated in right of payment to all
existing and future Senior Debt (as defined) of the
Company. The Notes rank pari passu with any present
and future senior subordinated indebtedness of the
Company and rank
6
<PAGE> 10
senior to all other subordinated indebtedness of
the Company. None of the Company's Subsidiaries (as
defined) is presently required to guarantee the
Notes, although under certain future circumstances,
the Company may be required to cause one or more
Restricted Subsidiaries (as defined) to guarantee
the Notes on a subordinated basis. As of March 31,
1997, the Company had approximately $155.0 million
of Senior Debt outstanding, and, in addition,
Subsidiaries of the Company had approximately $21.8
million of Indebtedness (as defined) outstanding.
See "Description of Notes -- Certain Covenants,"
"-- Subsidiary Guarantees" and "Description of
Certain Indebtedness."
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of the Company on or after April 1,
2002, at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption. In
addition, prior to April 1, 2000, the Company, at
its option, may redeem up to 35% of the aggregate
principal amount of the Notes originally issued
with the net cash proceeds of one or more Public
Equity Offerings (as defined) at a redemption price
equal to 109.75% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption;
provided that at least 65% of the aggregate
principal amount of Notes originally issued remains
outstanding immediately after any such redemption.
See "Description of Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control (as defined) each holder
of the Notes will have the right to require the
Company to purchase such holder's Notes at a price
equal to 101% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages,
if any, to the date of purchase. The Revolving
Credit Facility prohibits the purchase of Notes by
the Company in the event of a Change of Control,
unless and until such time as the Indebtedness
under the Revolving Credit Facility is repaid in
full. See "Description of Notes -- Repurchase at
the Option of Holders -- Change of Control."
Certain Covenants.......... The Indenture contains certain covenants that,
subject to certain exceptions, limit the ability of
the Company and its Subsidiaries to incur
Indebtedness and issue Disqualified Stock (as
defined) or, in the case of Subsidiaries, preferred
stock, and limit the ability of the Company and its
Restricted Subsidiaries to pay dividends or other
distributions, repurchase Equity Interests and
subordinated Indebtedness, or make certain other
restricted payments, consummate certain asset
sales, enter into certain transactions with
affiliates, incur indebtedness that is subordinate
in right of payment to any Senior Debt and senior
in right of payment to the Notes, make investments,
merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets
of the Company. See "Description of
Notes -- Certain Covenants" and "-- Repurchase at
the Option of Holders -- Asset Sales."
For additional information regarding the Notes, see "Description of Notes."
7
<PAGE> 11
ORIGINAL NOTES REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company agreed (i) to
file a registration statement (the "Exchange Offer Registration Statement") on
or prior to 30 days after the Issuance Date of the Original Notes with respect
to the Exchange Offer, (ii) to use its best efforts to cause such Registration
Statement to be declared effective under the Securities Act within 135 days
after the Issuance Date and (iii) upon the Exchange Offer Registration Statement
being declared effective, to offer the Exchange Notes in exchange for surrender
of the Original Notes. In certain circumstances, the Company will be required to
provide a shelf registration statement (the "Shelf Registration Statement) to
cover resales of the Original Notes by the holders thereof. If the Company does
not comply with its obligation under the Registration Rights Agreement, it will
be required to pay Liquidated Damages to holders of the Original Notes under
certain circumstances. See "Original Notes Registration Rights."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds from the sale of the Original Notes were
approximately $193.5 million after deducting the Initial Purchasers' discount
and estimated expenses related to the Initial Offering. The net proceeds from
the Initial Offering are being used as part of the financing of the Company's
AmeriSuites expansion and were used to repay certain indebtedness. The Company
plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by
the end of 1998. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" for a description of certain factors that should be
considered by participants in the Exchange Offer.
8
<PAGE> 12
SUMMARY RECENT CONSOLIDATED FINANCIAL AND OTHER DATA
The table below presents summary recent consolidated financial and other
data derived from the Company's historical consolidated financial statements as
of and for the years ended December 31, 1994, 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>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE,
RATIO AND HOTEL DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA(1):
Total revenues........................................... $134,303 $205,628 $268,868
Costs and expenses:
Direct hotel operating expenses....................... 66,620 116,565 145,419
Occupancy and other operating......................... 9,799 11,763 16,833
General and administrative............................ 15,089 15,515 17,813
Depreciation and amortization......................... 9,427 15,974 25,884
Other expense......................................... -- 2,200 --
-------- -------- --------
Total costs and expenses......................... 100,935 162,017 205,949
-------- -------- --------
Operating income......................................... 33,368 43,611 62,919
Interest expense......................................... (13,993) (21,603) (20,312)
Net income:
Income from recurring operations...................... 12,805 17,442 28,330
Other income -- non-recurring(2)...................... 5,453 23 2,584
-------- -------- --------
Income before extraordinary items..................... 18,258 17,465 30,914
Extraordinary items(3)................................ 172 104 202
-------- -------- --------
Net income............................................... $ 18,430 $ 17,569 $ 31,116
======== ======== ========
Fully diluted earnings per common share(4):
Income from recurring operations...................... $ 0.40 $ 0.54 $ 0.74
Other income -- non-recurring......................... 0.17 -- 0.06
-------- -------- --------
Income before extraordinary items..................... 0.57 0.54 0.80
Extraordinary items................................... 0.01 -- --
-------- -------- --------
Fully diluted earnings per common share.................. $ 0.58 $ 0.54 $ 0.80
======== ======== ========
OTHER DATA:
EBITDA(5)................................................ $ 42,795 $ 59,585 $ 88,803
Net cash provided by operating activities................ 28,334 38,628 65,936
Net cash used in investing activities.................... (33,910) (88,704) (240,957)
Net cash provided by (used in) financing activities...... (23,469) 87,085 141,485
Ratio of EBITDA to interest expense(5)(6)................ 3.06x 2.76x 4.37x
Ratio of earnings to fixed charges(7).................... 2.78x 2.02x 2.44x
HOTEL DATA(8):
All-suites:
Number of locations................................... 12 19 35
Number of rooms....................................... 1,494 2,319 4,348
REVPAR(9)............................................. $ 39.50 $ 43.98 $ 47.28
Full-service(8):
Number of locations................................... 30 31 31
Number of rooms....................................... 6,002 6,151 6,151
REVPAR(9)............................................. $ 51.27 $ 53.21 $ 60.77
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Limited-service:
Number of locations................................... 38 38 38
Number of rooms....................................... 3,943 3,943 3,943
REVPAR(9)............................................. $ 34.67 $ 37.54 $ 38.87
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED(10)
-------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities.............. $ 16,235 $ 107,369
Property, equipment and leasehold improvements, net.............. 695,253 758,353
Mortgages and notes receivable, net of current portion........... 24,195 24,195
Total assets..................................................... 786,098 946,832
Current portion of debt.......................................... 3,419 3,023
Long-term debt, net of current portion........................... 298,875 460,005
Total stockholders' equity....................................... 419,895 419,895
</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 year
ended December 31, 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 years ended December 31, 1995 and
1996, the Company recorded the operating revenues and operating expenses
related to this hotel.
(2) Other income -- 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 $120,000 in 1994, $70,000 in 1995 and $135,000 in 1996.
(4) Fully diluted earnings per common share, in addition to the adjustments for
primary earnings 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) The interest expense for the Company, as adjusted to give effect to the
Initial Offering and the use of certain proceeds thereof to repay debt, for
1996 was $36.4 million, based on the interest rate on the Notes of 9 3/4%
per annum. See "Use of Proceeds." The ratio of EBITDA to interest expense
for 1996 as so adjusted was 2.44x.
(7) Earnings used in computing the ratio of earnings to fixed charges consist
of income before income taxes, fixed charges and extraordinary items. Fixed
charges consist of interest expense, including amounts capitalized and the
amortization of deferred financing fees, and that portion of rental expense
representative of interest (deemed to be one third of rental expense).
(8) Hotel data represents operating data for the hotels in the Portfolio at
December 31, 1996. For purposes of showing operating trends, the results of
the Frenchman's Reef have been excluded from Hotel data due to the effect
of hurricane damage on the hotel's operations. For a discussion of the
Frenchman's Reef, see "Business -- Prime's Lodging Operations."
(9) "REVPAR" means revenue per available room, which is equal to total room
revenue divided by the number of rooms available for sale.
(10) As adjusted to reflect additional borrowings of $63.1 million under the
Revolving Credit Facility through March 31, 1997 (which were utilized for
AmeriSuites development), the Initial Offering and the application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
10
<PAGE> 14
The following table sets forth for the five years ended December 31, 1996,
operating data for the Owned Hotels (hotels owned or leased by Prime) in the
Portfolio at December 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 the Frenchman's Reef have been excluded from the table due to the
effect of hurricane damage on the hotel's operations. For purposes of showing
operating trends, the results of 25 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C> <C>
Number of locations.................. 55 59 66 74 90
Number of rooms...................... 7,087 7,576 8,642 9,616 11,645
Occupancy............................ 69.2% 71.4% 69.9% 69.6% 69.6%
ADR(1)............................... $ 56.04 $ 57.11 $ 60.59 $ 64.26 $ 70.39
REVPAR............................... $ 38.75 $ 40.77 $ 42.35 $ 44.70 $ 48.97
Room revenues........................ $98,485 $108,810 $121,691 $146,539 $184,606
Gross operating profit(2)............ $47,212 $ 52,629 $ 61,520 $ 74,424 $ 97,152
Gross operating profit
percentage(2)...................... 34.42% 35.34% 37.46% 39.02% 41.91%
</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 Managed Hotels (hotels managed for
third parties) in the Portfolio at December 31, 1996, see "Business -- Prime's
Lodging Operations."
11
<PAGE> 15
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Original Notes for the Exchange Notes offered hereby, holders of
Original Notes should consider carefully the following factors, which may be
generally applicable to the Original Notes as well as the Exchange Notes. This
Offering Memorandum contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Company
does not intend to register the Original Notes under the Securities Act. In
addition, any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent Original Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
original Notes not tendered could be adversely affected. See "The Exchange
Offer" and "Original Notes Registration Rights."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As of March 31, 1997, as adjusted to reflect additional borrowings of $63.1
million under the Revolving Credit Facility since December 31, 1996, the Initial
Offering and the application of a portion of the net proceeds therefrom to repay
Indebtedness, the Company's total consolidated Indebtedness (including current
portion) would have been $463.0 million. The Company expects it will incur
additional Indebtedness, which may include secured Indebtedness, in connection
with the implementation of its growth strategy. See "Description of
Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of Certain
Capital Stock."
The degree to which the Company is leveraged, as well as its rent expense,
could have important consequences, 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; (iii) in
addition to the Notes, certain other agreements governing the Company's
Indebtedness, including the Revolving Credit Facility and the 9 1/4% First
Mortgage Notes due 2006 (the "First Mortgage Notes"), contain 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; (iv) the Company may be hindered in its ability to adjust
rapidly to changing market conditions; and (v) the Company's substantial degree
of leverage could make it more vulnerable in the event of a downturn in general
economic conditions or in its business. The Company's ability to satisfy its
obligations, including the Notes, will be dependent upon its future performance,
which is subject to prevailing economic conditions and financial, business and
other factors, including factors beyond the Company's control. There can be no
assurance that the Company's operating cash flow will be sufficient to meet its
debt service requirements or to repay the Notes at maturity or that the Company
will be able to refinance the Notes or other indebtedness at maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
12
<PAGE> 16
SUBORDINATION OF NOTES; ASSET ENCUMBRANCE
At March 31, 1997, after giving effect to the Initial Offering and the
application of the net proceeds therefrom, the Company had approximately $155.0
million of Senior Debt outstanding, and, in addition, Subsidiaries of the
Company had approximately $21.8 million of Indebtedness outstanding. The
Indenture permits the Company to incur additional Senior Debt, subject to
certain conditions. The Notes are subordinated in right of payment to all
existing and future Senior Debt, including the principal, premium (if any) and
interest with respect to the Senior Debt under the Revolving Credit Facility and
the First Mortgage Notes.
The Company may not pay principal of, premium (if any) on, or interest on,
the Notes, or repurchase or redeem or otherwise retire any Notes, if any default
occurs and is continuing in the payment when due of any Senior Debt (except that
Holders of Notes may receive Permitted Junior Securities (as defined in the
Indenture) and payments made from the trust described under "Description of
Notes -- Legal Defeasance and Covenant Defeasance" and " -- Satisfaction and
Discharge"). In addition, if any other event of default exists with respect to
Designated Senior Debt (as defined in the Indenture) and certain other
conditions are satisfied, the Company may not make any payments on the Notes for
up to 179 days (except that Holders of Notes may receive Permitted Junior
Securities and payments made from the trust described under "Description of
Notes -- Legal Defeasance and Covenant Defeasance" and " -- Satisfaction and
Discharge"). Upon any payment or distribution of the assets of the Company in
connection with a total or partial liquidation or dissolution or reorganization
of or similar proceeding relating to the Company, the holders of Senior Debt
will be entitled to receive payment in full before the holders of the Notes are
entitled to receive any payment. See "Description of Notes -- Subordination."
The Notes are also unsecured and thus, in effect, rank junior to any
secured Indebtedness of the Company. The Indebtedness outstanding under the
Revolving Credit Facility and the First Mortgage Notes is secured by certain of
the Company's hotels, with recourse to the Company. The Revolving Credit
Facility and the First Mortgage Notes include certain covenants that, among
other things, restrict: (i) the making of investments, loans and advances and
the paying of dividends, payments of certain indebtedness and other restricted
payments; (ii) the incurrence of additional indebtedness; (iii) the granting of
liens, other that liens created pursuant to the Revolving Credit Facility and
the First Mortgage Notes and certain permitted liens; (iv) mergers,
consolidations and sales of all or a substantial part of the Company's business
or property; and (v) the sale of assets. The Revolving Credit Facility also
requires the Company to maintain certain financial ratios, including interest
coverage and leverage ratios, and to maintain a minimum level of stockholders'
equity and market capitalization. The ability of the Company to comply with
these and other provisions may be affected by events beyond the Company's
control. The breach of any of these covenants could result in a default under
the Revolving Credit Facility and the First Mortgage Notes, in which case the
lenders and the trustee, respectively, or their successors or assignees, could
elect to declare the entire principal amount under the Revolving Credit Facility
and the First Mortgage Notes, together with accrued interest, to be due and
payable, and the Company could be prohibited from making payments of interest
and principal on the Notes until the default is cured or all Senior Debt is paid
or satisfied in full. If the Company were unable to repay such amounts, such
lenders and the trustee, respectively, could proceed against their collateral.
If the Indebtedness under the Revolving Credit Facility or the First Mortgage
Notes were to be accelerated, there can be no assurance that the assets of the
Company would be sufficient to repay in full such Indebtedness and the other
Indebtedness of the Company, including the Notes. See "Description of
Notes -- Subordination."
For purposes of the Indenture, the Company's Subsidiaries (as defined) are
divided into two categories -- Restricted Subsidiaries, which generally are
subject to the restrictive covenants set forth in the Indenture, and
Unrestricted Subsidiaries, which generally are not. As of March 31, 1997, after
giving effect to the Initial Offering and the application of net proceeds
therefrom, Subsidiaries of the Company had approximately $21.8 million of
Indebtedness outstanding, to which the Notes are effectively subordinated. Under
certain future circumstances, the Company may be required to cause one or more
Restricted Subsidiaries to guarantee the Notes, although none of the Company's
Restricted Subsidiaries is presently required to guarantee the Notes. Any such
guarantee will be subordinated on the same basis to Senior Debt of the
Restricted Subsidiary providing such guarantee as the Notes are subordinated to
Senior Debt of the
13
<PAGE> 17
Company. Any such guarantee may also be subject to challenge under applicable
fraudulent conveyance or other bankruptcy laws. See "Description of
Notes -- Subsidiary Guarantees."
AMERISUITES EXPANSION RISKS
The Company is committed to expanding its AmeriSuites hotel brand to meet
growing demand in the all-suite 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. The Company will be
expanding into hotel markets where it does not currently operate. 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 Initial 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 affected.
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 41 AmeriSuites, 19, or 46.3%, have been open less than one
year and 28, or 68.3%, 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.
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
14
<PAGE> 18
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 from time to time makes selective acquisitions 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 hotel
acquisitions can be consummated successfully or that acquired hotels can be
operated profitably or integrated successfully into the Company's operations.
Hotel 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 open or under development are located in
Florida, New Jersey, New York, Georgia, Texas and Illinois, 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 certain risks associated with
geographic concentration.
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 12.9% of the Company's EBITDA for the year ended December 31,
1996. The Frenchman's Reef's operating results have been adversely affected in
recent years by hurricanes and a disruption in airline service. As a resort
hotel primarily operated for leisure travelers, operating results at the
Frenchman's Reef also are subject to adverse developments in general economic
conditions and changes in travel patterns. Adverse developments with respect to
the Frenchman's Reef may have a material adverse effect on the results of
operations of the Company.
In September 1995, the Frenchman's Reef suffered hurricane damage when
Hurricane Marilyn struck the U.S. Virgin Islands. The Company and its insurance
carrier settled the Company's property and business interruption insurance claim
for $25.0 million. Due to this insurance coverage, the Company's liquidity was
affected only to the extent of its insurance deductibles, for which the Company
provided a reserve of $2.2 million in 1995. In July 1996, Hurricane Bertha
struck the island and caused further damage to the hotel. The Company is
currently reviewing its claim for property damage with its insurance carrier and
is in the process of preparing a claim under its business interruption insurance
with respect to the damage caused by Hurricane Bertha. Although the Company has
continued to operate the hotel, the impact of the hurricanes has caused
operating profits to decline. The Company is currently underway with plans to
refurbish and upgrade the Frenchman's Reef. The Company estimates that the cost
of refurbishment will be approximately $30.0 million. Due to the extent of the
renovations and the additional damage caused by Hurricane Bertha, the
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Company closed the hotel in April 1997 and plans to reopen the hotel in December
1997, although there can be no assurance that the Frenchman's Reef will reopen
at such time or that the cost of refurbishment will not exceed the Company's
estimate. The Company does not believe the closing of the Frenchman's Reef will
have a material impact on its cash flow due to the seasonality of the hotel's
operations and its business interruption insurance coverage.
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.
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."
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CHANGE OF CONTROL
A Change of Control (as defined) could require the Company to refinance
substantial amounts of indebtedness. Upon the occurrence of a Change of Control,
the holders of the Notes would be entitled to require the Company to purchase
the Notes at a purchase price equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest and Liquidated Damages, if any, to the
date of purchase. The Change of Control may also constitute a change of control
or event of default under other Indebtedness of the Company, including the
Revolving Credit Facility and the indenture with respect to the First Mortgage
Notes. The Revolving Credit Facility prohibits the purchase of the Notes by the
Company in the event of a Change of Control, unless and until such time as the
Indebtedness under the Revolving Credit Facility is repaid in full, and the
First Mortgage Notes indenture requires that the Company offer to purchase the
First Mortgage Notes in the event of a change of control (as defined therein).
The Company's failure to purchase the Notes would result in a default under the
Indenture, the Revolving Credit Facility and the First Mortgage Notes indenture.
The inability to repay the Indebtedness under the Revolving Credit Facility and
the First Mortgage Notes indenture, if accelerated, would also constitute an
event of default under the Indenture, which could have adverse consequences to
the Company and the holders of the Notes. In the event of a Change of Control,
there can be no assurance that the Company would have sufficient assets to
satisfy all of its obligations under the Revolving Credit Facility, the Notes
and the First Mortgage Notes. See "Description of Notes -- Repurchase at the
Option of Holders -- Change of Control."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to (i) the
liquidity of any such market that may develop, (ii) the ability of holders of
Exchange Notes to sell their Exchange Notes or (iii) the price at which the
holders of Exchange Notes would be able to sell their Exchange Notes. If such a
market were to exist, the Exchange Notes could trade at prices that may be
higher or lower than their principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar notes and
the financial performance of the Company and its subsidiaries. The Company has
been advised by the Initial Purchasers that they presently intend to make a
market in the Exchange Notes. However, they are not obligated to do so, and any
market-making activity with respect to the Exchange Notes may be discontinued at
any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
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USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds from the sale of the Original Notes were
approximately $193.5 million after deducting the Initial Purchasers' discount
and estimated expenses related to the Initial Offering. The net proceeds from
the Initial Offering are being used as part of the financing of the Company's
AmeriSuites expansion and were used to repay amounts outstanding under the
Revolving Credit Facility and certain other secured indebtedness. The Company
plans to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by
the end of 1998.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were originally issued and sold on March 26, 1997. Such
sales were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and Rule 144A of the
Securities Act. Pursuant to the Registration Rights Agreement, the Company
agreed (i) to file a registration statement (the "Exchange Offer Registration
Statement") on or prior to 30 days after the Issuance Date of the Original Notes
with respect to the Exchange Offer, (ii) to use its best efforts to cause such
Registration Statement to be declared effective under the Securities Act within
135 days after the Issuance Date and (iii) upon the Exchange Offer Registration
Statement being declared effective, to offer the Exchange Notes in exchange for
surrender of the Original Notes. In certain circumstances, the Company will be
required to provide a shelf registration statement (the "Shelf Registration
Statement) to cover resales of the Original Notes by the holders thereof. If the
Company does not comply with its obligation under the Registration Rights
Agreement, it will be required to pay Liquidated Damages to holders of the
Original Notes under certain circumstances. See "Original Notes Registration
Rights."
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the Registration Rights Agreement.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus (the "Letter of Transmittal"), $1,000 in principal amount of Exchange
Notes for each $1,000 in principal amount of the Original Notes. The terms of
the Exchange Notes are identical in all respects to the terms of the Original
Notes for which they may be exchanged pursuant to this Exchange Offer, except
that the Exchange Notes will generally be freely transferable by holders
thereof, and the holders of the Exchange Notes (as well as remaining holders of
any Original Notes) will not be entitled to registration rights under the
Registration Rights Agreement. See "Original Notes Registration Rights." The
Exchange Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of the Indenture. See "Description of Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange.
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Original Notes directly from
the Company or (iii) broker-dealers who acquired Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging, and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Broker-dealers who acquired Original Notes as a
result of market making or other trading activities may use this Prospectus, as
supplemented or amended, in connection with resales of the Exchange Notes. The
Company has agreed that, for a period not to exceed 180 days after the Exchange
Date, it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
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Tendering holders of Original Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Original Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Original Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Original Notes accrued after the issuance of the Exchange Notes.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on May 12, 1997, unless the Company
in its sole discretion extends the period during which the Exchange Offer is
open, in which event the term "Expiration Date" means the latest time and date
on which the Exchange Offer, as so extended by the Company, expires. The Company
reserves the right to extend the Exchange Offer at any time and from time to
time prior to the Expiration Date by giving written notice to First Bank
National Association (the "Exchange Agent") and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Original Notes previously tendered pursuant to the Exchange
Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Issuers expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Original Notes for any reason,
including if any of the events set forth below under "-- Conditions to the
Exchange Offer" shall have occurred and shall not have been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Original Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent in writing and will
either issue a press release or give written notice to the holders of the
Original Notes as promptly as practicable. Unless the Company terminates the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date,
the Company will exchange the Exchange Notes for the Original Notes on the
Exchange Date.
If the Company waives any material condition to the Exchange Offer, or
amends the Exchange Offer in any other material respect, and if at the time that
notice of such waiver or amendment is first published, sent or given to holders
of Original Notes in the manner specified above, the Exchange Offer is scheduled
to expire at any time earlier than the expiration of a period ending on the
fifth business day from, and including, the date that such notice is first so
published, sent or given, then the Exchange Offer will be extended until the
expiration of such period of five business days.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Original Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Original Notes.
HOW TO TENDER
The tender to the Company of Original Notes by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
General Procedures. A holder of an Original Note may tender the same by
(i) properly completing and signing the Letter of Transmittal or a facsimile
thereof (all references in this Prospectus to the Letter of Transmittal shall be
deemed to include a facsimile thereof) and delivering the same, together with
the certificate or certificates representing the Original Notes being tendered
and any required signature guarantees (or a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") pursuant to the procedure
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described below), to the Exchange Agent at its address set forth on the back
cover of this Prospectus on or prior to the Expiration Date or (ii) complying
with the guaranteed delivery procedures described below.
If tendered Original Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Original Notes are to be reissued) in the
name of the registered holder, the signature of such signer need not be
guaranteed. In any other case, the tendered Original Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a firm (an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program (an "Eligible Program") within the meaning of Rule 17Ad-15 under the
Exchange Act. If the Exchange Notes and/or Original Notes not exchanged are to
be delivered to an address other than that of the registered holder appearing on
the note register for the Original Notes, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Original Notes should contact such holder promptly and instruct such
holder to tender Original Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Original Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will make a request to establish
an account with respect to the Original Notes at The Depository Trust Company
(the "Book-Entry Transfer Facility") for purposes of the Exchange Offer within
two business days after receipt of this Prospectus, and any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Original Notes by causing the Book-Entry
Transfer Facility to transfer such Original Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility in accordance with the Book-Entry
Transfer Facility's procedures for transfer. However, although delivery of
Original Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address specified on the back cover
page of this Prospectus on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide its taxpayer identification number (social security number or employer
identification number) and certify that such number is correct. Each tendering
holder should complete and sign the main signature form and the Substitute Form
W-9 included as part of the Letter of Transmittal, so as to provide the
information and certification necessary to avoid backup withholding, unless an
applicable exemption exists and is proved in a manner satisfactory to the
Company and the Exchange Agent.
Guaranteed Delivery Procedures. If a holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Original Notes to
reach the Exchange Agent before the Expiration Date, a tender may be effected if
the Exchange Agent has received at its office listed on the back cover hereof on
or prior to the Expiration Date a letter, telegram or facsimile transmission
from an Eligible Institution setting forth the name and address of the tendering
holder, the names in which the Original Notes are registered and, if possible,
the certificate numbers of the Original Notes to be tendered, and stating that
the tender is being made thereby and guaranteeing that within five New York
Stock Exchange trading days after the date of
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execution of such letter, telegram or facsimile transmission by the Eligible
Institution, the Original Notes, in proper form for transfer, will be delivered
by such Eligible Institution together with a properly completed and duly
executed Letter of Transmittal (and any other required documents). Unless
Original Notes being tendered by the above-described method (or a timely
Book-Entry Confirmation) are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are being delivered with this Prospectus and the related Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Original Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Original Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Original Notes
(or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Original Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Company, be unlawful. The Company also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. None of the Company, the
Exchange Agent or any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Original Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Original Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Original Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Original
Notes and to acquire Exchange Notes issuable upon the exchange of such tendered
Original Notes, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Original Notes, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Original Notes. The Transferor further agrees that acceptance of any
tendered Original Notes by the Company and the issuance of Exchange Notes in
exchange therefor shall constitute performance in full by the Company of its
obligations under the Registration Rights Agreement and that the Company shall
have no further obligations or liabilities thereunder (except in certain limited
circumstances). All authority conferred by the Transferor will survive the death
or incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
By tendering Original Notes, the Transferor certifies (a) that it is not an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, that it is not a broker-dealer that owns Original Notes acquired directly
from the Company or an affiliate of the Company, that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes or (b) that it is an
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"affiliate" (as so defined) of the Company or of the initial purchasers in the
original offering of the Original Notes, and that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable to it.
WITHDRAWAL RIGHTS
Original Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this Prospectus. Any such notice of
withdrawal must specify the person named in the Letter of Transmittal as having
tendered Original Notes to be withdrawn, the certificate numbers of Original
Notes to be withdrawn, the principal amount of Original Notes to be withdrawn
(which must be an authorized denomination), a statement that such holder is
withdrawing his election to have such Original Notes exchanged, and the name of
the registered holder of such Original Notes, and must be signed by the holder
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Company that the person withdrawing the tender has succeeded
to the beneficial ownership of the Original Notes being withdrawn. The Exchange
Agent will return the properly withdrawn Original Notes promptly following
receipt of notice of withdrawal. All questions as to the validity of notices of
withdrawals, including time of receipt, will be determined by the Company, and
such determination will be final and binding on all parties.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Original Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Company shall be deemed to have accepted for
exchange validly tendered Original Notes when, as and if the Company has given
written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Original
Notes for the purposes of receiving Exchange Notes from the Company and causing
the Original Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Original Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Original Notes. Original Notes
not accepted for exchange by the Company will be returned without expense to the
tendering holders (or in the case of Original Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the procedures described above, such non-exchanged Original Notes
will be credited to an account maintained with such Book-Entry Transfer
Facility) promptly following the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange Notes
in respect of any properly tendered Original Notes not previously accepted and
may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the Exchange Offer, if (a)
there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any court
or governmental agency or other governmental regulatory or administrative agency
or commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof, or (iii) resulting in
a material delay in the ability of the Company to accept for exchange or
exchange some or all of the Original Notes pursuant to the Exchange
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Offer; (b) any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the Exchange
Offer or any of the transactions contemplated by the Exchange Offer by any
government or governmental authority, domestic or foreign, or any action shall
have been taken, proposed or threatened, by any government, governmental
authority, agency or court, domestic or foreign, that in the sole judgment of
the Company might directly or indirectly result in any of the consequences
referred to in clauses (a)(i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of Exchange Notes having obligations with
respect to resales and transfers of Exchange Notes which are greater than those
described in the interpretations of the Commission referred to on the cover page
of this Prospectus, or would otherwise make it inadvisable to proceed with the
Exchange Offer; or (c) a material adverse change shall have occurred in the
business, condition (financial or otherwise), operations, or prospects of the
Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by them with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in whole
or in part at any time or from time to time in their sole discretion. The
failure by the Company at any time to exercise any of the foregoing rights will
not be deemed a waiver of any such right, and each right will be deemed an
ongoing right which may be asserted at any time or from time to time. In
addition, the Company has reserved the right, notwithstanding the satisfaction
of each of the foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Original Notes
tendered and no Exchange Notes will be issued in exchange for any such Original
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act").
EXCHANGE AGENT
First Bank National Association has been appointed as the Exchange Agent
for the Exchange Offer. Letters of Transmittal must be addressed to the Exchange
Agent at its address set forth on the back cover page of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting and legal fees, will be paid by
the Company and are estimated at approximately $250,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Original Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance
24
<PAGE> 28
thereof would not be in compliance with the laws of such jurisdiction. However,
the Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Original Notes in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF ORIGINAL NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Original Notes for Exchange Notes by holders will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Original Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Original Notes pursuant to the terms of this Exchange Offer,
the Company will have fulfilled a covenant contained in the terms of the
Original Notes and the Registration Rights Agreement. Holders of the Original
Notes who do not tender their certificates in the Exchange Offer will continue
to hold such certificates and will be entitled to all the rights, and
limitations applicable thereto, under the Indenture, except for any such rights
under the Registration Rights Agreement which by their terms terminate or cease
to have further effect as a result of the making of this Exchange Offer. See
"Description of Notes." All untendered Original Notes will continue to be
subject to the restriction on transfer set forth in the Indenture. To the extent
that Original Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Original Notes could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
The Company may in the future seek to acquire untendered Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Original
Notes which are not tendered in the Exchange Offer.
25
<PAGE> 29
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of December 31, 1996 and as adjusted to give effect to the
Initial Offering and the application of the net proceeds therefrom. 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>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of debt(2)......................................... $ 3,419 $ 3,023
======== ========
Long-term debt:
Revolving Credit Facility(3)..................................... 12,500 --
9 1/4% First Mortgage Notes due 2006............................. 120,000 120,000
Secured Debt, less current portion(2)............................ 80,125 53,755
9 3/4% Senior Subordinated Notes due 2007........................ -- 200,000
7% Convertible Subordinated Notes due 2002....................... 86,250 86,250
-------- --------
Total long-term debt..................................... 298,875 460,005
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; 39,822,144 shares issued and outstanding.......... 398 398
Capital in excess of par value................................... 338,825 338,825
Retained earnings................................................ 80,672 80,672
-------- --------
Total stockholders' equity............................... 419,895 419,895
-------- --------
Total capitalization..................................... $718,770 $879,900
======== ========
</TABLE>
- ---------------
(1) As adjusted to reflect additional borrowings of $63.1 million under the
Revolving Credit Facility through March 31, 1997, the Initial Offering and
the application of the net proceeds therefrom.
(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 March 31, 1997, the Company had no borrowings under the
Revolving Credit Facility and had borrowing availability of $100.0 million.
26
<PAGE> 30
RECENT SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The table below presents recent selected consolidated financial and other
data derived from the Company's historical consolidated financial statements as
of and for the years ended December 31, 1994, 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>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA(1):
Revenues:
Lodging............................................. $ 88,753 $146,184 $198,947
Food and beverage................................... 18,090 37,955 41,437
Management and other fees........................... 10,021 8,115 6,729
Interest on mortgages and notes receivable.......... 15,867 11,895 6,090
Business interruption insurance..................... -- -- 13,562
Rental and other.................................... 1,572 1,479 2,103
-------- -------- --------
Total revenues................................. 134,303 205,628 268,868
-------- -------- --------
Costs and expenses:
Direct hotel operating expenses:
Lodging........................................... 25,490 38,383 51,577
Food and beverage................................. 13,886 28,429 32,053
Selling and general............................... 27,244 49,753 61,789
Occupancy and other operating....................... 9,799 11,763 16,833
General and administrative.......................... 15,089 15,515 17,813
Depreciation and amortization....................... 9,427 15,974 25,884
Other expense....................................... -- 2,200 --
-------- -------- --------
Total costs and expenses....................... 100,935 162,017 205,949
-------- -------- --------
Operating income....................................... 33,368 43,611 62,919
Investment income...................................... 1,966 4,861 4,610
Interest expense....................................... (13,993) (21,603) (20,312)
Other income........................................... 9,089 2,239 4,306
-------- -------- --------
Income before income taxes and extraordinary items..... 30,430 29,108 51,523
Provision for income taxes............................. 12,172 11,643 20,609
-------- -------- --------
Income before extraordinary items...................... 18,258 17,465 30,914
Extraordinary items(2)................................. 172 104 202
-------- -------- --------
Net income............................................. $ 18,430 $ 17,569 $ 31,116
======== ======== ========
Earnings per common share(3):
Primary:
Income before extraordinary items................. $ 0.57 $ 0.54 $ 0.85
Extraordinary items............................... 0.01 -- --
-------- -------- --------
Earnings per common share........................... $ 0.58 $ 0.54 0.85
======== ======== ========
Fully diluted:
Income before extraordinary items................. $ 0.57 $ 0.54 $ 0.80
Extraordinary items............................... 0.01 -- --
-------- -------- --------
Earnings per common share........................... $ 0.58 $ 0.54 $ 0.80
======== ======== ========
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
-------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT HOTEL
DATA)
<S> <C> <C> <C>
OTHER DATA:
EBITDA(4)............................................. $ 42,795 $ 59,585 $ 88,803
Net cash provided by operating activities............. 28,334 38,628 65,936
Net cash used in investing activities................. (33,910) (88,704) (240,957)
Net cash provided by (used in) financing activities... (23,469) 87,085 141,485
Ratio of EBITDA to interest expense (4)(5)............ 3.06x 2.76x 4.37x
Ratio of earnings to fixed charges(6)................. 2.78x 2.02x 2.44x
HOTEL DATA(7):
All-suites:
Number of locations................................. 12 19 35
Number of rooms..................................... 1,494 2,319 4,348
REVPAR.............................................. $ 39.50 $ 43.98 $ 47.28
Full-service(7):
Number of locations................................. 30 31 31
Number of rooms..................................... 6,002 6,151 6,151
REVPAR.............................................. $ 51.27 $ 53.21 $ 60.77
Limited-service:
Number of locations................................. 38 38 38
Number of rooms..................................... 3,943 3,943 3,943
REVPAR.............................................. $ 34.67 $ 37.54 $ 38.87
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable $ 13,641 $ 61,462 $ 16,235
securities........................................
Property, equipment and leasehold improvements, 299,291 398,201 695,253
net...............................................
Mortgages and notes receivable, net of current 81,260 64,962 24,195
portion...........................................
Total assets......................................... 434,932 573,241 786,098
Current portion of debt.............................. 5,284 5,731 3,419
Long-term debt, net of current portion............... 178,545 276,920 298,875
Total stockholders' equity........................... 204,065 232,916 419,895
</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 year ended December 31, 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 years
ended December 31, 1995 and 1996, 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 $120,000 in 1994, $70,000 in 1995 and $135,000 in 1996.
(3) 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 common share was
32,022,000, 32,461,000 and 36,501,000 for the years ended December 31, 1994,
1995 and 1996 respectively. Fully diluted earnings per common share, in
addition to the adjustments for primary earnings 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 earnings per common share was
37,423,000 and 43,794,000 for the years ended December 31, 1995 and 1996,
respectively.
(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
28
<PAGE> 32
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) The interest expense for the Company, as adjusted to give effect to the
Initial Offering and the use of certain proceeds thereof to repay debt, for
1996 was $36.4 million, based on the interest rate on the Notes of 9 3/4%
per annum. See "Use of Proceeds." The ratio of EBITDA to interest expense
for 1996 as so adjusted was 2.44x.
(6) Earnings used in computing the ratio of earnings to fixed charges consist of
income before income taxes, fixed charges and extraordinary items. Fixed
charges consist of interest expense, including amounts capitalized and the
amortization of deferred financing fees, and that portion of rental expense
representative of interest (deemed to be one third of rental expense).
(7) Hotel data represents operating data for the hotels in the Portfolio at
December 31, 1996. For purposes of showing operating trends, the results of
the Frenchman's Reef have been excluded from Hotel data due to the effect of
hurricane damage on the hotel's operations. For a discussion of the
Frenchman's Reef, see "Business -- Prime's Lodging Operations."
29
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading hotel owner/operator which, as of March 31, 1997,
owned or leased 94 hotels and managed 13 hotels for third parties. The Company
has a financial interest in the form of mortgages or profit participations
(primarily incentive management fees) in 8 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 strategy is to capitalize on two lodging industry trends: (i)
favorable industry fundamentals, which are producing strong earnings growth due
to the operating leverage inherent in hotel ownership and (ii) growing consumer
preferences for newer all-suite accommodations with strong brand identities.
Through its focus on hotel equity ownership, the Company is benefiting from the
operating leverage inherent in the lodging industry. Through its development of
proprietary brands, the Company is positioning itself to generate additional
revenue not dependent on investment in real estate. The Company seeks to achieve
internal growth through the use of sophisticated operating, marketing and
financial systems at its hotels. The Company's external growth focuses on the
accelerated expansion of its proprietary AmeriSuites brand through new
construction. 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 such new hotels.
In 1996, earnings from recurring operations increased by 62.4%, reflecting
a 12.0% REVPAR increase at comparable hotels, the addition of 44 hotels
primarily through acquisition or construction over the past two years and the
impact of increased operating leverage. The Company's EBITDA increased by $29.2
million, or 49.1%, from $59.6 million in 1995 to $88.8 million in 1996, and
Hotel EBITDA increased by $35.1 million, or 62.9%, from $55.8 million in 1995 to
$90.9 million in 1996. EBITDA represents earnings before interest, taxes,
depreciation and amortization. Hotel EBITDA represents EBITDA generated from the
operations of Owned Hotels. Hotel EBITDA excludes management fee income,
interest income from mortgages and notes receivable, general and administrative
expenses and other revenues and expenses which do not directly relate to the
operations of Owned Hotels. The Company's hotels operate in three segments of
the industry: the all-suites segment, under the Company's proprietary
AmeriSuites brand; the upscale full-service segment, under major national
franchises; and the midprice limited-service segment, primarily under the
Company's proprietary Wellesley Inns brand. The following table illustrates the
Hotel EBITDA contribution from each segment (in thousands):
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
All-suites............................... $13,663 24.5% $25,987 28.6%
Full-service............................. 30,286 54.3 44,460 48.9
Limited-service.......................... 11,840 21.2 20,452 22.5
------- ------ ------- ------
Total.......................... $55,789 100.0% $90,899 100.0%
======= ====== ======= ======
</TABLE>
Hotel EBITDA for 1996 reflects the shifting mix in the Company's hotel
portfolio toward its proprietary brand AmeriSuites and the acquisition of 16
Wellesley Inns in March 1996.
30
<PAGE> 34
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
COMPARED TO THE YEAR ENDED DECEMBER 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 years ended December 31, 1995 and 1996. The results of the
four 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)
--------------------- ---------------------
1995 1996 1995 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Lodging....................................... $146,184 $198,947 $110,565 $124,164
Food and Beverage............................. 37,955 41,437 25,867 28,636
Management and Other Fees..................... 8,115 6,729
Interest on Mortgages and Notes Receivable.... 11,895 6,090
Business Interruption Insurance............... -- 13,562
Rental and Other.............................. 1,479 2,103
-------- --------
Total Revenues........................ 205,628 268,868
Direct Hotel Operating Expenses:
Lodging....................................... 38,383 51,577 29,877 31,731
Food and Beverage............................. 28,429 32,053 19,296 21,090
Selling and General........................... 49,753 61,789 34,938 37,352
Occupancy and Other Operating................... 11,763 16,833
General and Administrative...................... 15,515 17,813
Depreciation and Amortization................... 15,974 25,884
Other Expense................................... 2,200 --
Operating Income................................ 43,611 62,919
OPERATING EXPENSE MARGINS:
Direct Hotel Operating Expenses:
Lodging, as a percentage of lodging revenue... 26.3% 25.9% 27.0% 25.6%
Food and Beverage, as a percentage of food and
beverage revenue........................... 74.9% 77.4% 74.6% 73.6%
Selling and General, as a percentage of
lodging and food and beverage revenue...... 27.0% 25.7% 25.6% 24.4%
Occupancy and Other Operating, as a percentage
of
lodging and food and beverage revenue......... 6.4% 7.0%
General and Administrative, as a percentage of
total revenue................................. 7.5% 6.6%
OTHER DATA(1):
Occupancy....................................... 69.0% 69.7% 69.9% 71.9%
ADR............................................. $ 65.77 $ 70.22 $ 65.40 $ 71.14
REVPAR.......................................... $ 45.41 $ 48.95 $ 45.68 $ 51.16
Gross Operating Profit.......................... $ 67,574 $ 94,965 $ 52,321 $ 62,627
</TABLE>
- ---------------
(1) For purposes of showing operating trends, the results of the Frenchman's
Reef, which were impacted by hurricane damage, and four hotels disposed of
in 1995 and 1996 have been excluded from the Other Data section of the
table. Comparable Owned Hotels refers to 46 Owned Hotels that were owned or
leased by the Company during all of 1995 and 1996 (excluding the Frenchman's
Reef).
31
<PAGE> 35
Lodging revenues, which include room revenues and other related revenues
such as telephone and vending, increased by $52.7 million, or 36.1%, from $146.2
million in 1995 to $198.9 million in 1996. Lodging revenues increased due to
incremental revenues of $52.6 million from the 44 new hotels added during 1995
and 1996 and higher revenues for comparable Owned Hotels, which increased by
$13.6 million, or 12.3%, in 1996 as compared to 1995. The revenue gains were
offset by a decrease of $13.8 million at the Frenchman's Reef attributable to
hurricane-related damage.
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 1996, as compared to 1995, by industry
segment:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
All-suites................................... 11.7%
Full-service................................. 15.8%
Limited-service.............................. 5.2%
Total.............................. 12.0%
</TABLE>
The REVPAR growth at comparable Owned Hotels reflects strong results in
each of the Company's industry segments. The REVPAR increases reflect the
results of several repositionings and continued favorable industry trends in the
full-service segment, and growing recognition of the AmeriSuites brand in the
fast-growing all-suites segment. The improvements in REVPAR were generated by
increases in ADR, which rose by 8.8% and gains in occupancy of 2.9%.
Food and beverage revenues increased by $3.4 million, or 9.2%, from $38.0
million in 1995 to $41.4 million in 1996. The increase was primarily due to the
strong growth at comparable hotels and additional revenues from four new hotels
in 1996. The increases were partially offset by lower food and beverage revenues
at the Frenchman's Reef, which declined by $5.1 million due to the hurricane
damage. Food and beverage revenues for comparable Owned Hotels increased by $2.8
million, or 10.7%, due to increased banquet business.
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 decreased by $1.4 million, or
17.1%, from $8.1 million in 1995 to $6.7 million in 1996, primarily due to the
conversions of Managed Hotels into Owned Hotels. 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 $5.8 million, or 48.8%, from $11.9 million in 1995 to $6.1 million
in 1996, primarily due to conversions of notes receivable into operating hotel
assets or cash in 1995 and 1996.
Business interruption insurance revenue of $13.6 million in 1996 is based
on the settlement of the Company's claim related to the hurricane damage caused
by Hurricane Marilyn in September 1995 at the Frenchman's Reef. The Company is
currently preparing a claim under its business interruption insurance with
respect to Hurricane Bertha, which caused damage to the hotel in July 1996.
Direct lodging expenses increased by $13.2 million, or 34.4%, from $38.4
million in 1995 to $51.6 million in 1996, due primarily to the addition of new
hotels. Direct lodging expenses, as a percentage of lodging revenue, decreased
from 26.3% in 1995 to 25.9% in 1996. 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 27.0% in 1995 to 25.6% in 1996.
Direct food and beverage expenses increased by $3.7 million, or 12.7%, from
$28.4 million in 1995 to $32.1 million in 1996, due to the increased revenues at
comparable hotels and the addition of four full-service
32
<PAGE> 36
hotels in 1996. As a percentage of food and beverage revenues, direct food and
beverage expenses increased from 74.9% in 1995 to 77.4% in 1996, due to lower
margins at the Frenchman's Reef attributable to the hurricane damage. For
comparable Owned Hotels, direct food and beverage expenses as a percentage of
food and beverage revenue decreased from 74.6% in 1995 to 73.6% in 1996,
primarily due to the higher margins associated with the increased banquet
business.
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 $12.0 million, or 24.2%, from $49.8 million in 1995 to $61.8
million in 1996, 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 decreased from 27.0% in 1995 to 25.7% in 1996 due
primarily to the impact of the increases in ADR. For comparable Owned Hotels,
direct selling and general expenses as a percentage of revenues decreased from
25.6% in 1995 to 24.4% in 1996 due primarily to the ADR increases.
Occupancy and other operating expenses consist primarily of insurance, real
estate and other taxes and rent expense. Occupancy and other operating expenses
increased by $5.0 million, or 43.1%, from $11.8 million in 1995 to $16.8 million
in 1996 due to the addition of new hotels, including several leased hotels.
Occupancy and other operating expenses as a percentage of hotel revenues
increased from 6.4% in 1995 to 7.0% in 1996 due to rent expense associated with
the new leased hotels.
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 $2.3 million, or 14.8%, from $15.5 million in 1995 to
$17.8 million in 1996, due to increased advertising, personnel and training
costs associated with opening the new AmeriSuites hotels. As a percentage of
total revenues, general and administrative expenses decreased from 7.5% in 1995
to 6.6% in 1996 due to operating leverage.
Depreciation and amortization expense increased by $9.9 million, or 62.0%,
from $16.0 million in 1995 to $25.9 million in 1996, due to the impact of new
hotel properties and refurbishment efforts at several hotels.
Other expense of $2.2 million for 1995 consisted of a reserve for insurance
deductibles related to hurricane damage caused by Hurricane Marilyn at the
Frenchman's Reef hotel in St. Thomas, U.S. Virgin Islands.
Investment income decreased by $251,000, or 5.2%, from $4.9 million in 1995
to $4.6 million in 1996, due to lower weighted average cash balances in 1996.
Interest expense decreased by $1.3 million, or 6.0%, from $21.6 million in
1995 to $20.3 million in 1996, primarily due to capitalized interest related to
new AmeriSuites construction. Capitalized interest increased by $4.9 million
from $2.6 million in 1995 to $7.5 million in 1996. The decrease in interest
expense was partially offset by interest associated with higher average
borrowings in 1996.
Other income consists of items which are not part of the Company's
recurring operations. For 1996, other income consisted of gains on the sales of
land and hotel properties of $2.5 million and a gain on the settlement of a note
receivable of $1.8 million. Other income for 1995 consisted of a gain on the
settlement of a note receivable of $822,000 and gains on property sales of $1.4
million.
Pretax extraordinary gains of approximately $174,000 and $337,000 for 1995
and 1996 relate to the retirement of debt.
33
<PAGE> 37
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
-------- -------- -------- --------
(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
Other Expense................................... -- 2,200
Operating Income................................ 33,368 43,611
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%
ADR............................................. $ 60.36 $ 73.28 $ 59.92 $ 63.97
REVPAR.......................................... $ 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.
34
<PAGE> 38
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 generated by the conversion of the Company's interest in the
Frenchman's Reef from a mortgage note receivable to a hotel asset 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.
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.
35
<PAGE> 39
Direct hotel selling and general expenses consist primarily of hotel
expenses for Owned Hotels which are not specifically allocated to rooms or food
and beverage activities, such as administration, selling and advertising,
utilities, repairs and maintenance. Direct hotel selling and general expenses
increased by $22.6 million, or 82.6%, from $27.2 million in 1994 to $49.8
million in 1995, due primarily to the addition of new hotels. As a percentage of
hotel revenues (defined as lodging and food and beverage revenues), direct hotel
selling and general expenses increased from 25.5% in 1994 to 27.0% in 1995 due
to the addition of new full-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.
Other expense of $2.2 million for the year ended December 31, 1995 consists
of a reserve for insurance deductibles related to damage caused by Hurricane
Marilyn at the Frenchman's Reef.
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 $6.4 million, gains on property sales of $1.1
million and rebates of prior years' insurance premiums of $1.6 million.
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.
LIQUIDITY AND CAPITAL RESOURCES
Prime's external growth focuses on the accelerated expansion of its
AmeriSuites brand through new construction. As of March 31, 1997, Prime had 41
AmeriSuites in operation and plans to have 69 AmeriSuites hotels open by the end
of 1997 and 100 AmeriSuites open by the end of 1998.
Prime believes that it will have access to sufficient resources to
implement its planned expansion of the AmeriSuites brand, including capital from
the following sources: (i) net proceeds from the Initial Offering; (ii)
borrowings under the Company's $100 million Revolving Credit Facility; and (iii)
internally generated
36
<PAGE> 40
free cash flow from hotel operations. With a significant hotel asset base, Prime
also expects to seek additional debt or equity financing or enter into
sale/leaseback agreements with respect to certain of its properties.
The Company's major sources of cash for 1996 were net proceeds of
approximately $115.5 million from the issuance of the $120.0 million First
Mortgage Notes in January 1996, gross borrowings under the Revolving Credit
Facility of $52.5 million, net proceeds of $141.4 million from the issuance of
8.3 million shares of Common Stock and cash flow from operations of $65.9
million. The Company's major uses of cash during the period were capital
expenditures relating primarily to acquisitions and development of $286.5
million and debt repayments of $184.7 million, including repayments of $40.0
million under the Revolving Credit Facility.
Cash flow from operations was $65.9 million in 1996 as compared to $38.6
million in 1995. Cash flow from operations was positively impacted by the
utilization of net operating loss carryforwards ("NOLs") and other tax basis
differences of $11.8 million in 1996 and $9.5 million in 1995, respectively. At
December 31, 1996, the Company had federal NOLs relating to its predecessor,
Prime Motor Inns, Inc. ("PMI"), of approximately $90.7 million which are subject
to annual utilization limitations and expire beginning in 2005 and continuing
through 2007.
Common Stock. On August 2, 1996, the Company sold 8.3 million shares of
Common Stock at a price of $18 per share. The Company utilized the net proceeds
from the offering of approximately $141.4 million to fund AmeriSuites
development, to reduce indebtedness of $40.0 million under the Revolving Credit
Facility and to repay certain other indebtedness of $26.7 million, thereby
increasing availability for further AmeriSuites development.
Debt. On June 28, 1996, the Company established a Revolving Credit
Facility with a group of financial institutions providing for availability of
funds up to the lesser of $100.0 million or 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 or
substituted subject to the approval of the lenders. The Revolving Credit
Facility bears interest at LIBOR plus 2.25% and is available through June 2001.
The Revolving Credit Facility contains covenants requiring the Company to
maintain certain financial ratios and also contains covenants which limit the
incurrence and payment of debt, liens, dividend payments, stock repurchases,
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. On June 28, 1996, the Company borrowed $40.0
million under the Revolving Credit Facility and the proceeds were used to retire
$20.0 million of interim financing with the remainder utilized principally for
the development of AmeriSuites hotels. On August 5, 1996, the Company repaid the
full amount of this borrowing under the Revolving Credit Facility with the
proceeds from the issuance of Common Stock. As of December 31, 1996, the Company
had borrowed $12.5 million under the Revolving Credit Facility. The Company
borrowed an additional $63.1 million through March 31, 1997 and subsequently
retired all borrowings under the Revolving Credit Facility with a portion of the
net proceeds from the Initial Offering. As of March 31, 1997, the Company had
$100.0 million available under the Revolving Credit Facility.
On August 2, 1996, the Company prepaid in full $26.7 million of debt
secured by 10 hotels with the proceeds from the issuance of Common Stock. The
loans were due in February 2000 and bore interest at LIBOR plus 4.25%. The
hotels formerly used as collateral for this debt were added to the collateral
for the Revolving Credit Facility.
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 9 1/4% First Mortgage
Notes due 2006. 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, liens, dividend
payments, certain investments, transactions with affiliates, asset sales and
mergers and consolidations. The Notes are redeemable, in whole or in part, at
the option of the Company on or after January 15, 2001 at premiums to principal
which decline on each anniversary date thereafter. The Company utilized a
portion of
37
<PAGE> 41
the proceeds to pay down approximately $51.6 million of indebtedness, with the
remainder of the proceeds used to finance the purchase of the Wellesley Inns
described below and the development of AmeriSuites hotels.
During 1996, the Company prepaid and retired $1.4 million of its 10% Senior
Secured Notes resulting in pre-tax extraordinary gains of $151,000. The Company
also retired $2.4 million of mortgage debt in conjunction with the sale of a
hotel which resulted in a pre-tax extraordinary gain of $186,000.
In March 1997, the Company retired all of its 10% Senior Secured Notes with
a portion of the net proceeds from the Initial Offering.
As of December 31, 1996, the Company had $13.9 million of debt related to
the Frenchman's Reef which was originally scheduled to mature in December 1996.
The Company and the lender entered into an agreement to extend the maturity of
the loan to January 1998. The amended loan bore interest at the same rate
currently in effect and principal payments were waived until maturity. All other
terms and conditions of the loan remained in effect. The Company repaid this
debt with a portion of the net proceeds of the Initial Offering. The Company is
currently in negotiation to obtain new financing in connection with the
refurbishment plans at the Frenchman's Reef.
In October 1996, the Company entered into a six-month interest rate
contract with a major financial institution to hedge its interest rate exposure
on the anticipated financing of its development program in 1997. Under the
agreement, the Company effectively fixed interest rates for approximately seven
years at a Treasury yield of 6.4% on a $98.4 million notional principal amount.
Capital Investments. The Company's capital spending in 1996 was focused on
the development of its AmeriSuites hotel chain and the consolidation of
ownership of its Wellesley Inns chain. In 1996, the Company spent $184.6 million
on new construction and $69.4 million on acquisitions funded primarily by
existing cash balances, internally generated cash flow, the issuance of Common
Stock and proceeds from borrowings under the Revolving Credit Facility and the
issuance of the First Mortgage Notes.
The Company intends to rapidly expand its AmeriSuites chain through new
construction. The Company has opened 22 new AmeriSuites hotels since January 1,
1996 bringing the total to 41 hotels as of March 31, 1997. The Company plans to
have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end
of 1998. As of March 31, 1997, the Company had 45 AmeriSuites hotels under
development, including 27 under construction. The Company expects to spend a
total of approximately $300 million on development of new AmeriSuites hotels in
each of 1997 and 1998.
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. Subsequently, the Company sold two of the Wellesley Inns, which were
converted to another brand affiliation, and the two other limited-service
hotels, which were not consistent with the Company's strategy, for aggregate
proceeds of $11.4 million. The acquisition enabled the Company to establish full
control over its proprietary Wellesley Inns brand with all 28 Wellesley Inns
owned and operated by the Company. In order to ensure consistent quality and
enhance the value of its brand, the Company refurbished five of these acquired
hotels in 1996 and completed the renovation of nine other acquired Wellesley
Inns hotels in March 1997 at a total renovation cost for 1996 and 1997 of
approximately $9.0 million.
In September 1996, the Company acquired the Ramada Plaza Suite Hotel in
Secaucus, NJ, which was repositioned as a Radisson Suite Hotel. The acquisition
price of $16.5 million included the assumption of $12.2 million of debt. In
February 1997, the Company acquired a Holiday Inn in Monroe Township, NJ for
$11.2 million in cash. The Company may from time to time acquire full-service
hotels having operating synergies with other Company hotels, although no such
acquisitions are currently pending.
During 1996, the Company spent approximately $30.8 million on capital
improvements at its Owned Hotels, of which approximately $16.8 million related
to refurbishments and repositionings of recently acquired hotels. In 1996, the
Company completed the refurbishment and repositioning of the Hasbrouck Heights,
NJ, Crowne Plaza, the Las Vegas St. Tropez Hotel and five of the recently
acquired Wellesley Inns. The Company intends to spend approximately $7.0 million
in 1997 relating to the refurbishing of nine other recently acquired Wellesley
Inns and the Monroe Township Holiday Inn.
38
<PAGE> 42
In September 1995, the Frenchman's Reef in St. Thomas U.S. Virgin Islands
suffered damage when Hurricane Marilyn struck the island. The Company and its
insurance carrier settled the Company's property and business interruption
insurance claim with respect to Hurricane Marilyn for $25.0 million. In July
1996, the Company received the final installment under its settlement, bringing
the net proceeds to $22.8 million, net of deductibles, for which the Company
provided a reserve of $2.2 million in 1995. The Company utilized all insurance
proceeds to reduce the Frenchman's Reef mortgage loan to $13.9 million. In
addition, in July 1996, Hurricane Bertha struck the island and caused further
damage to the hotel. The Company is currently reviewing its claim for property
damage with its insurance carrier and is in the process of preparing a claim
under its business interruption insurance.
The Company is currently underway with plans to refurbish and upgrade the
Frenchman's Reef. In addition to hurricane-related renovations, the plan
provides for structural enhancements, redesigned guestrooms, increased banquet
and meeting space and new landscaping. The Company estimates that the cost of
refurbishment will be approximately $30.0 million. The Company has continued to
operate the hotel. However, due to the extent of the renovations and the
additional damage caused by Hurricane Bertha, the Company closed the hotel in
April 1997 and plans to reopen the hotel in December 1997, although there can be
no assurance that the Frenchman's Reef will reopen at such time or that the cost
of refurbishment will not exceed the Company's estimate. The Company does not
believe the closing of the Frenchman's Reef will have a material impact on its
cash flow due to the seasonality of the hotel's operations and its business
interruption insurance coverage.
In order to facilitate future tax-free exchanges of hotel properties, the
Company from time to time enters into arrangements with an unaffiliated third
party pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended.
As of March 31, 1997, the Company had advanced approximately $27.3 million to
such third party, which advances are classified as property, equipment and
leasehold improvements.
Asset Realizations. The Company has pursued a strategy of converting
mortgage notes receivable and other assets into cash or operating hotel assets.
The Company has also sold certain hotel assets which are not consistent with the
Company's development strategy. During 1996, the Company received $7.9 million
in cash in settlement of notes receivable and $13.0 million in cash on sales of
properties resulting in gains of $4.3 million. In 1996, the Company obtained
control of the 210-room Howard Johnson Hotel in Cocoa Beach, FL and the 204-room
Radisson Hotel in Fairfield, NJ by converting its mortgage notes receivable into
operating hotel assets. Through March 31, 1997, the Company received $15.1
million in cash from the sale of four hotels, including the Cocoa Beach Howard
Johnson Hotel.
39
<PAGE> 43
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, 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 year ended June 30, 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>
POST-REORGANIZATION
PRE-REORGANIZATION ------------------------------------------------------------------
---------------------- AS OF AND
AS OF AND FOR THE FOR THE
FOR THE ONE MONTH FIVE MONTHS AS OF AND FOR THE YEAR ENDED
YEAR ENDED ENDED AS OF ENDED DECEMBER 31,
JUNE 30, JULY 31, JULY 31, DEC. 31, -----------------------------------------
1992(1) 1992(1) 1992(1) 1992 1993 1994 1995 1996
---------- --------- -------- ----------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues.................... $ 134,190 $ 8,793 -- $ 41,334 $108,860 $134,303 $205,628 $268,868
Valuation writedowns and
reserves........................ (62,123) (13,000) -- -- -- -- -- --
Reorganization items................ (23,194) 1,796 -- -- -- -- -- --
Other income........................ -- -- -- -- 3,809 9,089 2,239 4,306
Income (loss) from continuing
operations before extraordinary
items(2).......................... (71,965) (10,274) -- 1,393 8,175 18,258 17,465 30,914
Extraordinary items-gains on
discharge of indebtedness (net of
income taxes)..................... -- 249,600 -- -- 3,989 172 104 202
Net income (loss)................... (71,965) 239,326 -- 1,393 12,164 18,430 17,569 31,116
Balance sheet data:
Total assets........................ $ 554,118 -- $468,650 $ 403,314 $410,685 $434,932 $573,241 $786,098
Long-term debt, net of current
portion........................... 8,921 -- 204,438 192,913 168,618 178,545 276,920 298,875
Stockholders' equity (deficiency)... (229,292) -- 135,600 137,782 171,364 204,065 232,916 419,895
</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 and $28.0 million of contractual interest expense
during the one month ended July 31, 1992 and for the fiscal year ended June
30, 1992, respectively, was not accrued and was not paid due to the chapter
11 proceeding.
40
<PAGE> 44
BUSINESS
THE COMPANY
Prime is a leading national hotel company, with a portfolio of 107 hotels
containing 15,287 rooms located in 25 states and the U.S. Virgin Islands (the
"Portfolio"). Prime controls two high-quality hotel brands -- AmeriSuites(R) and
Wellesley Inns(R) -- as well as a portfolio of upscale full-service hotels. One
of the country's largest hotel owner/operators, Prime has positioned itself to
benefit significantly from favorable lodging industry fundamentals that have
prevailed in recent years. From 1994 to 1996, the Company's EBITDA has grown at
a compound annual rate of 44.0%, from $42.8 million in 1994 to $88.8 million in
1996, while recurring net income has grown at a compound annual rate of 48.7%,
from $12.8 million to $28.3 million over the same period.
The Company's strategy is to capitalize on two lodging industry trends: (i)
favorable industry fundamentals, which are producing strong earnings growth due
to the operating leverage inherent in hotel ownership and (ii) growing consumer
preferences for newer all-suite accommodations with strong brand identities.
Reflecting this strategy, the Company owns and operates 94 of the 107 hotels in
the Portfolio and holds financial or equity interests in 8 of the remaining 13
hotels managed by the Company for third parties. Furthermore, more than 85% of
the Company's capital spending in 1995 and 1996 was dedicated to the growth of
the Company's proprietary AmeriSuites and Wellesley Inns brands. Through its
focus on hotel equity ownership, the Company is benefiting from the operating
leverage inherent in the lodging industry. Through its development of
proprietary brands, the Company is positioning itself to generate additional
revenue not dependent on investment in real estate.
Prime's Portfolio is modern and well-maintained, with an average hotel age
of approximately 11 years. Over the past three years, the Company has achieved
rapid growth in the Portfolio, from 5,092 owned rooms at January 1, 1994 to
12,610 owned rooms at March 31, 1997. At the same time, the Company has focused
on brand development, with the number of Owned Hotels operated under Prime's
proprietary AmeriSuites and Wellesley Inns brands increasing from 19 of the 41
Owned Hotels at January 1, 1994 to 69 of the 94 Owned Hotels at March 31, 1997.
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
limited-service segment, primarily under the Company's proprietary Wellesley
Inns brand.
All-Suites: Prime owns and operates 41 all-suite hotels under the
AmeriSuites brand name, and currently has another 45 AmeriSuites under
development, including 27 under construction. AmeriSuites are upper mid-price,
all-suite hotels containing approximately 128 suites and located primarily near
suburban commercial centers, corporate office parks and other travel
destinations, with close proximity to dining, shopping and entertainment
amenities. Since January 1, 1995, AmeriSuites has been one of the fastest
growing domestic hotel chains, expanding from 13 hotels to 41 hotels at March
31, 1997, an increase of 215%. In 1996, AmeriSuites contributed approximately
$26.0 million, or 28.6%, of the Company's Hotel EBITDA, a percentage which the
Company believes will increase significantly in 1997.
Full-Service: Prime operates 31 upscale full-service hotels with food
service and banquet facilities under franchise agreements with national hotel
brands such as Marriott, Radisson, Sheraton, Crowne Plaza, Holiday Inn and
Ramada. In 1996, the Company's full-service hotels contributed approximately
$44.5 million, or 48.9%, of the Company's Hotel EBITDA.
Limited-Service: Prime operates 35 limited-service hotels, 28 of which are
Wellesley Inns. The Company owns all of the Wellesley Inns, which compete
primarily in the mid-price segment with hotels such as Hampton Inns and La
Quinta Inns. The remaining seven limited-service hotels are operated under
franchise agreements with well-known national chains. In accordance with its
brand development strategy, the Company expects to divest a number of these
seven hotels within the next several years. In 1996, the Company's
limited-service hotels contributed approximately $20.5 million, or 22.5%, of the
Company's Hotel EBITDA.
41
<PAGE> 45
OPERATING PERFORMANCE AND INTERNAL GROWTH
Prime seeks to achieve internal growth through the use of sophisticated
operating, marketing and financial systems at its hotels. Prime has demonstrated
its ability to operate its hotels effectively in each of its three segments,
achieving REVPAR increases in 1996 at its comparable AmeriSuites, full-service
and limited-service hotels of 11.7%, 15.8% and 5.2%, respectively, versus 1995
results. Management believes that: (i) the AmeriSuites chain is positioned to
benefit from increased critical mass and name recognition resulting from the
chain's rapid growth, expanded marketing initiatives and product improvements;
(ii) the upscale full-service segment, located principally in the Northeast, is
positioned to benefit from strong regional and segment fundamentals, including
significant barriers to entry; and (iii) the Company's Wellesley Inns are
positioned to benefit from a $9.0 million renovation and reimaging program which
was completed in March 1997.
The Company's emphasis on efficient operations has increased operating
margins, thus translating its top-line REVPAR growth into increased earnings for
each of its three industry segments. In 1996, gross operating profit increased
by 17.0%, 25.9% and 10.4%, respectively, for comparable AmeriSuites,
full-service and limited-service hotels, versus 1995 results. The Company
expects to further improve its operating performance in 1997 through the
implementation of a new proprietary yield management system, an enhanced central
reservations system serving the AmeriSuites and Wellesley Inns chains, digital
telecommunications conversions, improved telephone call accounting systems and
significant increases in employee training programs.
AMERISUITES EXPANSION
Prime's external growth focuses on 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 plans
to have 69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the
end of 1998. At present, 41 AmeriSuites are open, with an additional 45 hotels
under development, including 27 under construction. At these levels, the Company
believes that it is approaching the critical mass necessary to begin development
of franchising programs, which would further leverage the value of its
proprietary brands.
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 All-Suite Hotel," emphasizing superior price/value relative to
traditional mid-price hotels by focusing on the chain's spacious suites, upscale
facilities and attractive amenity package. The Company is committed to the
expansion of the AmeriSuites brand for the following reasons:
- ATTRACTIVE INVESTMENT RETURNS: AmeriSuites have generated strong
investment returns, due to moderate development costs and high operating profit
margins. In 1996, AmeriSuites which were in operation for at least one year
generated an average EBITDA of $1.26 million, representing an average
unleveraged 18.1% return on total invested capital. In approving new AmeriSuites
for development, the Company seeks a projected unleveraged return on total
invested capital of 14% to 16% per year (although actual results may vary
significantly from projected results).
- RAPID STABILIZATION: Due to the attractiveness of the AmeriSuites
product, careful market analysis and extensive pre-opening sales and marketing
efforts, new AmeriSuites have rapidly attained high revenue and profit levels.
In 1996, the new AmeriSuites hotels which were open for at least three months
but less than 18 months achieved REVPAR levels which were within 8% of the
REVPAR levels achieved by stabilized AmeriSuites hotels which were in operation
for more than 18 months.
- BROAD CUSTOMER APPEAL: The AmeriSuites concept offers the benefits of an
all-suite hotel at a price that appeals to a wide variety of customers. Business
travelers are attracted to the specially designed business suites,
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
42
<PAGE> 46
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.
- FAST GROWING, FRAGMENTED MARKET: The all-suites segment has seen
above-market demand growth in recent years. From 1992 through 1996, demand for
all-suite hotels grew at more than triple the rate of demand growth experienced
by the lodging industry as a whole, and exceeded all-suites supply growth by
17.7%. Given the fast-growing demand for all-suite 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.
- FAVORABLE OPERATING OUTLOOK: Management expects the AmeriSuites chain to
continue its strong performance, due principally to the following factors:
Increased critical mass: AmeriSuites' historical performance
improvements have been achieved despite the lack of an extensive chain
infrastructure. With more than three times the number of hotels from
January 1995 levels, 28 additional properties expected to be added during
1997 and the addition of an enhanced central reservations system,
AmeriSuites' referral network, name recognition and marketing initiatives
have continued to strengthen. In 1997, Prime plans to double its
AmeriSuites national brand advertising expenditures to further enhance the
chain's market profile.
Upside opportunities vs. key competitors: The Company believes it is
well-positioned to capitalize on the superior price/value characteristics
of the AmeriSuites brand as the chain expands. Despite significant product
advantages over its older, more established non-suite competitors,
AmeriSuites, as a recently established brand in the early stages of
development, has historically generated comparatively lower REVPAR levels.
For example, in 1996 the 296-hotel Courtyard by Marriott chain, a principal
competitor of AmeriSuites, generated an average REVPAR more than 20% higher
than that of AmeriSuites, which management attributes to Courtyard's more
fully developed marketing programs and brand recognition. Management
believes that the growing AmeriSuites infrastructure, consisting of
elements such as improved frequency programs, an enhanced central
reservations system, increased advertising and marketing programs and the
increased visibility from the doubling of the chain's number of hotels in
the past year will permit AmeriSuites to achieve critical mass and
outperform its older, more established competitors.
Impact of product enhancements: Prime continually seeks to refine and
enhance the AmeriSuites product to improve guest satisfaction and economic
returns. In 1996, the Company introduced a larger, more upscale lobby and
arrival area, standardized indoor pools in Northern climates and introduced
a new concept for business travelers: Taking Care of Business Suites ("TCB
Suites"). TCB Suites comprise approximately 20% of AmeriSuites rooms and
are included in every hotel, offering guests a well equipped in-suite
office environment with the residential atmosphere typical of the chain's
suites. Management believes that these and other product improvements will
continue to enhance operating performance.
Prime believes that it will have access to sufficient resources to
implement its planned expansion of the AmeriSuites brand, including capital from
the following sources: (i) net proceeds from the Initial Offering; (ii)
borrowings under the Company's $100 million Revolving Credit Facility; and (iii)
internally generated free cash flow from hotel operations. With a significant
hotel asset base, Prime also expects to seek additional debt or equity financing
or enter into sale/leaseback agreements with respect to certain of its
properties.
INDUSTRY OVERVIEW
The lodging industry as a whole has experienced five consecutive years in
which the growth in room demand has exceeded the growth in supply. In 1996,
industry-wide percentage growth in demand for hotel rooms exceeded industry-wide
percentage growth in supply of hotel rooms by 34.8% (3.1% versus 2.3%). 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 65.7% in 1996 from 65.1% in 1995, and ADR
43
<PAGE> 47
increasing 6.7% in 1996 over 1995 levels. Historical industry performance,
however, may not be indicative of future results.
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
--------------------------- --------------------------- ---------------------------
1994 V. 1995 V. 1996 V. 1994 V. 1995 V. 1996 V. 1994 V. 1995 V. 1996 V.
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% 2.3% 4.7% 3.0% 3.1% 7.3% 6.1% 7.8%
BY REGION:
Middle Atlantic................ 0.4 1.1 1.0 4.0 1.2 3.3 10.5 5.8 10.1
South Atlantic................. 1.1 1.3 2.0 3.2 3.6 3.3 4.9 6.9 7.9
BY SERVICE (PRICE LEVEL):
Upscale........................ 2.0 1.9 3.4 3.8 2.6 3.4 5.0 4.7 5.4
Mid-Price...................... 2.0 2.4 3.3 4.2 3.8 3.3 5.5 5.9 6.7
Economy........................ 1.1 2.0 2.3 2.6 3.0 2.4 5.0 6.2 6.7
</TABLE>
44
<PAGE> 48
PRIME'S LODGING OPERATIONS
The following table sets forth information with respect to the Owned Hotels
and Managed Hotels as of March 31, 1997:
<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........................... 41 5,140 0 0 0 0 41 5,140
Full-Service:
Marriott.............................. 1 517 0 0 1 525 2 1,042
Radisson.............................. 3 627 0 0 0 0 3 627
Sheraton.............................. 3 589 0 0 0 0 3 589
Crowne Plaza.......................... 3 717 0 0 0 0 3 717
Holiday Inn........................... 2 390 3 690 0 0 5 1,080
Ramada................................ 8 1,256 3 672 1 125 12 2,053
Howard Johnson........................ 0 0 1 116 1 115 2 231
Independent........................... 1 149 0 0 0 0 1 149
-- ------ -- ----- -- ----- --- ------
Total Full-Service............ 21 4,245 7 1,478 3 765 31 6,488
Limited-Service:
Wellesley Inn......................... 28 2,817 0 0 0 0 28 2,817
Howard Johnson........................ 3 268 1 149 2 285 6 702
Other................................. 1 140 0 0 0 0 1 140
-- ------ -- ----- -- ----- --- ------
Total Limited-Service......... 32 3,225 1 149 2 285 35 3,659
-- ------ -- ----- -- ----- --- ------
Total.................... 94 12,610 8 1,627 5 1,050 107 15,287
== ====== == ===== == ===== === ======
</TABLE>
- ---------------
(1) Of the 94 Owned Hotels, 13 are operated under lease agreements. 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) Eight Managed Hotels in which the Company holds a mortgage or profit
participation on the property.
45
<PAGE> 49
The following table sets forth the location of the Company's hotels as of
March 31, 1997:
<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................... 22 2,341 -- -- 1 115 23 2,456
Georgia................... 6 803 -- -- 1 189 7 992
Illinois.................. 3 369 -- -- -- -- 3 369
Indiana................... 1 126 -- -- -- -- 1 126
Kansas.................... 1 126 -- -- -- -- 1 126
Kentucky.................. 1 123 -- -- -- -- 1 123
Maryland.................. 1 128 -- -- 1 525 2 653
Michigan.................. 1 128 -- -- -- -- 1 128
Minnesota................. 1 128 -- -- -- -- 1 128
Nevada.................... 2 350 -- -- -- -- 2 350
New Jersey................ 16 2,569 7 1,489 1 125 24 4,183
New York.................. 8 938 -- -- -- -- 8 938
North Carolina............ 2 254 -- -- -- -- 2 254
Ohio...................... 4 508 -- -- -- -- 4 508
Oklahoma.................. 1 128 -- -- -- -- 1 128
Oregon.................... 1 161 -- -- -- -- 1 161
Pennsylvania.............. 2 376 1 138 -- -- 3 514
South Carolina............ 1 111 -- -- -- -- 1 111
Tennessee................. 4 507 -- -- -- -- 4 507
Texas..................... 5 640 -- -- -- -- 5 640
U.S. Virgin Islands....... 1 517 -- -- -- -- 1 517
Virginia.................. 4 442 -- -- -- -- 4 442
-- ------ -- ----- -- ----- --- ------
Total........... 94 12,610 8 1,627 5 1,050 107 15,287
== ====== == ===== == ===== === ======
</TABLE>
46
<PAGE> 50
The following table sets forth for the five years ended December 31, 1996
operating data for the hotels in the Company's portfolio as of December 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 the Frenchman's
Reef, which were impacted by hurricane damage, have been excluded from the
table. For purposes of showing operating trends, the results of 25 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
--------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992.................. 55 7,087 9 1,747 2 650 66
1993.................. 59 7,576 9 1,747 3 765 71
1994.................. 66 8,642 9 1,747 5 1,050 80
1995.................. 74 9,616 9 1,747 5 1,050 88
1996.................. 90 11,645 9 1,747 5 1,050 104
<CAPTION>
ROOMS
------
<S> <C> <C>
1992.................. 9,484
1993.................. 10,088
1994.................. 11,439
1995.................. 12,413
1996.................. 14,442
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR OCCUPANCY
--------- ------ ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992.................. 69.2% $56.04 $38.75 70.7% $58.50 $41.33 64.9% $87.81 $56.96 69.2%
1993.................. 71.4 57.11 40.77 72.9 60.72 44.26 64.9 86.91 56.41 71.2
1994.................. 69.9 60.59 42.35 72.1 66.42 47.88 68.2 73.66 50.27 70.1
1995.................. 69.6 64.26 44.70 73.5 69.55 51.09 70.5 77.58 54.71 70.2
1996.................. 69.6 70.39 48.97 75.6 73.92 55.88 76.9 83.06 63.83 71.0
<CAPTION>
ADR REVPAR
------ ------
<S> <C> <C>
1992.................. $58.58 $40.51
1993.................. 59.63 42.48
1994.................. 62.84 44.05
1995.................. 66.28 46.54
1996.................. 71.99 51.08
</TABLE>
All-Suite Hotels
The Company currently owns 41 AmeriSuites hotels and has 45 AmeriSuites
hotels under development, including 27 under construction. Prime plans to have
69 AmeriSuites open by the end of 1997 and 100 AmeriSuites open by the end of
1998. 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. AmeriSuites hotels also offer business suites marketed under the name
"TCB (Taking Care of Business) Suites." TCB Suites were developed specifically
for the business traveler and feature a well-equipped in-suite office including
an oversized desk with executive chair, dual phone lines, easy chair and
ottoman, in addition to voice mail, data ports and other amenities. Each
AmeriSuites contains approximately 128 suites, including 24 TCB Suites, and two
to four meeting rooms. AmeriSuites are primarily located near suburban
commercial centers, corporate office parks and other travel destinations, with
close proximity to dining, shopping and entertainment amenities. The target
customer is primarily the business traveler, with an average length of stay of
two to three nights, and leisure or weekend travelers. AmeriSuites are marketed
primarily through direct sales, national marketing programs and a central
reservation system.
On January 31, 1997, the Company converted its central reservation system
for its AmeriSuites and Wellesley Inns brands to a new system developed and
operated by Anasazi Travel Resources, Inc. The new reservation system will
broaden access to travel agents through additional global distribution systems
and immediately increased the number of agent terminals by 23%. Through a
real-time interface connecting the hotels with the central reservation system
and global distribution systems, the Company will be able to swiftly implement
marketing and yield management strategies. Additionally, the system will provide
the Company with detailed guest history data for new marketing initiatives such
as frequent traveler programs. The system also has the capability to provide
automatic linkage with other reservation systems which may facilitate new
marketing alliances with strategic partners.
The Company believes it has outlined a comprehensive strategy for the rapid
development of the AmeriSuites brand while maintaining control of the
development process.
47
<PAGE> 51
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
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. Key cities where
AmeriSuites are open or under development include Atlanta (7), Dallas/Ft. Worth
(7), Chicago (6), Miami/Ft. Lauderdale (4) and Denver (3).
The following table sets forth for the five years ended December 31, 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. For purposes of showing
operating trends, comparable data has also been presented for the AmeriSuites
hotels which have been in operation for all of 1995 and 1996.
<TABLE>
<CAPTION>
COMPARABLE TOTAL
------------------------------- -------------------------------
HOTELS ROOMS HOTELS ROOMS
--------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
1992......... 6 749 6 749
1993......... 8 993 8 993
1994......... 12 1,494 12 1,494
1995......... 12 1,494 19 2,319
1996......... 12 1,494 35 4,348
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1992......... 60.0% $54.99 $32.97 60.0% $54.99 $32.97
1993......... 64.1 56.21 36.01 64.1 56.21 36.01
1994......... 65.9 59.90 39.50 65.9 59.90 39.50
1995......... 68.5 65.70 45.03 67.2 65.45 43.98
1996......... 70.9 70.90 50.28 65.6 72.12 47.28
</TABLE>
The Company believes that the all-suites segment will continue to be a high
growth segment of the industry. During the 1992-1996 period, demand for
all-suites rooms grew at more than triple the rate of demand growth experienced
by the lodging industry as a whole, and exceeded all-suites supply growth by
17.7%. The operating performance of the AmeriSuites hotels is benefiting from
this favorable trend. For the 12 owned AmeriSuites hotels which were open for
all of 1996 and 1995, REVPAR increased by 11.7% during 1996.
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 March 31, 1997 was approximately three years. The
Company believes that AmeriSuites provide attractive investment returns due to
their reasonable cost and rapid stabilization rate. In 1996, AmeriSuites which
were in operation for at least
48
<PAGE> 52
one year generated an average EBITDA of $1.26 million, representing an average
unleveraged 18.1% return on total invested capital. The Company believes that
returns from AmeriSuites development have generally equaled or exceeded those
prevalent in the hotel acquisition markets. Since January 1, 1996 the Company
has opened 22 new AmeriSuites hotels, bringing the number of AmeriSuites owned
and operated by the Company to 41.
Full-Service Hotels
The Company operates 31 upscale full-service hotels with food service and
banquet facilities 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 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 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 suffered hurricane damage as
described in the following paragraph. The Frenchman's Reef is marketed directly
through its own sales force in New York City and at the hotel, and through the
Marriott reservation system. The Frenchman's Reef market includes tour groups,
corporate meetings, conventions and individual vacationers.
In September 1995, the Frenchman's Reef suffered hurricane damage when
Hurricane Marilyn struck the U.S. Virgin Islands. In 1996, the Company and its
insurance carrier settled the Company's property and business interruption
insurance claim for $25.0 million. In addition, in July 1996, Hurricane Bertha
struck the island and caused further damage to the island. The Company is
currently reviewing its claim for property damage with its insurance carrier.
The Company is currently underway with plans to refurbish and upgrade the
Frenchman's Reef. In addition to hurricane-related renovations, the plan
provides for structural enhancements, redesigned guestrooms, increased banquet
and meeting space and new landscaping. The Company estimates that the cost of
refurbishment will be approximately $30.0 million. The Company has continued to
operate the hotel. However, due to the extent of the renovations and the
additional damage caused by Hurricane Bertha, the Company closed the hotel in
April 1997 and plans to reopen the hotel in December 1997, although there can be
no assurance that the Frenchman's Reef will reopen at such time or that the cost
of refurbishment will not exceed the Company's estimate. The Company does not
believe that the closing of the Frenchman's Reef will have a material impact on
its cash flow due to the seasonality of the hotel's operations and its business
interruption insurance.
The following table sets forth for the five years ended December 31, 1996,
operating data for the full-service hotels in the Company's portfolio as of
December 31, 1996. For purposes of showing operating trends, the results of the
Frenchman's Reef, which were impacted by hurricane damage, have been excluded
from the table. 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 nine
Owned Hotels that were managed by the Company prior to their acquisition by the
Company during
49
<PAGE> 53
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> <C> <C>
1992......... 18 3,284 28 5,532
1993......... 18 3,284 29 5,647
1994......... 19 3,639 30 6,002
1995......... 20 3,788 31 6,151
1996......... 20 3,788 31 6,151
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1992......... 66.1% $67.58 $44.64 67.5% $67.29 $45.45
1993......... 68.0 69.57 47.29 69.4 69.04 47.90
1994......... 67.2 75.31 50.64 69.0 74.31 51.27
1995......... 65.9 78.06 51.46 68.7 77.49 53.21
1996......... 69.9 85.74 59.93 72.4 83.89 60.77
</TABLE>
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 1996, the Company acquired the 151 room
Ramada Plaza Suites in Secaucus, NJ and repositioned the hotel as a Radisson
Suite hotel. In February 1997, the Company acquired the 150-room Holiday Inn in
Monroe Township, NJ.
The majority of the Company's repositioning efforts have been performed at
the full-service hotels. Since 1994, the Company successfully completed the
repositioning of 13 of its full-service hotels which included changing the
franchise affiliations of 6 such hotels. The Company recently completed the
repositioning of the Hasbrouck Heights, NJ Sheraton Hotel to a Crowne Plaza.
Limited-Service Hotels
The Company's limited-service hotels consist of 28 Wellesley Inns and seven
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 enabled the Company to establish full control over its
proprietary Wellesley Inns brand with all 28 Wellesley Inns owned and operated
by the Company. The acquisition provides the Company with significant new
opportunities to maximize the value of its brand.
Of the Company's 28 Wellesley Inns, 18 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 has refurbished five
of these hotels and completed renovations on nine other hotels in March 1997 to
ensure consistent product quality throughout the chain. Marketing efforts for
the Wellesley Inns chain will continue to rely heavily on direct marketing and
billboard advertising. In addition, the Wellesley Inns, along with the Company's
AmeriSuites, are marketed under the new reservation system developed by Anasazi
Travel Resources, Inc. 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'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. In accordance with its strategy, the
Company expects to divest a number of these hotels within the next several
years.
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The following table sets forth for the five years ended December 31, 1996
operating data for the limited-service hotels as of December 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 16 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> <C> <C>
1992......... 31 3,054 32 3,203
1993......... 33 3,299 34 3,448
1994......... 35 3,509 38 3,943
1995......... 35 3,509 38 3,943
1996......... 35 3,509 38 3,943
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1992......... 74.7% $44.83 $33.49 74.0% $44.86 $33.21
1993......... 77.1 45.69 35.22 76.4 45.71 34.90
1994......... 73.8 47.77 35.27 73.0 47.47 34.67
1995......... 74.6 51.01 38.04 74.0 50.73 37.54
1996......... 72.6 53.13 38.59 72.7 53.43 38.87
</TABLE>
OPERATIONS
As a leading domestic hotel operating company, the Company enjoys a number
of operating advantages over other lodging companies. With 107 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,
the most current data available from 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 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 is located in Fairfield, New Jersey, with an
AmeriSuites office in Atlanta, Georgia. Central management 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
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<PAGE> 55
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
shortand 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. The Company is in the process of
initiating a new internally developed proprietary yield management system which
will be implemented in all of the Company's hotels. 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.
The technical support staff is currently implementing digital telecommunications
conversions and call accounting system upgrades in all of the Company's hotels.
Additionally, the Company directs safety/risk management activities and provides
central legal services.
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
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<PAGE> 56
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 1994, 1995 and 1996, the Company spent
$8.9 million, $13.7 million and $16.8 million respectively, on the repositioning
of 34 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 and five of the recently acquired Wellesley Inns.
The Company intends to spend approximately $7.0 million in 1997 relating to the
refurbishing of nine other recently acquired Wellesley Inns and the Monroe
Township Holiday Inn.
MORTGAGES AND NOTES RECEIVABLE
As of December 31, 1996, mortgages and notes receivable totaled $25.5
million (including the current portion) and consisted primarily of an aggregate
principal amount of $8.6 million of mortgages and notes secured by Managed
Hotels and $13.6 million of mortgages secured by hotels that are leased by the
Company from third parties. The Company has pursued a strategy of converting its
mortgage and notes receivable into cash or operating hotel assets and has
received $54.8 million in cash and added five operating hotel assets through
note settlements over the past three years. In 1996, the Company obtained
control of the 210-room Howard Johnson Hotel in Cocoa Beach, FL and the 204-room
Radisson Hotel in Fairfield, NJ by converting these mortgage notes receivable
into operating hotel assets. See Note 6 to Consolidated Financial Statements.
MANAGEMENT AGREEMENTS
As of March 31, 1997, the Company provided hotel management services to
third party hotel owners of 13 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 2.0% to 5.0% and average 3.5% of total revenues
before giving consideration to performance related incentive payments. The base
and incentive fees comprised 58.5%, or $3.9 million, of the total management and
other fees for 1996. 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 8
of the 13 Managed Hotels.
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
nonexclusive nature of the franchise agreement allows the Company the
flexibility to continue to 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 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) and the Secaucus, New Jersey Radisson Suite hotel (formerly
Ramada Plaza). 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
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<PAGE> 57
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
The Company currently and from time to time is involved in litigation
arising in the ordinary course of its business. The Company does not believe
that it is involved in any litigation that will, individually or in the
aggregate, have a material adverse effect on its financial condition or results
of operations or cash flows.
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<PAGE> 58
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 POSITIONS
--------------------------- --- ------------------------------------------------------
<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)........ 48 Director
Herbert Lust, II(1)........ 70 Director
Jack H. Nusbaum............ 56 Director
Allen J. Ostroff(1)........ 60 Director
A.F. Petrocelli(1)......... 53 Director
Paul H. Hower.............. 62 Executive Vice President
Timothy E. Aho............. 53 Senior Vice President/Development
Denis W. Driscoll.......... 52 Senior Vice President/Human Resources
John H. Leavitt............ 44 Senior Vice President/Sales and Marketing
Joseph Bernadino........... 50 Senior Vice President, Secretary and General Counsel
Richard T. Szymanski....... 39 Vice President and Corporate Controller
Douglas W. Vicari.......... 37 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 Chief Executive Officer and a director of PMI during 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 during 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 through 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, Strategic Distribution, Inc., 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
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<PAGE> 59
subsidiary of The Prudential Insurance Company of America, since June 1994 and
was a Senior Vice President of the Prudential Realty Group from 1992 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 prior to such time was Vice President and Hotel Division Manager of
B.F. Saul Co.
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 1992 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 1992 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 during 1992 and a Senior Vice
President of Medallion Hotel corporation prior to such time.
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 during 1992.
Richard T. Szymanski has been a Vice President and Corporate Controller of
the Company since 1992. Mr. Szymanski was Corporate Controller of PMI during
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.
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<PAGE> 60
DESCRIPTION OF CERTAIN INDEBTEDNESS
REVOLVING CREDIT FACILITY
On June 28, 1996, the Company established a Revolving Credit Facility with
a group of financial institutions providing for availability of funds up to the
lesser of $100.0 million or 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 or substituted subject
to the approval of the lenders. The Revolving Credit Facility bears interest at
LIBOR plus 2.25% and is available through June 2001. The Revolving Credit
Facility contains covenants requiring the Company to maintain certain financial
ratios and also contains covenants which limit the incurrence and payment of
debt, liens, dividend payments, stock repurchases, 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. On June 28, 1996, the Company borrowed $40.0 million under the
Revolving Credit Facility and the proceeds were used to retire $20.0 million of
interim financing with the remainder utilized principally for the development of
AmeriSuites hotels. On August 5, 1996, the Company repaid the full amount of
this borrowing under the Revolving Credit Facility with the proceeds from the
issuance of Common Stock. As of December 31, 1996, the Company had borrowed
$12.5 million under the Revolving Credit Facility. The Company borrowed an
additional $63.1 million through March 31, 1997 and subsequently retired all
borrowings under the Revolving Credit Facility with a portion of the net
proceeds from the Initial Offering. As of March 31, 1997, the Company had $100.0
million available under the Revolving Credit Facility.
9 1/4% FIRST MORTGAGE NOTES DUE 2006
In January 1996, the Company issued $120.0 million of First Mortgage Notes
due January 15, 2006. Under certain circumstances, the Company may issue up to
an additional $80.0 million of First Mortgage Notes, although the Company has no
present intention to do so. The First Mortgage Notes bear interest at 9.25% per
annum with interest payment dates on January 15 and July 15. The First Mortgage
Notes are secured by 15 of the Company's hotels and related real and personal
property. The First Mortgage Notes are redeemable, in whole or in part, at the
option of the Company on or after January 15, 2001 at redemption prices
(expressed as a percentage of the principal amount) declining annually over a
three-year period from 104.625% to 100.000%, together with accrued and unpaid
interest, if any, to the redemption date. In addition, prior to January 15,
1999, the Company may redeem, on any one or more occasions, with the net cash
proceeds of any public offering of its common stock, up to $30.0 million in
aggregate principal amount of the First Mortgage Notes at a redemption price
equal to 109.25% of the principal amount of such First Mortgage Notes plus
accrued and unpaid interest thereon, if any, to the redemption date; provided,
however, that at least $100.0 million in principal amount of the First Mortgage
Notes must remain outstanding immediately following any such redemption. If a
Change of Control (as defined in the indenture with respect to the First
Mortgage Notes) occurs, the holder of a First Mortgage Note will have the right
to require the Company to repurchase all outstanding First Mortgage Notes, in
whole or in part, owned by such holder at 101% of their principal amount plus
accrued and unpaid interest, if any, to the date of repurchase. The First
Mortgage Notes rank pari passu in right of payment to all existing and future
senior indebtedness of the Company and rank senior in right of payment to all
subordinated indebtedness of the Company. The First Mortgage Notes are not
guaranteed by any of the Company's subsidiaries. The indenture governing the
First Mortgage Notes contains certain covenants, including limitations on the
incurrence of debt, dividend payments, certain investments, transactions with
affiliates, asset sales and mergers and consolidations.
OTHER SECURED DEBT
As of March 31, 1997, as adjusted for the Initial Offering, the Company has
mortgage notes payable of approximately $56.8 million that are secured by
mortgage notes receivable and hotel properties with a book value of $87.3
million. Principal and interest on these mortgages and notes are generally paid
monthly. At March 31, 1997 these notes bear interest at rates ranging from 6.40%
to 10.50% per annum and mature from
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<PAGE> 61
1998 through 2008. Included in the Company's debt at March 31, 1997 is debt of
the Company's subsidiaries of approximately $21.8 million at rates ranging from
10.20% to 10.50% and maturing from 2000 through 2004.
7% CONVERTIBLE SUBORDINATED NOTES DUE 2002
In April 1995, the Company issued $86.3 million of 7% Convertible
Subordinated Notes due April 15, 2002. The Convertible Notes bear interest at 7%
per annum with interest payment dates on April 15 and October 15. The
Convertible Notes are convertible into common stock of the Company at any time
prior to maturity at a conversion price of $12.00 per share, subject to
adjustment in certain events. The Convertible Notes are redeemable, in whole or
in part, at the option of the Company on or after April 17, 1998 at redemption
prices (expressed as a percentage of the principal amount) declining annually
over a three-year period from 104.0% to 101.0%, together with accrued interest
to the redemption date. If a Risk Event (as defined in the indenture with
respect to the Convertible Notes) occurs, the holder of a Convertible Note will
have the right to require the Company to offer to repurchase all outstanding
Convertible Notes, in whole or in part, owned by such holder at 100% of their
principal amount plus accrued interest, if any, to the date of repurchase. The
Convertible Notes are subordinated to all existing and future senior
indebtedness of the Company, including the Notes. The Convertible Notes are not
guaranteed by any of the Company's subsidiaries. The indenture governing the
Convertible Notes does not restrict the ability of the Company or its
subsidiaries to incur additional indebtedness, including senior indebtedness.
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<PAGE> 62
DESCRIPTION OF NOTES
GENERAL
The Original Notes were issued pursuant to an Indenture (the "Indenture")
dated as of March 26, 1997 between the Company and First Bank National
Association, as trustee (the "Trustee"), in a private transaction that was not
subject to the registration requirements of the Securities Act. The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Notes are subject to all such terms, and Holders of the
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below and
those terms made a part of the Indenture by reference to the Trust Indenture Act
as in effect on the date of the Indenture. A copy of the Indenture and
Registration Rights Agreement may be obtained from the Company. See
"-- Additional Information." The definitions of certain terms used in the
following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to the "Company" refer only to Prime
Hospitality Corp. without including any of its Subsidiaries.
The Notes are unsecured obligations of the Company, ranking subordinate in
right of payment to all Senior Debt of the Company. See "-- Subordination." As
of March 31, 1997, after giving effect to the Initial Offering and the
application of the net proceeds therefrom, the Company had approximately $155.0
million of Senior Debt outstanding, and, in addition, Restricted Subsidiaries of
the Company had approximately $21.8 million of Indebtedness. The Indenture
permits the incurrence of additional Senior Debt in the future.
For purposes of the Indenture, the Company's Subsidiaries are divided into
two categories -- Restricted Subsidiaries, which generally are subject to the
restrictive covenants set forth in the Indenture, and Unrestricted Subsidiaries,
which generally are not. On the date of the Indenture, none of the Company's
Subsidiaries were designated as an Unrestricted Subsidiary. None of the
Company's Restricted Subsidiaries is presently required to guarantee the Notes,
although under certain future circumstances the Company may be required to cause
one or more Restricted Subsidiaries to guarantee the Notes on a subordinated
basis. See "-- Subsidiary Guarantees." Subsidiaries that are properly designated
and maintained as Unrestricted Subsidiaries by the Company will not be required
to guarantee the Notes under any circumstances.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $200,000,000, and
will mature on April 1, 2007. Interest on the Notes accrues from the respective
date of issuance and is payable semi-annually in arrears in cash on April 1 and
October 1 of each year, commencing on October 1, 1997, at the rate of 9 3/4% per
annum to Holders of record on the immediately preceding March 15 and September
15. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the respective
date of issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal of and premium, interest and
Liquidated Damages, if any, on the Notes will be payable at the office or agency
of the Company maintained for such purpose or, at the option of the Company,
payment of interest and Liquidated Damages may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holder of Notes; provided that all payments with respect to Notes the Holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency will be the office of the Trustee maintained for such
purpose. The Notes are issued in denominations of $1,000 and integral multiples
thereof.
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<PAGE> 63
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to April 1,
2002. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, at any time upon not less than 30 nor more than 60
days notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the applicable redemption date, if redeemed during the
twelve-month period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------- ----------
<S> <C>
2002.................................... 104.875%
2003.................................... 103.250%
2004.................................... 101.625%
2005 and thereafter..................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to April 1, 2000, the Company may
redeem, on any one or more occasions, with the net cash proceeds of one or more
public offerings of its common equity (a "Public Equity Offering") (within 60
days of the consummation of any such Public Equity Offering), up to 35% of the
aggregate principal amount of the Notes at a redemption price equal to 109.75%
of the principal amount of such Notes plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the redemption date; provided, however,
that at least 65% of the aggregate principal amount of Notes originally issued
remains outstanding immediately after any such redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash or
Cash Equivalents of all Obligations on Senior Debt, whether outstanding on the
Issuance Date or thereafter incurred. Upon any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors or marshalling of assets
of the Company or in a bankruptcy, reorganization, insolvency, receivership or
other similar proceeding relating to the Company or its property, whether
voluntary or involuntary, all Obligations due upon all Senior Debt shall first
be paid in full in cash or Cash Equivalents, or such payment shall be duly
provided for to the satisfaction of the holders of Senior Debt, before any
payment or distribution of any kind or character is made on account of any
Obligations on the Notes, or for the acquisition by the Company or any of its
Subsidiaries of any of the Notes for cash or property or otherwise, and, until
all Obligations with respect to Senior Debt are paid in full in cash or Cash
Equivalents, any distribution to which the Holders would be entitled shall be
made to the holders of Senior Debt (except that Holders of Notes may receive
Permitted Junior Securities and payments made from the trust described under
"-- Legal Defeasance and Covenant Defeasance" and "-- Satisfaction and
Discharge").
If any default occurs and is continuing in the payment when due, whether at
maturity, upon any redemption, by declaration or otherwise, of any principal of,
interest on, unpaid drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any Senior Debt, no payment of any kind
or character shall be made by or on behalf of the Company or any other Person on
its behalf with respect to any Obligations on the Notes or to acquire any of the
Notes for cash or property or otherwise (except that Holders of Notes may
receive Permitted Junior Securities and payments made from the trust described
under "-- Legal Defeasance and Covenant Defeasance" and "-- Satisfaction and
Discharge"). In addition, if any other event of default occurs and is continuing
with respect to any Designated Senior Debt, as such event of default is defined
in the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default
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to the Trustee (a "Default Notice"), then, unless and until all events of
default have been cured or waived or have ceased to exist or the Trustee
receives notice from the Representative for the respective issue of Designated
Senior Debt terminating the Blockage Period (as defined below), during the 179
days after the delivery of such Default Notice (the "Blockage Period"), neither
the Company nor any of its Subsidiaries shall (x) make any payment of any kind
or character with respect to any Obligations on the Notes (except that Holders
of Notes may receive Permitted Junior Securities and payments made from the
trust described under "-- Legal Defeasance and Covenant Defeasance" and
"-- Satisfaction and Discharge") or (y) acquire any of the Notes for cash or
property or otherwise. Notwithstanding anything herein to the contrary, in no
event will a Blockage Period extend beyond 179 days from the date the payment on
the Notes was due and only one such Blockage Period may be commenced within any
365 consecutive days. No event of default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Debt shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Debt whether or
not within a period of 365 consecutive days, unless such event of default shall
have been cured or waived for a period of not less than 90 consecutive days (it
being acknowledged that any subsequent action, or any breach of any financial
covenants for a period commencing after the date of commencement of such
Blockage Period that, in either case, would give rise to an event of default
pursuant to any provisions under which an event of default previously existed or
was continuing shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less ratably than holders of Senior Debt.
As of March 31, 1997, after giving effect to the Offering and the application of
the net proceeds therefrom, the Company had approximately $155.0 million of
Senior Debt outstanding.
None of the Company's Subsidiaries is presently required to guarantee the
Notes, although under certain future circumstances the Company may be required
to cause one or more Restricted Subsidiaries to guarantee the Notes on a
subordinated basis. The Indebtedness represented by any such Guarantee (i.e.,
the payment of Obligations on the Notes) will be subordinated on the same basis
to Senior Debt of the Guarantor as the Notes are subordinated to Senior Debt of
the Company.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement and
all other such Senior Debt and to repay the Indebtedness owed to each lender or
holder of Senior Debt which has accepted such offer or (ii) obtain the requisite
consents under the Credit Agreement and all other Senior Debt to permit the
repurchase of the Notes as provided below. The Company shall first comply with
the covenant in the immediately preceding sentence before it shall be required
to repurchase Notes pursuant to the provisions described below and the Company's
failure to comply with the covenant described in the immediately preceding
sentence shall constitute an Event of Default described in clause (iii) and not
in clause (ii) under "-- Events of Default" below.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required
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<PAGE> 65
by law (the "Change of Control Payment Date"). Holders electing to have a Note
purchased pursuant to a Change of Control Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Trustee or Paying Agent, if any, at the
address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. The Credit Agreement prohibits the purchase
of Notes by the Company in the event of a Change of Control, unless and until
such time as the Indebtedness under the Credit Agreement is repaid in full, and
the First Mortgage Notes indenture requires that the Company offer to repurchase
the First Mortgage Notes in the event of a change of control (as defined
therein). See "Risk Factors -- Change of Control." In the event the Company is
required to purchase outstanding Notes pursuant to a Change of Control Offer,
the Company expects that it would seek third party financing to the extent it
does not have available funds to meet its purchase obligations. However, there
can be no assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder s right to require purchase of its Notes upon a
Change of Control and the Change of Control purchase feature of the Notes may
not be amended or waived without the consent of at least 66 2/3% in principal
amount of the Notes then outstanding. Restrictions in the Indenture described
herein on the ability of the Company and its Restricted Subsidiaries to incur
additional Indebtedness, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or purchase of the
Notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or purchase.
Such restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Notes to require the Company to repurchase such Notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company to another person may be uncertain.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, conduct an Asset Sale, unless (x) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
sold or otherwise disposed of (evidenced by a resolution of the Board of
Directors set forth in an officers certificate delivered to the Trustee) and (y)
at least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash or Cash Equivalents; provided,
however, that the principal amount of the following shall be deemed to be cash
for purposes of this provision: (A) any liabilities (as shown on the Company's
or such Restricted Subsidiary's most recent balance sheet or in the notes
thereto), of the Company
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or any Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes or any Guarantee thereof) that are assumed or forgiven
by the transferee of any such assets and (B) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are converted by the Company or such Restricted Subsidiary into cash within
90 days of the closing of such Asset Sale (to the extent of the cash received).
Notwithstanding the foregoing, the restriction in clause (y) above will not
apply with respect to mortgages or other notes receivable received by the
Company or any Restricted Subsidiary from a transferee of any assets to the
extent such mortgages or other notes receivable are Restricted Investments
permitted to be made by the Company or such Restricted Subsidiary under the
covenant entitled "Restricted Payments."
Within 365 days of any Asset Sale, the Company or such Restricted
Subsidiary may (a) apply the Net Proceeds from such Asset Sale to prepay any
Indebtedness that ranks by its terms senior to the Notes (or any Guarantee
thereof) and, in the case of any Indebtedness under a revolving Credit Facility,
to effect a permanent reduction in the amount of Indebtedness that may be
incurred pursuant to clause (ii) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Certain Capital Stock," or
(b) invest the Net Proceeds from such Asset Sale in property or assets used in a
Hospitality-Related Business; provided that the Company or such Restricted
Subsidiary will have complied with this clause (b) if, within 365 days of such
Asset Sale, the Company or such Restricted Subsidiary shall have commenced and
not completed or abandoned an investment in compliance with this clause (b) and
shall have segregated such Net Proceeds from the general funds of the Company
and its Subsidiaries for that purpose and such Investment is substantially
completed within 180 days after the first anniversary of such Asset Sale. Any
Net Proceeds from an Asset Sale that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $20.0 million,
the Company shall make an offer, to all Holders of Notes and other Indebtedness
that ranks by its terms pari passu in right of payment with the Notes and the
terms of which contain substantially similar requirements with respect to the
application of net proceeds from asset sales as are contained in the Indenture
(an "Asset Sale Offer") to purchase on a pro rata basis the maximum principal
amount of Notes, that is an integral multiple of $1,000, that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Notes and other such Indebtedness tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, the Company may use such deficiency for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds available for purchase
thereof, the Trustee shall select the Notes to be purchased in the manner
described under the caption "-- Selection and Notice" below. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Pending the final application of any Net Proceeds from an Asset Sale pursuant to
this paragraph, the Company or any Restricted Subsidiary may temporarily reduce
Indebtedness of the Company or a Restricted Subsidiary that is a Guarantor that
ranks by its terms senior to the Notes (or any Guarantee thereof) or otherwise
invest such Net Proceeds in Cash Equivalents. The Credit Agreement generally
prohibits the purchase of Notes by the Company in the circumstances described
above unless and until such time as the indebtedness under the Credit Agreement
is repaid in full.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act and other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with any offer to purchase and the purchase of Notes as described above. To the
extent that the provisions of any securities laws or regulations conflict with
the "Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
SELECTION AND NOTICE
In the event that less than all of the Notes are to be purchased in an
Asset Sale Offer or redeemed at any time, selection of Notes for purchase or
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and
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appropriate, provided that no Notes of a principal amount of $1,000 or less
shall be redeemed in part, provided, further, that if a partial redemption is
made with the proceeds of a public offering by the Company of common equity
securities, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to procedures of The Depository Trust Company), unless
such method is otherwise prohibited.
Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the purchase or redemption date to each Holder of
Notes to be purchased or redeemed at its registered address. If any Note is to
be purchased or redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
purchased or redeemed.
A new Note in principal amount equal to the unpurchased or unredeemed
portion of any Note purchased or redeemed in part will be issued in the name of
the Holder thereof upon cancellation of the original Note. On and after the
purchase or redemption date, interest ceases to accrue on Notes or portions
thereof called for purchase or redemption as long as the Company has deposited
with the Trustee funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Restricted Payments. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (other than:
(1) dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company; or (2) dividends or distributions by a
Restricted Subsidiary of the Company, provided that to the extent that a portion
of such dividend or distribution is paid to a holder of Equity Interests of a
Restricted Subsidiary other than the Company or a Restricted Subsidiary, such
portion of such dividend or distribution is not greater than such holder's pro
rata aggregate common equity interest in such Restricted Subsidiary); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any Restricted Subsidiary or other Affiliate of the Company
(other than (A) any Equity Interests owned by the Company or any Wholly Owned
Restricted Subsidiary of the Company and (B) pursuant to transactions otherwise
constituting Permitted Investments hereunder); (iii) purchase, redeem or
otherwise acquire or retire for value any Indebtedness of the Company or any
Restricted Subsidiary that is subordinated or junior in right of payment, by its
terms, to the Notes or any Guarantee thereof prior to the scheduled final
maturity or sinking fund payment dates for payment of principal and interest in
accordance with the original documentation for such subordinated or junior
Indebtedness; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the covenant described
under the caption "-- Incurrence of Indebtedness and Issuance of Certain
Capital"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv) and (v) of the next succeeding paragraph), is
less than the sum, without duplication, of (i) 50% of the Consolidated Net
Income of the Company for the period (taken as one accounting period) from
January 1, 1996 to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale,
in either case, since January 23, 1996, of either (A) Equity Interests of
the Company or of (B) debt securities of
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the Company that have been converted or exchanged into such Equity
Interests (other than Equity Interests (or convertible or exchangeable debt
securities) sold to a Restricted Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted or exchanged
into Disqualified Stock), plus (iii) in case any Unrestricted Subsidiary
has been redesignated a Restricted Subsidiary and becomes a Guarantor
pursuant to the terms of the Indenture or has been merged, consolidated or
amalgamated with or into, or transfers or conveys assets to, or is
liquidated into, the Company or a Restricted Subsidiary that is a
Guarantor, and provided that no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof, the
lesser of (A) the book value (determined in accordance with GAAP) at the
date of such redesignation, combination or transfer of the aggregate
Investments made by the Company and its Restricted Subsidiaries in such
Unrestricted Subsidiary (or of the assets transferred or conveyed, as
applicable) and (B) the fair market value of such Investment in such
Unrestricted Subsidiary at the time of such redesignation, combination or
transfer (or of the assets transferred or conveyed, as applicable), in each
case as determined in good faith by the Board of Directors of the Company,
whose determination shall be conclusive and evidenced by a resolution of
such Board and, in each case, after deducting any Indebtedness associated
with the Unrestricted Subsidiary so designated or combined or with the
assets so transferred or conveyed, plus (iv) 100% of any dividends or
interest actually received in cash by the Company or a Restricted
Subsidiary that is a Guarantor after the Issuance Date from (A) a
Restricted Subsidiary the Net Income of which has been excluded from the
computation of Consolidated Net Income, (B) an Unrestricted Subsidiary, (C)
a Person that is not a Subsidiary or (D) a Person that is accounted for on
the equity method plus (v) $25.0 million, minus (vi) the aggregate amount
of all Restricted Payments made by the Company and its Restricted
Subsidiaries from and after January 23, 1996 and on or before the Issuance
Date. To the extent that any Restricted Investment made since January 23,
1996 is sold for cash or Cash Equivalents or otherwise liquidated or repaid
for cash after the Issuance Date, the lesser of (A) the cash return of
capital with respect to such Restricted Investment less the cost of
disposition, if any, and (B) the aggregate amount of the Investment made by
the Company or a Restricted Subsidiary in such Restricted Investment shall
not, following such sale, liquidation or repayment, be counted in the
calculation of the aggregate amount of Restricted Payments made by the
Company or its Restricted Subsidiaries for purposes of this clause (c).
The foregoing provisions will not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, purchase, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any proceeds that is utilized for such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c) (ii) of the preceding paragraph, (iii) the defeasance, redemption,
repayment or purchase of Indebtedness of the Company or any Restricted
Subsidiary that is subordinated or junior in right of payment, by its terms, to
the Notes or any Guarantee thereof in a Permitted Refinancing; (iv) the
defeasance, redemption, repayment or purchase of Indebtedness of the Company or
any Restricted Subsidiary that is subordinated or junior in right of payment, by
its terms, to the Notes or any Guarantee thereof with the proceeds of a
substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests (other than Disqualified Stock) of the Company; provided that
the amount of any proceeds that is utilized for such defeasance, redemption,
repayment or purchase shall be excluded from clause (c) (ii) of the preceding
paragraph; and (v) the purchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company pursuant to any management
equity subscription agreement or stock option agreement in effect as of January
1, 1996; provided, however, that the aggregate price paid for all such
purchased, redeemed, acquired or retired Equity Interests shall not exceed
$1,000,000 per year on a cumulative basis since January 1, 1996; provided that,
in the case of clauses (ii) through (v) above, no Default or Event of Default
shall have occurred and be continuing or would occur as a consequence thereof.
In determining whether any Restricted Payment is permitted by the foregoing
covenant, the Company may allocate or reallocate all or any portion of such
Restricted Payment among the clauses (i) through (v) of
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the preceding paragraph or among such clauses and the first paragraph of this
covenant including clauses (a), (b) and (c), provided that at the time of such
allocation or reallocation, all such Restricted Payments, or allocated portions
thereof, would be permitted under the various provisions of the foregoing
covenant.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors of the Company
set forth in an officers certificate delivered to the Trustee) on the date of
the Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Restricted Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an officers certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this covenant were computed, which calculations may be
based upon the Company's latest available financial statements.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default or Event
of Default. For purposes of making the determination as to whether such
designation would cause a Default or Event of Default, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the time
of such designation, (y) the fair market value of such Investments at the time
of such designation and (z) the original fair market value of such Investments
at the time they were made. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the resolution of the
Board of Directors of the Company giving effect to such designation and an
officers certificate certifying that such designation complied with the
foregoing conditions.
Incurrence of Indebtedness and Issuance of Certain Capital Stock. The
Indenture provides that the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable with respect to (collectively,
"incur" and correlatively, an "incurrence" of) any Indebtedness (including
Acquired Debt), that the Company will not issue, and will not permit any of its
Restricted Subsidiaries to issue, any shares of Disqualified Stock and that the
Company will not permit any of its Restricted Subsidiaries to issue any
Preferred Stock; provided, however, that the Company or any of its Restricted
Subsidiaries may incur Indebtedness or issue shares of Disqualified Stock and
its Restricted Subsidiaries may issue Preferred Stock, if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock or Preferred Stock is issued would have been at least 2.0 to 1, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or Preferred Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Indebtedness; provided, however, that if any such Indebtedness
ceases to be Non-Recourse Indebtedness of an Unrestricted Subsidiary, such
event shall be deemed to constitute an incurrence of Indebtedness by a
Restricted Subsidiary of the Company;
(ii) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness pursuant to the Credit Agreement in an aggregate principal
amount not to exceed $100.0 million at any one time outstanding, plus up to
an additional $50.0 million in aggregate principal amount of Indebtedness
at any one time outstanding that may be incurred from time to time,
pursuant to one or more Credit Facilities, minus the aggregate amount of
all proceeds of all sales or other dispositions of assets that have been
applied to permanently reduce the outstanding amount of such Indebtedness
pursuant to clause (a) of
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the second paragraph of the covenant described under the caption
"-- Repurchase at the Option of Holders -- Asset Sales;"
(iii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iv) Hedging Obligations that are incurred for the purpose of fixing
or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or required by the terms of the Credit Agreement to be
outstanding;
(v) the incurrence or the issuance by the Company of Refinancing
Indebtedness or Refinancing Disqualified Stock of the Company or any
Restricted Subsidiary or the incurrence or issuance by a Restricted
Subsidiary of Refinancing Indebtedness or Refinancing Disqualified Stock of
such Restricted Subsidiary, as the case may be; provided, however, that
such Refinancing Indebtedness or Refinancing Disqualified Stock, as the
case may be, is a Permitted Refinancing;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Restricted Subsidiaries; provided, however, that
(a) any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness being held by a Person other than a Wholly Owned
Restricted Subsidiary and (b) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be;
(vii) the incurrence of Indebtedness represented by the Notes and any
Guarantee thereof;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries, in the ordinary course of business and consistent with past
practice, of Indebtedness to secure performance bonds not to exceed $15.0
million at any one time outstanding; or
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount at any
time outstanding not to exceed $10.0 million; provided that the net
proceeds of such Indebtedness are used to finance the renovation or
refurbishment of properties owned by the Company or a Restricted Subsidiary
which are employed in a Hospitality-Related Business.
In the event any Restricted Subsidiary of the Company becomes a guarantor
of Indebtedness of the Company pursuant to any provisions of such Indebtedness
causing such Guarantee to arise subsequent to incurrence of the underlying
Indebtedness in a manner similar to that provided for in the Indenture, such
Guarantee shall not be deemed a separate incurrence of the underlying
Indebtedness, provided that the underlying Indebtedness is either (i) Existing
Indebtedness or (ii) permitted to be incurred under the terms of the Indenture
when first incurred.
Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a) (i) pay dividends
or make any other consensual distributions to the Company or any of its
Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any
other interest or participation in, or measured by, its profits, or (ii) pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries, (b) make
loans or advances or capital contributions to the Company or any of its
Restricted Subsidiaries or (c) sell, lease or transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reasons of (i) Existing
Indebtedness as in effect on the Issuance Date, (ii) the Indenture and the
Notes, (iii) applicable law, (iv) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries or of any Person that becomes a Restricted Subsidiary as in effect
at the time of such acquisition or such Person becoming a Restricted Subsidiary
(except to the extent such Indebtedness was incurred in connection with or, if
incurred within one year prior to such acquisition or such Person becoming a
Restricted Subsidiary, in contemplation of such acquisition or such Person
becoming a Restricted Subsidiary), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that
the Consolidated Cash Flow of such Person is not taken into account (to the
extent of such restriction) in
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determining whether such acquisition was permitted by the terms of the
Indenture, (v) any instrument governing Indebtedness or Capital Stock of a
Person who becomes a Guarantor as in effect at the time of becoming a Guarantor
(except to the extent such Indebtedness was incurred in connection with or, if
incurred within one year prior to the time of becoming a Guarantor, in
contemplation of such Guarantee), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person who became a Guarantor, (vi)
by reason of customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (vii) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in this clause (c) on the property
so acquired, (viii) permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Refinancing Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, or (ix) customary restrictions in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such
security agreements and mortgages.
Prohibition on Incurrence of Senior Subordinated Debt. The Indenture
provides that (i) the Company will not incur, issue, assume or otherwise become
liable for any Indebtedness that is senior in right of payment to the Notes and
subordinate or junior in right of payment to any other Indebtedness of the
Company and (ii) no Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is senior in right of payment
to the Guarantee by such Guarantor of the Notes and subordinate or junior in
right of payment to any other Indebtedness of the Guarantor.
Merger, Consolidation or Sale of Assets. The Indenture provides that the
Company may not consolidate or merge with or into (whether or not the Company is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company pursuant to a supplemental indenture under the Notes and the
Indenture; (iii) immediately after such transaction no Default or Event of
Default exists; and (iv) the Company or any Person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth (immediately after the transaction) equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described under the caption "-- Incurrence of Indebtedness
and Issuance of Certain Capital Stock."
Upon any such consolidation, merger, lease, conveyance or transfer in
accordance with the foregoing, the successor Person formed by such consolidation
or into which the Company is merged or to which such lease, conveyance or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor had been named as the Company therein and thereafter
(except in the case of a lease) the predecessor corporation will be relieved of
all further obligations and covenants under the Indenture and the Notes.
Transactions with Affiliates. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or Guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary on an arm's
length basis with an unrelated Person, (b) the Company delivers to the
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Trustee (i) with respect to any Affiliate Transaction involving aggregate
payments in excess of $5.0 million, an officers certificate certifying that such
Affiliate Transaction complies with clause (a) above and such Affiliate
Transaction is approved by a majority of the disinterested nonemployee members
of the Board of Directors and (ii) with respect to any Affiliate Transaction
involving aggregate payments in excess of $10.0 million (other than an Affiliate
Transaction involving the acquisition or disposition of a hotel by the Company
or a Restricted Subsidiary of the Company), an opinion as to the fairness to the
Company or such Restricted Subsidiary from a financial point of view issued, at
the option of the Company, by an investment banking firm of national standing or
a Qualified Appraiser and (c) the Company delivers to the Trustee in the case of
an Affiliate Transaction involving the acquisition or disposition of a hotel by
the Company or a Restricted Subsidiary of the Company and (x) involving
aggregate payments of less than $25.0 million, an appraisal by a Qualified
Appraiser to the effect that the transaction is being undertaken at fair market
value or (y) involving aggregate payments of $25.0 million or more, an opinion
as to the fairness of the transaction to the Company or such Restricted
Subsidiary from a financial point of view issued by an investment banking firm
of national standing; provided, however, that the following shall not be deemed
Affiliate Transactions: (A) any employment, deferred compensation, stock option,
noncompetition, consulting or similar agreement entered into by the Company or
any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
(B) transactions between or among the Company and/or its Wholly Owned Restricted
Subsidiaries or any Guarantor, (C) the incurrence of fees in connection with the
provision of hotel management services, provided that such fees are paid in the
ordinary course of business and are consistent with past practice and (D)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant described under the caption "-- Restricted Payments."
Line of Business. The Indenture provides that for so long as any Notes are
outstanding, the Company will not, and will not permit any of its Restricted
Subsidiaries to, engage in any business or activity other than a
Hospitality-Related Business.
Payments for Consent. The Indenture provides that neither the Company nor
any of its Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
SUBSIDIARY GUARANTEES
As of the Issuance Date, no Subsidiary of the Company or business entity in
which the Company owns an interest was required to act as a Guarantor in respect
of the Notes. However, the Indenture provides that if (i) the Company or any
Restricted Subsidiary shall transfer or cause to be transferred, in one or a
series of related transactions, any assets (including cash or Cash Equivalents
other than pursuant to clause (e) of the definition of Permitted Investments),
businesses, divisions, real property or equipment having a book value or fair
market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be conclusive and evidenced by a resolution
of such Board), in excess of $5.0 million to any Restricted Subsidiary that is
not a Guarantor or (ii) if the Company or any of its Restricted Subsidiaries
shall acquire or create after the Issuance Date another Restricted Subsidiary
having total assets with a fair market value in excess of $5.0 million at the
time of such acquisition or creation, the Company will cause such Restricted
Subsidiary to execute and deliver to the Trustee a supplemental indenture
pursuant to which such Restricted Subsidiary shall guarantee, on an unsecured
senior subordinated basis, all of the obligations of the Company with respect to
the Notes together with an opinion of counsel (which counsel may be an employee
of the Company) to the effect that the supplemental indenture has been duly
executed and delivered by such Restricted Subsidiary and is in compliance in all
material respects with the terms of the Indenture. The Indebtedness represented
by any such Guarantee (i.e., the payment of Obligations on the Notes) will be
subordinated on the same basis to Senior Debt of the Guarantor as the Notes are
subordinated to Senior Debt
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of the Company. The Credit Agreement generally prohibits the incurrence of any
such Guarantee unless and until such time as the indebtedness under the Credit
Agreement is repaid in full.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity, whether or not affiliated with such Guarantor
(other than the Company or another Guarantor), unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee under the Indenture, (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists and (iii) such Guarantor, or any Person formed by or surviving
any such consolidation or merger, (A) would have Consolidated Net Worth
(immediately after giving effect to such transaction), equal to or greater than
the Consolidated Net Worth of such Guarantor immediately preceding the
transaction and (B) would be permitted by virtue of the Company's Fixed Charge
Coverage Ratio to incur, immediately after giving effect to such transaction, at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio set forth in the covenant described above under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Certain Capital Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, which sale or other disposition is otherwise
in compliance with the terms of the Indenture, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
automatically and unconditionally released and relieved of any obligations under
its Subsidiary Guarantee.
For purposes of a Guarantee with respect to the Notes, each Guarantor's
liability will be that amount from time to time equal to the aggregate liability
of such Guarantor thereunder, but shall be limited to the least of (i) the
aggregate amount of the obligations of the Company under the Notes and the
Indenture or (ii) the amount, if any, which would not have (A) rendered such
Guarantor "insolvent" (as such term is defined in the Federal Bankruptcy Code
and in the Debtor and Creditor Law of the State of New York) or (B) left it with
unreasonably small capital at the time its Guarantee with respect to the Notes
was entered into, after giving effect to the incurrence of existing Indebtedness
immediately prior to such time; provided that, it shall be a presumption in any
lawsuit or other proceeding in which a Guarantor is a party that the amount
guaranteed pursuant to the Guarantee with respect to the Notes is the amount set
forth in clause (i) above unless any creditor, or representative of creditors of
such Guarantor, or debtor in possession or trustee in bankruptcy of the
Guarantor, otherwise proves in such a lawsuit that the aggregate liability of
the Guarantor is limited to the amount set forth in clause (ii). The Indenture
provides that, in making any determination as to the solvency or sufficiency of
capital of a Guarantor in accordance with the previous sentence, the right of
such Guarantor to contribution from other Guarantors and any other rights such
Guarantor may have, contractual or otherwise, shall be taken into account.
REPORTS
Whether or not required by the rules and regulations of the Commission, so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes all quarterly and annual financial information that would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants. In addition, whether or not required by the rules and
regulations of the Commission, the Company will submit a copy of all such
information with the Commission for public availability (unless the Commission
will not accept such a submission) and file such information with the Trustee
and make such information available to investors and securities analysts who
request it in writing. In addition, for so long as the Notes are outstanding,
the Company will continue to provide to Holders and to prospective purchasers of
Notes the information required by Rule 144(d)(4).
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest or
Liquidated Damages, if any, on the Notes (whether or not such payment shall be
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Notes at
maturity, upon redemption or otherwise (including the failure to make a payment
to purchase Notes tendered pursuant to a Change of Control Offer or an Asset
Sale Offer) (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture); (iii) failure by the Company or any
Restricted Subsidiary to comply with the covenants described under the captions
"-- Repurchase at the Option of Holders -- Change of Control" (other than a
default provided for in clause (ii) above), "-- Repurchase at the Option of
Holders -- Asset Sales" (other than a default provided for in clause (ii)
above), "-- Certain Covenants -- Restricted Payments," "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Certain Capital Stock,"
"-- Certain Covenants -- Prohibition on Incurrence of Senior Subordinated Debt"
and "-- Certain Covenants -- Merger, Consolidation or Sale of Assets" and under
the penultimate paragraph under the caption "Amendments, Supplements and
Waiver," which failure continues for a period of 30 days after written notice
shall have been given to the Company by the Trustee or to the Company and the
Trustee from Holders of at least 25% in principal amount of Notes then
outstanding; (iv) failure by the Company or any Guarantor for 60 days in the
performance of any other covenant, warranty or agreement in the Indenture or the
Notes after written notice shall have been given to the Company by the Trustee
or to the Company and the Trustee from Holders of at least 25% in principal
amount of the Notes then outstanding; (v) the failure to pay at final stated
maturity (giving effect to any applicable grace periods and any extensions
thereof) the principal amount of Non-Recourse Indebtedness of the Company or any
of its Restricted Subsidiaries with an aggregate principal amount in excess of
the lesser of (A) 10% of the total assets of the Company and its Restricted
Subsidiaries measured as of the end of the Company's most recent fiscal quarter
for which internal financial statements are available immediately prior to the
date on which such default occurred, determined on a pro forma basis, and (B)
$100 million, and such failure continues for a period of 10 days or more, or the
acceleration of the final stated maturity of any such Non-Recourse Indebtedness
(which acceleration is not rescinded, annulled or otherwise cured within 10 days
of receipt by the Company or such Restricted Subsidiary of notice of any such
acceleration); (vi) the failure to pay at final stated maturity (giving effect
to any applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness (other than Non-Recourse Indebtedness) of the Company or any
Restricted Subsidiary of the Company and such failure continues for a period of
10 days or more, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise cured
within 10 days of receipt by the Company or such Restricted Subsidiary of notice
of any such acceleration) if the aggregate principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
in default for failure to pay principal at final maturity or which has been
accelerated, in each case with respect to which the 10-day period described
above has passed, aggregates $10.0 million or more at any time; (vii) failure by
the Company or any of its Restricted Subsidiaries to pay final judgments
rendered against them (other than judgment liens without recourse to any assets
or property of the Company or any of its Restricted Subsidiaries other than
assets or property securing Non-Recourse Indebtedness) aggregating in excess of
$10.0 million, which judgments are not paid, discharged or stayed for a period
of 90 days (other than any judgments as to which a reputable insurance company
has accepted full liability); (viii) except as permitted by the Indenture, any
Guarantee with respect to the Notes shall be held in a judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor (or its successors or assigns), or any Person acting on
behalf of such Guarantor (or its successors or assigns), shall deny or disaffirm
its obligations or shall fail to comply with any obligations under its
Guarantee; and (ix) certain events of bankruptcy or insolvency with respect to
the Company, any Guarantor or any of the Company's Subsidiaries that would
constitute a Significant Subsidiary or any group of the Company's Subsidiaries
that, taken together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any of its Subsidiary
that would constitute a Significant Subsidiary
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or any group of its Subsidiaries that, taken together, would constitute a
Significant Subsidiary or any Guarantor, all outstanding Notes will become due
and payable without further action or notice. Under certain circumstances, the
Holders of a majority in principal amount of the outstanding Notes may rescind
any acceleration with respect to the Notes and its consequences. Holders of the
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
The Indenture provides that no Holder of a Note may pursue a remedy under
the Indenture unless (i) the Holder of a Note gives to the Trustee written
notice of a continuing Event of Default or the Trustee receives such notice from
the Company; (ii) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue a remedy;
(iii) such Holder of a Note or Holders of Notes offer and, if requested, provide
to the Trustee indemnity satisfactory to the Trustee against any loss, liability
or expense; (iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and, if requested, the provision of
indemnity; and (v) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request; provided, however, that such provision
does not affect the right of a Holder of a Note to sue for enforcement of any
overdue payment thereon.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, including with respect to any
Restricted Payments made during such year, the basis upon which the calculations
required by the covenants described under the caption "-- Certain
Covenants -- Restricted Payments" were computed (which calculations may be based
on the Company's latest available financial statements) and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default. The Company
will also be required to deliver to the Trustee, forthwith upon any officer
becoming aware of a Default or an Event of Default, an officers certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder, past, present
or future of the Company, any successor Person or any Guarantor, as such, shall
have any liability for any obligations of the Company under the Notes, any
Guarantee thereof or the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver and release
may not be effective to waive or release liabilities under the federal
securities laws and it is the view of the Commission that such a waiver or
release is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of any Guarantor discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due, (ii) the
Company's and the Guarantors obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's and the Guarantors obligations
in connection therewith and (iv) the Legal Defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company and any Guarantor released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not
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including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
of such principal or installment of principal of, premium, if any, or interest
on the outstanding Notes; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel (which counsel may be
an employee of the Company or any Subsidiary of the Company) reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the Issuance Date, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel (which counsel may be an employee of the Company or any Subsidiary of
the Company) reasonably acceptable to the Trustee confirming that the Holders of
the outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not occurred; (iv)
no Default or Event of Default shall have occurred and be continuing on the date
of such deposit (other than a Default or Event of Default resulting from the
borrowing of funds applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit (or greater period of time in which
any such deposit of trust funds may remain subject to bankruptcy or insolvency
laws insofar as those apply to the deposit by the Company); (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under, any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that, as of
the date of such opinion, (A) the trust funds will not be subject to any rights
of holders of Indebtedness other than the Notes and (B) assuming no intervening
bankruptcy of the Company between the date of deposit and the 91st day following
the deposit and assuming no Holder of Notes is an insider of the Company, after
the 91st day following the deposit, the trust funds will not be subject to the
effects of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors rights generally under any applicable United States or state
law; (vii) the Company shall have delivered to the Trustee an officers
certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company shall have delivered to the Trustee an
officers certificate and an opinion of counsel (which counsel may be an employee
of the Company), each stating, that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (b)(i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable by their terms or shall
have been called for redemption and the Company has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for such purpose
an
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amount of money sufficient to pay and discharge the entire Indebtedness on the
Notes not theretofore delivered to the Trustee for cancellation or redemption,
for the principal amount, premium and Liquidated Damages, if any, and accrued
interest to the date of such deposit; (ii) the Company has paid all other sums
payable by it under the Indenture; and (iii) the Company has delivered
irrevocable instructions to the Trustee to apply the deposited money toward the
payment of the Notes at maturity or on the redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an opinion of
counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar (who will initially be the Trustee) and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Note selected for redemption. Also, the Company is not
required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs of this
subsection, the Indenture or the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder of Notes): (i) reduce
the principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes;
(iii) reduce the rate of or change the time for payment of interest on any Note;
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration); (v) make any Note payable in money other than that stated in the
Notes; (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, if any, or interest on the Notes; (vii) waive a
redemption payment with respect to any Note; (viii) make any change in the
foregoing amendment and waiver provisions; or (ix) modify or change any
provision of the Indenture or the related definitions affecting the
subordination or ranking of the Notes or any Guarantee thereof in a manner which
adversely affects the Holders in any material respect. In addition, without the
consent of at least 66 2/3% in principal amount of the Notes then outstanding,
an amendment or waiver may not make any change to the covenants described under
the caption "-- Repurchase at the Option of Holders -- Change of Control" or
"Repurchase at the Option of Holders -- Asset Sales."
The Indenture provides that, without the consent of at least 75% in
aggregate principal amount of Notes outstanding, the Company will not amend,
modify or alter the Convertible Note Indenture in any way that will (i) increase
the rate of or change the time for payment of interest on any Convertible Notes,
(ii) increase the principal of, advance the final maturity date of or shorten
the Weighted Average Life to Maturity of any Convertible Notes, (iii) alter the
redemption provision or the price or terms at which the Company is required to
offer to purchase such Convertible Notes or (iv) amend the provisions of Article
Twelve of the Indenture governing the Convertible Notes which relate to
subordination.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency,
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to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in the case of a merger, consolidation or sale of assets, to release a
Guarantor in accordance with the Indenture, to make any change that would
provide any additional rights or benefits to the Holders of the Notes (including
providing for Guarantees with respect to the Notes pursuant to the covenant
described under the caption "-- Subsidiary Guarantees") or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who received this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge by writing to Prime Hospitality
Corp., 700 Route 46 East, P.O. Box 2700, Fairfield, New Jersey 07007-2700,
Attention: Joseph Bernadino, Esq., Senior Vice President, Secretary and General
Counsel, (201) 882-1010.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person: (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (ii) Indebtedness encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Asset Sale" means (i) the sale, lease (other than operating leases in
respect of facilities which are ancillary to the operation of the Company s or a
Restricted Subsidiary s hotel properties), conveyance or other disposition of
any property or assets of the Company or any Restricted Subsidiary (including by
way of a sale and leaseback transaction and including a disposition by the
Company or a Restricted Subsidiary of Equity
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Interests in an Unrestricted Subsidiary), (ii) the issuance or sale of Equity
Interests of any of the Company's Restricted Subsidiaries or (iii) any Event of
Loss, other than, with respect to clauses (i), (ii) and (iii) above, the
following: (1) the sale or disposition of personal property held for sale in the
ordinary course of business, (2) the sale or disposal of damaged, worn out or
other obsolete property in the ordinary course of business so long as such
property is no longer necessary for the proper conduct of the business of the
Company or such Restricted Subsidiary, as applicable, (3) the transfer of assets
by the Company to a Restricted Subsidiary of the Company or by a Restricted
Subsidiary of the Company to the Company or to another Restricted Subsidiary of
the Company, (4) the exchange of assets held by the Company or a Restricted
Subsidiary of the Company for one or more hotels and/or one or more
Hospitality-Related Businesses of any person or entity owning one or more hotels
and/or one or more Hospitality-Related Businesses; provided, that the Board of
Directors of the Company has determined that the terms of any exchange are fair
and reasonable and that the fair market value of the assets received by the
Company, as set forth in an opinion of a Qualified Appraiser, are equal to or
greater than the fair market value of the assets exchanged by the Company or a
Restricted Subsidiary of the Company, (5) any Restricted Payment, dividend or
purchase or retirement of Equity Interests permitted under the covenant
described under the caption "-- Certain Covenants -- Restricted Payments," (6)
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in compliance with the provisions of the Indenture
described above under the captions "-- Repurchase at the Option of
Holders -- Change of Control" and "-- Certain Covenants -- Merger, Consolidation
or Sale of Assets," (7) the conversion of or foreclosure on any mortgage or
note, provided that the Company or a Restricted Subsidiary receives the real
property underlying any such mortgage or note or (8) any transaction or series
of related transactions that would otherwise be an Asset Sale where the fair
market value of the assets, sold, leased, conveyed or otherwise disposed of was
less than $5.0 million or an Event of Loss or related series of Events of Loss
pursuant to which the aggregate value of property or assets involved in such
Event of Loss or Events of Loss is less than $5.0 million.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock, including, without
limitation, with respect to partnerships, partnership interests (whether general
or limited) and any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, such partnership.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition, (ii) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers
acceptances with maturities not exceeding six months from the date of
acquisition and overnight bank deposits, in each case with any domestic
commercial bank having capital and surplus in excess of $500 million, (iii)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (i) and (ii) entered into with any
financial institution meeting the qualifications specified in clause (ii) above,
(iv) commercial paper or commercial paper Master Notes having a rating of P-2 or
the equivalent thereof by Moody's Investors Service, Inc. or A-2 or the
equivalent thereof by Standard & Poor's Corporation and in each case maturing
within six months after the date of acquisition, (v) money market mutual funds
that provide daily purchase and redemption features, and (vi) corporate debt
with maturities of not greater than six months and with a rating of A or the
equivalent thereof by Standard & Poor's Corporation and a rating of A2 or the
equivalent thereof by Moody's Investors Service, Inc.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease or transfer, in one or a series of related transactions, of all or
substantially all of the Company's assets to any person or group (as such term
is used in Section 13(d)(3) of the Exchange Act) other than to a Wholly Owned
Restricted Subsidiary that is a Guarantor, (ii) the adoption of a plan relating
to the liquidation or dissolution of the Company, (iii) the acquisition by any
person or group (as such term is used in Section 13(d)(3) of the Exchange Act)
of a direct or indirect interest in more than 50% of the ownership of the
Company or the voting
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power of the voting stock of the Company by way of purchase, merger or
consolidation or otherwise (other than a creation of a holding company that does
not involve a change in the beneficial ownership of the Company as a result of
such transaction), (iv) the merger or consolidation of the Company with or into
another corporation or the merger of another corporation into the Company with
the effect that immediately after such transaction the stockholders of the
Company immediately prior to such transaction hold less than 50% of the total
voting power of all securities generally entitled to vote in the election of
directors, managers, or trustees of the Person surviving such merger or
consolidation or (v) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus: (a) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale, to the extent such losses were deducted in computing Consolidated
Net Income, plus (b) provision for taxes based on income or profits of such
Person for such period, to the extent such provision for taxes was included in
computing Consolidated Net Income, plus (c) Consolidated Interest Expense of
such Person for such period to the extent such expense was deducted in computing
Consolidated Net Income, plus (d) Consolidated Depreciation and Amortization
Expense of such Person for such period, to the extent deducted in computing
Consolidated Net Income in each case, on a consolidated basis for such Person
and its Restricted Subsidiaries and determined in accordance with GAAP, less (e)
other income as reflected on such Person's consolidated financial statements, as
prepared in accordance with GAAP, to the extent such other income was included
in computing Consolidated Net Income. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, the depreciation and
amortization of and the interest expense of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to such Person by
such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its stockholders. Any calculation of the Consolidated Cash Flow of
an individual hotel property shall be calculated in a manner consistent with the
foregoing.
"Consolidated Depreciation and Amortization Expense" means, with respect to
any Person for any period, the total amount of depreciation and amortization
expense (including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and the
total amount of non-cash charges (other than non-cash charges that represent an
accrual or reserve for cash charges in future periods or which involved a cash
expenditure in a prior period) of such Person and its Restricted Subsidiaries
for such period on a consolidated basis as determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (a) interest expense, whether paid or
accrued, to the extent such expense was deducted in computing Consolidated Net
Income (including amortization of original issue discount, non-cash interest
payments, the interest component of Capital Lease Obligations, and net payments
(if any) pursuant to Hedging Obligations, but excluding amortization of deferred
financing fees), (b) commissions, discounts and other fees and charges paid or
accrued with respect to letters of credit and bankers acceptance financing and
(c) interest for which such Person or its Restricted Subsidiaries is liable,
whether or not actually paid, pursuant to Indebtedness or under a Guarantee of
Indebtedness of any other Person; in each case, calculated for such Person and
its Restricted Subsidiaries for such period on a consolidated basis as
determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that the following shall be excluded: (i) the Net Income of any Person
that is not a Restricted Subsidiary or that is accounted for by the equity
method of accounting shall be excluded, whether or not distributed to the
Company or one of its Restricted Subsidiaries, (ii) the Net Income of any Person
that is a Restricted Subsidiary and that is restricted from declaring or paying
dividends or other
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distributions, directly or indirectly, by operation of the terms of its charter,
any applicable agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation or otherwise shall be included only to the extent of the
amount of dividends or distributions paid to the referent Person or a Wholly
Owned Restricted Subsidiary, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded and (vi) the cumulative effect of change in
accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person, as of any date
of determination, the sum of (i) the consolidated equity of the common
stockholders of such Person and its consolidated Subsidiaries as of such date
plus (ii) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of Preferred Stock (other than Disqualified
Stock) that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such Preferred Stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within 12 months
after the acquisition of such business) subsequent to the Issuance Date in the
book value of any asset owned by such Person or a consolidated Subsidiary of
such Person, (y) all Investments as of such date in unconsolidated Subsidiaries
and in Persons that are not Subsidiaries (except, in each case, Permitted
Investments) and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issuance Date or (ii) was nominated for election or elected to
such Board of Directors with the affirmative vote of at least a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agreement" means the revolving credit facility dated June 26, 1996
entered into between and among the Company and the lenders party thereto, Credit
Lyonnais New York branch, as documentation agent, and Bankers Trust Company, as
agent, including any related notes, security documentation, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, in each case as amended, modified, supplemental, restructured,
renewed, restated, refunded, replaced or refinanced or extended from time to
time on one or more occasions.
"Credit Facility" means the Credit Agreement and one or more borrowing
arrangements, to be entered into, by and between the Company and/or one or more
Restricted Subsidiaries and a commercial bank or other institutional lender,
including any related notes, security documentation, guarantees, collateral
documents, instruments and agreements executed in connection therewith, in each
case as amended, modified, supplemented, restructured, renewed, restated,
refunded, replaced or refinanced or extended from time to time on one or more
occasions.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of a
Credit Facility (ii) Indebtedness under or in respect of the Company's 9 1/4%
First Mortgage Notes due 2006, and (ii) any other Indebtedness constituting
Senior Debt which, at the time of determination, has an aggregate principal
amount of at least $25.0 million and is specifically designated in the
instrument evidencing such Senior Debt as "Designated Senior Debt" by the
Company.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to April 1,
2007.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for Capital Stock).
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"Event of Loss" means, with respect to any property or asset (tangible or
intangible, real or personal), any of the following: (A) any loss, destruction
or damage of such property or asset or (B) any actual condemnation, seizure or
taking by the power of eminent domain or otherwise of such property or asset, or
confiscation of such property or asset or the requisition of the use of such
property or asset.
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issuance Date (after giving effect
to the use of proceeds of the Initial Offering), excluding, for this purpose,
amounts committed for under the Credit Agreement as in effect on the Issuance
Date.
"Existing Real Estate" means any real estate owned, leased or optioned by
the Company or any of its Subsidiaries on the Issuance Date, or any real estate
on which the Company or any of its Subsidiaries holds a mortgage on the Issuance
Date.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness (other than revolving credit borrowings that provide
working capital in the ordinary course of business) or issues or redeems
Preferred Stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of Preferred Stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. For purposes of making the computation referred to above, acquisitions,
dispositions and discontinued operations (as determined in accordance with GAAP)
that have been made by the Company or any of its Restricted Subsidiaries,
including all mergers, consolidations and dispositions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be calculated on a pro forma basis assuming that all such
acquisitions, dispositions, discontinued operations, mergers, consolidations
(and the reduction of any associated fixed charge obligations resulting
therefrom) had occurred on the first day of the four-quarter reference period.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (a) Consolidated Interest Expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, to the extent such
expense was deducted in computing Consolidated Net Income and (b) the product of
(i) all cash dividend payments (and non-cash dividend payments in the case of a
Person that is a Restricted Subsidiary) on any series of Preferred Stock of such
Person or its Restricted Subsidiaries (other than Preferred Stock owned by such
Person or its Restricted Subsidiaries), times (ii) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States of America is
pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) or otherwise
incurring, assuming or becoming liable for the payment of any principal, premium
or interest, direct or indirect, in any manner (including, without limitation,
letters of credit and reimbursement agreements in respect thereof), of all or
any part of any Indebtedness.
"Guarantor" means such Persons that become a guarantor of the Notes
pursuant to the terms of the Indenture, and each of their respective successors.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Hospitality-Related Business" means the hotel business and other
businesses necessary for, incident to, in support of, connected with or arising
out of the hotel business, including, without limitation, (i) developing,
managing, operating, improving or acquiring lodging facilities, restaurants and
other food-service facilities, sports or entertainment facilities, and
convention or meeting facilities, and marketing services related thereto, (ii)
acquiring, developing, operating, managing or improving the Existing Real
Estate, any real estate taken in foreclosure (or similar settlement) by the
Company or any of its Restricted Subsidiaries, or any real estate ancillary or
connected to any hotel owned, managed or operated by the Company or any of its
Restricted Subsidiaries, (iii) owning and managing mortgages in, or other
Indebtedness secured by Liens on hotels and real estate related or ancillary to
hotels or (iv) other related activities thereto.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, and also includes, to the extent not otherwise included,
the Guarantee of any Indebtedness of such Person or any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
the Company no longer owns, directly or indirectly, greater than 50% of the
outstanding Common Stock of such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issuance Date" means the closing date for the sale and issuance of the
Original Notes.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however, any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with any Asset Sale, and excluding any
extraordinary gain (but not loss), together with any related provision for taxes
on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions), and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the
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repayment of Indebtedness secured by a Lien on the asset or assets the subject
of such Asset Sale and any reserve for adjustment in respect of the sale price
of such asset or assets.
"Non-Recourse Indebtedness" means Indebtedness (a) as to which neither the
Company nor any of its Restricted Subsidiaries (i) provides credit support
(other than in the form of a Lien on an asset serving as security for
Non-Recourse Indebtedness) pursuant to any undertaking, agreement or instrument
that would constitute Indebtedness, (ii) is directly or indirectly liable (other
than in the form of a Lien on an asset serving as security for Non-Recourse
Indebtedness) or (iii) constitutes the lender and (b) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Junior Securities" means Equity Interest in the Company or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to a
greater extent than, the Notes are subordinated to Senior Debt pursuant to
Article 10 of the Indenture.
"Permitted Investments" means (a) any Investments in the Company or any
Guarantor, (b) Investments in any Restricted Subsidiary that is not a Guarantor
not to exceed an aggregate of $5.0 million per Restricted Subsidiary; (c) any
Investments in Cash Equivalents; (d) Investments by the Company or any
Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company or any Guarantor or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company or any Guarantor, and (e) net cash advances to
Restricted Subsidiaries in the ordinary course of business and consistent with
the Company's past cash management practices in an amount not to exceed $10.0
million at any one time outstanding.
"Permitted Refinancing" means Refinancing Indebtedness or Refinancing
Disqualified Stock, as the case may be, to the extent (a) the principal amount
of Refinancing Indebtedness or the liquidation preference amount of Refinancing
Disqualified Stock, as the case may be, does not exceed the principal amount of
Indebtedness or the liquidation preference amount of Disqualified Stock, as the
case may be, so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of premiums and reasonable expenses incurred in connection
therewith); (b) such Refinancing Indebtedness or Refinancing Disqualified Stock,
as the case may be, is scheduled to mature or is redeemable at the option of the
holder, as the case may be, no earlier than the Indebtedness or Disqualified
Stock, as the case may be, being refinanced; (c) in the case of Refinancing
Indebtedness, the Refinancing Indebtedness has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (d) in the case of Refinancing Disqualified Stock, the Disqualified
Stock has a Weighted Average Life to Mandatory Redemption equal to or greater
than the Weighted Average Life to Mandatory Redemption of the Disqualified Stock
being extended, refinanced, renewed, replaced, defeased or refunded; (e) if the
Indebtedness or the Disqualified Stock, as the case may be, being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated or junior in
right of payment to the Notes, the Refinancing Indebtedness or Refinancing
Disqualified Stock, as the case may be, is subordinated or junior in right of
payment to the Notes on terms at least as favorable to the Holders of Notes as
those contained in the documentation governing the Indebtedness or the
Disqualified Stock, as the case may be, being extended, refinanced, renewed,
replaced, defeased or refunded or is payable solely in Equity Interests of the
Person whose Indebtedness is being purchased, redeemed or otherwise acquired or
retired for value.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock" means any Equity Interest with preferential right in the
payment of dividends or liquidation or any Disqualified Stock.
"Refinancing Disqualified Stock" means Disqualified Stock issued in
exchange for, or the proceeds of which are used, to extend, refinance, renew,
replace, defease or refund Disqualified Stock or Indebtedness permitted to be
issued pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Certain Capital Stock"
or Indebtedness referred to in clauses (iii), (v), (vii) and (ix) of the second
paragraph of such covenant.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or
the proceeds of which are used to extend, refinance, renew, replace, defease or
refund Indebtedness permitted to be incurred pursuant to the Fixed Charge
Coverage Ratio test set forth in the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Certain
Capital Stock" or Indebtedness referred to in clauses (iii), (v), (vii) and (ix)
of the second paragraph of the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Certain Capital Stock."
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of Designated Senior Debt; provided, that if, and for
so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means, in the case of the Company or any Guarantor, the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of the Company, whether
outstanding on the Issuance Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Without limiting the generality of the foregoing, "Senior Debt" shall
also include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of, (x) all Obligations of every nature of the Company under
the Credit Agreement, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit, fees,
expenses and indemnities, whether outstanding on the Issuance Date or thereafter
incurred, (y) all Hedging Obligations (including Guarantees thereof), whether
outstanding on the Issuance Date or thereafter incurred and (z) the Company's
9 1/4% First Mortgage Notes due 2006. Notwithstanding the foregoing, "Senior
Debt" shall not include (i) any Indebtedness of the Company or any Guarantor to
a Subsidiary of the Company or any Affiliate of the Company or any of such
Affiliate's Subsidiaries, (ii) Indebtedness to, or guaranteed on behalf of, any
shareholder, director, officer or employee of the Company or any Subsidiary of
the Company or any Guarantor (including, without limitation, amounts owed for
compensation), (iii) Indebtedness to trade creditors and other amounts incurred
in connection with obtaining goods, materials or services, (iv) any liability
for federal, state, local or other taxes owed or owing by the Company or any
Guarantor, (v) that portion of Indebtedness incurred in violation of the
Indenture provisions set forth under "-- Certain
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Covenants -- Incurrence of Indebtedness and Issuance of Certain Capital Stock,"
and (vi) any Indebtedness which is, by its express terms, subordinated in right
of payment to any other Indebtedness of the Company or any Guarantor.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a combination
thereof.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a board
resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Indebtedness; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (c) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (d) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
the Company or any of its Restricted Subsidiaries; and (e) has at least one
director on its board of directors that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of the Company or
any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the board resolution giving effect to such designation and an
officers certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Certain Capital Stock,"
the Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary, provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary, and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Certain Capital Stock," and (ii) no Default or Event of Default
would be in existence following such designation.
"Weighted Average Life to Mandatory Redemption" means, when applied to any
Disqualified Stock at any date, the number of years obtained by dividing (a) the
sum of the products obtained by multiplying (x) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity, in respect thereof, by (y)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
liquidation preference amount of such Disqualified Stock.
Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including
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payment at final maturity, in respect thereof, by (y) the number of years
(calculated to the nearest one twelfth) that will elapse between such date and
the making of such payment, by (b) the then outstanding principal amount of such
Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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ORIGINAL NOTES REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on the Closing Date of the Initial Offering. Pursuant to the
Registration Rights Agreement, the Company agreed to file with the Commission
the Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the Exchange Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the Holders of
Transfer Restricted Securities (as defined below) pursuant to the Exchange Offer
who are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for Exchange Notes. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation of
the Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Original Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Original Notes by the Holders
thereof who satisfy certain conditions relating to the provision of information
in connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Original Note until (i)
the date on which such Original Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Original Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy of
the prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Original Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Original Note may be sold pursuant to
Rule 144(k) under the Act.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 30
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 135 days after the Closing Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
is declared effective by the Commission, Exchange Notes in exchange for all
Original Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 30 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 135 days
after such obligation arises. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then Liquidated Damages shall accrue on the principal amount of the Original
Notes at a rate of 0.50% per annum with respect to the first 90-day period
immediately following the occurrence of such Registration Default. The amount of
the Liquidated Damages will increase by an additional 0.50% per annum with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum aggregate amount of Liquidated Damages of 1.0% per
annum on the principal amount of the Original Notes. All accrued Liquidated
Damages will be paid by the Company on each Damages Payment Date in the manner
set forth in
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"Book-Entry, Delivery and Form." Following the cure of all Registration Defaults
with respect to any Original Notes, the accrual of Liquidated Damages on such
Original Notes will cease.
Holders of Original Notes will be required to make certain representations
to the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Original Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Original Notes directly from
the Company or (iii) broker-dealers who acquired Original Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes; provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the Staff has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
exchange pursuant to the Exchange Offer (other than a resale of an unsold
allotment from the sale of the Original Notes to the Initial Purchasers) with
the prospectus contained in the Exchange Offer Registration Statement. Pursuant
to the Registration Rights Agreement, the Company has agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this Prospectus in connection with the
resale of such Exchange Notes. The Company has agreed that, for a period not to
exceed 180 days after the Exchange Date, it will make this Prospectus, and any
amendment or supplement to this Prospectus, available to any broker-dealer that
requests such documents in the Letter of Transmittal.
Each holder of the Original Notes who wishes to exchange its Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer -- Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Original Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that it
will deliver a prospectus in connection with any resale by it of such Exchange
Notes.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such brokerdealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
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The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Original Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
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BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes initially will be represented by a single permanent
global certificate in definitive, fully registered form (the "Global Note"). The
Global Note will be deposited with, or on behalf of, The Depository Trust
Company, New York, New York ("DTC") and registered in the name of a nominee of
DTC.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of Exchange
Notes of the individual beneficial interests represented by such Global Note to
the respective accounts of persons who have accounts with such depositary and
(ii) ownership of beneficial interests in the Global Note will be shown on, and
the transfer of such ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). Ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture. No beneficial owner of an interest in the
Global Note will be able to transfer that interest except in accordance with
DTC's procedures, in addition to those provided for under the Indenture.
Payments of the principal of, premium (if any), and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest on the Global Note, will credit
participants accounts with payments in amounts proportionate to their respective
beneficial interests in the principal amount of the Global Note as shown on the
records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in the Global Note held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
certificated security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Note, in accordance with the normal procedures of DTC and with the procedures
set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account the DTC interests in the Global Note are credited
and only in respect of such portion of the aggregate principal amount of
Exchange Notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Indenture,
DTC will exchange the Global Note for certificated securities, which it will
distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need
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for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, certificated securities will be issued
in exchange for the Global Note.
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LEGAL MATTERS
Certain legal matters with respect to the legality of the Exchange Notes
offered hereby will be passed upon for the Company by Willkie Farr & Gallagher,
New York, New York. Jack H. Nusbaum, a Director of the Company who beneficially
owns 10,000 shares of Common Stock and an additional 55,000 shares of Common
Stock underlying stock options, is a partner in the law firm of Willkie Farr &
Gallagher.
EXPERTS
The consolidated financial statements included and incorporated by
reference in this Prospectus, 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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy materials and other
information with 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, Illinois 60661. Copies of
such material also can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. The 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 Indenture requires the Company to file with the
Commission and provide to holders of the Notes the reports and other information
required to be filed with the Commission by the Exchange Act, whether or not the
Company is then subject to such requirements. See "Description of
Notes -- Reports."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available upon request from
Prime Hospitality Corp., 700 Route 46 East, P.O. Box 2700, Fairfield, New Jersey
07007-2700, Attention: Joseph Bernadino, Esq., Senior Vice President, Secretary
and General Counsel, (201) 882-1010. In order to ensure timely delivery of the
documents, any request should be made by May 5, 1997.
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and the Company's Current Report on Form 8-K dated March 7, 1997,
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 Exchange 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.
90
<PAGE> 94
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, P.O. Box 2700,
Fairfield, New Jersey 07007-2700, Attention: Joseph Bernadino, Esq., Senior Vice
President, Secretary and General Counsel, (201) 882-1010.
91
<PAGE> 95
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Financial Statements:
Balance Sheets at December 31, 1995 and 1996........................................ F-3
Statements of Income for the Years Ended December 31, 1994, 1995 and 1996........... F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and
1996............................................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... F-6
Notes to Consolidated Financial Statements............................................ F-7
</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> 96
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, 1995 and 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 28, 1997
F-2
<PAGE> 97
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 49,533 $ 15,997
Marketable securities available for sale............................. 11,929 238
Restricted cash...................................................... 8,973 2,637
Accounts receivable, net of reserves of $213 and $420
in 1995 and 1996, respectively.................................... 13,139 12,653
Current portion of mortgages and notes receivable.................... 1,533 1,338
Other current assets................................................. 8,070 11,228
-------- --------
Total current assets.............................................. 93,177 44,091
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization........................................ 398,201 695,253
Mortgages and notes receivable, net of current portion................. 64,962 24,195
Other assets........................................................... 16,901 22,559
-------- --------
Total Assets...................................................... $573,241 $786,098
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt.............................................. $ 5,731 $ 3,419
Other current liabilities............................................ 38,961 45,887
-------- --------
Total current liabilities......................................... 44,692 49,306
Long-term debt, net of current portion................................. 276,920 298,875
Other liabilities...................................................... 18,713 18,022
-------- --------
Total liabilities................................................. 340,325 366,203
-------- --------
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 39,804,917 shares issued and outstanding in 1995
and 1996, respectively............................................ 310 398
Capital in excess of par value....................................... 183,050 338,825
Retained earnings.................................................... 49,556 80,672
-------- --------
Total stockholders' equity........................................ 232,916 419,895
-------- --------
Total Liabilities and Stockholders' Equity................... $573,241 $786,098
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 98
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Lodging.................................................. $88,753.. $146,184 $198,947
Food and beverage........................................ 18,090 37,955 41,437
Management and other fees................................ 10,021 8,115 6,729
Interest on mortgages and notes receivable............... 15,867 11,895 6,090
Business interruption insurance.......................... -- -- 13,562
Rental and other......................................... 1,572 1,479 2,103
-------- -------- --------
Total revenues................................... 134,303 205,628 268,868
-------- -------- --------
Costs and expenses:
Direct hotel operating expenses:
Lodging............................................... 25,490 38,383 51,577
Food and beverage..................................... 13,886 28,429 32,053
Selling and general................................... 27,244 49,753 61,789
Occupancy and other operating............................ 9,799 11,763 16,833
General and administrative............................... 15,089 15,515 17,813
Depreciation and amortization............................ 9,427 15,974 25,884
Other expense............................................ -- 2,200 --
-------- -------- --------
Total costs and expenses......................... 100,935 162,017 205,949
-------- -------- --------
Operating income........................................... 33,368 43,611 62,919
Investment income.......................................... 1,966 4,861 4,610
Interest expense........................................... (13,993) (21,603) (20,312)
Other income............................................... 9,089 2,239 4,306
-------- -------- --------
Income before income taxes and extraordinary items......... 30,430 29,108 51,523
Provision for income taxes................................. 12,172 11,643 20,609
-------- -------- --------
Income before extraordinary items.......................... 18,258 17,465 30,914
Extraordinary items -- gains on discharges of indebtedness
(net of income taxes of $120, $70 and $135 in 1994, 1995
and 1996, respectively).................................. 172 104 202
-------- -------- --------
Net income................................................. $ 18,430 $ 17,569 $ 31,116
======== ======== ========
Earnings per common share:
Primary:
Income before extraordinary items........................ $ .57 $ .54 $ .85
Extraordinary items...................................... .01 -- --
-------- -------- --------
Earnings per common share.................................. $ .58 $ .54 $ .85
======== ======== ========
Fully diluted:
Income before extraordinary items........................ $ .57 $ .54 $ .80
Extraordinary items...................................... .01 -- --
-------- -------- --------
Earnings per common share.................................. $ .58 $ .54 $ .80
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 99
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
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 and tax benefits 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 basis
differences................................. -- -- 6,167 -- 6,167
Compensation expense related to stock option
plan........................................ -- -- 16 -- 16
Proceeds and tax benefits 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
Net income.................................... -- -- -- 31,116 31,116
Utilization of net operating loss
carryforwards............................... -- -- 10,590 -- 10,590
Amortization of pre-fresh start tax basis
differences................................. -- -- 1,243 -- 1,243
Compensation expense related to stock option
plan........................................ -- -- 5 -- 5
Proceeds from issuance of stock............... 8,250,000 83 141,337 -- 141,420
Proceeds and tax benefits from exercise of
stock options............................... 148,492 1 1,516 -- 1,517
Proceeds from exercise of stock warrants...... 401,926 4 1,084 -- 1,088
---------- ---- -------- ------- --------
Balance December 31, 1996..................... 39,804,917 $398 $ 338,825 $ 80,672 $419,895
========== ==== ======== ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 100
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 18,430 $ 17,569 $ 31,116
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 9,427 15,974 25,884
Utilization of net operating loss carryforwards....... 5,861 3,370 10,590
Gains on settlements of notes receivable.............. (6,224) (822) (1,774)
Gains on discharges of indebtedness................... (292) (174) (337)
Gains on sales of assets.............................. (1,099) (1,957) (4,349)
Amortization of pre-fresh start tax basis
differences......................................... 6,954 6,167 1,243
Deferred income taxes................................. (205) 1,557 1,386
Compensation expense related to stock options......... 60 16 5
Increase (decrease) from changes in other operating
assets and liabilities:
Accounts receivable................................... (1,945) (5,320) 486
Other current assets.................................. 127 (887) (3,158)
Other liabilities..................................... (2,760) 3,135 4,844
------- -------- ---------
Net cash provided by operating activities............. 28,334 38,628 65,936
------- -------- ---------
Cash flows from investing activities:
Net proceeds from mortgages and other notes receivable... 36,198 27,603 8,933
Disbursements for mortgages and notes receivable......... (1,100) (12,704) (800)
Proceeds from sales of property, equipment and leasehold
improvements.......................................... 1,480 8,167 12,962
Purchases of property, equipment and leasehold
improvements.......................................... (48,473) (74,758) (101,891)
Construction of new hotels............................... (14,549) (37,518) (184,566)
Decrease in restricted cash.............................. 1,268 752 6,336
Proceeds from insurance settlement....................... -- 7,500 1,500
Proceeds from sales of marketable securities............. 1,116 2,928 15,023
Purchase of marketable securities........................ (5,885) (11,520) --
Other.................................................... (3,965) 846 1,546
------- -------- ---------
Net cash used in investing activities................. (33,910) (88,704) (240,957)
------- -------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt....................... 19,026 119,360 182,196
Payments of debt......................................... (43,771) (33,961) (184,740)
Proceeds from the exercise of stock options and
warrants.............................................. 1,196 1,729 2,605
Proceeds from issuance of common stock................... -- -- 141,420
Other.................................................... 80 (43) 4
------- -------- ---------
Net cash provided by (used in) financing activities... (23,469) 87,085 141,485
------- -------- ---------
Net increase (decrease) in cash and cash equivalents....... (29,045) 37,009 (33,536)
Cash and cash equivalents at beginning of period........... 41,569 12,524 49,533
------- -------- ---------
Cash and cash equivalents at end of period................. $ 12,524 $ 49,533 $ 15,997
======= ======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 101
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
Prime Hospitality Corp. (the "Company") is a hotel owner/operator with a
portfolio of hotels, as of March 21, 1997, located in 25 states and the U.
S. Virgin Islands. The Company owns and operates hotels and manages the
remaining hotels for third parties. The Company operates its hotels under its
proprietary AmeriSuites and Wellesley Inns brand names and under franchise
agreements with national hotel chains including Marriott, Radisson, Sheraton,
Crowne Plaza, Holiday Inn, Ramada and Howard Johnson.
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-7
<PAGE> 102
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)." Following these standards, the Company
measures impairment of a loan 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. Based upon its evaluation, the Company determined that no impairment
had occurred as of December 31, 1996.
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, 1996, the Company has determined
that no impairment has occurred.
OTHER ASSETS
Other assets consist primarily of deferred issuance costs related to the
Company's 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-8
<PAGE> 103
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 consolidated 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.
EARNINGS PER COMMON SHARE
Primary earnings per 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 earnings per share was 32,022,000, 32,461,000
and 36,501,000 for the years ended December 31, 1994, 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 common shares used in computing fully diluted earnings per
share was 37,423,000 and 43,794,000 for the years ended December 31, 1995 and
1996, respectively.
PRE-OPENING COSTS
Non-capital expenditures incurred prior to opening new or renovated hotels
such as payroll and operating supplies are deferred and expensed within one year
after opening. Pre-opening costs charged to expense were $86,000, $364,000 and
$1.3 million for the years ended December 31, 1994, 1995 and 1996. As of
December 31, 1996, $2.1 million of pre-opening costs are included in other
current assets.
INTEREST RATE AGREEMENTS
The Company has an interest rate swap agreement with a major financial
institution which reduces the Company's exposure to interest rate fluctuations
on its variable rate debt. The accounting treatment for this agreement is to
accrue net interest to be received or to be paid as an adjustment to interest
expense as incurred.
The Company has an interest rate hedge agreement with a major financial
institution which terminates in April 1997 to reduce its interest rate exposure
on the anticipated financing of its development program in 1997. Gains or losses
resulting from this hedge will be deferred and amortized to interest expense
over the life of the anticipated obligation.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1994 and 1995
consolidated financial statements to conform them to the December 31, 1996
presentation.
F-9
<PAGE> 104
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- HOTEL ACQUISITIONS
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 28 Wellesley Inns now owned and
operated by the Company. The acquisition price was comprised of approximately
$60.4 million to purchase the first mortgages on the 18 hotels, with a face
value of approximately $70.5 million, and $4.7 million to purchase the interests
of the three partnerships which owned the hotels. Approximately $1.9 million of
the total purchase price was paid to a partnership in which a general partner is
a related party. In connection with the transaction, the Company also terminated
its management agreements and junior subordinated mortgages related to the 18
hotels. In September 1996, the Company acquired the Ramada Plaza Suite in
Secaucus, NJ and repositioned the hotel as a Radisson Suite Hotel. The
acquisition price was $16.5 million, which included the assumption of $12.2
million of debt.
The 1996 acquisitions have been accounted for as purchases and,
accordingly, the revenues and expenses of those 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.
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 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 $19.7 million and was comprised of (I)
$16.1 million in cash, which was paid in 1995, plus (ii) $18.5 million in notes
maturing in 1997, less (iii) $14.9 million of existing debt on five hotels,
which was forgiven at face value. The transaction resulted in a net increase of
approximately $3.6 million 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 $18.7 million. 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 $15.2 million. 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,
-------------------
1995 1996
------- -------
<S> <C> <C>
Cash..................................................... $ 4,312 $ 5,079
Commercial paper and other cash equivalents.............. 45,221 10,918
------- -------
Totals......................................... $49,533 $15,997
======= =======
</TABLE>
F-10
<PAGE> 105
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- MARKETABLE SECURITIES
Marketable securities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- ----
<S> <C> <C>
Equity securities.......................................... $ 3,796 $238
Corporate debt securities.................................. 8,133 --
------- ----
Totals........................................... $11,929 $238
======= ====
</TABLE>
During 1996, the Company realized $1.8 million in gains on sales of
marketable securities which is included in investment income.
NOTE 5 -- OTHER CURRENT ASSETS/LIABILITIES
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Hotel inventories......................................... $2,686 $ 4,762
Pre-opening expense....................................... 261 2,088
Accrued interest receivable............................... 2,803 2,082
Prepaid expense........................................... 1,616 1,868
Other..................................................... 704 428
------ -------
Totals.......................................... $8,070 $11,228
====== =======
</TABLE>
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Accounts payable......................................... $ 4,717 $ 5,990
Construction payables.................................... 2,223 6,643
Interest................................................. 3,616 7,734
Accrued payroll and related benefits..................... 3,151 4,590
Accrued expenses......................................... 4,303 4,944
Insurance reserves....................................... 6,007 7,146
Hurricane damage reserve................................. 8,718 2,438
Other.................................................... 6,226 6,402
------- -------
Totals......................................... $38,961 $45,887
======= =======
</TABLE>
F-11
<PAGE> 106
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Properties operated by the Company(a).................... $57,171 $22,194
Other(b)................................................. 9,324 3,339
------- -------
Total.......................................... 66,495 25,533
Less current portion..................................... (1,533) (1,338)
------- -------
Long-term portion........................................ $64,962 $24,195
======= =======
</TABLE>
- ---------------
(a) At December 31, 1996, the Company is the holder of mortgage notes receivable
with a book value of $8.6 million secured primarily by two hotel properties
operated by the Company under management agreements and $13.6 million 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. One
of these mortgages has 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 1994, 1995 and
1996, the Company recognized $2.0 million, $2.0 million and $2.9 million,
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-12
<PAGE> 107
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- YEARS OF
1995 1996 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Land and land leased to others(a).................. $ 69,765 $119,654
Hotels............................................. 246,278 387,631 20 to 40
Furniture, fixtures and autos...................... 67,001 103,899 3 to 10
Leasehold improvements............................. 26,038 58,340 3 to 40
Construction in progress........................... 22,667 78,266
-------- --------
Sub-total..................................... 431,749 747,790
Less accumulated depreciation and amortization..... (33,548) (52,537)
-------- --------
Totals................................... $398,201 $695,253
======== ========
</TABLE>
- ---------------
(a) Included in land at December 31, 1995 and 1996 was $8.9 million and $32.7
million, respectively, of land associated with hotels under construction.
At December 31, 1996, the Company was the lessor of land and certain
restaurant facilities in Company-owned hotels with an approximate aggregate book
value of $5.4 million pursuant to noncancelable operating leases expiring on
various dates through 2013. Minimum future rentals under such leases are $7.4
million, of which $3.7 million is scheduled to be received in the aggregate
during the five-year period ending December 31, 2001.
Depreciation and amortization expense on property, equipment and leasehold
improvements was $9.3 million, $14.8 million and $22.0 million for the years
ended December 31, 1994, 1995 and 1996, respectively.
During the years ended December 31, 1994, 1995 and 1996, the Company
capitalized $.8 million, $2.6 million and $7.5 million, respectively, of
interest related to borrowings used to finance hotel construction.
NOTE 8 -- DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
9.25% First Mortgage Notes(a).......................... $ -- $120,000
Revolving Credit Facility(b)........................... -- 12,500
7% Convertible Subordinated Notes(c)................... 86,250 86,250
Mortgages and other notes payable(d)................... 158,904 71,414
10% Senior Secured Notes(e)............................ 30,374 10,867
Capitalized lease obligations(f)....................... 7,123 1,263
-------- --------
Total debt............................................. 282,651 302,294
Less current maturities................................ (5,731) (3,419)
-------- --------
Long-Term debt, net of current portion................. $276,920 $298,875
======== ========
</TABLE>
- ---------------
(a) On January 23, 1996, the Company issued $120 million of 9.25% 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
F-13
<PAGE> 108
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $51.6 million of debt.
(b) On June 28, 1996, the Company established a revolving credit facility (the
"Revolving Credit Facility") with a group of financial institutions
providing for availability of funds up to the lesser of $100 million or 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.
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 and also contains
certain covenants which limit the incurrence of debt, liens, dividend
payments, stock repurchases, 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. On June 28, 1996, the Company borrowed $40 million under
the Revolving Credit Facility and proceeds were used to retire $20 million
of interim financing with the remainder utilized principally for development
of AmeriSuites hotels. On August 5, 1996, the Company repaid the full amount
of this borrowing under the Revolving Credit Facility with proceeds from the
issuance of Common Stock (see Note 15). As of December 31, 1996, the Company
had borrowed $12.5 million under this facility and had additional borrowing
capacity of $87.5 million.
(c) In 1995, the Company sold $86.3 million 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.
(d) The Company has mortgage and other notes payable of approximately $71.4
million that are secured by mortgage notes receivable and hotel properties
with a book value of $137.7 million. Principal and interest on these
mortgages and notes are generally paid monthly. At December 31, 1996 these
notes bear interest at rates ranging from 6.4% to 10.5%, with a weighted
average interest rate of 8.4%, and mature from 1998 through 2008.
The Company has $13.9 million of debt secured by the Marriott's Frenchman's
Reef Hotel (the "Frenchman's Reef") in St. Thomas, U.S. Virgin Islands which
was originally scheduled to mature in December 1996. The Company and the
lender have entered into an agreement to extend the maturity of the loan to
January 1998. The loan continues to bear interest at the same rate and
principal payments are waived until maturity. All other terms and conditions
of the loan remain in effect.
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 Note 11). The Company utilized the net insurance
proceeds of $22.8 million to reduce the Frenchman's Reef mortgage loan to
$13.9 million. The Company is currently in negotiation to obtain new
financing in connection with the refurbishment plans at the Frenchman's
Reef.
On August 2, 1996, the Company prepaid in full $26.7 million of debt secured
by 10 hotels with the proceeds from the issuance of Common Stock (See Note
15). The loans were due in February 2000 and bore interest at LIBOR plus
4.25%. The hotels formerly used as collateral for this loan are now part of
the collateral securing the Revolving Credit Facility described in (b)
above.
(e) 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 $62.2 million as of December 31, 1996.
F-14
<PAGE> 109
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 million, 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, 1996, the Company was in compliance with all covenants
applicable to the 10% Senior Secured Notes.
The Company has $1.4 million of its 10% Senior Secured Notes which it
repurchased but did not retire due to certain restrictions under the note
agreement. These notes are currently held by a third party agent and are
recorded as investments on the Company's balance sheet. As of December 31,
1996, the Company had unrecognized holding gains of approximately $26,000
related to these securities.
(f) At December 31, 1996, the Company had a capital lease obligation in the
amount of $1.3 million. Principal and interest on this obligation is paid
monthly. This lease matures in 2000 and bears interest at Prime plus 3%.
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 $40.0 million of variable interest rate debt. Under the agreement, on a
monthly basis the Company pays a fixed rate of interest of 6.18% and receives a
floating interest rate payment equal to the 30 day LIBOR rate on a $40.0 million
notional principal amount. The agreement commenced in October 1995 and expires
in 1999.
In October 1996, the Company entered into a six month interest rate hedge
agreement with a major financial institution to reduce its interest rate
exposure on the anticipated financing of its development program in 1997. Under
the agreement, the Company effectively fixed interest rates at a Treasury yield
of 6.4% for approximately seven years on a $98.4 million notional principal
amount.
Maturities of long-term debt for the next five years ending December 31 are
as follows (in thousands):
<TABLE>
<S> <C>
1997...................................................... $ 3,419
1998...................................................... 17,645
1999...................................................... 25,052
2000...................................................... 12,289
2001...................................................... 14,138
Thereafter................................................ 229,751
--------
Total........................................... $302,294
========
</TABLE>
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 2061. 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-15
<PAGE> 110
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, 1996 (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 4,833
1998............................................................... 4,787
1999............................................................... 4,828
2000............................................................... 4,717
2001............................................................... 4,326
Thereafter......................................................... 47,023
-------
Total......................................................... $ 70,514
=======
</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, 1994,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Rentals.......................................... $4,654 $4,630 $6,652
Contingent rentals............................... 823 745 1,250
------ ------ ------
Rental expense.............................. $5,477 $5,375 $7,902
====== ====== ======
</TABLE>
Employee Benefits
The Company does not provide any material post employment benefits to its
current or former employees.
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,
1994, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $ 970 $ 320 $ 5,147
State....................................... 28 299 563
------- ------- -------
998 619 5,710
Deferred:
Federal..................................... 9,780 9,929 13,005
State....................................... 1,514 1,165 2,029
------- ------- -------
11,294 11,094 15,034
------- ------- -------
Total............................... $12,292 $11,713 $20,744
======= ======= =======
</TABLE>
Income taxes are provided at the applicable federal and state statutory
rates.
F-16
<PAGE> 111
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the temporary differences in the areas listed below
resulted in deferred income tax provisions for the years ended December 31,
1994, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Utilization of net operating loss............................. $ 5,861 $ 3,370 $11,714
Amortization of pre-fresh start basis
differences -- properties and notes......................... 5,632 6,167 1,243
Depreciation.................................................. 200 1,400 830
Compensation expense.......................................... -- 604 691
Other......................................................... (399) (447) 556
------- ------- -------
Total............................................... $11,294 $11,094 $15,034
======= ======= =======
</TABLE>
At December 31, 1996, the Company had available federal net operating loss
carryforwards of approximately $90.7 million which will expire beginning in 2005
and continuing through 2007. Of this amount, $87.3 million is subject to an
annual limitation of $8.7 million 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 $5.9 million which will expire during various
periods from 1997 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 $31.7 million against the deferred tax asset as of
December 31, 1996. 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,
1994, 1995 and 1996, the Company recognized $5.9 million, $3.4 million and $10.6
million, respectively, of such benefits as a contribution to stockholders'
equity.
Additionally, the Company recognized $7.0 million, $6.2 million and $1.2
million as a contribution to stockholders' equity for the years ended December
31, 1994, 1995 and 1996, respectively, 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, 1995 and 1996.
NOTE 11 -- BUSINESS INTERRUPTION INSURANCE
In September 1995, the Frenchman's Reef suffered damages when Hurricane
Marilyn struck the U.S. Virgin Islands. The Company and its insurance carrier
settled the Company's property and business interruption insurance claim with
respect to the Frenchman's Reef for $25.0 million. In July 1996, the Company
received the final installment under its settlement, bringing the net proceeds
to $22.8 million, net of deductibles, for which the Company provided a reserve
of $2.2 million in 1995. In addition, in July 1996, Hurricane Bertha struck the
island and caused further damage to the hotel. The Company is currently
reviewing its claim for property damage with its insurance carrier and is in the
process of preparing a claim under its business interruption insurance.
Although the Company has continued to operate the hotel, the impact of the
hurricanes has caused operating profits to decline from prior year levels. In
1996 and 1995, the Company continued to record the operating revenues and
expenses of the Frenchman's Reef. In addition, the Company recorded business
F-17
<PAGE> 112
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interruption insurance revenue of $13.6 million in 1996 based on the claim
settlement which is included in operating revenues. The Company is currently
underway with plans to refurbish and upgrade the Frenchman's Reef. In addition
to the hurricane-related renovations, the plan provides for structural
enhancements, redesigned guestrooms, increased banquet and meeting space and new
landscaping.
Other expense of $2.2 million for the year ended December 31, 1995 consists
of a reserve for insurance deductibles related to hurricane damage caused by
Hurricane Marilyn at the Frenchman's Reef.
NOTE 12 -- OTHER INCOME
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, 1994, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Gains on settlements of notes receivable................. $6,355 $ 822 $1,774
Gains on sales of properties............................. 1,099 1,417 2,532
Rebates of prior years' insurance premiums............... 1,579 -- --
Other.................................................... 56 -- --
------ ------ ------
Total.......................................... $9,089 $2,239 $4,306
====== ====== ======
</TABLE>
NOTE 13 -- 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, 1995 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage and notes receivable........... $ 64,962 $ 76,058 $ 24,195 $ 38,928
Long-term debt.......................... 276,920 278,899 298,875 343,039
Interest rate swap agreement............ -- (15) -- (173)
Interest rate hedge agreement........... -- -- -- (620)
</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 values of the interest rate swap and hedge agreements are
based on the estimated amounts the Company would pay to terminate the
agreements.
The Company's mortgages and other notes receivable (See Note 6) 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 United States.
F-18
<PAGE> 113
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- 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, 1994, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Management and other fee income(a)....................... $ 1,165 $ 1,427 $ 1,040
Interest income(a)....................................... 1,283 518 582
Management fee expense(b)................................ 679 -- --
Interest expense(b)...................................... 461 -- --
Reservation fee expense(b)............................... 317 -- --
</TABLE>
- ---------------
(a) At December 31, 1996, the Company managed six 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 hotels owned by related parties. (See
Note 2).
(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 15 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS
COMMON STOCK
On August 2, 1996, the Company sold 8.3 million shares of Common Stock at a
price of $18 per share. The Company utilized the proceeds from the offering of
approximately $141.4 million (net of underwriting discounts and expenses of $7.2
million) to fund AmeriSuites development, to reduce indebtedness of $40.0
million under the Revolving Credit Facility and to repay certain other
indebtedness of $26.7 million, thereby increasing availability for further
AmeriSuites development.
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. A total of 200,000 options were reserved under these plans (net of
amounts granted to date) as of December 31, 1996.
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 and 1996,
respectively, options to purchase 648,000 and 595,000 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. Options to purchase 50,000 shares
of common stock were granted under this plan in both 1995 and 1996.
F-19
<PAGE> 114
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Company's 1992 Stock Option and Performance Incentive Plans,
options to purchase 367,000 and 15,000 shares of common stock were issued to
employees in 1994 and 1995, respectively. The options were granted at prices
which approximate fair market value at the date of grant. Generally, these
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 30,000 and 60,000 shares of common stock were issued to
non-employee directors of the Company in 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, 1996. In addition, options to
purchase 330,000 shares were granted to a former officer in 1992, all of which
were exercised. The exercise prices of the remaining exercisable options are
based on the average market price one year from the date of grant which was
determined to be $2.71 per share with respect to 330,000 shares and $3.81 per
share with respect to the other 20,000 shares. Based on this exercise price, the
amount of compensation expense attributable to these options was $60,000,
$16,000 and $5,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
Effective January 1, 1996, the Company adopted the provisions of SFAS 123,
Accounting for Stock-Based Compensation. As permitted by the Statement, the
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans other than for performance-based awards,
which was not significant. Had the fair value method of accounting been applied
to the Company's stock plans, which requires recognition of compensation cost
ratably over the vesting period of the underlying equity instruments, net income
would have been reduced by $1.3 million, or $.03 per share in 1995 and $2.3
million, or $.05 per share in 1996. This pro forma impact only takes into
account options granted since January 1, 1995 and is likely to increase in
future years as additional options are granted and amortized ratably over the
vesting period. The average fair value of options granted during 1995 and 1996
was $4.46 and $7.33, respectively.
The fair value was estimated using the Black-Scholes option-pricing model
based on the weighted average market price at grant date of $9.59 in 1995 and
$16.51 in 1996 and the following weighted average assumptions: risk-free
interest rate of 6.22% for 1995 and 6.43% in 1996, volatility of 42.39% for 1995
and 38.64% for 1996, and dividend yield of 0.0% for 1995 and 1996.
F-20
<PAGE> 115
PRIME HOSPITALITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the various stock option plans:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
---------- --------------
<S> <C> <C>
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
---------
Granted........................................................... 646,000 $14.75-$18.00
Exercised......................................................... (149,000) $ 3.63-$10.81
Canceled.......................................................... (59,000) $ 3.63-$16.63
---------
Outstanding at December 31, 1996.................................. 2,266,000
=========
Exercisable at December 31, 1996.................................. 1,101,000 $ 2.71-$10.88
=========
</TABLE>
WARRANTS
Pursuant to the Plan, warrants to purchase 2,053,583 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, 1996 warrants to purchase 1,027,392 shares have been exercised
and 1,026,191 remain outstanding.
NOTE 16 -- SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes non-cash investing and financing activities for
the years ended December 31, 1994, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Assumption of mortgages and notes payable in connection with
the acquisitions of hotels................................... $ 18,718 $ 5,120 $ 12,222
Hotels received in settlements of mortgage notes receivable.... 54,521 2,702 35,306
Note receivable received in exchange for the sale of a hotel... $ 1,497 $ -- $ --
</TABLE>
Cash paid for interest was $15.5 million, $22.4 million and $22.4 million
for the years ended December 31, 1994, 1995 and 1996, respectively.
Cash paid for income taxes was $1.9 million, $1.2 million and $8.0 million
for the years ended December 31, 1994, 1995 and 1996, respectively.
F-21
<PAGE> 116
PRIME HOSPITALITY CORP.
All tendered Original Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent
for the Exchange Offer is
FIRST BANK NATIONAL ASSOCIATION
By Facsimile:
(612) 244-1537
Attention: David Haugen
Confirm by telephone:
(612) 244-8162
By Registered or Certified Mail:
First Bank National Association
First Trust Center
180 East Fifth Street
Saint Paul, Minnesota 55101
By Hand:
First Bank National Association
First Trust Center
180 East 5th Street
4th Floor -- Bond Drop Window
180 East Fifth Street
Saint Paul, Minnesota 55101
By Overnight Courier:
First Bank National Association
First Trust Center
180 East Fifth Street
Saint Paul, Minnesota 55101
(612) 762-3813
